Good morning, ladies and gentlemen. Welcome to BRP Inc.'s FY 2022 fourth quarter results conference call. For participants who use the telephone line, it is recommended to turn off the sound on your device. I would now like to turn the meeting over to Mr. Philippe Deschênes. Please go ahead, Mr. Deschênes.
Thank you, Julian. Good morning, and welcome to BRP's conference call for the fourth quarter and year-end results for fiscal 2022. Joining me this morning are José Boisjoli, President and Chief Executive Officer, and Sébastien 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 and that the actual results could differ from those implied in these statements. The forward-looking information is based on certain assumptions and is subject to risks and uncertainties, and I invite you to consult BRP's MD&A for a complete list of these. Also, during the call, reference will be made to supporting slides, and you can find the presentation on our website at brp.com under the investor relations section. With that, I'll turn the call over to José.
Thank you, Philippe. Good morning, everyone, and thank you for joining us. Please turn to slide four. I am very pleased with our fourth quarter performance, which concluded an exceptional year. We've delivered record annual financial results, reaching the highest revenue and profitability in our history. Our team continued to gain market share in our product line in the powersports industry while managing through supply chain pressure, demonstrating solid execution once again. In fact, our manufacturing agility allow us to better serve our dealer and customers alike. Moreover, during the year, we've delivered capacity expansion project on time and on budget. Our new Valcourt facility added about 50% of side-by-side capacity, and our Querétaro extension added about 30% of personal watercraft capacity. In addition, we strengthened our industry-leading product portfolio.
We introduced several new market-shaping products in our product line, and the highlight of the year was the introduction of the Sea-Doo Switch, which extended our addressable market, positioning us well to continue to grow in the coming years. In short, we've delivered an exceptional year despite the turbulence caused by supply chain disruption. Now let's turn to slide five for the key financial highlights of the year. We've delivered record financial results on both our top line and bottom line, hitting historic highs on several financial metrics. Our revenue ended the year at CAD 7.6 billion, up 28% over fiscal year 2021. This growth was driven by higher volume across all our product lines and favorable pricing. Likewise, our profitability reached new heights. Our normalized EBITDA was up 46% - CAD 1.4 billion, representing a margin of 19.1%.
Our diluted normalized earnings per share grew 84% to reach CAD 9.92, ending above our guidance range of between CAD 9 and CAD 9.75. Turning to slide six for a look at our North American powersport retail performance and market share for the year. As you know, fiscal 2022 was marked by continued consumer demand for our products. However, our low level of network inventory, coupled with the ongoing supply chain constraints, limited our ability to fully meet demand. Still in this context, our team allow us to outpace the industry. Our retail was down 6% for the year compared to the industry, which was down mid-teens. As a result, we ended the year with about 30% market share, gaining about three percentage points over fiscal 2021 and about 10 percentage points over the past six years.
This solid performance is a testimony of our continued agility to meet customer demand. Now turning to slide seven for a brief look at our Q4 retail performance. Our retail sales continued to be constrained by product availability in the fourth quarter. Still, we were able to outpace the industry in North America, representing over 70% of our revenue. We're also able to outpace the industry and gain market share in snowmobiles as we prioritize the utilization of available components for that segment into Q4 for its peak retail season. Let me elaborate further on this on slide eight. Our modular design approach, combined with our diversified product portfolio, allow us to leverage common components across our different product line and adapt to seasonality. We have illustrated this on the slide.
As you can observe, we have three models of gauges, the compact, the mid-range, and the high-end, which are utilized across our different product lines. In collaboration with our supplier, we can prioritize the type of gauge we needed, and our team can then decide on which product line it will be installed, depending on seasonality. This modular approach is a competitive advantage. It provides additional flexibility to navigate through supply chain constraints, especially with the current limited availability of semiconductors. In Q4, we prioritized our snowmobile, and this allowed us to outpace the industry in terms of total retail performance. Turning to consumer demand on Slide nine. Consumer interest for powersports is not slowing down. The momentum with preseason customer deposits for personal watercraft and snowmobile is continuing and reaching record levels.
As of March 13 in North America, personal watercraft customer certificates for season 2022 are up over 25%, and snowmobile spring unit bookings for season 2023 are up over 100%. In addition, there are many signs pointing to sustained strong level of consumer interest in powersports. There is a continued influx of new entrants. Website traffic remains elevated. Sea-Doo Switch and Can-Am off-road vehicle are also seeing strong momentum with customer pre-orders. All in all, we are well-positioned to capitalize on continued interest in powersports. Now let's turn to slide 10 for year-round product. Revenue were up 12% - CAD 853 million in the fourth quarter. Let me provide a brief overview of our North American retail performance.
Our retail slightly lagged the industry in Q4 for all our product line, including side-by-side ATV and three-wheel vehicle, as it was limited by supply chain disruption and our decision to prioritize snowmobile production. However, season to date, side-by-side and ATV outpaced the industry. While it is still early in the season, three-wheel vehicle lagged the industry, also due to a change in production schedule favoring snowmobiles. All in all, we are pleased with the momentum we are seeing in all product line and are well-positioned to continue to gain market share driven by our strong lineups. A quick update on capacity extension project in side-by-side vehicle. We have completed the ramp-up of Juárez 3, which provide us with 50% more capacity compared to fiscal year 2021.
