BRP Inc. (NASDAQ:DOOO) Q2 2023 Earnings Conference Call September 14, 2022 9:00 AM ET

Company Participants

José Boisjoli - President, Chief Executive Officer
Sébastien Martel - Chief Financial Officer
Philippe Deschênes - Investor Relations

Conference Call Participants

Robin Farley - UBS
Xian Siew - BNP Paribas
Benoit Poirier - Desjardins Capital
Joe Altobello - Raymond James
Mark Petrie - CIBC World Markets
Gerrick Johnson - BMO Capital Markets
Martin Landry - Stifel GMP
Craig Kennison - Baird
Cameron Doerksen - National Bank Financial
Jaime Katz - Morningstar
Brian Morrison - TD Securities
Fred Wightman - Wolfe Research

Operator

Good morning ladies and gentlemen. Welcome to the BRP Inc. FY23 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.

Philippe 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 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.

José Boisjoli

Thank you Philippe. Good morning everyone and thank you for joining us.

BRP once again demonstrated its ability to succeed in the 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’s 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 ISIT 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 product to customers, I especially thank them for their comprehension. We expect to make up for the lost sales throughout the second half of the year, limiting the impact on our results. Consequently, with better than expected results so far this year and supply chain improvements, we are increasing our normalized EPS guidance for the year to a range of $11.32 to $11.65 per share, representing a year-over-year increase of 14% to 17%.

Let’s turn to Slide for key financial highlights.

Revenues reached $2.4 billion, up 28% compared to last year driven by solid growth for side-by-side and three-wheeled vehicles and the introduction of the Sea-Doo Switch. Normalized EBITDA was up 1% to $418 million and normalized earnings per share increased 2%, reaching $2.94.

Turning to Slide 5 for a look at our Q2 retail performance, retail sales continued to be limited by product availability resulting in a decline of 16% for parts or 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 digits.

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 6.

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 continues to convert rapidly in retail.

Moreover, despite higher interest rates, consumer credit acceptance remains stable and we are seeing many positive signs of continued strength in demand. We still see a strong influx of new entrants of 41%, website traffic and Google searches for our different brands remain significantly higher than pre-pandemic levels, retail velocity is solid, and dealer bookings following our BRP Club is ongoing and orders are trending up over 20% versus last year.

Turning to Slide 7 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 disruptions, which helped 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 improvements put us in a good position to increase production throughput and deliver solid growth in H2.

Turning to Slide 8 for an overview of the key products introduced at our BRP Club held in August, it was our first in-person dealer event since the start of the pandemic and the first that combined both our power sport and marine dealer 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 line-up by creating a new industry segment with the introduction of the Sea-Doo Explorer Pro, specially designed for longer trips on the water. On the Can-Am off-road vehicle side, we improved our offering in the mid of power sport side-by-side segment, a large and very popular category, and we reinforced our kid ATV line-up, an industry segment that has seen significant growth in recent years.

We also unveiled upcoming products on the EV side, including the two initial models our electric motorcycle line-up, the Can-Am Origin, a dual purpose motorcycle equally capable 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 combines the pace of a board with the exciting sensation of foiling. This product opens a totally new market for us and our research reveals 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 products like this in the future. Initial shipments of these three electric products are expected for summer 2024.

Another main highlights of the Club on Slide 9 was the official introduction of our new first BRP designed boat line-up with the Rotax Stealth engine technology. When we launched our buy-build-transform strategy with the acquisition of boat companies in 2018, our objective was to create the critical mass that we could leverage to transform the marine industry with our design innovation and technical know-how, and this is exactly what we are doing with the introduction of our new Manitou, Alumacraft and Quintrex boat line-ups that redefine the boating experience and all include our new Rotax Stealth engine. This groundbreaking outboard engine disappears under the boat, which creates a truly integrated design and frees up valuable space. This brings significant benefit to the consumer in addition to being priced competitively with equivalent models on the market.

