Good morning, ladies and gentlemen. Welcome to the BRP Inc.'s FY 2023 Second 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, Julie. Good morning, and Welcome to BRP's Conference call for the second quarter of fiscal year 2023. 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 future 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. BRP once again demonstrated its ability to succeed in a unique operating environment. We concluded the first half of the year on a very strong note by delivering our strongest quarterly revenues and normalized EBITDA ever. Our team resiliency was further tested following the end of the quarter as we were the target of a cyberattack, forcing us to temporarily suspend operations. Our quick reaction and relentless effort allowed us to contain the situation and limit its impact. A very special thanks to our team of IS&T experts who did a remarkable job from the very beginning and who have worked diligently to restore operations and systems. As this situation is causing delays in delivering products to customers, I sincerely thank them for their comprehension.
We expect to make up for the lost all sales throughout the second half of the year, limiting the impact on our result. Consequently, with better than expected results so far this year and supply chain improvement, we are increasing our normalized EPS guidance for the year to a range of CAD 11.30-CAD 11.65 per share, representing a year-over-year increase of 14%-17%. Let's turn to slide four for key financial highlight. Revenues reached CAD 2.4 billion, up 28% compared to last year, driven by solid growth for side-by-side and three-wheel vehicle and the introduction of the Sea-Doo Switch. Normalized EBITDA was up 1% to CAD 418 million, and normalized earnings per share increased 2%, reaching CAD 2.94. Turning to slide five for a look at our Q2 retail performance.
Retail sales continued to be limited by product availability, resulting in a decline of 16% for powersports product in North America for the quarter. However, excluding personal watercraft, for which shipments were delayed compared to last year, we outpaced the North American industry. While our retail sales were down 2%, industry sales were down high single-digit percentage . The retail decline does not indicate a lack of consumer demand. It reflects limited product availability in our dealer network. We are confident that retail will improve as we continue to ship more product, and it is, in fact, what we are experiencing so far in Q3, as shown on slide six. As you know, over the last few quarters, we have shipped units that were missing a few components and retrofitted them at the dealer when components are available.
This strategy is paying off, as you can see on this slide. At the end of Q2, our network inventory was up 134%, including a significant number of unfinished units for which missing components were shipped to dealers in the last two weeks of July. This improved unit availability led to retail growth over 20% so far in Q3. This shows that consumer demand is still strong and everything we ship to dealers continue to convert rapidly in retail. Moreover, despite higher interest rates, consumer credit acceptance remains stable and we are seeing many positive signs of continued trend in demand. We still see a strong influx of new entrants of 41%. Website traffic and Google search for our different brands remain significantly higher than pre-pandemic levels.
Retail velocity is solid and dealer booking following our Club BRP is ongoing and orders are trending up over 20% versus last year. Turning to slide seven for a quick supply chain update. The supply chain environment evolved positively as expected in the second quarter, and we are seeing improvement in all key areas. Delivery schedule of components requiring semiconductors is better. We are dealing with less supplier disruption, which help the planning of our production schedule and logistics costs, availability and delay level are all improving. We are also seeing price coming down across many commodities, which could be favorable long term. However, the benefit will be limited this year as input costs are mostly hedged throughout the back half of the year. As planned, these supply chain improvement put us in a good position to increase production throughput and deliver solid growth in H2.
Turning to slide eight for an overview of the key product introduced at our Club BRP held in August. It was our first in-person dealer event since the start of the pandemic, and the first that combined both our powersports and marine dealers network, leading to the highest attendance ever, with over 5,300 participants from 55 countries. In terms of product launches, we strengthened our Sea-Doo lineup by creating a new industry segment with the introduction of the Sea-Doo Explorer Pro, officially designed for longer trips on the water. On the Can-Am off-road vehicle side, we improved our offering in the mid-power sport side-by-side segment, a large and very popular category, and we reinforced our kid ATV lineup, an industry segment that has seen significant growth in recent years.
We also unveil upcoming product on the EV side, including the two initial model of our electric motorcycle lineup. The Can-Am Origin, a dual-purpose motorcycle equally capable and on and off road, and the Can-Am Pulse, the perfect motorcycle for rides in and out of the city. We also introduced the Sea-Doo Rise, an electric hydrofoil board that combine the pace of a board with the exciting sensation of foiling. This product opened a totally new market for us, and our research revealed that the vast majority of consumers who own or have owned a Sea-Doo show interest for the Rise. In addition, this is an ideal electric product since very little energy is consumed when foiling. This is a great example of innovation you can expect from us, and you can look forward to more exciting product like this in the future.
Initial shipment of these three electric product are expected for summer 2024. Another main highlight of the club on slide nine was the official introduction of our new first BRP design boat lineup with the Rotax S engine technology. When we launched our buy build transform strategy with the acquisition of boat companies in 2018, our objective was to create a critical mass that we could leverage to transform the marine industry with our design, innovation, and technical know-how. This is exactly what we are doing with the introduction of our new Manitou, Alumacraft, and Quintrex boat lineups that redefine the boating experience and all include our new Rotax S engine. This groundbreaking outboard engine disappear under the boat, which creates a truly integrated design and free up valuable space.
