Good morning, ladies and gentlemen. Welcome to the BRP Inc. Fiscal Year 2022 Second Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Philip De Chien.
Please go ahead, Mr. Chen.
Thank you, Natalia. Good morning, and welcome to BRP's conference call for the Q2 of fiscal year 'twenty two. Joining me this morning are Jose Boisjoli, President and Chief Executive Officer and Sebastien Martel, Chief Financial Officer. Before we move to the prepared remarks, I would like to remind everyone that certain forward looking statements will be made during the call 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 and 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 Jose. Thank you, Philippe. Good morning, everyone, and thank you for joining us. I am pleased to report That we concluded the first half of the year on a very strong note, delivering record financial results again this quarter, driven by continued momentum across all our product lines. Our team once again demonstrated incredible resiliency and successful manage Through a challenging supply chain and logistic environment, while limiting the negative impact on our dealers and customers.
This resulted in the dealer in the delivery of more units than planned. I would like to thank our supplier for Given these exceptional results, our continued positive outlook for the business and factoring in the successful completion We are increasing our normalized EPS guidance for the year to a range of $8.25 to $9.75 per share. It now represents a growth of 53% to 81% compared to last year. You will notice that we widened our guidance range to account for the current environment and ongoing supply chain challenges. Sebastien will provide further details on this in a moment.
Let's take a look at key financial highlights for the Q2 on Slide 4. Revenue were up 54% to 1,900,000,000 Normalized EBITDA increased 94 percent to $415,000,000 and normalized earnings per share were up 1.5x to 2.89 This robust performance was primarily driven by higher volume across all our product lines, lower than expected sales program due to the continued strong retail demand, coupled with very low network inventory. Turning to Slide 5 For a look at our retail performance for the quarter. Our North American barsport retail sales were better than expected, But we're down 19% for the quarter as we were lapping a record quarter last year with retail up 40%. Compared to the Q2 of fiscal year 2020, which was pre COVID, our North American retail was up 14% Despite operating with significantly less inventory in the network, this is a clear indication of continued solid demand.
In fact, our fiscal year 2022 Q2 Retail is the highest ever recorded with the exception of last year. A few words on our network inventory. As we mentioned last quarter, historically, we have been operating with about 170 days of inventory in the network. Last year, we were down to about 80 days. And in our most recent quarter, we were down to an average of 26 days.
This low inventory level combined with Ongoing supply chain uncertainty are limiting our ability to grow retail. As a result, We expect retail to remain under pressure throughout Q3 and start to grow and improve in Q4, driven by limiting by the timing of snowmobile shipment and the additional production capacity from Uala S3 and Queretaro. Looking at the global retail picture on Slide 6. Although our North American retail sales were down in comparison to last year, We still outpaced the industry, which was down mid-thirty percent. You can notice that our lineup continued to perform well in North America as we've gained market share in most product lines.
Similarly, in international market, retail sales decreased in Q2 due to the lack of inventory combined with it being a very strong quarter last year. However, compared to the corresponding quarters 2 years ago, retail was up 9%. With our new product introduction combined with the additional capacity, We are very well positioned to continue to outpace the industry. Another positive sign is the continued strong traction we are to extract and retain new entrant, our product portfolio and provide a broad lineup of entry level product Through innovation, creating and reinventing categories and generating value for customers, inspiring them to join powersport by leveraging our ambassador and expanding our offer within unchartered society, easing their learning curve to education with initiatives such as the rider education program and how to videos content series And growing and further developing our community with programs such as Women Off on Road. With this We believe we are well positioned to leverage the growing interest of new customer in our industry.
Our recent statistics indicate that Nuancerend represents 42% of our buyers in the 2nd quarter compared to 41% last year. As a reminder, it was roughly 20% historically. They are a more varied group than our traditional customer with younger and more diverse people, including more women and families. In addition, our serving continue to confirm that these new entrants intend to remain in the industry With only a mere 4% indicating having purchased a product as a COVID distraction. Also, The repurchase rate of our customer is higher than what we typically observe.
These are all positive Turning to Slide 8 for an overview of the key product We introduced at our recent virtual Can Am and Sidu Club that was held mid August. Once again, the event was extremely popular with over 85% attendance by our dealer from around the world. It also allow us to reach a growing consumer audience at the same time. In terms of product launches, On the Personal Aircraft side, we expanded our Fish Pro lineup with the addition of 2 key models. The Fish Pro Trophy, A top of the line fishing personal aircraft equipped with many of the key feature of full size fishing boats and the Fish Pro Scout a more accessible option.
This product has been very popular since its introduction in 2018. It is the fastest growing segment in our Personal Watercraft lineup with over 65% of buyer being new entrant to Personal Watercraft, With over 50,000,000 angler in the U. S. And over 700,000,000 worldwide, There is a significant market opportunity for the Fish Pro lineup. This is another example of our ability to identify market opportunities and Trade Subcategories.