The boats attracted a large crowd during the Club. Our new boats are very well received by marine dealers and many powersport dealers also expressed interest in carrying these product lines. With these new line-ups, we expect to gain additional market share in the large and attractive $36 billion marine industry. It also represents an important step towards our objective of growing our marine business to $1 billion by fiscal year 2025. Moreover, these are the first boats designed with a modular approach which will improve margins 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 our year-round products.

Revenue was up 42% to $1.4 billion in Q2, representing by far our strongest quarter ever for year-round products. The growth was primarily driven by strong shipments and a favorable mix of side-by-side and three-wheeled vehicles. In terms of retail, the 2022 North American ORV season ended on June 30 and both our Can-Am side-by-side and ATVs outperformed their respective industries.

Side-by-side vehicles gained ground in all three segments and had three percentage points of market share for the season. Both product lines have also outpaced their industry in the quarter. Side-by-side notably achieved its highest market share ever in the month of July, and the strong retail momentum continued 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-wheeled vehicles, 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 completions are up significantly year to date. We are well positioned to sustain our momentum in three-wheeled vehicles with increased shipments for the upcoming months.

Turning to seasonal product on Slide 11, seasonal product revenues were $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 delay in unit shipments, which will take 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 orders for the model year ’23 Sea-Doo Switch are trending about three times higher than the actual production of model year ’22. As for snowmobiles, 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 units pre-sold to consumers.

Continuing on Slide 12 with a look at powersport parts and accessories and apparel and OEM engines, revenues were up 4% to $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 delayed unit shipments. Looking ahead, P&A remain a key growth area for us. Our focus on innovation will further drive consumer interest for accessories. This includes bringing the LinQ system to our extended boat line-up and introducing product with a high potential for add-on accessory sales, such as the Sea-Doo Explorer Pro.

Moving to marine on Slide 11, revenue reached $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 percent 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 [indiscernible] retail was down on low volume. Looking ahead, as mentioned earlier, we are shifting our focus to the next boat generation with the Rotax Stealth 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.

Sébastien Martel

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 were up 28% versus last year, reaching $2.4 billion. Our gross profit margin was roughly in line with our expectations, ending at 24.7%, but 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, which both impacted logistics, commodities and labor costs. Still, we continue to tightly manage our expenses, leading to strong normalized EBITDA of $418 million, representing a normalized EBITDA margin of 17.2%.

Our normalized net income came in at $238 million, resulting in normalized earnings per share of $2.94, up 2% from last year’s Q2. From a cash flow perspective, we generated $332 million of operating cash flow and we continued investing in growth with $112 million of capex, resulting in $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 $400 million and raising a $100 million U.S. dollar term loan. These actions provided us with the flexibility to continue investing in our long term growth, notably as we recently announced three 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 us 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 led to very strong retail growth of over 20% so far in Q3.

Now looking at Slide 17 for an update on the guidance for the year, before getting into the numbers, I would like to come back on the impact of the cyber incident which we were a victim of earlier in August. As we communicated when the attack occurred, our monitoring systems rapidly detected the breech 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 to 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; and 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 result in a $0.30 EPS improvement and our normalized EPS is now expected to end between $11.30 and $11.65, representing growth of 14% to 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% to 36% and normalized EBITDA up 41% to 48% compared to the first half. We are well positioned to deliver these strong results given the improvements in the supply chain, which we expect will allow us to increase production and drive higher volumes of fully completed units, resulting in stronger wholesale and margins; and second, the continued robust demand for products with robust retail so far in Q3, a high level of snowmobile pre-orders, very positive reception of our new product introductions leading to strong momentum with bookings following the recent Club, 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.

José Boisjoli

Thank you Sébastien. Before concluding, I would like to briefly discuss the acquisitions announced in July and August.

At our investor day in June, I pointed to significant opportunities in powersport and marine which support our M25 objective of reaching $12 billion to $12.5 billion of revenue and $13.50 to $14.50 of normalized EPS. We are also looking at expanding our addressable market to support our growth beyond fiscal year ’25.

One of these opportunities is our entry in the $15 billion European and North American two-wheeled motorcycle industry with the introduction of our electric Can-Am motorcycle family. These new products were very well received at the BRP Club. 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 $70 billion and there is room for us to capture significant market share.

