Good morning, ladies and gentlemen, and welcome to the DRP, Inc. FY 2020 Second Quarter Results Call. I would now like to turn the meeting over to Mr. Philippe Deschenes. Please go ahead, Mr.
Deschenes.
Thank you, Louise. Good morning, and welcome to BRP's conference call for the Q2 of fiscal year 2020. Joining me this morning are Jose Bojalie, 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 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 atbrp.com under the Investor Relations section. So with that, I'll turn
the call over to Jose. Thank you, Philippe. Good morning, everyone, and thank you for joining us. I am pleased to report that we concluded the first half of the fiscal year on a strong note as our momentum continued in the Q2 and we've delivered solid results across the board. The demand of our product remains strong as we achieve another quarter of double digit retail growth for our powersport.
Although we had poor early spring weather, especially in certain regions like the northern and Midwest portion of North America, we were able to catch up in June July for all product lines. From a financial standpoint, we experienced our best second quarter on record after delivering our highest revenue and normalized EPS diluted for that period. On the back of this solid performance, the successful completion of our substantial issuer bid and the closing of the Telwater acquisition, we are narrowing the range and increasing our year end EPS guidance to $3.65 to $3.80 an increase of 18% to 23% year over year. Now let's get into the highlight of the quarter, starting with the financial results on slide 4. Our revenue reached a record level for our 2nd quarter at $1,460,000,000 representing a year over year growth of 21%, notably driven by year round product.
All regions contributed to the growth with revenue up 21% in the United States, 32% in Canada and 14% for international. Our normalized EBITDA was up 16% to 168,000,000 resulting in a normalized earnings per share of $0.71 up 8% over last year. Our retail momentum continued to be strong. In North America, our powersports industry remained healthy and continued to perform well despite negative weather condition earlier in the spring, posting a mid single digit retail growth for the quarter. Our product continued to outperform in the region as we delivered a second consecutive quarter of mid teen retail growth.
Internationally, we continue to be affected by political and economic tension in certain parts of the world. Mexico has slowed down, but still remain up mid single digit with retail remaining generally strong in Latin America overall and up 18%. In EMEA, we are performing well with retail up 18%, while the industry is down high single digit. For APAC, our performance in China has been flattish and China is impacting the rest of APAC, where our retail is slightly down 2% and the industry down about 10%. Looking at the North American retail by product line on slide 6.
Again, this quarter, in general, we outpaced the competition and delivered growth in our powersport product line. Side by side and ATV had very strong quarter with retail up in the high 20% and low teen percent respectively. 3 wheeled vehicle continued their robust growth, which lifted up in the 90%, driven by the introduction of Ryker. And finally, Personal Watercraft was up low single digit, affected by weather condition this spring, which is better than the marine business and in line with the rest of the industry. Turning to slide 7.
On June 4, we introduced our Model Year 20 Can Am Off Road lineup, the most complete and competitive yet. The key highlights are the introduction of the Can Am Defender 6x6 HD10, representing a significant addition to Can Am utility lineup with its 6 wheel traction, longer cargo box and industry leading torque. This model was in response to a need in the industry for increased cargo capacity. The combination of the longer box and 6 wheels give this product incredible capability and the opportunity to create a new segment in the industry. The Kanan Defender 6x6 is also the 8th new side by side platform introduced over the last 4 years, delivering on the commitment we made in 2015 of introducing a new side by side platform every 6 months for the next 4 years.
Now, the Mavic X3 Turbo RR offers the best performance in the sports segment with its industry leading 195 horsepower and improved off road maneuverability. Since its introduction in 2016, we continue to build awareness for the Mavriq X3, our flagship side by side vehicle, as the phase of racing present and future. For example, we occupied the top 6th place earlier this month in the highly regarded best in the desert race from Las Vegas to Reno. With our model year 2020 introduction, we now offer a more competitive lineup across the price spectrum with the introduction of a new build HP and entry level high HP Maverick X3 package, very happy with those introduction. And for ATV, the upgraded Can Am Outlander feature improved airflow with new inner fender and side panel making the temperature cooler and more comfortable for the rider.
With the introduction of the Can Am Defender 6x6 complete, we plan to continue the same pace of innovation, which allow us to more than double our side by side retail over the past 4 years. Our capability increase at URS 2 is completed and we are now running at full line speed. As you see on this slide, we still have a lot of room to grow in the Utility, Sport and Recreational segments. Over the years, we have set a solid foundation that positioned us well to capture market opportunity and continue our growth trajectory. Now let's turn to Slide 9 for the year round product highlight.