This brings significant benefit to the consumer in addition to being priced competitively with equivalent model on the market. The boat attracted large crowd during the Club BRP. Our new boat are very well received by marine dealers, and many powersports dealers also expressed interest in carrying these product lines. With these new lineups, we expect to gain additional market share in the large and attractive CAD 36 billion marine industry. It also represent an important step towards our objective of growing our marine business to CAD 1 billion by fiscal year 2025. Moreover, these are the first boat designed with the modular approach, which will improve margin in our marine business as we expand this design to additional models. We are very excited about this new step in our marine strategy. Now let's turn to slide 10 for year-round products.
Revenue were up 42% to CAD 1.4 billion in Q2, representing by far our strongest quarter ever for year-round products. The growth was primarily driven by strong shipment and a favorable mix of side-by-side and three-wheeled vehicle. In terms of retail, the 2022 North American ORV season ended on June 30th, and both our Can-Am side-by-side and ATV outperformed their respective industries. Side-by-side vehicle gained ground in all three segments and had a 3 percentage points of market share for the season. Both product line have also outpaced their industry in the quarter. Side-by-side notably achieve its highest market share ever in the month of July. The strong retail momentum continue in August, driven by improved product availability, leading to our side-by-side retail being up about 60% so far in Q3.
As for three-wheel vehicle, despite retail being down in the quarter due to limited product availability, we still outperformed the industry. We continue to gain traction with consumers through several initiatives, such as Women of On-Road and rider education programs. For which course completion are up significantly year to date. We are well-positioned to sustain our momentum in three-wheel vehicle with increased shipment for the upcoming months. Turning to seasonal product on slide 11. Seasonal product revenues were CAD 691 million, up 20% from last year, driven by the introduction of the Sea-Doo Switch, as well as by favorable pricing and mix for personal watercraft. Looking at the retail. Our retail for personal watercraft in the second quarter was impacted by limited product availability due to the dealer unit shipment, which will take place later than usual in the season.
This resulted in retail down low 30% in the second quarter, but up high 20% so far in the third quarter. While the delay of deliveries was not ideal, the momentum in our Sea-Doo business is very strong and demonstrated by solid booking trends. For example, in its second year, dealer order for the model year 2023 Sea-Doo Switch are trending about 3 x higher than the actual production of model year 2022. As for snowmobile, we are currently in the slow period of the year, but we are very well positioned for the upcoming season with a record level of unit presold to consumers. Continuing on slide 12 with a look at powersports parts and accessories and apparel and OEM engines. Revenue were up 4% to CAD 257 million for the quarter.
Our revenue continued to benefit from our growing product portfolio, which led to higher replacement parts and the popularity of our accessories driven by the LinQ ecosystem. However, growth was limited in the quarter due to lower volume of accessories for personal watercraft in light of dealer unit shipment. Looking ahead, PA&A remains a key growth area for us. Our focus on innovation will allow further drive consumer interest for accessories. This includes bringing the LinQ system to our expanded boat lineup and introducing products with a high potential for add-on accessory sales, such as the Sea-Doo Explorer Pro. Moving to marine on slide 11. Revenue reached CAD 132 million, up 5% from last year, driven by a more favorable product mix, partially offset by lower boat shipments. Looking at retail sales.
In North America, Manitou performed well with retail up low teens percentage in the quarter, while Alumacraft was down low 20%, reflecting our exit from fully welded boats. In the Australian market, the second quarter represents the off-season and dealer retail was down on low volume. Looking ahead, as mentioned earlier, we are shifting our focus to the next boat generation with the Rotax S engines. Production of these boats will begin to ramp up in the fall, and they should be available to customers in time for the next boating season. With that, I turn the call over to Sébastien.
Thank you, José, and good morning, everyone. Thanks to the sustained robust demand for products and the improving supply chain environment, we delivered our strongest quarter ever in terms of financial results. Looking at the numbers, our revenues for the quarter up 28% versus last year, reaching CAD 2.4 billion. Our gross profit margin was roughly in line with our expectations, ending at 24.7%. Was down in comparison to last year's level as the benefit from volume, mix, and pricing was more than offset by supply chain and inflation, both of which impacted logistics, commodities, and labor costs. Still, we continue to tightly manage our expenses, leading to strong normalized EBITDA of CAD 418 million, representing a normalized EBITDA margin of 17.2%.
Our normalized net income came in at CAD 238 million, resulting in normalized earnings per share of CAD 2.94, up 2% from last year's Q2. From a cash flow perspective, we generated CAD 332 million of operating cash flow, and we continued investing in growth with CAD 112 million of CapEx, resulting in CAD 220 million of free cash flow generation for the quarter. We also seized the opportunity to further strengthen our balance sheet by increasing our revolver capacity by CAD 400 million and raising a $100 million term loans. These actions provided us with the flexibility to continue investing in our long-term growth.
Notably, as we recently announced re-acquisitions, all the while maintaining the capacity to make the necessary investments in working capital and ensure that we maximize our production output and sustain our solid retail performance in the current environment. Moving to our network inventory on slide 16. Year-over-year, our network inventory is up over 130%, with most of the increase being driven by strong shipments of missing components to dealers late in the quarter.