In addition, remember that last quarter, we announced the start of the phase two expansion of Juárez 3, which plan to effectively double production capacity at that facility. The production ramp-up is forecast to start in the first quarter of fiscal year 2024. With this additional production capacity, we are in a solid position to gain from the strong side-by-side demand. Turning to seasonal product on slide 11. Seasonal product revenue were up 56% in Q4 to CAD 1 billion. Let's start by looking at snowmobile. 11 months into its season 2022, the North American snowmobile industry is down in the low teens percent, while our snowmobile retail is up low single digits%, significantly outpacing the industry. We reached a record high market share in North America in Q4, and this momentum continue in February.
We are experiencing similar success in Europe, where we also reached record high market share in Scandinavia season to date. Turning to our model year 2023 lineup. To sustain our momentum, we continue the pace of innovation and introduce an all-new REV Gen5 platform available in trail and deep snow segment, as well as new models significantly designed for new entrants and younger riders. Early trend in spring unit booking are very strong, which is positioning us well for success in season 2023. Turning to personal watercraft. While still very early in the season, the North American industry retail is down about 20%, while our Sea-Doo retail is down low 60% due to a lack of inventory in the network and our decision to prioritize snowmobile production. However, we have good traction in counter-seasonal market.
Sea-Doo is performing very well with over 10% percentage point of market share gain in Australia and New Zealand so far this season, and retail up over 20% for the fourth quarter in Brazil. Many signs are pointing to positive momentum for personal watercraft business, the traction in counter-seasonal market and the continued very strong level of customer preseason certificates in North America. Continuing on slide 12 with a look at powersports parts, accessories, and apparel and OEM engine. This segment experienced a similar trend as vehicles. Revenue was up 21% in Q4 and surpassed the CAD 1 billion mark for the first time. This growth was driven by higher replacement parts revenue due to increased product usage combined with strong unit retail, which generated increased accessory sales. As you can see, our proprietary LinQ ecosystem continued to be popular. Now turning to marine.
Revenue was up 6% - CAD 135 million in Q4. Looking at retail sales. Well, Quintrex is in the core of its retail season in Australia and is performing very well with retail up mid-teens% for the quarter and about 10% year to date. In North America, we are off-season, but our bookings for season 2022 are complete. In a sense, we will be running at maximum production capacity all year. We are pleased with the performance of our boat brand, but the next big leap will happen this summer when we introduce new model year 2023 boats with the Project Ghost engine technology. With that, I will turn the call over to Sébastien.
Thank you, José, and good morning, everyone. We completed fiscal 2022 with record results for our fourth quarter as we continued to experience solid customer demand for products and demonstrated strong execution in delivering our production plan. We also optimized the utilization of available components to maximize the final assembly of substantially completed units. With this, our revenues exceeded the CAD 2 billion mark for the first time in a quarter as they reached CAD 2.3 billion, up 29% over last year. Our gross profit margin ended at 26%, a slight decline from last year's level due to higher logistics, commodities, and labor costs related to supply chain disruptions.
We generated CAD 460 million of normalized EBITDA, up 33% from last year, and our normalized net income came in at CAD 251 million, up CAD 89 million from Q4 last year, driven by higher volume of unit deliveries and favorable pricing, which were partly offset by higher production and logistics costs and higher operating expenses. This resulted in a record normalized diluted earnings per share of CAD 3, coming in ahead of expectations and resulting in a full year normalized diluted EPS that came in above our guidance range. With these strong results and a solid free cash flow generation for the quarter of CAD 376 million, we ended the year with a robust balance sheet, notably with CAD 266 million of cash and a low net leverage ratio of 1.2 x.
Moreover, following the end of the quarter, we seized the opportunity to increase our revolver capacity by CAD 300 million to bring the total available capacity to CAD 1.1 billion, further improving the strength of our balance sheet and our financial flexibility. Moving to our network inventory situation on slide 15. Year-over-year, our network inventory is up 21%, driven by strong shipments of missing components to dealer late in the quarter. Our strategy of retrofitting units at the dealership is bearing fruit as these elevated shipments of components towards the tail end of Q4 allowed us to deliver our strongest February in terms of retail. Still, network inventory remains very low from a historical perspective, being down 60% in comparison to the fourth quarter of fiscal 2020.
Looking ahead, given the continued strong demand for products and the ongoing supply chain disruptions, we do not expect any meaningful inventory replenishment to happen until late in fiscal 2023 or even in the start of fiscal 2024. Now moving on to the guidance slide on page 16. As we continue to experience very good consumer interest for our products, and as we operate with low network inventory, we are well-positioned to continue delivering growth in fiscal 2023, notably with total company revenues that are expected to increase 24%-29%. Looking at the different product categories, year-round products are expected to grow between 30%-35%, primarily driven by side-by-side with a continued robust demand for lineup, the new product introductions, and supported by additional production capacity for Maverick X3. Three-wheel and ATV are also expected to contribute to our growth.