For Can Am, our product introduction include the upgrade of Maverick Turbo RR engine to 100 horsepower, which is a first in the industry. This new engine power, coupled with all our with Our all new P DRIVE roller clutch system ensure that we maintain the performance leadership in the sports segment, the fastest growing category in the industry. We also introduced new engine option in our utility lineup With the HD 7 and HD 9 that offer leading class power and capabilities and we improved the ruggedness and capabilities of the Can Am Ryker Rally to maximize performance and comfort off road. These new products were very well received by dealers and the media and our booking results are tracking very strong. Turning to Slide 9, the main highlight of the club was the official introduction of the game changing Sidu switch.
When we reentered the boat industry in 2018, we realized there were many opportunities for us to reinvent the pontoon space, which accounts for about 30% of U. S. Powerboats and is quite sizable. In addition, It has one of the fastest growing rate in the industry with an 8% CAGR over the last 5 years. Turning to Slide 10.
The Switch is a product that combines all the onboard space and stability of a pontoon With the driving performance and the watersports friendly capabilities of a runabout, it provides the most convenient, Accessible, adaptable and fun boating experience. One of the key innovative features of this switch It's plug and play LEGO inspired system, which provides flexibility to change around your interior layout To adapt to your needs as the day evolves. The boat will also appeal to new boarders as it is easy to use, easy to dock And it's the first ever boat to come with a braking system. It is available in a variety of land and engine configuration with different package starting at the very accessible price of USD 17,999 and will be sold through our SeaDude dealer network. The product also represents a sizable opportunity for accessories business.
It is highly adaptable with over 65 dedicated accessories available at launch and is also compatible with all Link System. Production is planned to start in the latter part of Q4 with deliveries expected for the next boating season. Having talked to many dealers, many are already sold out of model year 2022, which is expected to be delivered to customer by the end of June and some are taking orders for model year 2023. We strongly believe that the Stidus switch is a game changer for the boating world as it is a unique innovative product that is well positioned to attract new border and the younger generation. Over the years, we have proven We are able to disrupt the industry by creating new segments.
We did it with the Seadust part, which helped the personal watercraft industry grow 86% since its introduction and more recently with the Ryker, which allowed the 3 wheeled vehicle industry to grow 48% in 2 years following its introduction. And now we believe we will do the same in the pontoon industry. Now let's turn to Slide 11 for a year round product. On Saturday, July 17, there was a fire in the outdoor storage yard of the Uales II Mexico facility Where side by side vehicles are produced, all employee on-site were safely evacuated And no damage was caused to the manufacturing facility. Production resumed on the following Tuesday.
And once again, I wish to sincerely thank our employees for their quick response. I'm very grateful to the firefighter, local businessmen, Local businesses and authorities for their help and support. Now looking at side by side North American Retail. In the Q2, Can Am Side by Side Retail was down low 20%, outpacing the industry, which was down mid-forty percent. As a result, Can Am side by side made some solid market share gain despite being constrained by very low network inventory.
Similarly, we've closed the North American season at the end of June with an increase of high single digit compared to mid single digit for the industry. Note that this growth come over and above Record level growth last year for the full season when the industry grew low 20%, while Can Am low 40%. The future looks very promising for our Can Am side by side business. Consumer demand for our lineup remains very strong. Our new products are very well received.
And on August 23, we started the production of our Uala S3 facility on plan. We'll be ramping up through the end of the year to a full second shift and plan to have the full benefit of the additional 50% of capacity at the beginning of January 2022. Turning to ATV. Can Am North American Retail was in line with the industry For both the quarter and full season, both were down in the low 40% for the quarter Due to the limited product availability and high single digit for the full season. Now 3 wheeled vehicle.
Can Am 3 wheeled vehicle continue to perform well compared to the industry, gaining market share both In the quarter and season to date, it remained the fastest growing brand in the motorcycle industry so far this season. The rider education program registration continues to trend above expectation. In fact, we continue to be successful at This trend is very positive and we are very excited at the outlook for the 3 wheeled vehicle business. Turning to seasonal product on Slide 12. Seasonal product revenue were up 78% $575,000,000 driven primarily from higher shipment, a richer mix of Persol Watercraft and lower sales program.
Now looking at Personal Watercraft Retail. Seadoo continued to gain market share in the quarter. In North America, in North American retail season to date is now up low teen percent compared to an industry that is down low single digit. Currently, the brand hold the number one market position in all segments in the industry. Based on the way the season is performing, we expect it to end with a very low level of network inventory again this year, which will lead to strong shipment in the next fiscal year.
For snowmobile, we are currently in the slow period of the season. Our retail was down due to limited product availability as we ended last season with an all time low level of inventory in the network. Still, we are very well positioned for the upcoming season with a record level of unit pre sold to consumer. Continuing on Slide 13 with a look at Power Sport Parts, Accessories and Apparel and OEM Engines. Revenue were up 19 percent to $249,000,000 for the quarter.