To support our ambitions in this field, we recently announced three key acquisitions, a 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 systems 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 bicycles; and the Canadian powersports operation of Kongsberg, a long-time supplier of ours specialized 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 these acquisitions that bring 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 introductions, additional production capacity and recent acquisitions 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.

Question-and-Answer Session

Operator

[Operator instructions]

Your first question comes from Robin Farley from UBS. Please go ahead.

Robin Farley

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 improvements in the logistics and commodity pieces. With that higher revenue kind of not translating into--I don’t know if perhaps you’re just being conservative, but I’d love to hear your thoughts on that.

Sébastien Martel

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, so 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’s staying flat.

Robin Farley

Okay, great. Thanks.

Then just one quick follow-up, are you seeing anything in the environment that’s promotional from others? It sounds like obviously continuing strong retail demand and lack of availability across the board, but just any thoughts there? Thanks.

José Boisjoli

So far, I would say the environment is quite stable, like we saw in the last, I would say, 18 months.

Robin Farley

Okay, great. Thank you.

Operator

The next question comes from Xian Siew with BNP. Please go ahead.

Xian Siew

Hi guys, thanks for the questions. For the quarter, net 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%?

Sébastien Martel

Well, if you look at our year-to-date, or for six months, our retail is down 12% after six months, and 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 digits, 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 digits overall industry growth for the full year.

Xian Siew

Okay, got it, but I guess to clarify, the 20% quarter to date for you, that’s outperforming the industry, right?

Sébastien Martel

Well, we don’t have the industry data as of the mid of September, but the number is based on over Monday’s data, so quarter to date Monday. Obviously we don’t have the industry data as of the mid month.

Xian Siew

Okay, got it. Then 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; but just curious, how many new orders are you coming--are you still making--you know, increasing the number of pre-orders? I think pre-orders were up 80% in Q1. Where are we today, and is there any way to kind of think about the pace of new orders coming in?

José Boisjoli

First on the retrofit side, like I said in my remarks, we received a lot of components in the month of July and a lot in the last week of July, that have been delivered to the dealers, and that’s the reason why we saw the retail going up in Q3. The supply chain is definitely getting better, then we are expecting the number of backorders to go down significantly by the end of the year, and this is overall quite healthy.

In terms of the--your second question on the pre-orders, this time of the year, it’s a bit difficult to read. The snowmobiles, obviously pre-orders are extremely high - this didn’t change, and we just came out of the Club beginning of August with the introduction of the Sea-Doo watercraft, Sea-Doo pontoon, the side-by-side and ATVs that we allocated to December, the three-wheeled vehicles, and all the boats, and so far the reception at the dealers is excellent and, like we said, the bookings, because we introduced the product, we had discussions on volume, and bookings are coming in right now and we’re trending about 20% up versus last year. I’m very, very happy with that.

Product well received, and I would like to remind you that the dealers are the front line. They are dealing with the consumer and so far--I mean, momentum is great.

Xian Siew

Okay, got it. Thank you very much.

Operator

Your next question comes from Benoit Poirier from Desjardins Capital. Please go ahead.

Benoit Poirier

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 orders placed during the quarter versus those who had been made prior to Q3, and if you could provide some color about the inventory replenishment, whether this is still around $1.4 billion and mostly skewed towards fiscal ’24, or is it trending a bit earlier than expected? That would be great, thanks.

Sébastien Martel

Yes, sure. I’ll pick up on the inventory question, and I could cover also the orders. Obviously when you look at the inventory and you compare it to where we were in Q1, it’s up $400 million at the dealer network. We talked about the inventory opportunity replenishment at 1.4. You can appreciate that a significant portion of that inventory is related to seasonal products such as personal watercraft, and so a lot of the retail that is happening in August was for personal watercraft. Even with the cyber incident, the wholesale deliveries were lower than expected in August, so 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 it was supposed to be retail, I’d say that the 1.4 opportunity is still there today. In terms of the retail which happened when the orders from the consumers were placed, these are orders that have been in dealers’ hands for a long time - as I said, some of them were Switch, some of them were personal watercraft, so in-season product. Side-by-side, the inventory is so low that consumers had placed these orders with the dealers several months or several quarters ago.