Seasonal products are expected to grow 22%-27%, driven by the introduction of the Sea-Doo Switch and by strong momentum with both PWC and snowmobiles, as you saw with the high level of pre-season orders we have for both these product lines. Powersport PA&A and OEM engines revenue are expected to increase 17%-22%, driven by the increase in use of vehicles resulting in higher replacement part sales and by the growing interest in our accessories lineup. Marine revenues are expected to grow 12%-17%, notably driven by the planned introduction of new boats in each of our boat brands with Project Ghost in the second half of the year. On the profitability side, our normalized EBITDA is expected to increase 12%-15%.
Finally, we expect our normalized EPS to end the year between CAD 10.75 and CAD 11.10, representing a growth of 8%-12%. Note that the share count does not account for any potential future share repurchases. Zooming in on profitability, our guidance calls for a slight contraction of normalized EBITDA margin as illustrated on slide 17. In fact, over the last two years, our normalized EBITDA margin has improved by almost 600 basis points driven by strong volume growth and favorable product mix, a low level of sales program, the leveraging of our efficient manufacturing footprint in Mexico, as most of our growth has been produced in these factories, and our ability to gain leverage on operating expenses.
These elements were only partially offset by the inefficiencies and additional costs resulting from ongoing supply chain disruptions, which were mostly felt starting in the second half of fiscal 2022. While we have proceeded with price increases and surcharges to offset such additional costs, it remained a headwind to our margin percentage as the price increases did not cover potential margin on these additional costs. Looking ahead to fiscal 2023 and beyond, we expect to continue benefiting from positive volume and mix impact and the leverage of our manufacturing footprint. However, we do cautiously assume that we will see a return to some sales program activity at a certain point as OEMs start rebuilding inventory. Moreover, we expect that ongoing inflationary pressure and supply chain disruptions will weigh more on fiscal 2023, as we expect these elements to impact us for the full year.
We do plan to continue utilizing our strategy of building substantially completed units and retrofitting them when components are received. While this strategy is accretive from a revenue and profitability standpoint, it is less efficient from a margin perspective. With this, our guidance calls for a normalized EBITDA margin of about 17% in FY 2023, a level that we believe is sustainable longer term for our business. Now turning to slide 18 for a look at the expected normalized EBITDA split between the first half and the second half of the year. We expect FY 2023 to be more similar to FY 2021, with over 60% of our normalized EBITDA being generated in the second half of the year.
In terms of year-over-year growth, we expect our first quarter normalized EBITDA to be down in the 40%-50% range as we operate through supply chain and inflationary pressures, notably resulting from Omicron-related disruptions at the start of the year, and as we lap a very strong first quarter last year where such pressures were limited. We are also expecting our product mix to be negatively impacting in Q1 as we are planning to ship higher-end SSVs and PWCs in Q2. While these supply chain challenges and their impacts are difficult to predict, based on the information we have today, we are comfortable with our plan and expect to return to strong growth starting in Q2 as the Omicron-related issues subside and we start lapping a more comparable environment.
Finally, looking at our return of capital to shareholders on slide 19. As you know, our business generates significant free cash flow, and we have always been diligent in managing our capital allocation decisions, prioritizing organic investments in the business and returning excess capital to shareholders. As the business grew rapidly in recent years, we have returned over CAD 2.3 billion of capital to our shareholders over the last seven years, and notably returned over CAD 700 million in fiscal 2022 in the form of dividend and buybacks, as we repurchased over 6.7 million shares. We believe these actions are a strong way to enhance the return we provide to our shareholders, and given our solid outlook on the business and the strength of our balance sheet, we are well positioned to continue applying the same capital allocation recipe in fiscal 2023.
This is why we announced this morning a 23% increase of our dividend per share and the launch of a CAD 250 million substantial issuer bid. We would not be taking these actions if we did not believe in our ability to continue growing the business in the coming years, and we look forward to providing you with updated Mission 2025 financial targets as we are planning an in-person investor day in June. On that, I will turn the call over to José.
Thank you, Sébastien. Please turn to slide 21. Before I conclude, I want to highlight the exciting announcement we made this morning regarding Can-Am, which has been highly anticipated and expected from our customers and dealer network. With the motorcycle industry shifting to electric, we saw an opportunity to reclaim our motorcycle heritage and re-enter the market with an electric offering. I am thrilled to confirm we are launching a family of electric two-wheel motorcycles under the iconic Can-Am brand. Our new product are being developed with many different riders in mind. We expect this model to be available to the market in mid-2024. With the two-wheel motorcycle, we are entering a new global market. This first family of product will address about 40% of the North American and European industry, representing an estimated 600,000 units per year.
We firmly intend to grow in this market like we have done so many times in the past with new product introduction. We are known for generating growth by leveraging our technological know-how, our strong brand, and our manufacturing footprint, and we are confident we'll do it again. What's more, with this new product line, we are further solidifying our dealer value proposition and expanding our addressable market. To conclude, we had an exceptional fiscal year 2022. We were able to achieve these results thanks to robust demand for our product and our team ability to successfully manage through supply chain disruption. We expect to build on this momentum and deliver another record year for fiscal year 2023. Our guidance calls for solid growth ranging between 8%-12% in diluted normalized EPS.