Year to date, revenue increased by about 30 in each of our product lines. This growth is driven by higher volume of replacement part due to increased product usage, Combined with strong unit retail, which has generated which generates increased accessory sales across all product lines. Our extensive lineup of parts, apparel and accessories, notably our proprietary link system is driving strong consumer demand. Now looking to Marine on Slide 14. Revenue were up 56% to $125,000,000 The benefit from a favorable mix of both Sol and lower sales program more than offset the lower volume of outboard engines Quarter as sales were more made earlier in the season compared to last year.
However, both brands are performing well year As for Telwater, we were at the end of the boating season in Australia. Retail continued to perform well and was up high single digit for the quarter. We also host a virtual event with our Alumacraft and Manitou dealers 3 weeks ago, where we introduced our 2022 lineup. It included improvement to our Alumacraft Pro City Bath Boat and to our Manitou XT and LX models. We are pleased with the progress we've made in our Marine business and are looking forward to launching new boats with the Ghost engine in each of our 3 brands in the second half of twenty twenty two.
With that, I turn the call over to Sebastien. Thank you, Jose,
and good morning, everyone. As Jose mentioned, we carried our strong momentum into the 2nd quarter and closed the first half of the year with very solid results that came in above our expectations. This performance was broad based with robust revenue growth across all product categories and regions. From a profitability standpoint, we had another exceptional quarter as we generated $570,000,000 of gross profit on $1,900,000,000 of revenue, resulting in a 29.9% margin. Compared to last year, the gross profit margin benefited from better fixed cost absorptions as last year's Q2 margin suffered from the temporary production shutdown.
The exit from outboard engine business, especially as we had additional costs related to the wind down of Evinrude in last year's Q2 and a positive impact from higher volume, favorable product mix and lower sales programs, which were partly offset by higher production and distribution costs and unfavorable FX. With this strong gross profit generation and lower than expected operating expenses, we delivered $415,000,000 of normalized EBITDA and generated $2.89 of normalized diluted earnings per share. Worth noting that these were our strongest quarterly results ever. From a cash flow perspective, we generated $417,000,000 of cash from operations and invested $217,000,000 in working capital, notably, As we continue operating with higher level of work in process inventory and are managing through supply chain constraints. We also invested $132,000,000 in CapEx and returned $361,000,000 to shareholders, primarily through the successful completion of our SIB, under which we repurchased 3,400,000 shares.
Turning to Slide 17 for a more detailed look at the From last year's Q2, driven by a positive impact from volume, mix, pricing and sales program, representing $393,000,000 which was partly offset by the negative impacts of increased production costs And depreciation expense was $66,000,000 higher operating expense for $83,000,000 as we continue investing
for our
long term growth, Higher normalized tax expense were $52,000,000 and unfavorable foreign exchange variation for $43,000,000 This resulted in $250,000,000 of normalized net income for the quarter coming in stronger than expected mainly because we were able to ship more units than we had initially planned. We benefited from lower than anticipated sales programs and we continue to diligently manage our spending, which resulted in lower operating expenses versus our plan. Now moving on to Slide 18 for a quick look at our network inventory situation. As Jose mentioned, we continue operating with very low levels of network inventory, which is limiting our ability to generate retail growth. In fact, despite increasing our production output in the quarter, consumer demand for our products continued to outpace the capacity of the supply products and resulted in an inventory decline of 51% versus last year and 76% versus 2 years ago.
While this situation is definitely not optimal, we believe that low levels of inventory are widespread across the industry. And once we gain the full benefit of our additional production capacity in the coming months and supply chain disruptions are mitigated, We will be very well positioned to take advantage of the sustained consumer interest in our products. Now let me provide you with a bit of context before getting And to the updated guidance by looking at Slide 19. As you know, many industries, including powersports, have been dealing with supply chain challenges for the better part of the year. So far, we have been able to manage through this turbulence while limiting the negative impact on our business.
Still, we remain vigilant as the situation is constantly evolving with pressure coming from the semiconductor shortage, COVID related factory shutdowns, especially in Southeast Asia and labor shortages in North America. While we have limited direct exposure to these issues, many of our suppliers have to deal with such challenges on a daily basis, putting pressure on their operations and limiting their ability to commit to firm delivery schedules for parts. As such, we expect increased variability and the timing of reception of components from suppliers during the second half of the year. This may impact our production schedules and the timing of product shipments over the next Few quarters. Still, we continue to aim to deliver on all dealer orders we have on hand and we plan to continue to produce at capacity, Store or ship to dealers some unfinished products and retrofit them once missing components are received.