Revenue were up 33% for the quarter, driven by a higher volume of side by side and ETV sold and the introduction of the Can Am Ryker. On the retail side, the North American side by side industry ended its season 2019 on June 30 with retail sales up mid single digit. Can Am side by side had a very strong end of season with retail up in the high 20% for the quarter, driven by our continued pace of innovation, strong momentum with our dealer network and greater availability of product. For the full season, our retail was up 20% and for the first time we ranked 2nd in the industry. Our side by side business also continued to grow rapidly in international market, notably in EMEA and Latin America, where retail sales grew above 25% in the quarter.
Turning to ATV. The North American Can Ami TV retail was up high single digit and ended the season with the number 3 market share position in North America. We have a very strong momentum with ATV as we continue to gain market share in both the mid CC and the high CC categories. Our ETV growth is also a result of our growing Can Am off road offering, our dealer value proposition and overall improved brand awareness. We have similar success in Latin America and in Europe, where our retail grew 15% and 37%, respectively, in the quarter.
I am very pleased with our off road vehicle performance and confident we can continue our momentum. Now looking at the 3 wheeled vehicle business. 9 months into season 2019, the North American 3 wheel motorcycle industry is up in the mid-thirty percent range. Our Can Am 3 wheeled vehicle retail sales are up over 100% for the same period and our lineup is driving the industry growth so far this season. We are pleased with the momentum we have with Ryker.
We are seeing strong consumer demand, especially in North America and in Europe and the awareness for the product continued to grow as it is attracting a lot of attention from the media and the online community. We have made good progress with our rider education program, which is now with a conversion rate that is trending above our 15% target. All in all, we are pleased with the launch of Ryker and the progress we have made in the 1st year of our 2 year plan as well as with the different initiatives taken to unlock the full potential of our 3 wheeled vehicle business. As you know, our goal is to replicate the Sidu Spark success story and which seems to be on the right path. Now turning to seasonal product on slide 10.
Seasonal product revenue were up 11%, primarily driven by favorable product volume and mix for Personal Watercraft. Looking at retail sales. Historically retail sales have always been strongest for Sea Doo in the North America, East and Midwest versus the competition, which ran to perform well in the South. With the poor spring weather condition and sustained flooding, we were disadvantaged in these markets. Despite this, because of our strong lineup, we were able to catch up in June July and finish the quarter in line with the industry.
The industry 10 months into the season 2019 is up low single digit percentage and Sea Doo North America Retail is also up low single digits over the same period. It is a similar situation in EMEA where the market was slightly down, driven mainly by Scandinavian weather condition, although Sea Doo continued to gain market share. The Sidu Fish Pro is also performing well in its 1st season with very good sell through in all our key markets around the world. In fact, the Fish Pro won an Australian Good Design Award for the quality of our design and its innovative feature. For snowmobile, the Scandinavian industry ended its season 2019 on June 30, with retail up low single digit.
Ski Doo and LYNX combined retail was also up low single digit for the season, and they maintained the number one position in the industry. Continuing with a look at powersports PAC and OEM Engine on slide 11. Revenues were up 18% in the quarter, driven by continued solid momentum for our parts and accessory business across all of our Power Support product line. Our accessory business continued to experience strong growth with a 32% increase in revenue for the quarter, notably helped by the success of the Ryker accessories lineup, for which sales continue to trend above target. The core of our success is our strategy to develop accessories in parallel with the vehicle, resulting in an extensive lineup of accessories that are already at the launch, well integrated into the vehicle and compatible with multiple models across all brands.
The Defender 6x6 is a great example of this as we already introduced over 150 accessories available for this vehicle. On the Rotax front, during the quarter, we opened the 1st Rotax Max Dome in Linz, Austria, close to our manufacturing facility in Ganskereschen. It is an innovative concept that combines indoor electric go karting, racing with gaming technology, augmented reality and virtual entertainment. Karting is the perfect product for electrification because the distant range per charge in a control environment is not an issue compared to other product lines. By adding the aspect of gamification, it creates a whole new customer experience.
During the year, we will continue to improve the MaxDome model, but our mid to long term plan is to expand this concept to other cities and countries. This is our first venture in the direct to consumer experience and it provides us a useful learning opportunity both to define this model and to potentially offer other experiential concepts in the future. Now looking at the Marine category on slide 12. Revenues were up 1% in the quarter due to the acquisition of Alumacraft and Manitou last year, offset by a lower volume of outboard engines sold. The marine industry was the most impacted by the unfavorable weather condition we experienced during the spring and the early summer.