However, the first half of the year could prove to be more challenging as the Omicron variant impacted several of our suppliers in the early part of the year, creating increased lag time in a supply chain already under pressure. That said, we are confident we can achieve this guidance based on sustained consumer demand interest in powersports and marine, our strong product portfolio, including recent product introduction, additional production capacity from Juárez 3 and Querétaro, and the upcoming significant inventory replenishment cycle, which is now expected to start in the back half of fiscal year 2023 at the earliest and will last for about 12-18 months. We are well positioned to outpace the industry given our strong brands, manufacturing agility and the benefit from additional production capacity. In addition, we have multiple levers to sustain growth in fiscal year 2024 and beyond.
We look forward to sharing more detail with you in June. Finally, I would like to thank all our employees for their relentless effort during this challenging period, our suppliers and dealers for their collaboration and resilience, and our customers for their loyalty. On that note, I will turn the call over to the operator for questions.
Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. Our first question comes from Mark Petrie from CIBC. Please go ahead. Your line is open.
Yeah, good morning. I just wanted to follow up on the discussion with regards to margins for fiscal 2023 and then sort of the longer term outlook. How much of the compression this year do you think is structural, you know, versus more temporary with the supply chain? And then could you just talk about the dynamics with regards to pricing, how much of that is in the market today and what you think the opportunity is as we progress through the year?
Yeah. Good morning. When I look out for next year, we did talk about like a 200 basis point decline in margin. The volume is gonna be a positive tailwind for us, probably a 100 basis point increase in margin coming from volume. I talked about programs being more conservative as we expect some inventory to build up in the network. Obviously we want to make sure that the right level of programs are set there. That's about a 100 basis points of a headwind. The structural I meant coming from inflation and inefficiencies we believe will be with us for most of fiscal 2023, and that's about a 200 basis point headwind for us.
In terms of pricing, we've done pricing adjustments in January, and obviously that's reflected in our guidance. We do anticipate as well to adjust pricing further come the next model year change. That happens usually in the late second quarter period. Usually we do a 1% price increase, but this year we anticipate that the price increase will be obviously higher than the standard 1% to account for higher inflation.
Understood. Okay, that's helpful. And José, you highlighted the strong growth that you guys continue to see in terms of new entrants or new customers entering the powersports industry, but wondering if you could just talk about sort of what you're seeing from existing customers. I think there's been some ups and downs with that cohort, just based, I think, mostly on limited product availability. What's your perspective for this year, either versus last year or versus sort of pre-pandemic levels?
Good morning, Mark. To be honest, not much change. Again, for new entrant, we're still tracking about 30% versus historically 20%. Repurchase intent, it's remaining. Not much change with the existing customers. One trend is out there, the customer more and more are ready to pre-order a unit to give a deposit to secure the delivery. We saw, like I said in my note, snowmobile presales is 100% above last year. Watercraft is about 25% above last year, and it was two very successful year last year.
We don't see much change in existing customers except the customer is more ready than ever before to secure their purchase sooner than ever before.
Okay. Understood. Appreciate the comments and wish you all the best.
Thank you.
Our next question comes from Robin Farley from UBS. Please go ahead. Your line is open.
Great, thanks. Two questions. One is, I know you talked about dealer inventory being down about 60% versus pre-pandemic. I think you've also talked about the ending inventory that probably doesn't need to go all the way back to those levels. How should we think about what amount of shipments would you need just to restock dealers to kind of whatever that new normal will be? If you could sort of help us quantify that as a percentage of retail or shipments or something. You know, just kind of how we should think about what that restocking amount is. Then secondly, I had a second question on the electric bike market. By the way, was that introduction in 2024, is that fiscal or calendar 2024?
The market when you refer to the 600,000 sort of addressable market, is that combustion engine motorcycles today that you think could become electric? Or, can you help us think about how big the electric bike market specifically might be in, let's say, you know, calendar 2025? Thanks.
Good morning, Robin. Seb, I'll take the first question, and José will take the second one. On the restocking opportunity, it is a big opportunity for BRP to just replenish the inventory. Obviously, the industry has grown. Our market share has grown as well. But to put it in simple terms, when I look at the restocking opportunity, it's about a quarter's worth of wholesale revenue. That's how big of an opportunity it is. And when is that gonna happen? Most likely, as I said, it's gonna happen next year in fiscal year 2024. With that, I'll turn it over to José.
Good morning, Robin. Just to make sure, I will repeat a bit what I said in my note in the intro. First, what we're introducing this morning, it's our first family of product and basically, we're targeting at the beginning North America and Europe market. The industry that we're addressing with that family of product in North America and Europe is about 600,000 units a year. This is combustion motorcycles to date. That being said, we believe that the motorcycle industry will migrate faster to electric than other product line, and a few reasons. First, those products run above zero C elsius, it's easier to electrify. There is less drag on the motorcycle than any product line. And obviously, it's easier access to the charging station.