Based on the visibility we have today, We expect that these supply chain issues will weigh in more on Q3, which will limit our wholesale in the quarter. Nonetheless, We expect to be in a good position to retrofit most of the units in the Q4, leading to a much stronger 4th quarter. While we are comfortable with our plan, we are operating with lower visibility than we usually do, which may lead to delays in shipments of units between Q3 and Q4 and even between Q4 and Q1 of next year. This is why we have updated our guidance with a wider than usual range as you can see on Slide 20. In light of the better than planned results achieved so far this year and the continued lower level of sales program throughout the rest of the year, we are comfortable increasing the higher end of our seasonal and powersports P and A and OEM engine revenue guidance ranges.
And we are also maintaining The higher end of the year on products and marine revenue guidance ranges impacts despite the potential supply chain headwinds. Note That we have lowered the bottom end of the year on products revenue guidance range to reflect the impact of the losses of the unit in the fire. With these adjustments, we now expect total company revenues to grow between 27% 35%. We have also adjusted our profitability metrics to reflect elements previously mentioned and to account for higher commodity costs, which are mostly offset by pricing increases and additional costs resulting from inefficiencies due to the ongoing supply chain issues. Following the adjustments and accounting for a strong H1 results, we now expect normalized EBITDA to grow between 30% 47%.
And after taking into account our revised assumptions for financing costs and depreciation expense and using a lower share count as a result of the Our normalized EPS is now expected to end between $8.25 $9.75 representing a growth between 53% 81%. As for expectations in terms of quarterly results for the back half of the year, As I already mentioned, our objective is to deliver on dealer orders we have despite managing through supply chain pressures. We expect that these issues could weigh more on Q3 and then improve as the year progresses to provide more upside in Q4. At the midpoint of our guidance, we would expect normalized EPS to grow about 40% in Q4. On that, I'll turn the call over to Jose.
Thank you, Sebastien. To conclude, we've delivered record result in the first half of the year. We're able to achieve this Thanks to our solid execution across the company and the very strong consumer demand. Short term, we'll concentrate On delivering a solid second half of the year, we'll focus on managing and mitigating supply interruption and deliver on our production plan. Our objective remains to deliver all order on hand.
Based on this, we are confident in our ability to achieve our revised guidance. Furthermore, we are confident about the future As we expect to benefit from numerous key initiatives and trends, including new product introduction, Such as Project GOES and the T2 switch. The latter represents a new business for us and is already proving quite promising. In fact, you can expect more product introduction over the next 3 years than we have done in the past 3. The sustained consumer interest in powersports and marine.
Our strategy for new entrant, which is progressing well, every day that passes provide us with greater confidence in our ability to turn them into lifelong customers. The upcoming significant inventory replenishment cycle that is expected to take place over the next 12 to 18 months. The additional production capacity from Uarez 3 and Queretaro, which is expected to have a positive impact over the next 2 years starting in fiscal year 2023 and the electrification of all our product lines. As you can see, we are well positioned to drive long term growth and continue to outpace the industry. We are confident in our ability to execute and our growth strategy in fiscal year 'twenty three and beyond.
I insist on expressing my sincere gratitude to our employee, Dealer and suppliers for their collaboration, commitment and patience during these challenging times. In this ever changing world, their agility, dedication and capacity to successfully manage is impressive and truly make the difference. On that note, I turn the call over to the operator for questions.
Your first question is from the line of Robin Farley with UBS.
Great. Thank you. Two questions. Obviously, fantastic quarter. I'm just wondering, we hear a lot from dealers about Some OEMs that have made market share gains where they don't have as much as an availability issue.
And I'm wondering some of them are newer entrants into the off road market. And I'm wondering if those counted in your industry measure of market share in that data. And then I guess sort of either way, I wonder if you have general thoughts on some of these new entrants You're kind of taking advantage of the lack of availability and just kind of to the degree that could be sort of making inroads into the future? Thanks.
Good morning, Robin. I mean, for sure, in the supply restriction that we have in the network from time to time we hear dealers that are saying that they've lost some customers, but To be honest, it's minimal. It's quite a small number. And what we are very happy with, like I said in my intro, Those new entrants are growing. We're at 43% in Q2 versus 41%, and you know our So recall average was 20%.
But more and more we surveyed them quarter after quarter, we see that they intend to stay within The industry and the repurchase cycle is better than everything is pointing in the right direction to make them have Lifelong customer. And obviously, right now, when we do our projection for the future, we count them in because we believe that the trend is
And then Second question is looking at your comment about retail sales through the quarter and comparing to others' comments about the June quarter, it looks like July was a bit worse in terms of product availability in retail, not surprising. So I guess just looking at your guidance, I guess what gives you the confidence that Q4 logistics would be getting so much better? I mean, is it just that you feel like it can't possibly get worse? Or I guess just to try and get that conviction that things won't sort of continue to be at these Difficult levels into Q4 potentially. Thanks.