On top of that, 1 third of our Evinrude and Alumacraft business and 50% of our Manitou business is in the Great Lake region, the area hardest hit. Because of our current geographical concentration, we were especially impacted. Looking at retail, the North American outboard engine industry ended its season 2019 on June 30, with retail about flat compared to the previous season. Even road retail was down high teen percentage for the season. In the Marine business, boat industry data is delayed and it's not reported the same way as for the engine and power support.
Regarding the boat retail for the period of April to June, for Alumacraft, the aluminum fishing boat industry was down low teens and we were down high teens. For Manitou, the pontoon boat industry was down high single digit and were down mid teens for the same period. Finally, following the end of the second quarter, we completed the acquisition of Telewater, the leading manufacturer of aluminum boat in Australia. Our marine strategy is ongoing and the Evinrude, Alumacraft and many two teams are all working together to integrate the next generation of engine with the next generation of boats. We are looking forward to sharing more detail on our strategy with you soon.
Considering this is our 1st year into the boat business, this is not exactly the season we would have asked for. However, we are satisfied with the progress the team have made on the integration of our acquisition. And as a reminder, this is a mid to long term strategy and we are confident in our ability to deliver its high potential. On that note, I will turn the call over to Sebastien.
Thank you, Jose, and good morning, everyone. Our momentum continued in the Q2 as we delivered solid financial results that came in, in line with our expectations. Our revenues grew 21 percent to reach $1,500,000,000 for the quarter, representing a record for a second quarter at BRP. Our gross profit margin ended at 22.5%, a decline of 70 basis points from last year's 2nd quarter as a favorable impact coming from volume and pricing was more than offset by higher sales programs, production costs and unfavorable product and region mix. The normalized EBITDA was up 16% to $168,000,000 and the normalized EPS reached $0.71 We generated $75,000,000 of free cash flow and invested $67,000,000 on CapEx.
We were also quite active in terms of capital deployment over the last few months as we successfully completed the $300,000,000 SIB, effectively repurchasing 6,300,000 shares and we completed the Telwater acquisition. To support both initiatives and to preserve our financial flexibility going forward, we raised the new term loan tranche of US335 $1,000,000 during the quarter. Our balance sheet remains solid and our strong financial flexibility allows us to continue to invest in the business, all the while maintaining the ability to opportunistically deploy different capital allocation initiatives. Turning to Slide 15. Our quarterly normalized net income was up about $3,000,000 compared to last year as it ended the quarter at $69,000,000 In terms of year over year variations, we saw an increase of $72,000,000 driven by a favorable impact coming from volume, mix, pricing and sales programs.
These elements were mostly offset by higher production and distribution costs and higher depreciation expense for a total negative impact of $23,000,000 Higher operating expenses for $41,000,000 to support our different projects, notably the launch of new products such as the Ryker, increased R and D costs for future product launches and higher SG and A notably associated with IT investments. Higher financing costs and tax expense and FX for $6,000,000 Turning to Slide 16 for a look at our network inventory position. Our network inventory position is up 16% versus last year's Q1, primarily driven by the continued strong demand for our off road lineup for which retail percentages were up low teens for ATV and high 20s for SSV in the quarter. Remember that we had capacity constraints last year, which limited our ability to ship to meet demand and now with the completion of YRIS 2 capacity expansion, we have greater ability to ship products and sustain the retail growth. Our contributors to the growth of network inventory are Ryker, for which retail is very strong in its 1st season and we are seeing some dealers already out of inventory And snowmobile, as we ended the season with slightly more inventory than previous year and we also started shipments earlier this year compared to last year.
We have always been diligent in managing inventory levels with our dealers. At the end of the second quarter, our inventory at our dealership is in line with expectations and it is down 9% versus Q1 following a strong powersport retail performance in the second quarter. So overall, we are very comfortable with the level and the quality of our network inventory. Now looking at Slide 17 for an update on guidance. As I mentioned, we ended the first half of the year with solid financial results in line with our expectations and our outlook for the year remains generally unchanged.
Our industries are behaving as we had anticipated with the exception of the marine business for which as Jose mentioned suffered the most from the unfavorable weather conditions. Given the strong momentum we have with SSV and the competitiveness of our new lineup, we are reviewing upward the lower end of our year round products revenue guidance and the range is now up 16% to 19%. As for marine, the addition of Telwater for the second half of the year is expected to offset the softer results we experienced with our current North American marine business due to the weaker industry TAM and so our revenue guidance for marine remains unchanged. This results in a total company revenue guidance of up 10% to 13%. As a result, the lower end of the normalized EBITDA guidance range has been increased and we are now expecting growth of 21% to 23%.