If you can project what's happening in the car industry, many cities or countries are restricting access to downtown with combustion engine cars. We believe this could happen also on two-wheel. Because of all this, we felt that it was the right thing to do to launch Can-Am two-wheel. I would like to highlight again that it's leveraging our know-how. The electric power pack that we're developing for all our existing products with the modular approach will fit this line of motorcycles. It's the Can-Am brand. The existing dealer network, we might have to open up new dealers in Europe, but in North America, most of our dealers could carry the two-wheel vehicle. Obviously, it's leveraging our manufacturing footprint.
For us, it's a, I would say, a very good addition to our plan, and is the way we continue to intend to grow.
Is there a percent, even if it's very ballpark, of what you think that market, what percent of what's internal combustion engine today would be electric by, you know, say 2025?
Yeah. This is a tough question, Robin. How fast the customer will accept electric is very difficult to predict. We see right now in the car a very fast acceleration of those trend. Obviously, there is more offering than ever before. On top of it, there is some restrictions that are coming in many countries and it's trendy. A lot more people want to ride electric. Then, we don't have much hard data on this, but we want to be in front of the wave to make sure that we are one of the first to benefit of this trend in term of consumers and we believe it is the right thing to do and a very good opportunity for us.
Okay, great. Thank you very much.
Next question comes from Martin Landry from Stifel GMP. Please go ahead. Your line is open.
Hi. Good morning, everyone. My first question, Sébastien, on your revenue guidance of a growth of 24%-29%, I'm wondering if it'd be possible to break down the growth between unit and pricing.
Yes. Is that your only question or?
No. No, I have another question.
Yeah. You have about, just in terms of pure pricing there, for next year, full year compared to this year, you have about a 4% increase coming from pricing.
4%?
Yeah.
Okay. Okay, that's helpful. Thank you. Then, I believe you mentioned that, you know, 17% EBITDA margin implied in your guidance for fiscal 2023, it's a level that you see as sustainable on a go-forward basis for future years. It's much higher than your EBITDA margins that you had before COVID, which were around 12.5%. You know, wondering if you could bridge for us the difference, you know, what are the puts and takes that explains that uptick in your profitability?
Yeah. If you go to slide 17, which I shared this morning, obviously there are several puts and takes, but the main one is obviously our business has grown, compared to where it was pre-COVID. Also our footprint, our manufacturing footprint has also changed.
We are leveraging our Mexican operations. We have grown in Mexico, and that obviously provides us with a huge opportunity to improve margin through the more efficient and better cost operations. The third element I think is the overall environment around sales programs. There were a lot of learnings that came out of COVID that we will continue applying going forward. There's a few hundred basis points that'll be coming from, I guess, a better managed retail program environment, better managed inventory as well at the dealer network. These would be the three main elements that would drive sustained margin growth. When you look at other OEMs in the past, many of them have been able to sustain these types of margins as well.
One of the big drivers was the volume that came with their businesses. That's obviously something we're benefiting from.
Okay. That's helpful. Thank you, and congrats on the great results.
Thank you, Martin.
Our next question comes from Craig Kennison from Baird. Please go ahead, your line is open.
Hey, good morning. Thanks for taking my questions. You know, looking at world headlines, they're certainly troublesome, to say the least. You've got war, oil, inflation, and then central bank policy. I guess, first, have you seen any change in consumer trends since the outbreak of war? Secondly, if we do enter a recession, you know, what are the key pages of your recession playbook for management?
Good morning, Craig. First, we didn't see since the beginning any change in customer interest or behavior for our product line. As you know, we stopped delivery in Russia. For fuel price, you know, a lot of people talk about fuel price, but the increase in fuel cost is quite high, but this is a low impact in the cost for our customer. I give you some number. A snowmobile customer, and this is coming from our warranty data. The average customers on snowmobile spend about CAD 500 a season average on fuel. If you increase 30%, that's CAD 150. ATV customer is CAD 200 a season, then the 30% translates to CAD 60 more for a season.
The fuel price, obviously, nobody likes it, but it's like a minimal impact on the customer ownership for a season. The rate of inflation is not the rate of inflation. Interest rates are quite low. When you combine all this, we didn't see yet any slowdown in any customer interest.
If I talk about your question on recession, obviously, we're a much different company than we were 10 years ago at the last recession. From just a core balance sheet point of view, obviously, we have a very strong balance sheet with low leverage at 1.2x . When you look at the overall powersports industry and the environment, there is very low inventory in the network. That means no need to put promotions in. You're able to continue to ship units to dealers, so you don't have to shut off operations drastically like what happened in 2008, 2009. Obviously, as a business, we're much more diversified as well. Our product line, more product lines.
We also have different product offering in terms of price point entry-level models that are there that weren't there back in 2008 and 2009. Our business from a geography point of view as well is well diversified with over CAD 2 billion of revenue in international. Two other points. Obviously, our manufacturing footprint in Mexico offers us with a lot of leverage opportunity in terms of efficient manufacturing. I guess the last point and the key point is that it's our lineup. We have a super good lineup that is very competitive.
As a player in the market, we believe that we would come out very strong, as demand for the innovations that we've introduced recently is very good, and we expect that it would continue to outpace the industry if a recession were to happen.