Then obviously, right now, like Sebastien There is 3 area of challenges: the semiconductor, the COVID restriction impact on manufacturing operation in the South Asia And the labor shortage, mainly in North America. And the second one, the COVID restriction in South Asia, OEM over there, a company manufacturer component are getting better with sanitary measure. Most of them vaccine themselves, their employee. And we believe we're going in the right direction. In terms of semiconductor, you know that many Chips are produced in those countries and there was a fire in Japan.
After that, there was a few factories shutdown in Malaysia, But now those factories are back to normal. When we've talked to our supplier who supply to us electronic component like engine, Computer or a cluster for the vehicle, they believe with what they know today that the situation will improve On the back end of 2021 and through 2022. I don't think it will come back to normal in 2022, but we are confident and once From where we are today, the situation will improve in the next 12 to 18 months. Then that's why our guidance has a wide range because with what we know today, we'll be closer to the high end. If there is some other uncertainty, it will be more difficult, but that's why we decided to widen the range.
Okay, great. Thank you very much.
Your next question is from the line of Joe Altobello with Raymond James.
Thanks. Hey, good morning, everybody. So first question is back to the guidance, EPS guidance in particular. The raise looks to be largely margin driven along with the lower share count to some degree. What's been better than you thought So far this year from a profitability standpoint, is it mix, is it input costs, etcetera?
Yes. Good morning, Joe. Obviously, there are many factors that are driving the financial results. There are a lot of pluses and minuses, but the big pluses are obviously Sales program, the promotional environment is still very healthy for OEMs and for dealers as well. And so we don't have to offer as much promotions as we initially anticipated and that's what drove the better results in the second quarter.
Obviously, with the high level of demand and we'll call it the scarcity of production, OEMs and we are more selective in which product we make and yes, the mix is richer as well. That's a plus. Obviously, there are some headwinds that we're seeing on commodity costs and logistics, but we're able to offset some of that with pricing And surcharges as well.
Got it. That's helpful. And just maybe secondly, I apologize if I missed this. In terms of your full year outlook For retail, is it still flat to up high single for this year?
Yes, flat high to high to low single digit. That's a right number. Obviously, year to date, we're flattish. Q3 is going to be a tough one because we're going into the 3rd quarter with Super low network inventory and with the supply chain challenges that Jose just talked about is going to be a challenge.
Your next question is from the line of Martin Landry with Stifel GMP.
Hi, good morning. I just wanted to get a bit more clarity on your guidance for the back half. You're seeing that you expect Q4 EPS to increase at 40% year over year using the midpoint. So that would suggest that your Q3 would be weaker and could be down even Lower than 2 years ago. So just trying to understand exactly What's putting pressure on your Q3?
Looking at your inventory levels on your balance sheet, it doesn't look super low. Has there been some pull forward sales into Q2? Or like just a bit of color would be helpful.
Sure. Good morning, Martin. First, yes, as I said earlier, Q2 ended better because we shipped more units. Some of that was pulled So we had finished good inventory that we're able to wholesale in the quarter. So that obviously reduces the units available for sale in the 3rd quarter.
But the big challenge in the Q3 is, as I mentioned earlier, is the supply chain and our ability to produce finished goods. We'll have more retrofit units at the end of Q3, then we have the end of Q2. These units will be reworked in our expectation in the Q4. So From a volume perspective, obviously, that's going to impact Q3 and that's why the profitability will be down. But as Jose indicated, we Talked with our suppliers and we have they give us visibility as to when and the ranges of supply and so we're confident that Q4 is a number that we can deliver.
Okay.
And then again, you've got some comments Talking about 2023, fiscal 2023, talking about you're expecting further growth. Just to clarify, when you're talking about Further growth, are you talking about revenue growth or EPS growth?
It's both. We itemized what These are for next year. Obviously, we have added capacity. We have SEDU switch. We have as well new product And there is obviously a extremely low level of inventory in the network that needs to replenish.
So from a top line perspective, We anticipate growth and from a profitability perspective as well. If you take just the midpoint of the guidance for this year, Our expectation is that we're able to generate double digit EPS growth next year.
Double digit EPS growth for fiscal 'twenty three?
Yes.
Okay, perfect. Thank you.
Your next question is from the line of Derek Johnson with BMO Capital
I want to talk about your distribution process. I understand you don't ship preorders, Polaris points to its use of preorders as an asset as well as its retail flow management. Can you talk about your process and how you distribute and why it's better than the competition?
Yes. Good morning, Geraint. Then maybe My answer will be a bit long, but I will give you the big picture. As Sebastien said, the main challenges right now are semiconductor COVID restriction is a Southeast and labor shortage in North America, and we believe all the OEM are facing the same challenges, and we're not better than the others. But the way we do it, 1st, we in our we keep we try to keep what we control our production planning Very stable.