Benoit Poirier

Okay, that’s great. Just a question on the snowmobiles, obviously you have already pre-sold a very good number of snowmobiles for the upcoming winter, but 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?

José Boisjoli

Like we said, Benoit, a high level of our Ski-Doo model year ’23 are already sold to end consumers, and there is always some in-season models but for sure, it’s difficult to see how our competitor will react and if they will slow down production because of all this. But this makes us even more confident that we will sell through everything we have, we will ship to the dealer before the end of the year.

Benoit Poirier

Okay, perfect. Last one for me, do you see--in terms of booking trends, is there a larger interest for, or do you see a big change in the mix versus between entry level and higher end products?

José Boisjoli

No. No, I know many of you have that question, but so far we didn’t see any trends 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 dealers. Now we’re hearing that many dealers already sold their whole Sea-Doo ’23 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 industry.

Benoit Poirier

Okay. Congratulations, and thanks for the time.

José Boisjoli

Thank you Benoit.

Operator

Your next question comes from Joe Altobello from Raymond James. Please go ahead.

Joe Altobello

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?

Sébastien Martel

Yes, good morning Joe. First, obviously the investigation is still ongoing and so there’s certain information I can’t share with you, but here is a few points that I can obviously cover. First, cyber security 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 we have the latest tools and technology. Our tools were able to quickly detect the infiltration and limit the impact on our business, and soon after we put our plan to progressively restart operations, making sure that our systems and data were scrubbed to make sure that was safe to restart the operation.

In terms of overall quantification, as I said earlier in terms of guidance, no impact in the guidance as we’re able to offset it; but when you combine the fact that our sites were closed for between one to two weeks and the fact that we could recoup with some weekends and overtime, net-net we probably lose four to 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.

Joe Altobello

Okay, all right. That’s helpful.

Maybe second question, you guys sounded pretty optimistic about supply chain getting better this morning. How confident are you that what you’re seeing is sustainable and not just some puts and takes like we’ve seen in the past?

José Boisjoli

Like we said in Q2, what happened in the summer--I mean, semiconductors have improved and we are well--in good position 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, 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, then 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.

Joe Altobello

Okay, great. Thank you guys.

Operator

Your next question comes from Mark Petrie from CIBC. Please go ahead.

Mark Petrie

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 potentially over 50% growth in Q3, but that still leaves a significant amount of growth for Q4 in order to hit this sort of guidance. Could you just help us think about the balance between Q3 and Q4 with regards to, I guess, revenues and margins?

Sébastien Martel

Yes, sure. Obviously when you look at the overall guidance margin-wise, there was going to be an improvement happening in the second half of the year with--compared to where we were. The bulk of the improvement in margin is going to happen, though, in the fourth quarter with strong shipments of personal watercraft, snowmobiles, and side-by-sides.

Year to date, the revenues were about $4.2 billion. We’re looking at back half of the year between $5.3 billion and $5.7 billion. I’d say that the overall growth in revenue will be much higher in Q4, in line with the EPS growth, and so revenues are probably in the range--probably 60% of the revenue is going to be in Q4 and the remaining in Q3, would be a fair distribution.

Mark Petrie

Okay. As we think about the pacing of growth into fiscal ’24, you mentioned that you’re still of the belief that the $1.4 billion of inventory replenishment opportunity, you know, I think what would remain in place going into next year is the expectation effectively that that can be serviced in fiscal ’24, or what’s your current view on the balance of your ability to supply and what you’re seeing with regards to demand?

José Boisjoli

Just an additional comment and to answer your question, I would like to remind you that we added capacity for watercraft and side-by-side, but 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 factories at a good pace. We have a BOD catch-up because we received components from suppliers that will be retrofit at the dealer level during Q3 and Q4, and next year obviously the capacity is there, then if the demand is there, we feel confident we can run all operations at a higher level in fiscal year ’24 versus ’23.

Mark Petrie

Okay, and then maybe just to clarify then, is your expectation that the retrofits will effectively be complete at the dealer level by the end of this year, or is that going to remain in place for next year?