That's very helpful. Thank you. Just to follow up on the electric motorcycle strategy, could you give an indication for what you think the margin profile of that business might be when it's fully mature versus what, maybe your core business, performs at?
Well, obviously we're entering in this business because we believe it's one, a good opportunity for us, and two, it's a profitable opportunity. All our businesses, we have obviously multiple product lines, and they all have varying degrees of profitability. We're not entering into this business because we believe it's gonna be an underperformer versus other product lines. We are leveraging some of the, obviously, our footprint, our supply chain, our dealership, our brands. That provides us with an opportunity to be cost efficient. As you know, and as we've said in the past, we are insourcing the technical know-how. As we've done for internal combustion engines, we're doing the same thing with electrics, electrification of our products. That also provides us with a cost competitive advantage.
In order to own this know-how, obviously, you make usually better profits. Overall, we're excited about the opportunity. It could be a sizable opportunity for us down the road.
Also I would add to Sébastien, you know us, we like to push technology and innovation. I mean, we intend to come with a product that will wow the customers. We came up with some idea that we believe will make a difference, we feel it's a good opportunity.
Great. Thank you.
Our next question comes from Xian Siew from BNP Paribas Exane. Please go ahead. Your line is open.
Hi, guys. It's Xian Siew here. Thanks for all the details. Maybe on market share gains, how are you thinking about that for fiscal 2023? You know, you mentioned some limited availability hurt maybe share in some categories in the quarter, but then you know, so maybe that catches up and then you have strong volume expectations. Maybe, some help on how you're thinking about that for next year. Within that, I guess, what are your expectations for retail sales in fiscal 2023?
On the retail or market share gain, right now the demand for our products and the pre-sold units are so high that the market share gain depend more on our ability to supply and which product line in which quarter. I give an example. In Q4, because we're getting into the peak of the snowmobile season, we favor snowmobile at the expense of watercraft in North America because in the north, in the snow belt, you don't need a watercraft in Q4. Now we're shifting in Q1, and in Q1, obviously the snowmobile production is done and we're shifting to watercraft.
Starting from probably for the next 12 months, you need to be careful not to look at the retail by product line by quarter because it depends a lot more what we prioritize versus, the need for the industry and the supply chain constraints we could have. That's why I gave the example of the gauge family to better explain the idea. Obviously I cannot give you this morning the market share we're planning by product line, but you see the type of growth we're planning on the top line, then this will obviously reflect on market share gain. That's the extent I could answer your question.
Okay. Got it. Yeah. No, that makes sense. Then maybe on the retrofit, you know, this quarter you had a nice increase in the units kind of driven by that as you gave them the parts. I guess how many more units are out there in terms of retrofit? I know you're adding more, but any, you know, how many more you know, how do you think about that retrofit evolution through the year maybe?
We will continue using that strategy for the year. It will vary depending on the product line and the quarters and the month. Just to give you an appreciation of what it meant for Q4, the retrofit unit, the impact on revenues was about slightly above 5% impact on revenues, our ability to accelerate the retrofitting of units that were there in Q3 that we retrofitted in Q4. That's the magnitude of it, and I'm not expecting it to vary that much quarter to quarter.
Again, the strategy is to run the factory at maximum capacity. When we have a missing part that is easy to retrofit, we prefer to ship it to the dealer because that's easier to ship the component and you have a lot of dealer repairing the unit than to serve our customer, to deliver our unit to the customer in the season is faster. This is a strategy that dealer prefer that we do this versus reducing our production and reducing their orders.
Okay. Got it. Thank you.
Our next question comes from Brian Morrison from TD Securities. Please go ahead. Your line is open.
Hi. Thanks very much. A couple softballs for you, Seb. Just within those retrofits, can you just break down by product line? Is that mostly ORVs at this point in time?
It varies. We ship, we are in the peak personal watercraft season, so if we're missing components on watercraft and it's something that could be refitted at the dealership, we'll ship personal watercraft. It's gonna vary.
Okay. In terms of your working capital, you've got a pretty big tailwind. I'm wondering in dollar volumes, what do you think the unwind will be this year? If I look to fiscal 2024, should I expect CapEx still in that CAD 700 million range?
For CapEx, yes, you should expect it in that range going forward. Yes, this year, the working cap should be a tailwind, probably in the range of CAD 200 million-CAD 300 million.
Okay. Last question, just with, you know, it kind of alludes to a previous question this morning. Just with world events, is there any change to your geographic allocation? Like, is Europe still gonna be 15%-20% of your forecast revenue, or is that what's in your outlook?
Well, obviously, we've reflected our decision to exit Russia in our guidance. Russia was probably a business of about CAD 250 million or 5%, less than 5% of our revenues, call it CAD 200 million-CAD 250 million. Obviously we're not expecting a lot of revenue to be generated from that market this year. The good news is we're able to reallocate these units to other markets that are in need of units. We're not expecting a negative financial impact from our decision to pause shipments in Russia this year.
All right. Just the cadence of Switch, is that still CAD 500 million target over three years? How you should get there is kind of linear?