We don't want to change production schedule. And for watercraft, snowmobile and 3 wheel, We are allocating product for 1 year. The dealer gave us the mix and the wish list, but when the booking is done, we We try to freeze it for the year on our side. For ATV side by side, right now, we're allocating the product by a period of 3 months. And again, we try to freeze what we produce to minimize the interruption from our end.
After that, we work with supplier to optimize the supply. And because we have a diversified product portfolio and geographic diversification, We try to allocate and prioritize component depending on the retail season. Like right now, if we have a cluster, We'll put it on a snowmobile instead of a watercraft because nobody need a watercraft. The peak season is next spring. Then this is how we prioritize component between product line.
And also we've took the decision with the dealer. We consult a few key dealer To retrofit to produce with missing part, then we'll retrofit units in our factory and at the dealer level. And the goal is to honor all orders and our team is very agile, but disciplined To implement those principles, that's our recipe. And so far, it's not obviously perfect, but it's working quite well.
Okay. And one more, just could you quantify perhaps the order of magnitude, the contribution expected from Switch? We hear sellouts and model year sellouts, but I really don't have any idea how to model Switch right now. So What should we anticipate in terms of top line contribution?
But here, the boating industry, you know, is a $20,000,000,000 Plus business and it's a big opportunity for us. And just to give you a sense, we estimated that this calendar year 2021, The pontoon industry in North America will be about 80,000 units. But there is a fleet of used product, It's about 600,000 units that have been produced in the last 15 years. And we know that switch like Spark We'll attract to the used market, the trade in. Then we believe quickly the switch could grow the industry from 80,000 to 100,000 Units a year, let's say, in the next 3 years, and we're targeting 15% market share.
Then We believe that Switch could become a $500,000,000 business in about 3 years midterm time life.
Your next question is from the line of Mark Petrie with CIBC.
Yes, good morning. Just with regards to the labor Just wondering if there's any effect in your Mexico operation?
Good morning, Mark. To be honest, no. The labor situation in Mexico is good. It's we don't have any labor shortage in Mexico. And this is obviously with now In the country, this is giving us some flexibility.
In Europe, Finland, construction, It's the same thing, not much labor difficulty. Obviously, Canada and United States are more difficult, affecting all our manufacturing side but also our But in Mexico, it's very well, very good.
Okay, excellent. Thanks. And then could you I mean that last answer was very helpful with regards to switch. Can you give us a sense of How the capacity for that will be ramping? And then also anything you can comment in regards to the same idea for Ghost?
And then also how that factors into your CapEx plans for fiscal 2023?
Then in terms of capacity And in any of our new product line, we always plan our capacity or capacity Into phase. And right now, Phase 1 is ready. As you remember, the hull the motorized hull will be assembled in Queretaro, shipped to Stortevan, And the production will start at the end of Q4. But capacity with what we see right now, the demand Obviously, it's very good. A lot of units are already presold to consumer, and we are ready To increase the second phase of capacity, if we see that the demand is there, it's a bit too early to call the spot.
But like I said, I mean, we intend we believe that the pontoon industry in North America could be in the range of 100,000 units Quite fast and we targeting 15% market share, then we're ready to grow if we need to To invest in more capacity if the need is there.
On your question for CapEx for next year, Obviously, this year is a big year for CapEx investments, almost $600,000,000 at the high end of the range. We are investing this year in assembly line capacity. We'll have investments next year on the manufacturing side, Powertrain, PWC, so I'm expecting to have a sustained investment next year, Probably in the range of where we are this year. Obviously, we're investing in new products as well, and that's requiring CapEx. So, and Jose mentioned that we're our pace of introduction is going to be high in the next 3 years.
And so obviously that comes with CapEx.
Okay. Thanks very much. I'll pass the line.
Thank you.
Your next question is from the line of Shiyan Su with Sain BNP Paribas.
Hi, guys. Thanks for the question.
I just want to dig into Slide 19 a bit more. So you show how much you have expected production. I'm just curious how does that compare to And if there were no supply chain disruption or full capacity, how does that is it 20% higher, 30% higher?
Yes. When I'm looking at Q3 versus a year ago, capacity is expected to go up double digit. That's we'll call it the total output. This is units that are going to be available for sale and also units that would be retrofitted. And if you're looking at Q4, you're going to see that line actually up versus Q3, so further increase happening in Q4.
So we are running at almost full capacity. We could produce more of the supply chain disruptions. We're not as bad, But we are taking advantage of all of our all of the ships available to produce units.
Okay, got it. And then can you maybe put into context first Q2? So is Q4, You're showing you're talking about improving the supply chain. Is it even better than Q2 or is it kind of getting back to Q2 after maybe a dip in Q3?
Well, I think the first half of Q4 is still going to be Hi, probably the bad amount of Q4, that's when things will be more normalized. In terms of output, obviously, Q4 is going to be higher than Q2 because now we have The new peak personal watercraft capacity that's coming online and we also have YAS 3 that's going to be online in the 3rd Q4. So higher than Q2 in terms of output, yes. Right. Okay,
got it. Thank you. Thank you.