We have adjusted upward our net financing cost to reflect the additional debt, the share count downward following the completion of the SIB and reviewed upward the depreciation expense. These three elements result in a net positive impact of $0.05 Following these adjustments and the strong results with SSV, we're tightening and increasing the normalized EPS guidance range to 3.65 23% over last year. The normalized EBITDA cadence between the 3rd Q4 is forecasted to be similar in size for both quarters. Our guidance calls for a strong second half of the year as the demand for product remains solid and we have good visibility on our shipment volumes and operating expenses for the remaining of the year. We expect fiscal year 2020 to be a record year for BRP and our business fundamentals are solid given us the confidence in delivering these strong results.
With this, I'll turn the call back to Jose.
Thank you, Sebastien. We have had a record performance for our Q2 and I'm very pleased with the results and progress on our key strategic initiatives. We are experiencing continued momentum by product line and region and I still see lots of growth potential for our business, especially in year round segments. I'm also pleased with the conclusion of the Telwater acquisition and the fact that it marked an important milestone in the advancement of the Marine strategy. Despite talk of an economic slowdown, our industry remained healthy, our dealer traffic is good and we continue to observe strong retail trend in August.
Our team continued to execute well on all fronts and I want to thank them once again for their hard work around the world. We are looking forward to our next Sidu and Can Am dealer meeting in a little over a week in Las Vegas and the introduction of more innovative product and hope to see you there. And finally, as I mentioned earlier, we are confident that given our positive performance, we will be able to deliver on our improved guidance. I will now turn the call over to the operator for questions.
Thank you, Mr. Our first question is from Robin Farley from UBS. Please go ahead.
Great, thanks. Two questions. One is, just looking at the commentary about the off road being kind of up mid single digit, I guess others in industry had talked about the June quarter being up high single digits. So I wonder if you could just sort of say what if you saw deceleration in the growth rate in July or perhaps did not, just any color on that? And then obviously, of course, how August is also relative to that just in terms of acceleration or deceleration from those trends?
Thanks.
Good morning, Robin. Obviously, we cannot comment on the others, but what we saw in Q2 is ATV was basically flattish when side by side was up high single digit. Obviously, side by side has a big play in term of volume in the Q2. Then I cannot comment on the off road numbers that you heard in other call.
But the July was not soft for us. It was a good retail quarter. And we're seeing as Jose alluded into his opening remarks, we're seeing again, we don't see the industry for August, but we see our numbers and the trends are positive as well in August.
Okay, great. Thanks. Just obviously concerns out there about broader macro factors in the last 2 months. And then just a longer term question. With shipments maybe more falling into Q2, I guess Juarez 2 ramped up maybe faster than what you had initially guided or what
expectations were for kind of what shipments would be in Q2.
So given that supply move up from these levels if it was a kind of a supply constraint issue in your original shipment guidance that maybe is now behind you?
Yes. Well, we've adjusted the guidance for year round products driven by side by side of the strong demand that we saw in the second quarter. And so the guidance now reflects what we anticipate is going to happen in the Q2. Obviously, if demand is continuing to be robust, could we adjust our shipments? Obviously, yes, we have that possibility of adjusting shipments if need be and increasing capacity before the end of the year.
Is there kind of a percent capacity that's being utilized now versus what potential is still there? I don't know if that's something you can quantify. And then that's But
if I give you some color, again, just to remind you what we said before. In H1, basically, our capacity was similar to last year because we shut down the factory for 2 weeks to remodel it, and we had a slow ramp up to ensure that quality was right. Then overall, our H1 capacity was similar to last year. And in the second half, Q4, we have like a 50% capacity possibility. And right now, we're running because Q3 is always we introduced a new model here.
Q3 will be a strong quarter. More to come on Q4, but this is the type of capacity that we have done. On a full year basis, overall, if we will be using the full capacity, we'll be about 25% up versus last
year. Okay, great. Thank you.
Thank you. Our next question is from Benoit Poirier, Desjardins Capital Markets. Please go ahead.
Yes. Good morning, gentlemen, and congratulations for the good results. When we look at the retail inventory was up 16% year over year. Would you be able to quantify how much was weather driven and what should we expect in Q3 in terms of inventory level?
Yes. Well, when I look at good morning, by the way. When I look at the inventory, as I said, again, we're very comfortable. Retail was only softer for personal watercraft and that was impacted by weather. But it was again very strong for ATV and super strong for side by side.
So are we talking a few 1,000 units in inventory because of weather? That's probably the size of it. So not very material.
Okay, okay, perfect. And for the Ryker, you've been able to ramp up successfully the product. And also with the millennial, so could you maybe provide more color about what you've learned from them related to the brand, the desire to have a 2 wheeler vehicle and also how they use Ryker as opposed to the Spider in terms of commuting versus a pure hobby?