Sébastien Martel

Our expectation is that we will ship very little, if no BODs, which was our retrofit units at the dealer, in the fourth quarter, but we will still have some units in our inventory that we will need to retrofit in the first half of next year. But 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 the seasonal products 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, and so--but that inventory will be already sold to the dealer and dealers will have orders. We expect to still be low in side-by-side ATV inventory in Q4.

Mark Petrie

Okay, that’s helpful, thanks. Then I guess just one last one, obviously you’ve made a number of acquisitions, 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 your immediate capital priorities over the course of the next year and opportunity for NCIB activity.

A - Sébastien Martel

Yes, well if you look at what we’ve done in terms of share buybacks since the beginning of the year, we’ve purchased $300 million of shares, and we’ve obviously communicated to all of you in the past, our priority has been investing in the business, and so 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 dealer by using a retrofit approach - that obviously required some capital investments, and obviously the acquisitions that we’re doing as well is going to require cash, probably to the tune of about $200 million.

That has always been our priority, but we’ve also been very diligent and being opportunistic in buying back shares, so 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.

Mark Petrie

That’s very helpful. Thanks, and all the best.

José Boisjoli

Thank you.

Operator

Your next question comes from Gerrick Johnson from BMO Capital Markets. Please go ahead.

Gerrick Johnson

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, and then also, is Switch in PWC retail when you report that retail? Also related, the delay in Sea-Doo shipments, I think after last quarter, we were expecting an acceleration in 2Q, so that seems to be pushed out.

Sébastien Martel

Yes, 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 seasonal this year is that Switch will be 10% of our revenue, and so obviously a very good business for us.

Your second question, Gerrick - sorry?

Gerrick Johnson

The delay on Sea-Doo shipments.

José Boisjoli

Yes, what happened on the Sea-Doo shipment, Gerrick, there was a critical component for the Sea-Doo, specific to Sea-Doo, that we received a big shipment in July. We had to re-ship the component in kits to the dealers, and those were shipped the last two weeks of July, then the dealers received the components 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.

Gerrick Johnson

Okay, got it, great. Then on Manitou and Alumacraft, how about the orders coming out of your Club event? Are they in line with your expectations?

José Boisjoli

We sold out. Everything we can produce is sold out to the dealers, and we’re hearing very good comments that presale units to consumer is extremely strong.

Gerrick Johnson

Okay, very good. Thank you.

José Boisjoli

Thank you.

Operator

Your next question comes from Martin Landry from Stifel GMP. Please go ahead.

Martin Landry

Hi, good morning. I just want to go back on the promotional environment and wondering what have you factored into your H2 guidance in terms of promotional activity, and when do you think that we go back to promotional levels that are more in line with historical levels?

Sébastien Martel

We’ve done--given that we shipped some units later than what we would have liked for personal watercraft, for three-wheeler, 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 too significant, but cautiously we’re planning for it.

In terms of going back to normal, obviously our hope is that we don’t go back to normal ever, but we know that what we’re living today is exceptional and there is probably going to be a 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 tactical in how we deploy programs.

So could we end up, as I shared, saving 100 basis points overall from less promotions, that’s certainly something that we’re pushing the teams to strive for.

Martin Landry

Okay, that’s helpful. Then maybe just switching gears to your acquisitions in the electric sector and urban mobility, I was wondering, I’m a bit curious with urban mobility, was wondering when we could see you launch something in that sector, and I was wondering if you can discuss the competitive landscape in urban mobility. Is it a fragmented market, and what does the distribution network look like?

José Boisjoli

Yes, 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. We are--basically the three acquisitions that we’ve done was to give us the additional know-how. The Pinion gearbox, it’s a very, very sophisticated, small compact gearbox that can be applied to many of our product lines.

I will not comment this morning on what we’re looking at, but again you can expect from us that we’ll enter a new category of product, we intend to invent new categories of product, and it’s like--my best example is the Sea-Doo Rise, the electric hydrofoil. Hydrofoil has been around for many years, but you need to be an athlete to ride an electric hydrofoil. The one that we’re 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, 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 $70 billion bubble, but too early to give you more detail this morning.