Your next question is from the line of Jean Katz with Morningstar.
Hi, good morning. I actually sort of want to piggyback on that question because I think it looks like there's a little bit of slack In the capacity utilization and manufacturing chain, but I think you articulated that it would be something like 12 to 18 months until the dealer channel was replenished. And I guess I was expecting it to be a bit longer given that Retail demand would theoretically be significantly higher if there was actually inventory in the channel. So Is there a way to reconcile those dates to feel more confident that that's the right timeline to get back
Then just to come back on your capacity usage. Typically, and if you look historically, our second half is always has been stronger than our first half Because we introduced new product, let's say, in August for the new season and typically, our factory for watercraft, snowmobile, All the seasonal product and year round product are running at full capacity. Obviously, right now with Quevitaro, a new line for watercraft And you have a history that is ramping up. Capacity will be more in fiscal year beginning of 2022. But we always have been using our factories almost at max on H2.
I'll get some there.
Yes. And maybe on your inventory question, we finished Q2 with the lowest level of inventory there Since the beginning of the pandemic, inventory in Q2 was actually down 25% compared to Q1. So our expectation is that there's going to be no replenishment this year. Replenishment is going to start next year, at the end of next year and into fiscal year 'twenty four. That's our expectation for
Okay. And then for with inventory, does that can you sort of walk us through your expectations of what that looks like over the next few quarters as the supply chain becomes less strangled? Thanks.
It's still going to be tight. There's a obviously, there's a tailwind of demand there. Consumers are waiting for their product. So everything that we ship to dealers in the next few quarters is most likely going to be retailed very quickly. Jose mentioned that a lot of dealers are Switch and Switch is going to be wholesale up until next year.
So our expectation is that as there is a backlog of demand, We won't see inventory replenishment happening in the next few quarters, and it's only in the back half of next year that we should see Inventory is starting to build up. Thank you.
Your next question is from the line of Benoit Poirier with Desjardins, Mark Capital Markets.
Yes. Good morning, everyone, and congratulations again for the good quarter. With respect to fiscal year 2023, could you maybe talk a little bit about the margin expectation? And also could you quantify the size of the inventory replenishment, whether it's still $1,300,000,000 of potential revenue over a 12 to 18 months period.
Well, obviously, for next year, we are expecting some headwinds. Obviously, commodity are going to Continue to be a headwind, but we should be able to offset that through pricing. If I look at this year, expected EBITDA margin is about 17% to 18%. I would expect that next year as well. Programs are going to be probably a headwind for us, but obviously, we'll be benefiting From the increased volume, better asset utilization, better operational leverage and also Mission 2020, you all know that we have some cost saving targets.
We'll also be getting those as we introduce new products with better margins. So our expectation is that margins should be similar to what we've had this year.
Okay. That's great. And would you be able to quantify the size of the inventory replenishment,
Sebastien? Well, As I said, the inventory is extremely low. The end of Q2 is the record low. When you look at the historical levels where we were, obviously, the industries have grown a lot. If I can Simplify it for you, the inventory replenishment opportunity is almost equivalent to a quarter of wholesale.
That's what it could be.
Okay, okay, perfect. And last one for me. You already provide some color about the switch in terms of market size down the road, but could you maybe provide some color about the mix and level of accessories ordered so far versus the initial expectation? Good morning, Benoit. This is
Good morning, Benoit. Difficult, I mean, if you remember, just to give you a sense for all the analysts The investor, the switch, if you go the low end, the Compact 100 and 13 Foot, it's starting at $18,000 The 21 foot crews go up to 36.5, but you can add some package. As you know, we have 3 package. We have The 3 package and if I give you the example of the water, sport and fund package, Then it's a package of $7,000 Then if you take Cruise 21, which retails for 30 $6,000 and you had the water and fund package, you're ending up at $43,000 Then it's anywhere between $18,000 and I would say, dollars 45 And right now, it's a bit early. We have a lot of preorder in the system, but I would say we're tracking slightly above $30,000
Okay. That's great color. Thank you very much again and Congratulations. Thank you, Benoit.
Your next question is from the line of Fred Wightman with Wolfe Research.
Hey, guys. Good morning. I just wanted to follow-up on some of the expected tailwinds from the Juarez facility. I think you made the comment that you're still Back in that 50% capacity boost by January, just given how tight the supply chain is today, can you maybe give us a sense for when you started to make Mortars with suppliers, just how good the line of sight is to ramp. It just seems like a big ask for 4 months from now.
Yes, good morning. Then obviously, the again, I'm coming back to the supply chain. Right now, The main difficulty is semiconductor. At the beginning of 2021, we had a lot of different components that was difficult. But going from one plastic to the others, it's a thing that now we manage well.