This was particularly true for our side-by-side business, as our network inventory at the end of July was three times higher compared to what it was last year, leading to retail growth of about 60% so far in Q3 and positioning it as well to meet customer demand throughout the back half of the year. Still inventory levels remain very low from a historical perspective, being down 44% in comparison to the second quarter of fiscal year 2020. As José highlighted earlier, our strategy of retrofitting units at the dealership is paying off as these shipments of components towards the tail end of the quarter. That's a very strong retail growth of over 20% so far in Q3. Now looking at slide 17 for an update of the guidance for the year.
Before getting into the numbers, I would like to come back on the impact of the cyber incidents which we were victim of earlier in August. As we communicated when the attack occurred, our monitoring systems rapidly detected the breach and allowed us to take necessary precautions to limit the impact. Soon after, we put into action our plan to progressively restart operations, and most of our sites were operational within a couple of weeks. All in all, we lost somewhere between one-two weeks of production, depending on the facility. However, as previously disclosed, we expect no impact from this event on our guidance this year as first, we expect to recoup part of the production loss by working weekends and overtime.
Second, while the incident resulted in downtime from a manufacturing standpoint, we continued receiving components throughout that period, and ultimately these components will be used to reduce the level of unfinished inventory planned for the rest of the year, and therefore allow us to deliver more wholesale from these units. From a revenue standpoint, we expect to be able to offset the volume loss and then some. With this, now let's go over the updated guidance. Our updated guidance reflects our stronger than anticipated second quarter results. Our expectation that we will offset the impact of the cyber incident through overtime and additional conversion of retrofit units and an improving supply chain environment favorable to higher production and to higher throughput of fully completed units in the second half of the year.
Given this, we now expect to be able to deliver more side-by-side and seasonal products versus our previous guidance. As a result, we therefore expect our total revenues to grow between 26% and 31% for the year and normalized EBITDA to grow between 14% and 17%. These adjustments results in a CAD 0.03 EPS improvement, and our normalized EPS is now expected to end between CAD 11.30 and CAD 11.65, representing a growth of 14%-17% over last year. As you have already realized, this implies a very strong second half of the year, as you can see on slide 18. In fact, we expect to deliver record results in the second half of the year with revenues up 27%-36% and normalized EBITDA up 41%-48% compared to the first half.
We are well positioned to deliver these strong results given the improvement in the supply chain with our products with robust retail so far in Q3, high level of snowmobile pre-orders, very positive reception of our new product introductions leading to strong momentum with bookings following the recent Club BRP, and a very solid inventory replenishment opportunity. In terms of how we see H2 unfold, we expect normalized EPS to be up over 50% in Q3 and the rest of the growth to come in Q4, resulting in a record second half. On that note, I will turn the call back to José.
Thank you, Sébastien. Before concluding, I would like to briefly discuss the acquisition announced in July and August. At our investor day in June, I pointed to significant opportunities in powersports and marine, which support our M25 objective of reaching CAD 12-CAD 12.5 billion of revenue and $13.50-$14.50 of normalized EPS. We are also looking at expanding our addressable market to support our growth beyond fiscal year 2025. One of these opportunities is our entry in the CAD 15 billion European and North American two-wheel motorcycle industry with the introduction of our electric Can-Am motorcycle family. These new products were very well received at the Club BRP. We are also exploring other markets in mobility and urban services, as well as in low voltage EV products.
As an example, the Sea-Doo Rise electric hydrofoil is the first product to be introduced that comes from exploring such markets. This is just the beginning. You can expect more innovation from us in the next few years. In total, we estimate these new markets to be worth about CAD 70 billion, and there is room for us to capture significant market share. To support our ambition in this field, we recently announced three key acquisitions as shown on slide 21. These acquisitions are Great Wall Motor Austria, and welcome a team of 53 experienced engineers, technicians and professionals specialized in the development of e-drive system and transmissions. An 80% stake in Pinion from Germany, a pioneer in the development, design, assembly, and sales of compact gearbox technology for traditional and electric bicycle.
The Canadian powersports operation of Kongsberg, a longtime supplier of ours, specializes in electronic and mechatronic production, development and manufacturing. All these acquisitions are expected to support our long-term growth by adding key capabilities and know-how to support our EV strategy and entry in new markets. I am very excited with this acquisition that brings us great talent and innovation opportunities. In conclusion, I am pleased with our performance throughout the first half of the year as we've delivered better than expected results in a challenging environment. Looking ahead to the rest of the year, we are well-positioned to deliver record results in H2 on the back of our solid product portfolio, healthy consumer demand, and signs of improvement in the supply chain environment.
Beyond this year, the strong inventory replenishment cycle, new product introduction, additional production capacity, and recent acquisition put us in a good position to sustain our growth trajectory. Lastly, I thank all our employees for their hard work, resilience, and dedication, our suppliers for doing all they can to meet our orders, and our dealers for their support. On that note, I turn the call over to the operator for questions.
Thank you. At this time, I would like to remind everyone, in order to ask a question, press star one on your telephone keypad. To withdraw your question, press star one again. We'll pause for a moment to compile the Q&A roster. Your first question comes from Robin Farley from UBS. Please go ahead.