That's a loaded question, Benoit. Let's see. It's a bit early to conclude on the Ryker. We're super happy about the reception of the unit. And as you know, today, our RT and F3 owners are in average 59 years old.
And we're targeting consumer between 3555. And right now, very preliminary, but the average Ryker user or buyer is about 10 years younger than the RTNF3, then we're attracting definitely younger people. That being said, it's a bit early into the season. You have early adapter. You have people who always wanted to have a 3 wheel and could not afford NRT or NF3 that decided to buy Ryker, then very difficult to conclude at this point.
Then the intent is to finish the season because there is still retail going on. We started shipping the Model Year 20 in August, and there is still some Ryker, I mean, with still some retail going on. And we'll have a complete analysis of the season later in December and when we meet you at the Analyst Day in October, and we'll be able to conclude more at the end of the next year.
Okay. That's great color. And when we look at Marine, you're over index to the U. S. Northern and Midwest region.
Could you talk a bit about your dealership expansion strategy? How it goes so far?
Yes. We basically there is 3 type of expansion. There is Alumacraft or Manitou dealers or Evenrood who take another brand. There is conversion to Evenrood, Alumacraft or Manitou dealer who take Evenrood, and there is white space. And again, we'll share with you more about the detail of our strategy in October.
But basically, we had a goal this year, in fiscal year 2020, to add about 120, 150 roof, and it could be an Alumacraft dealer taking even Rude or an Alumacraft taking Manitou or whitespace, and we are about halfway there, then we're going we're tracking quite well. Obviously, like I said in my remark, I mean, being Manitou is very, very Midwest and Alumaculaf is East, and we had a more difficult season than what we had hoped for. But again, the Marine strategy is a long term strategy. I'm very happy with the work that the teams are the work that the team have done so far on developing the next generation of boat with the new generation of Evinrude, and we feel confident in the future.
Okay. And last one for me. From a capital deployment standpoint, the stock is down significantly since the completion of the substantial issuer bid. So I was wondering if you could tell more about the room to perform further in CIB and given the devaluation right now and the strong outlook?
Yes. Obviously, we are very disappointed with where the stock price is trading. Obviously, it's not reflective of the performance that we've had over the last several years and last quarters. As you said, the momentum is there. And so the valuation is attractive for buybacks and obviously it's something that we will consider and entertain in the next few quarters.
Okay. Thank you very much for the time.
Thank you. Our next question is from Tim Conder from Wells Fargo Securities. Please go ahead.
Thank you. Gentlemen, any commentary that you can give us relating to the promotional activities that you may have done during the fiscal Q2 or that you're seeing in the market right now? And again, maybe across the product lines on the marine side and then on the ATV and the side by side product lines? Thank you.
Good morning, Tim. If we start by off road, I would rate it yellow. ETV was very similar to the last few years. And on the side by side, you need to understand that it's the 1st year where we can we have some product availability. And it's the 1st season where we had like some non current at the end of June.
Then we had for the first time some normal promotion on Defender and the Maverick family. And some of our competitors complain about it, but the rebate we were giving is in line with what every OEM is doing at the end of the season. Then I would consider off road yellow. Watercraft, we have reacted on the back end of the summer because we were behind. Then last year was green.
This year, we invested a bit more than last year, not ridiculous, but a bit more than last year. And 3 wheel, I will consider it green. We if you remember, we readjusted our pricing in RT and F3 last year, and our promotion for model year 2019 started only in August like it should be. Then this is overall the retail environment. On the boat side, we were a bit more generous than in the past 2 years, but again, in line with the other OEM.
Okay.
And Jose, any color geographically, whether you want to look at North America collectively or Canada versus the U. S. And then basically the rest of the world, whether you want to say Europe or just broad geographic regions as far as promotions and collectively or if you do want to break them down by the product categories?
Yeah. What I gave you, Tim, is applying to Canada and United States. The situation was about the same in both countries. The weather was the weather, and we catch up in June, July on the retail front. At international, it's a lot of moving piece.
Scandinavia was similar to what we saw in North America in terms of weather. Then we had a slowdown in the watercraft. In Scandinavia, off road was not affected. That being said, in the Western Europe, watercraft have done extremely well, because they had a warm summer, and we're very happy with the overall. Other than that, some adjustment in APAC, but overall, I would say very similar to last year, except North America and Scandinavia.
Okay, great. Thank you for the color.
Yeah.
Thank you. Next question is from Gerrick Johnson from BMO Capital Markets. Please go ahead.