Sometimes it's more expensive, but We're doing well. And right now, the roadblock that we see for growth next year is the semiconductor. And like we said, There was that fire in the Japan factory, some difficulty with some microchips supplier in the In South Asia, but now situation is getting better. From where we start today, we believe and our Components suppliers say the same that this will improve with some ups and downs. And we are right now planning with them To for a growth in fiscal year 2023.
And right now, this is our plan. We're planning for the growth, And we'll manage to reach there.
Makes sense. If we just take a step back and look at some of the sort of the macro side of the equation, the start to mirror sort of that broader macro backdrop or is the vehicle space still sort of a good contra indicator Where if people really are spooked about Delta and traveling that they're sort of pivoting towards some of these safer Vehicle discretionary purchases.
I think our industry might be a bit different than general consumer demand in a sense that The COVID restriction forced many people to stop traveling. I think now people are restarting to travel, but Now they realize it will be more complicated. It will take maybe a few years before it's back to what it used to be pre COVID. And for us, we're still happy to see that ratio of new entrant buying our product. And when we look at those new entrants and we survey them, they are more family oriented, they are more women, they are younger And even their household income have increased versus the traditional buyer that we had.
And I think that's why Right. We are quite optimistic about our future because we believe that those new entrants could change the dynamic into our industries.
Okay. Thanks guys.
Your next question is from the line of Derek Dley with Canaccord Genuity.
Hi, good morning. Thanks for taking the question. I'm actually Pulkit and Derek's associate Just filling in for him today. A couple of questions for you guys. Could you speak to your capital allocation preferences going forward after that wrap up of Juarez is complete?
Yes. Good morning. Obviously, where we prioritize capital deployment, we've Invested in CapEx and that's always been a priority of us investing in organic growth, but we've been active in terms of deployment for share buybacks as we've done in the last quarter. Our balance sheet is very strong. And so we have obviously options to deploy capital going forward.
And we're always mindful of what's the best opportunity for the business that drives the better returns. These And new products such as electric, but also just new introductions that we've done with the switch.
That's really helpful. Thank you. And then as a follow-up, I know limited promotional activity was a factor this are in terms of the gross margins, but what do you view as a more normalized gross margin target looking forward?
Well, this quarter, we benefited from a good mix and also better sales incentive. My Fiscal year 'twenty, not last year, but versus fiscal year 'twenty. And going forward, the expectation is that we probably keep 150 basis points of
That's great. Thanks a lot.
Thank you.
Your next question is from the line of Brian Morrison with TD Securities.
Thank you. Good morning. This is Megan Annette on for Brian. So understandably there are challenges in securing semiconductors and components, but can you just talk about your ability to secure those components Given the planned increase in your capacity, and does that contribute at all to the outperformance relative to the industry in Q2? And Any thoughts you have on that dynamic for the second half of the year?
On securing, obviously, with the shortage that It's happening in the world. All electronic supplier are asking for A better visibility long term than we gave to our suppliers our need for our fiscal year 2023 A few months ago, and there is no surprise there. And we have to commit maybe a bit longer than typically In the past, then that's why our supplier know exactly what we expect To produce next year, we know the idea where it will be tight, and we're working to improve either capacity or invested in more tooling. We are been working on this for the last few months. And that's why we are again, we believe that from where we are today, things will improve with ups and downs.
But with what we know, we believe it will be better, but it will last probably till the end of 2022.
And on your question on our performance in the Q2 compared to the overall industry, obviously, our teams have been doing a phenomenal job. It is, I want to say a nightmare to manage, but it's a daily battle to make sure we get the parts necessary to build the units. And we've seen in certain product lines where we've gained Significant market share in the Q2 and we believe it's because we've been able to produce more units to meet consumer demand than other OEMs. And so obviously, that's a kudos to our team. But obviously, we need to continue focusing on delivering Great results in the next few quarters.
And just secondly, is there anything you can call out, in terms of the operating expenses being below
It's a tight management of expenses. Obviously, last year, we went through COVID, we reduced costs Significantly, so this year, this quarter, we saw an increase in overhead expenses. But obviously, we're mindful of making sure that we spend money if Especially on the marketing front, obviously, there's scarcity in the network. There's good awareness for our brands. And so sometimes we modulate what expenses we do based on what's needed.
Your final question comes from the line of Craig Kennison with Baird.
Hey, thanks for taking my question. This has been a very helpful call. Just a quick one. Will the supply chain issues that you're seeing have any impact on your electric vehicle timeline?
For the time, no. No. We obviously, we are at the period where we're building Where we're developing the product and its engineering work and building prototype, but no delay on our program.
That ends the question and answer session. Are there any closing remarks?
Yes. Thank you. Thank you all for joining us today and we look forward to
This concludes the BRP, Inc. 2nd quarter results conference call. Thank you for your participation. You may now disconnect.