Great. Thanks for taking the question. Obviously very strong results. I'm just curious why your gross margin guidance is unchanged when the revenue is higher. Just given your comments about, you know, improvements in the logistics and commodity pieces, with that higher revenue kind of not translating into, I don't know if you're perhaps just being conservative, but wanted to hear your thoughts on that. Thanks.
Yep. Good morning, Robin. Obviously, there are pluses and minuses in building the guidance, and obviously, yes, a better top line, which is good. We are improving the overall EBITDA as well, coming with higher revenues. It's a variation between operating expenses and gross margin. We will be investing probably slightly more in operating expenses, and that's why you're not seeing the gross margin move. It stays flat.
Okay, great. Thanks. Just one quick follow-up. Are you seeing anything in the environment that's promotional from others? It sounds like obviously, you know, continuing strong retail demand and lack of availability, you know, across the board, but just any thoughts there? Thanks.
No, so far, I mean, I would say the environment is quite stable like we saw in the last, I would say 18 months.
Okay, great. Thank you.
Next comes from Xian Siew from BNP. Please go ahead.
Hi, guys. Thanks for the question. The quarter to date retail sales up 20% for your products is very impressive. I guess, where do you think they shake out for the rest of the year, and how do you think the industry is comparing relative to that, 20%?
Well, if you look at our year to date or first six months, our retail is down 12% after six months. With the planned increase in wholesale and the better inventory position versus a year ago at the end of Q2, our expectation is that total retail for the year for us should probably be high single digit, is where we're targeting to end. From an industry perspective, obviously, it's still limited by inventory, and so I'm expecting the industry to probably be in the mid- to- low single digit overall industry growth for the full year.
Okay, got it. I guess to clarify, that 20% quarter to date for you, that's outperforming industry, right?
Well, we don't have the industry data as of the mid of September. The number is based on over the Monday's data, so year to quarter or quarter to date Monday. Obviously we don't have the industry data as of mid-month.
Okay. Got it. Yeah. It sounds like you're making progress on the retrofit, and that's helping the availability and some of the increases in the quarter to date retail. Just curious, how many, like, new orders are you still making, you know, increasing the number of pre-orders? I think pre-orders were up 80% Q1. Where are we today, and is there any way to kinda think about the pace of new orders coming in?
First, on the retrofit side, like I said in my remark, we received a lot of component on the month of July and a lot in the last week of July that have been delivered to the dealer, and that's the reason why we saw the retail going up in Q3. The supply chain are definitely getting better than we expecting the number of back order to go down significantly by the end of the year. This is overall quite healthy. In term of your second question on the pre-orders, this time of the year, it's a bit difficult to read. The snowmobile, obviously pre-order are extremely high. This didn't change.
We've just came out of the Club BRP beginning of August, with the introduction of the Sea-Doo Watercraft, Sea-Doo Pontoon, the side-by-side and ATV that we allocated till December, the three-wheel vehicle and all the boat.
So far, the reception of the dealer is excellent. Like we said, the booking, because we introduced the product, we have discussion on volume and booking are coming in right now, and we're trending about 20% up versus last year. Been very happy with that. Product well received. I would like to remind you that the dealer are the front liner. They are dealing with the consumer and so far, I mean, the momentum is great.
Okay, got it. Thank you very much.
Your next question comes from Benoit Poirier from Desjardins Capital. Please go ahead.
Yes, thank you very much, and congratulations for the results. Just to come back on the strong retail performance so far in Q3, obviously up over 20%. I was just wondering how much is driven by order placed during the quarter versus those who have been made prior to Q3. If you could provide some color about the inventory replenishment, whether this is still around CAD 1.4 billion and mostly skewed towards fiscal 2024, or is it trending a bit earlier than expected? That would be great. Thanks.
Yeah, sure. I'll pick up on the inventory question, and I could cover also the order. Obviously, when you look at the inventory and to compare it to where we were in Q1, it's up CAD 400 million at the dealer network. We talked about the inventory opportunity replenishment 1.4. You can appreciate that a significant portion of that inventory is related to seasonal products, such as personal watercraft. A lot of the retail that is happening in August was for personal watercraft. Even with the cyber incident, wholesale deliveries were lower than expected in August. As of today, my inventory in the network is actually lower than where it was in July.
Given the short-term nature of the product that we shipped in July, i.e., in terms of when they were supposed to be retail, I'd say that the 1.4 opportunity is still there today. As in terms of the retail which happened when the orders from the consumers were placed, these orders that have been with dealer in dealers hands for a long time. As I said, some of them were Switch, some of them were personal watercraft, so in-season products. Side by side, the inventory is so low that consumers had placed these orders with the dealers several months or several quarters ago.
Okay, that's great. Just a question on the snowmobile. Obviously, you have already pre-sold a very good number of snowmobiles for the upcoming winter. Given the stop-ride-sale at Polaris, do you see an opportunity to gain market share ahead of the winter season, or is most of the planned inventory already sold out?