Hey, good morning. Looking at your own inventory up 22%, can you discuss the puts and takes there? Thank you.
Yes. Good morning, Gerrit. Well, as you probably saw, the second half of the year implies a very strong H2, strong volume growth as well and strong profitability growth. And so we are or we have produced some of the units for shipment in Q3. And so that is the main driver of the increased inventory.
The SSB business is going strong. We have also a strong international business with longer transit times and that business is growing as well. And so that needs to be accounted for in our planning as well and therefore that results in higher inventory levels.
Okay. And one more thing that you don't seem to talk about, I'd like to hear about is your initiatives in Texas and how that new office is going and some the number of
people in Dallas, and we the number of people in Dallas, and we changed a bit the structure of the management team. We divided the United States in 3 regions, and we have a leader on each region. That gave us in the past, we were managing United States a lot, I mean, East to West, South to North. And now we have like more regional focus, which gave us an opportunity to have some tactical focus on different region or different opportunities. Then overall, very happy with the Dallas office.
And we believe that we have a lot of people there that are better connected to the U. S. Market versus when we were managing United States from Canada.
Great. Thank you.
Thank you.
Thank you. Our next question is from Mark Petrie from CIBC. Please go ahead.
Hi, good morning. I just wanted to ask about the dealer base in the U. S. And I guess specifically mostly on the side by sides. But I think you're sort of at relative maturity in terms of dealer count, but gaining floor space and mind share.
Wonder if there are any metrics you can share that would help us gauge that and how you sort of continue that momentum? And obviously, there's a combination of factors, but is the focus sort of in continuing that momentum more on just generating demand? Or is there still more to do around engagement, improving systems and that sort of thing?
On the number count, we believe we have about the right number of dealers. If you remember, we signed a lot of dealer in the last few years, and now we have about 12.50 in North America. There is always some turn, 25 to 30 years that is happening. But the focus is more on what you said, continuing to gain space into the dealership and gain inefficiency, better engage with our dealers, help the dealers to become better retailer. And it's we work with them hand on hand.
Then this is the focus. And we're doing, I believe, a pretty good job to have business discussion with dealers and helping them to raise the bar.
And do you think broadly speaking, obviously, there's lots of different factors, but in terms of driving the engagement, is it more a matter of continuing to create consumer demand and obviously the dealers are going to respond to that? Or is it in terms of how you engage with the dealers, manage their profitability, improving systems, ordering systems, inventory, supply and those types of levers?
I mean, we see we try to help the dealer to order the right product mix, and we're monitoring more and more their inventory, helping them to understand their retail and make sure that they have the right model at the right time in the dealership. Also, the service part is getting more and more important. There is a lot of money tied into the service part and the dealers some dealers do it extremely well, others not as well, then it's working hand on hand with the dealers to help to be more efficient in what they do. And so far, we don't see the need to increase the number of dealer. It might happen if we continue to grow in the side by side business where we have some maybe today we have a dealer supporting a big region and maybe in time we need 2.
But for this year, the focus is more working on the efficiency of the dealer.
Okay. Appreciate it.
Thank you. Our next question is from Craig Kennison from Baird. Please go ahead.
Good morning. Thanks for taking my questions. I wanted to ask about your view of the U. S. Consumer.
A lot of talk about maybe a slowdown, maybe that's especially true with wealthier consumers, but you have an interesting perch on the world. What are you seeing?
Yes. Good morning, Craig. I mean, again, there is a lot of talk about a slowdown, but you know the thing that we're watching that we believe could affect our business. But I give you some statistics. U.
S. Unemployment rate in July was 3.7%, very low. The housing slowed down a bit, but it was up 0 point 6% in July versus a year ago. The U. S.
Consumer consumption remained strong. It was up 3.3% in June and 3.4% in July. And to be honest, I mean, we don't see a slowdown in our powersports business. I mean, Q1, the industry was up high single digit and in Q2, we were mid single digit up. Then this is and you know, we're not economists, but this is the thing that we believe that is affecting our business.
And so far, we're very happy with the state of the economy and the consumer.
Thanks. And with respect to Telwater, I apologize if I missed it, but could you frame the revenue and margin profile of that business and detail what's included in guidance?
Yes. The so in guidance, we have 6 months of revenue built in there. On an annual basis, Telwater is a, let's say, dollars 80,000,000 to $90,000,000 business, Canadian dollars. Margin profile is very similar to what you see in other boat companies in the U. S.
So, lower gross margin, lower level of operating expenses, but similar EBITDA margins.