Martin Landry

Perfect, thank you.

José Boisjoli

Thank you.

Operator

Your next question comes from Craig Kennison from Baird. Please go ahead.

Craig Kennison

Hey, good morning. Thanks for taking my questions. You’ve addressed several already.

A point of clarification on Slide 6 - 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?

Sébastien Martel

The revenue is recognized when the part is shipped to the dealer.

Craig Kennison

Got it, and how long does it generally take to get to the dealer, and how long does it take to have that part installed on average?

Sébastien Martel

Oh, it could take a day to a few days. We ship them--usually we have overnight service that we get the parts to the dealers. We want to get them quickly as possible because we know consumers are waiting for the products.

Craig Kennison

Then I guess regarding that unfinished product at dealerships, what are the most common part shortages that, when shipped, would allow them to be recognized as revenue and sold at retail?

José Boisjoli

The cluster, the gauge. Like we explained before, we have three types of clusters - low, medium and high end, and 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--cluster is very short, but let’s say average it will take between 45 minutes to retrofit the unit.

Craig Kennison

Great, thank you.

Operator

Your next question comes from Cameron Doerksen from National Bank Financial. Please go ahead.

Cameron Doerksen

Thanks, good morning. I guess maybe to go back to an earlier question around working capital and your wholesale inventories - I mean, obviously assuming a 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’d think kind of a normal level of inventory on your balance sheet should be, given the size of the business now, because we’ve seen obviously a significant increase over the last 18 months, but a lot of that is kind of unusual, so what do you think a normal level of inventory should be for BRP with the size of the business now?

Sébastien Martel

Yes, well obviously we have invested in working capital in the last few years for raw materials for retrofits, and there’s lower actually finished goods, and the inventory is at a record level, over $2 billion on our books in inventory. My expectation is that in Q3, we’ll still be running with high inventory, probably even some investments in working capital that are going to 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.

When are we going to come back to normalized inventory? Obviously we’re running today with higher raw material because we want to have a bit more buffer in our planning, and we are actually having discussions with the team as to, okay, what’s going to be that new level once we get to that new normal.

There’s one thing I’m going to note, that I do know, is that finished goods inventory is going to go up in the fourth and in the first quarters of next year, but when will the raw material come back down to more regular levels, it’s still too early to call, Cameron.

Cameron Doerksen

Okay, fair enough. Maybe just second question on--I guess again on the M&A, the Kongsberg acquisition, more of a vertical 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 supply in-house, and 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?

José Boisjoli

First, we were about 80% of that division sales, and there is many unique features that we developed together over the years. We even have common patterns in certain areas. But I give an example - power steering, we developed with them the power steering that we use on our ATV side-by-side and our three-wheeled vehicle units. It’s unique to BRP, and we believe we can accelerate the pace, and it’s a combination of acquiring the know-how and also being self sufficient in key components. It has the power steering, and this is only one part that they’re doing for us.

Cameron Doerksen

Okay, do you think there’s additional acquisitions you might want to do too for other critical components?

José Boisjoli

At this point, we’re looking obviously at opportunities all the time. At this point, there is no specific plan for this, and again the acquisition of Kongsberg had two objectives. 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 better coordination between our team here in Canada and their team to go faster. It was like two objectives for Kongsberg.

Cameron Doerksen

Okay, makes sense. All right, thanks very much.

José Boisjoli

Thank you.

Operator

Your next question comes from Jaime Katz from Morningstar. Please go ahead.

Jaime Katz

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.

Sébastien Martel

Good morning Jaime. When I look at the data for Q2 and I look at the overall FICO scores compared 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. You might say, well Seb, it’s easy to get higher scores if the acceptance rates are lower, but acceptance rates are also trending higher. Last year in Q2, we were at 66% of acceptance rates from our financing partner; this quarter, we’re at 71%, and when I look at the data just for August, we’re still trending higher at 73% of acceptance rates.

As we say, 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, so we’re not seeing any slowdown from the consumer in the interest in powersports and marine products.

Jaime Katz

Okay, and then 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 any other trends that might be noteworthy? Thanks.