It's still the target.
Thank you.
Our next question comes from Joe Altobello from Raymond James. Please go ahead. Your line is open.
Thanks. Hey, guys. Good morning. Just a few questions on the outlook. I guess first you talked about EBITDA and how that's gonna progress throughout the year. Can you give us a sense for what the cadence is for revenue, particularly in Q1? I'm trying to understand if the decline in Q1 EBITDA is mostly margin related, or is there some revenue impact as well?
Some of it is revenue related as well. We expect revenue to be probably in line with what we had last year. Obviously, delivery is impacted by the supply chain, mix as well. Obviously, we've had a few price increases compared to last year which should compensate, but flattish revenue.
Okay, that's helpful. Maybe secondly, the implied EBITDA decline in Q1, it sounds like it's mostly supply chain. Is there some commodity impact there as well? Secondly, I assume this is industry-wide, it's not BRP specific in terms of what you're seeing in this quarter.
Well, what happened is beginning of the year, a few of our supplier, mainly in Asia, was hit by the Omicron variant, and some were operating at, let's say, 50% of capacity. That created like a hole into the supply of their component, which will reflect in the beginning, the Q1. This is why we give you some guideline on how the Q1 will be affected.
In terms of commodities, are you baking in any commodity inflation?
As I said in my question I had earlier, it's about a 200 basis point impact coming from commodities and efficiencies this year.
Got it.
For the full year.
Great. Thanks, guys.
Our next question comes from George Doumet from Scotiabank. Please go ahead. Your line is open.
Yeah. Morning, guys. Congrats on a strong quarter and outlook. Seb, can you maybe quantify the dollar value that we've incurred in terms of cost for supply chain fiscal 2022?
Well, obviously the math is pretty easy to do. I'll just pull out my numbers. If you look at the overall margin impact coming from cost inefficiencies or I'd call it a 300 basis point impact coming from inflation, and inefficiencies.
Okay. If you.
Go ahead.
Obviously most of them happen, I'd say probably in the last eight months of the year. Earlier in the year it was more tempered in terms of inflation.
Okay, got it. If we were to look beyond fiscal 2023, with the restocking, can you maybe quantify some of the margin pressure or headwind that you can face, like, from future, I guess, unfavorable mix and sales programs kinda coming back?
Yeah. Obviously, we've introduced a lot of new products with a richer mix, so I'm not expecting mix to significantly impact us negatively. I am expecting programs to increase. Obviously, we've benefited from a low promotional environment. My expectation is that next year we'll probably have 100 basis point negative impact, and that's gonna continue on in the years to come after.
Okay. Thanks. Maybe for José, the CAD 500 million revenue goalpost that you guys put out for Switch, would you maybe care to put a venture out there in terms of when, how many years you think we'll need to attain that number?
Like I said, when we introduced Switch, we were targeting to be north of CAD 500 million within three years, and we're tracking to be there.
Okay. Awesome. Thanks a lot, guys.
Yep.
Our next question comes from Benoit Poirier from Desjardins Capital Markets. Please go ahead. Your line is open.
Hey, good morning, everyone, congrats for the good quarter. Just coming back on the electric two-wheel market, could you talk about where you see the revenue opportunity three to five years down the road? How sizable it could be? Any thoughts about the potential market share and the average selling price overall?
Obviously, Benoit, the delivery will start mid-2024. We are two years in advance. We don't want, for competitive reason, to give too much color on all this. What I can say is, again, phase one of product and phase one of market strategy is North America and European market, 600,000 units a year. You can expect that in time, we could introduce that family in other region, but we don't know yet. We need to better do the analysis. The other thing is there could be other family of product to come.
For this first family of product in North America and Europe, introducing it in mid-2024, we would be disappointed if we would not be north of $ 500 million in sales by 2030.
Okay. That's great color. Would you be willing to disclose where those units will get manufactured, José?
Yeah, Querétaro.
Okay. That's great.
Delivery.
Now if we look at PWC, obviously there are some peer, some of your peers that struggle in 2021. You were able to gain some market share and one of your biggest peer announced the production cuts of 30% in production for 2022. Could you talk a little bit about how Sea-Doo differentiate from your peers and whether you'll be able to grab further market share gain for PWC in the upcoming season?
Like I said, Benoit, a few minutes ago, the retail demand is so strong and there are so many units pre-sale that the market share depend more on our ability to supply the product. Our strategy have been to run our factory at maximum capacity and if we have back order, either we retrofit them or the dealer retrofit it. That's a different strategy than some of our competitor have done, who they prefer reducing their production. Our goal is to run Querétaro at maximum capacity and to deliver as many units as we can in season 2022 and season 2023, fiscal year 2023, because that's a great opportunity. On top of it, I would say that our product is extremely popular.
Watercraft is benefiting from a lot of popularity right now. The FishPro is doing extremely well, and we will introduce in fall other new product. We are right now in, I would say a very exciting period for Watercraft, and we'll try to benefit as much as we can from it.