Thank you. And then finally, again, with respect to Telwater, to what extent do you intend to run Telwater, Alumacraft and Manitou separately versus trying to leverage any commonalities between among those businesses in terms of R and D and other factors to get efficiency?
Yes, absolutely. I mean, we are working right now on the metrics organization where obviously there will be a leader for each boat brand, but you have cross functional function like design, R and D, operation where company will share the best practice. What we like about the 3 acquisitions is they are both the 3 of them are involved in aluminum boat construction, and there is definitely synergy between each of them to be cane and comparing the way they do thing. On top of it, in terms of product development, we have team right now working on the next generation of boat and engine to make sure that we have a perfect integrated product. Then basically, it's a metric structure where there is a responsible for each boat brand, but you have some cross functional function to help the synergy.
Very helpful. Thank you. Thank you.
Thank you. Next question is from Brian Morrison from TD Securities. Please go ahead.
Good morning. I think I understand the increase in inventory in the powersport industry. I'm content with that. Maybe with the inclusion of Telwater and the flat revenue guidance in marine now, maybe you can just walk through or help us understand the marine inventory both in the dealer network and internally? And potentially with the industry softness that you're going through right now and albeit potentially temporary, whether your appetite for M and A might be heightened or whether you're content with your current portfolio?
Yes. Then again, the Evinrude inventory have decreased by 10% into the quarter, then we are comfortable with our level of inventory. On the boat side, the two brands that we manage in North America are very different. Manitou, it's a high ticket item. And they used to have 5 to 6 months of inventory at the dealership.
They turn their inventory typically a bit more than 2 times a year. And right now, we have about 6 months of inventory out there, about 10% higher than typical, and we're comfortable with that. Alumacraft, it's a lower ticket item. Their normal inventory is more in the 12 months, about the same than the industry average. And we're a bit maybe 5% to 10% more than typical, but we are comfortable on both brand on the boat inventory at the dealer.
At our factory, very minimal. I mean, this is being a boat is a big piece of equipment and we have minimum inventory in our yard at both Manitou and Alumacraft. For Telwater, it's about the same. Again, we've done officially the acquisition on August 1. It's the same pattern, not much inventory at the manufacturing facility.
And I believe they turned the inventory quite high, but I don't have enough data to be to answer your question. In terms of acquisition in the boat space, for the time being, we are happy with those 3 boat company. And the focus in the next, I would say, 12 months will be to make sure that we maximize the synergy and we maximize the integration and how we can maximize the work between the 3 boat company and BRP to again deliver on the boat strategy. Then don't expect boat acquisition in the next 12 months.
Okay. Thanks. Just to clarify, in terms of the inventory then, should we expect promotional activity in the
back half of the year?
And I can only presume that that's factored into your current guide.
Yes. Promotional activity should be similar year over year. Obviously, sometimes our promotional activity may be influenced by weather, especially when we look at the snowmobile season that is upcoming. But the guidance reflects what we believe is appropriate promotions in order to drive the retail that ultimately drives our wholesale numbers.
Okay. One last housekeeping item maybe, Sebastien. In terms of your net income adjustment, can you maybe just clarify it's modestly changed, but excludes this pardon me, includes an FX change. Maybe just on a normalized basis, can you just tell me what's changed here?
Yes. The FX change that you see in our normalization of net income and normalization of EBITDA relates to the long term debt. So as our debt, which is denominated in U. S. Dollar gets revalued every quarter, that creates a FX non cash FX variation in the P and L.
And given the materiality of the debt and the swings that we often see in currency, it does create noise in the P and L and that's why we normalize that item.
Yes. So just on a normalized basis, has net income changed or is that per diem?
Well, the net income as per the bridge is up $3,000,000 at $69,000,000 if you look at the bridge that we have in the webcast.
Sorry, I'm talking about the guidance?
The guidance, sorry, The normalized net income is up to reflect the EBITDA adjustment that we did on the bottom end of the range.
Okay. Thank you. All right.
Thank you. Next question is from Greg Badishkanian from Citigroup. Please go ahead.
Hey, guys. Good morning. It's actually Fred Wightman on for Greg. Just wondering if you could talk about what, if any impact you're seeing in terms of the supply chain, either product disruptions or pricing changes, just given the tariff and trade back and forth we're seeing in North America? And then what that means for the implied back half increase in output that you guys are expecting in guidance?
Yes. As we've shared with all of you in the last few quarters, the whole tariff dispute between U. S. And China is having minimal impact on our results. So let's say the wave 4s that were just announced, we're probably looking at worse a $5,000,000 impact for us.