I mean, like we said, Benoit, a high level of our Ski-Doo model year 2023 are already sold to end consumers. There is always some in-season model, but, for sure, it's difficult to see how our competitor will react and if they will slow down production because of all this. This make us even more confident that we will sell through everything we have. We will ship to the dealer before the end of the year.
Okay, perfect. Last one for me. Do you see, in terms of booking trend, is there a larger interest for or do you see a big change in the mix versus between entry-level and higher-end products?
No. No, I know many of you have that question, but so far we didn't see any trend versus the low end. What is interesting, you know, it was our first in-person dealer meeting, beginning of August, and we gave the allocation to the dealer. Now we're hearing that many a dealer already sold their whole Sea-Doo 2023 allocation to end consumers. Same thing for the Sea-Doo Switch. I know we have some concern about the demand and the environment of the global economy, but so far we don't see that in our industries.
Okay. Congratulations and thanks for the time.
Thank you, Benoit.
Your next question comes from Joe Altobello from Raymond James. Please go ahead.
Thanks. Hey, guys. Good morning. I guess first question on the ransomware attack, and I apologize if I missed this, but did you guys quantify the impact of the ransomware attack on maybe revenue across Q2 and Q3?
Yeah. Well, good morning, Joe. Well, first, obviously the investigation is still ongoing, and so there's certain information I can share with you, but here's a few points that I can obviously cover. First, cybersecurity has been a priority of BRP for several years, and we've made considerable investments in cyber. We've obviously updated our plans based on the advice of experts over the years and making sure that we have the latest tools and technology. Our tools were able to quickly detect the infiltration and limit the impact on our business. Soon after, we've put our plan to progressively restart operations, making sure that our systems and data were scrubbed to make sure that it was safe to restart the operations.
In terms of overall quantification, as I said earlier, in terms of guidance, no impact on the guidance as we're able to offset it. When you combine the fact that our sites were closed for between one-two weeks and the fact that we could recoup with some weekends and overtime, net-net, we probably lose four-five days of production before the compensating effect of having more components and selling more, building more good units and delivering these units to the network.
Okay. All right. That's helpful. Maybe second question, you guys sounded pretty optimistic about supply chain getting better this morning. I mean, how confident are you that what you're seeing is sustainable, and not just, you know, some puts and takes, like you've seen in the past?
I mean, like we said, in Q2, I think. I mean, what happened in the summer, I mean, semiconductors have improved, and we are well-positioned with our suppliers for H2. On top of it, in terms of logistics and transportation, everything is easier and we have less case by case. For the last 12 months, we had many cases every day, every week, and now we see some reduction in those case by case. I'm happy because the procurement team around the world at BRP could take some holiday. This is a good sign that things are improving. That's why we're quite optimistic that we will be able to run all our factories at full capacity in the fall.
Okay, great. Thank you, guys.
Your next question comes from Mark Petrie from CIBC. Please go ahead.
Hey, good morning. I just wanted to actually ask, with regards to the guidance, hoping you can give a bit of color regarding the pacing of growth between Q3 and Q4. Obviously heard the comment for, you know, potentially over 50% growth in Q3, but that still leaves, you know, a significant amount of growth for Q4, you know, in order to hit the sort of guidance. Could you just help us think about sort of the balance between Q3 and Q4 with regards to, I guess, revenues and margins?
Yeah, sure. Well, obviously, when you look at the overall guidance, margin-wise, there's gonna be an improvement happening in the second half of the year compared to where we were. The bulk of the improvements in margin is gonna happen though in the fourth quarter with strong shipments of personal watercrafts, snowmobiles and side-by-side. Year-to-date, the revenues were about CAD 4.2 billion. We're looking at back half of the year between CAD 5.3 billion-CAD 5.7 billion. I'd say that the overall growth in revenue will be much higher in Q4, in line with the EPS growth. Revenues are probably in the range, probably 60% of the revenue is gonna be in Q4 and the remaining in Q3. It would be a fair distribution.
Okay. When we think about sort of the pacing of growth into fiscal 2024, you mentioned that you're still of the belief that the CAD 1.4 billion of inventory replenishment opportunity, you know, I think would remain in place going into next year. Is the expectation effectively that that can be kind of serviced in fiscal 2024? Or what's your current view on the sort of balance of your ability to supply and what you're seeing with regard to demand?
Just an additional comment, and to answer your question, I would like to remind you that we had the capacity for watercraft and side-by-side, but we were not able in H1 to run the factory at full capacity because of the supply chain. Now, in H2, we're running all our factory at a good pace. We have a BO catch up because we receive components from supplier that will be retrofit at the dealer level during Q3 and Q4. Next year, obviously the capacity is there. If the demand is there, we feel confident we can run all operation at a higher level in fiscal year 2024 versus 2023.
Okay. Then maybe just to sort of clarify. Is your expectation that the retrofits will effectively be sort of complete at the dealer level by the end of this year? Or is that gonna remain in place for next year?