José Boisjoli

Yes, in terms of--obviously we’re watching Europe because in the context of the energy shortage, there is high inflation in some areas. But if we look at the Q2 retail again in EMEA, and it was low double digits, when in North America was mid double digits and LatAm was also mid low double digits, then basically 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.

Jaime Katz

That’s really helpful. Thank you.

Operator

Your next question comes from Brian Morrison from TD Securities. Please go ahead.

Brian Morrison

Yes, thank you. Good morning.

I just want to follow up on the earlier question on the guidance weighting--you know, second half EPS, it looks like 30% will be Q3 and 70% Q4. But you’re talking about the supply chain improvements, capacity improvements, so is the skewing to Q4, is this cyber related, is it supply chain, is it the retro products and WIP? I guess in simplistic terms, why can’t we push through more retrofit in Q3?

Sébastien Martel

Good question, Brian. Obviously yes, the cyber incident impacted Q3 production. Some of the catch-up is going to be happening mostly in Q4 with overtime and weekends, and also the completion rates are going to 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, but just the inherent, we’ll call it improvement of the supply chain and cyber incident are obviously weighting heavier on the third quarter.

Brian Morrison

Okay, and then I guess a higher level question, maybe for José, 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?

José Boisjoli

No, when we signed the agreement, they knew about our plan with the Ghost technology, and the agreement is going on.

Brian Morrison

So what is the competitive response, or what do you think the competitive--you know, what’s their reaction to having a new competitor, a very strong competitor now in place?

José Boisjoli

This, I don’t know. 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, but for us the division is to sell a complete product like we do on all our other product lines. That being said, it will take a while before we get there, but step by step we will continue to go there.

When we acquired Telwater in Australia, Mercury was not there, and now they are a partner in Australia, then there is some win-win for both companies and the relationship continues.

Brian Morrison

Okay, thank you. Congratulations.

José Boisjoli

Thank you Brian.

Operator

Your next question comes from Fred Wightman from Wolfe Research. Please go ahead.

Fred Wightman

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 you could sort of put parameters around what that tailwind could look like as we think about next fiscal year?

Sébastien Martel

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 would--we will obviously work hard to remove or reduce next year, and it brings a considerable opportunity for us going forward as we address it.

Fred Wightman

Makes sense. Then on the updated guidance, have you guys assumed, or is there any business interruption insurance that is contemplated in that?

Sébastien Martel

We do have insurance coverage for cyber incidents. We’re in the middle of doing the computations. Yes, we did file a claim with the insurance company, and our guidance assumes that the insurance will not be--or the insurance with the additional costs would be normalized from those numbers.

Fred Wightman

Sorry, just to be clear, so the business interruption insurance claim, assuming that goes through, would be incremental to the current guidance, or current guidance assumes that--

Sébastien Martel

That would be normalized.

Fred Wightman

Okay. All right, thank you.

Operator

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.

Gerrick Johnson

Great, thanks. On the acquisitions, how is that impacting your guidance for the year, and also Sébastien, how is that impacting the P&L from an accounting standpoint, given that these are some suppliers?

Sébastien Martel

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 powersport P&A and OEM engines, but no significant impact this year. Kongsberg, obviously it’s twofold, as José said, from a technology standpoint, strategically there’s a good fit there, and from a vertical integration, obviously it’s going to reduce our overall building material cost. We expect some minor benefits this year, but they’re still operating in a tough supply chain environment and some--most of the benefits will come next year. But--

Gerrick Johnson

Okay, but the impact--

Sébastien Martel

But nothing super material, Gerrick.

Gerrick Johnson

Okay, I was just wondering about the accounting for it, so this is not adding revenues since they were supply components, or is there some revenue recognition or is it a cost--

Sébastien Martel

No revenues. It’s going to be a cost advantage we get mostly next year.

Gerrick Johnson

Okay, okay. Thank you.

Operator

There are no further questions at this time. I will turn the call back over to Mr. Deschênes for closing remarks.

Philippe Deschênes

Super, thank you Julie, and 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 30. Have a good day, everyone.

Operator

This concludes today’s conference call. You may now disconnect.