So all the tariffs, when you combine them all for the full year, so from wave 1 to wave 4, you're probably looking at $15,000,000 for full year for this year. And let's say if that was to be applied on a full year basis, you're looking at probably maximum $20,000,000 Again, we source very few of our components from China. When we look at our whole supply chain and product quality, it doesn't necessarily always fit to source in China because we're not necessarily all meeting the specs that we want to meet or the lead times are not there. And so that's why we source very few of our components from China and we're not as impacted as other companies.
That's really helpful. And then there is a call out in the slide specifically for the Maverick Sport dealer inventory impact. How much is that specifically on a percentage basis?
Off the top of my head, I wouldn't be able to give it to you or probably give it to you offline. But last year, we had very little privileged the shipment of the Mavriq X3 and the Defender. We privileged the shipment of the Maverick X3 and the Defender, which are higher margin products. And that's why this year now with the capacity we have, we ship more into the network. Okay.
We'll follow-up. Thank you.
Thank you. Next question is from Derek Dley from Canaccord Genuity. Please go ahead.
Yes. Hi, guys. Good morning. Just following up on just that question in terms of dealer inventory. There's also a comment in there just in terms of snowmobile sales having earlier shipment.
So should we expect some sort of a timing adjustment between Q2 and Q3?
No. Again, it's a small volume. We always this year, snowmobile volume shipments are expected to be higher than last year. And so given the season and the production schedule is very condensed, you have abilities to either produce earlier in the Q2 or later in Q4. And depending on when engineering release are ready, that's going to impact when we ship.
And therefore, this year, because of those factors, we ship more units in the Q2.
Okay. That's helpful. And Sebastian, I think in the past you've provided a bit more color, just in terms of some of the puts and takes in the magnitude of each of the impacts on gross margin that you called out in the press release, commodity production distribution. I'm wondering if you could give us that bridge again?
Yes, sure. So as you all saw, margins are down 70 basis points this quarter. Volume was a positive impact as you saw the revenue growth year over year. So that's almost a 200 basis point plus to the margin. Mix was unfavorable and sales programs as well were unfavorable.
The mix driven obviously by Ryker and also we did ship less X3s in the quarter as we knew that we were coming out with a new X3 at 195 horsepower. So we kind of held back on some of the shipments of X3s. That was a negative combined there, the mix and the sales programs, 140 basis points. Production costs, negative 80 basis points, half of it coming from added depreciation. The other half coming from obviously now we're running a bigger plant.
We've kind of done 2 waves of increases on a year over year basis, so that's being reflected in our operating costs. So that's 80 basis points and the last item, FX for 50 basis points.
Great. Very helpful. Thank you very much.
Thank you. The last question is from Cameron from National Bank Financial. Please go ahead.
Thanks very much. Just wanted to, I guess, clarify the question earlier on the inflationary cost headwinds and then the tariff impact. I think in the past, the number that you had talked about was kind of $35,000,000 in inflationary costs, some of that was tariffs and some other things. What's, I guess, the equivalent number now on a kind of a full year basis?
Well, we talked about $35,000,000 impact in the past for we call it inflation, freight, commodity and tariffs. So you could add an extra $5,000,000 to that, Cameron.
Okay. Perfect. That's great. And just on the side by side business, just thinking about the product portfolio now, you've introduced the 8th platform, which you had been targeting over that period. I just wondered if you can talk a bit about just on a product basis, where you think you're still underrepresented?
Or is it just really more of a kind of growing market share in the sub segments that you're in now? Is there anything else that you feel as though that you need to, I guess, increase the product portfolio to continue to grow?
Yes. In the last 4 years, basically, we introduced new platform in almost every segment into the industry. And there is still wide space for us in the side by side business. And you can expect in time other new valuation of model trying to create new segments like an example, the Fish Pro in the watercraft, we're good to create new segment in a product category. That will be our main focus.
And still, if you look at our product portfolio, today we have the base, but we can continue to expand our offering to the consumer and delivering on new trend or new request for consumer. The other and some investor is always asking the question, will you stop there? For sure not. I mean, we intend to keep the same pace of investment that we've done in the last 4 years forward. Obviously, like I said, it's not necessarily a new platform every 6 months, but you can expect that we will continue to push in the side by side industry.
Okay, that's great. That's very helpful. Thank you very much.
Thank you.
Thank you. So Mr. Deschenes, this was our last question. I will now return the meeting back over to you for closing remarks.
Thank you, Louise, and thanks everyone for joining us this morning. We want to invite you to join us at our dealer event in Las Vegas in September 10 2011 and at our Investor Day in October 2829. Thanks again everyone and have a good day.
Thank you. Your conference has now ended. Please disconnect your lines at this time. We thank you for your participation.