Our expectation is that we will ship very little, if no BODs, which were our retrofit units at the dealer, in the fourth quarter. We will still have some units in our inventory that we will need to retrofit in the first half of next year. Based on where the supply chain is trending today, we believe that we could move away from sending incomplete units to the dealers by the fourth quarter. In terms of inventory opportunity, obviously, when we look at it, we look at it from a year-round products position, i.e. ORV and a seasonal product business. We know we will have personal watercraft inventory at the end of the year because of the timing in production, so better timing in production this year versus last year.
that inventory will be, i.e., already sold or to the dealer, and dealers will have orders. We expect to still be low in side-by-side ATV inventory in Q4.
Okay, that's helpful. Thanks. I guess just one last one. Obviously, you've made a number of acquisitions, you know, more tuck-in in nature and size, I guess, but obviously important from a strategic perspective. Seb, just given the elevated CapEx and sort of the macro uncertainty, maybe you could just remind us of sort of your immediate capital priorities over the course of the next year and opportunity for NCIB activity.
Yeah, well, if you look at what we've done in terms of share buybacks since the beginning of the year, we've purchased CAD 300 million of shares. As we've obviously communicated to all of you in the past, our priority has been investing in the business. This year we have an ambitious CapEx plan. We also invested in working capital to manage through the supply chain headwinds and allow us to bring units quicker to the dealers by using a retrofit approach. That obviously required some capital investment. Obviously the acquisitions that we're doing as well is gonna require cash probably to the tune of about CAD 200 million. That has always been our priorities, but we've also been very diligent and being opportunistic in buying back shares.
Making sure that we maintain that financial flexibility and being opportunistic is something that we will obviously pay close attention going forward as we've done in the past.
That's very helpful. Thanks, and all the best.
Thank you.
Your next question comes from Gerrick Johnson from BMO Capital Markets. Please go ahead.
Good morning. Thank you. I'm interested in seasonal, particularly in personal watercraft. Is there a way to quantify Switch contribution to seasonal in the quarter? Then also is Switch in PWC retail when you report their retail? Also related, the delay in Sea-Doo shipments. I think, after last quarter, we're expecting an acceleration in 2 Qs. That seems to be pushed out.
Yeah. Well, first, the Switch is not built into the personal watercraft retail. Obviously, it's a different industry, so it is not included in those numbers. In terms of overall contribution, what I can tell you is that the expectation for Sea-Doo this year is that Switch will be 10% of our revenue. Obviously, a very good business for us. Just your third question, Gerrick, sorry.
The delay on Sea-Doo shipments.
Yeah. What happened on the Sea-Doo shipment, Gerrick, there was a critical component for the Sea-Doo, specific to Sea-Doo, that we receive a big shipment in July. We had to reship the component and get to the dealer, and those were shipped the last two weeks of July. Then the dealer received the component, but they could not obviously retail before the end of July. That's why we see the pace increasing in Q3, and I think there will be some more retail going on in the next few months. That's what happened.
Okay. Got it. Great. On Manitou and Alumacraft, how about the orders coming out of your club event? Are they in line with your expectations?
We sold out. Everything we can produce is sold out to the dealers, and we're hearing very good comments that pre-sell units to consumers are extremely strong.
Okay. Very good. Thank you.
Thank you.
Your next question comes from Martin Landry from Stifel GMP. Please go ahead.
Hi, good morning. I just wanna go back on the promotional environment and wondering what have you factored into your H2 guidance in terms of promotional activity? When do you think that we go back to promotional levels that are more aligned with historical levels?
Given that we shipped some units later than what we would have liked, for personal watercraft, for three-wheel, that we have provided in the guidance, a bit more promotion, but nothing significant. As I said earlier, there's always some pluses and minuses. That's one of the adjustments we did, but nothing's too significant. Cautiously we're planning for it. In terms of going back to normal, our hope is that we don't go back to normal ever. We know that what we're living today is exceptional and there's probably gonna be a revised new normal after COVID. Obviously, dealers tell us they like operating with lower inventory.
All the OEMs say it as well, and there are some learnings from the last two or three years that we know that we can apply going forward in being much more tactful in how we deploy programs. Could we end up, as I've shared, saving 100 basis points overall from less promotional? That's certainly something that we're pushing the teams to strive for.
Okay. That's helpful. Maybe just switching gears to your acquisitions, you know, in the electric sector and urban mobility. I was wondering, I'm a bit curious with urban mobility. You know, when we could see you launch something in that sector. I was wondering if you can discuss the competitive landscape in urban mobility and, you know, is it a fragmented market and what does the distribution network look like?
Yeah, this is a very general question, Martin. Let's say that this is definitely a segment that is growing. Human assist products are very popular because many customers buy it because obviously they train when they ride their product and some use the product for utility. Basically, the three acquisitions that we've done were to give us the additional know-how. The Pinion gearbox, it's a very sophisticated, small compact gearbox that can be applied to many of our product lines. Then I will not comment this morning on what we're looking at, but again, you can expect from us that we will enter in new category of product. We'll invent, we intend to invent new category of product. It's like my best example is the Sea-Doo Rise, the electric hydrofoil.
Hydrofoils have been around for many years, but you need to be an athlete to ride an electric hydrofoil. The one that we launching with the Sea-Doo Rise, and I'm sure you saw the video, you can run it as a board, you can run it with the foil half deployed or full deployed. Very easy to ride for the whole family. This is what we intend to do, is to democratize certain industry and come with great innovation, and that's why we are confident we can grab good market share in that CAD 70 billion global. Too early to give you more detail this morning.