Okay, that's great. Last question with respect to capital deployment, obviously, if we take into account your SIB and NCIB and upcoming free cash flow generation for fiscal year 2023, you're gonna end the year with still what I would see as a very strong balance sheet. Any thoughts about the capital allocation and whether the 2x leverage is still a level you would target longer term?
As we've said, we're comfortable operating within a range of 1.5x-2 x. As you've mentioned, yes, we have obviously a strong balance sheet and good financial flexibility to continue returning capital to shareholders. As you saw this morning, the SIB is a good indication of this. Obviously, we have confidence in the business. We have confidence in the growth as well that we're able to deliver, and we believe that announcing the SIB today was a good step in that direction.
Perfect. That's great color. Thanks for the time.
Thank you.
Merci.
Our next question comes from Derek Dley from Canaccord Genuity. Please go ahead, your line is open.
Yeah. Hi, I'll echo congratulations on a great quarter and outlook. Just as it relates to the R&D spend, you know, historically it's been in a sort of 4.5% range as a percentage of revenue. Should we expect something similar next year, or will that be going up with the electric motorcycle project?
We should expect something very similar next year. When you look at the overall decline in EBITDA margin, it will come from gross margin, but from an overall operating expense as a percentage of revenue should be very similar to what we have in fiscal year 2022.
Okay, that's helpful. I know this is a tough one, but in terms of the, you know, you guys are calling for supply chain issues to, you know, relent in the back half of the year, the back three quarters of the year. I mean, what is kind of giving you confidence that that's gonna be the case? Are you seeing, you know, some incremental improvements on the edges today?
I would say right now the main difficulty is semiconductor. The rest, there is always some ups and down, but it's more manageable. Right now is semiconductor that remain more difficult. Our supplier, our main key supplier believe that it will get better in the back half of calendar year 2023. The other one that is a bit difficult is the shortage of container and transit time that sometimes is not unplanned. This is why, because our supplier of semiconductor believe it will get better, we believe it will get better in the fall of 2023.
Okay, great. Thank you very much.
Thank you.
Our next question comes from Cameron Doerksen from National Bank Financial. Please go ahead, your line is open.
Yeah, thanks. Good morning. I guess just to follow up on the supply chain question. Is there any, I guess, incremental risks that you see to the supply chain just from this war between Ukraine and Russia? I mean, is there any European suppliers that are cause for concern, or is there any incremental risks around semiconductors that you're, I guess, concerned about?
Yeah. First, we have no supplier either in Russia or Ukraine. That's at least positive. Obviously a lot of people talk about neon. We know that Ukraine was a big producer of neon for semiconductor companies and electronics companies. It seems right now they seem to have found ways to manage that. So far, no big supplier or supply issue caused by Russia and Ukraine.
Okay. Perfect. Just my second question, just going back to the, I guess, the EV motorcycle. I mean, you sort of touched on some of these points, but obviously, there's quite a few other manufacturers and startups trying to build electric motorcycles. So I just wonder if you can maybe detail a little bit more what is gonna differentiate BRP in that market, which right now looks to be a pretty crowded market?
Obviously, Cameron, we won't disclose too much this morning. We are two years before shipment. I mean, it's. You know our track record with product like Spark, product like the Ryker, product like the Sea-Doo Switch. Again, the new Can-Am electric motorcycle will leverage the existing electric power pack we're developing for the other product lines. For us, we're benefiting from a modular electric power pack that we'll build in-house. We found ways, we believe, to come out with some interesting innovation into the motorcycle industry, leveraging again the brand, manufacturing footprint, the dealer network. For us, it's an additional product line that is continuing to build our product portfolio that makes a ton of sense.
We believe, and this is, I mean, our track record prove it, we will become a legitimate OEM into the motorcycle industry.
Okay, you know, just to follow up, I mean, I guess, obviously, your original plan was to roll out electric vehicle versions of basically all your products over the next several years. This is obviously the first announcement here, but is it still your expectation that you'll keep to that timeline for electric product introductions across the product portfolio?
Yeah. All product line will offer some electric model by the end of 2026.
Okay. Great. Thanks very much.
Thank you.
Our next question comes from Fred Wightman from Wolfe Research. Please go ahead. Your line is open.
Hey, guys. I just wanted to follow up on the semi-finished inventory commentary. I think last quarter you gave us sort of a bridge from the reported dealer inventory number to what that would look like with the semi-finished units. Is there any chance that you could do that again, this quarter?
Yeah. If obviously we have very little inventory in the dealership that was unfinished. Obviously, what occurred is that we were able to ship a lot of components in the back half of Q4. Just to give you some color, if we had not shipped these components in the dealership, the inventory year-over-year would have been down in the 20% range instead of up 21%. Obviously, it had a big play in Q4 in terms of inventory availability. As I said, it obviously helped retail in February as we had a record month from a retail point of view this past February.
Perfect, guys. Thank you.
We have no further questions. I would like to turn the call back over to Mr. Philippe Deschênes for closing remarks.
Super. Thank you. Thanks, everyone, for joining us this morning and for your interest in BRP. We look forward to speaking with you again for our first quarter conference call on June third, and we hope to have you with us at our upcoming Investor Day later in June. Thanks again, everyone, and have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.