Perfect. Thank you.
Thank you.
Your next question comes from Craig Kennison from Baird. Please go ahead.
Hey, good morning. Thanks for taking my questions. You've addressed several already, a point of clarification on slide six. Seb, when is revenue recognized on unfinished units at the dealer? Is it when the part is shipped to the dealer, when it arrives at the dealer, or when the part is installed?
The revenue is recognized when the part is shipped to the dealer.
Got it. Maybe how long does it generally take to get to the dealer, and how long does it take to have that part installed on average?
Oh, it could take a day to a few days, and we ship them. Usually we have overnight service that we get the parts to the dealers. We wanna get them quickly as possible because we know the consumers are waiting for the products.
I guess regarding that unfinished product at dealerships, what are the most common part shortages that when shipped, you know, would allow them to be recognized as revenue and sold at retail?
Cluster, the gauge. Like we explained before, we have three types of clusters: low, medium, and high-end. This is. There are several microchips in there, and the cluster is one of the most critical components that we ship after assembly. This typically takes. The cluster is very short, but let's say on average it will take between about 45 minutes to retrofit a unit.
Great. Thank you.
Thank you.
Thank you.
Your next question comes from Cameron Doerksen from National Bank Financial. Please go ahead.
Good morning. I guess maybe just want to go back to an earlier question just around working capital and your wholesale inventories. I mean, obviously a significant part of the inventory increase on your balance sheet is related to these retrofits. Maybe you can just discuss a little bit about how or maybe discuss what you think a kind of a normal level of inventory on your balance sheet should be given the size of the business now, because we see obviously a significant increase over the last, you know, 18 months, but a lot of that is kind of unusual. What do you think kind of a normal level of inventory should be for BRP with the size of the business now?
Yeah. Well, obviously we've invested in working capital in the last few years for raw material, for retrofit, and there's lower actually finished goods. And the inventory is at a record level, over CAD 2 billion of on our books inventory. My expectation is that in Q3 we'll still be running with high inventory, probably even some investments in working capital that are gonna continue as we ramp up our production. And the expectation is that should go down in the fourth quarter and probably be a working capital cash generation element. So when are we gonna come back to normalized inventory? Obviously, we're running today with higher raw material because obviously we wanna have a bit more buffer in our planning.
We are actually having discussions with the team as to, okay, what's gonna be that new level once we get to that new normal. There's one thing I do know is that finished goods inventory is gonna go up in the fourth and first quarters of next year. When will the raw materials come back down to more regular levels? It's still too early to call, Cameron.
Okay. Fair enough. Maybe just second question on, I guess again on the M&A, the Kongsberg acquisition, it's more of a vertical, I guess, integration for BRP. Can you maybe just go into a little more detail as to why you felt the need to bring some of that, I guess, supply in-house? Is there anything else that you think is critical that you think you need to bring in-house, that potentially could be an M&A opportunity for you?
First, we were about 80% of that division sales. There is many unique feature that we developed together over the years. We even have common pattern in certain area. I give an example, power steering. We develop with them the power steering that we use on our ATV side-by-side and our three-wheel vehicle units. It's unique to BRP, and we believe we can accelerate the pace. It's a combination of acquiring the know-how and also being self-sufficient in key component as the power steering, and this is only one part that they're doing for us.
Okay. Do you think there's additional, you know, acquisitions you might wanna do for other critical components?
I mean, at this point, we're looking obviously at opportunities all the time. At this point, there is no specific plan for this. Again, the acquisition of Kongsberg has two objective. One obviously is vertical integration, doing it ourselves, but the other one was to acquire the very talented team over there, to continue to push innovation and have a better coordination between our team here in Canada and their team, to go faster. It was like a two objective for Kongsberg.
Okay. No, makes sense. All right. Thanks very much.
Thank you.
Your next question comes from Jaime Katz from Morningstar. Please go ahead.
Hey, good morning. Thanks for squeezing me in. I actually have a couple nuanced questions just on consumer behavior. I think you discussed the availability of credit, saying that it seemed pretty good, but I'm curious whether the usage of credit for purchases has changed or if the quality of borrowers has changed over time?
Good morning, Jaime. When I look at the data for Q2, and I look at the overall FICO scores there, when I compare to where we were pre-pandemic and where we were last year, the FICO scores are actually higher, which is obviously a good sign on the people who apply for credit. Then you all, you might say, "Well, Seb, it's easy to get higher scores if the acceptance rates are lower." The acceptance rates are also trending higher. Last year, Q2, we were at 66% of acceptance rates from our financing partner. This quarter, we're at 71%. When I look at the data just for August, we're still trending higher at 73% of acceptance rate. As we say, we...
Yes, we are looking at what's happening in the news, and we are reading and listening to all the articles and looking at inflation, but the retail is remaining strong. Booking from dealers is strong and they're on the front line. Website visits are also strong. We're not seeing any slowdown from the consumer in the interest in powersports and marine products.
Okay. I don't think it was bifurcated, but between North America and international, it seems like there was a little bit of a shift in the composition of sales. Is there anything that you're seeing abroad that indicates that the cadence of demand might be slower than domestic, or you know, any other trends that might be noteworthy? Thanks.
Yeah, in terms of. Obviously, we're watching Europe because in the context of the energy shortage, there is high inflation in some area. If we look at the Q2 retail again in EMEA, and it was low double digit, when in North America was mid- double digit and LATAM was also mid- low- double digit. Basically in EMEA in Q2, despite all the pressure that we see or we hear about energy, the retail was somewhat in line with what we saw in North America and LATAM.
That's really helpful. Thank you.
Your next question comes from Brian Morrison from TD Securities. Please go ahead.
Yes. Thank you. Good morning. I just wanna follow up on the earlier question on this, on the guidance weighting of, you know, second half EPS. Looks like 30% will be Q3 and 70% Q4. But you're talking about the supply chain improvements, capacity improvements. So is this skewed to Q4? Is this cyber related? Is it supply chain? Is it the mix of retrofit products and WIP? I guess in simplistic terms, why can't we push through more retrofit in Q3?
Good question, Brian. Obviously, yes, the cyber incident impacted Q3 production. Some of the catch-up is gonna be happening mostly in Q4 with overtime and weekends. The completion rates are gonna be higher or are expected to be higher in the fourth quarter. Obviously, we are working with the teams. Can we optimize and be better in Q3? That's something we always strive to do. Just the inherent, we'll call it improvement of the supply chain and cyber incidents are obviously weighing heavier on the third quarter.
Okay. I guess a higher level question maybe for just. When you discontinued Evinrude, you signed a deal with Brunswick. Does that agreement phase out with the Stealth technology now in place, or what is that relationship going forward?
No. We, when we signed the agreement, they knew about our plan with the Ghost technology, and the agreement is going on.
I guess what is the competitive response or what do you think the competitive response? You know, what's your reaction to having a new competitor or a very strong competitor now in place?
This, I don't know. I mean, again, if you look at the marine industry, it's a huge industry, $36 billion, and today we have about half a billion dollars of revenue in that industry. We have a long way to go. For us, the vision is to sell a complete product like we do on all our other product line. That being said, it will take a while before we get there. Step by step, we will continue to go there. When we acquired the Telwater in Australia, Mercury was not there. Now they are a partner in Australia. There is some win-win for both companies and the relationship continues.
Okay. Thank you. Congratulations.
Thank you, Brian.
Your next question comes from Fred Wightman from Wolfe Research. Please go ahead.
Hey, guys. Good morning. Thanks for the question. Seb, you had alluded to some potential tailwinds just on the raw material side. I know you're not really expecting that to hit this year, but is there any way that you could sort of put parameters around what that tailwind could look like as we think about next fiscal year?
Well, earlier in the year, we talked about a headwind coming from inflation, supply chain disruption of about 300 basis points. Obviously, this year, commodities are improving, but we're kind of hedged or committed with our suppliers this year, so not much opportunity. Obviously that 300 basis point headwind is something that we will obviously work hard to remove or reduce next year. It brings a considerable opportunity for us going forward as we address it.
Makes sense. On the updated guidance, have you guys assumed or is there any business interruption insurance that is contemplated in that?
We obviously do have insurance coverage for cyber incidents. We're obviously in the middle of doing the computations. Yes, we did file a claim with the insurance company. Our guidance assumes that the insurance or the additional costs would be normalized from those numbers.
Sorry. Just to be clear, so the business interruption insurance claim, assuming that goes through, would be incremental to the current guidance?
No, it would be normalized.
Okay. All right. Thank you.
Again, if you'd like to ask a question, press star one on your telephone keypad. Your next question comes from Gerrick Johnson from BMO Capital Markets. Please go ahead.
Great, thanks. On the acquisitions, how is that impacting your guidance for the year? Also, Sébastien, how is that impacting the P&L, you know, from an accounting standpoint, given that these are some suppliers?
Well, for this year, no impact on the guidance. They are relatively small acquisitions. Pinion is a relatively small business with a lot of opportunity. It will be presented in the Powersports PA&A and OEM engines, but no significant impact this year. Kongsberg, well, obviously, it's twofold, as José said, from a technology standpoint. Strategically, there's a good fit there. From a vertical integration, obviously, it's gonna reduce our overall bill of material costs. We expect some minor benefits this year, but they're still operating in a tough supply chain environment. Most of the benefits will come next year. Nothing-
Okay. The impact.
Nothing super material, Gerrick.
Okay. I was just wondering about the accounting for it. This is not adding revenues since they were, you know, supply components or is there, some revenue recognition or is it a lower cost?
No revenues. It's gonna be a cost advantage.
Okay.
We'll get more the next year.
Okay. Thank you.
There are no further questions at this time. I will turn the call back over to Mr. Deschênes for closing remarks.
Super. Thank you, Julie. Thanks everyone for joining us this morning and for your interest in BRP. We look forward to speaking with you again for our third quarter conference call on November 30th. Have a good day, everyone.
This concludes today's conference call. You may now disconnect.