BRP, Inc. (NASDAQ:DOOO) Q4 2021 Earnings Conference Call June 3, 2021 9:00 AM ET

Company Participants

Philippe Deschenes - Manager, Treasury & IR
Jose Boisjoli - President, CEO & Chairman
Sebastien Martel - CFO

Conference Call Participants

Robin Farley - UBS Investment Bank
Cameron Doerksen - National Bank Financial
Craig Kennison - Robert W. Baird & Co.
Benoit Poirier - Desjardins Capital Markets
Frederick Wightman - Wolfe Research
Martin Landry - Stifel
Sean Collins - Citi Group Research
Brian Morrison - TD Securities
Derek Dley - Canaccord Genuity
Jaime Katz - Morningstar
Gerrick Johnson - BMO Capital Markets
Mark Petrie - CIBC

Operator

Good morning, ladies and gentlemen. Welcome to the BRP Inc. Full Year '22 First Quarter Results Conference Call. [Operator Instructions].

I would like to now turn the meeting over to Mr. Philippe Deschenes. Please go ahead, Mr. Deschenes.

Philippe Deschenes

Thank you. Good morning and welcome to BRP's conference call for the first quarter of fiscal '22. 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, please note that certain forward-looking statements will be made during the call and that the result could differ from those implied in these statements. Please note that the forward-looking information is based on certain assumptions and is subject to risks and uncertainties and I invite you to consult BRP's MD&A for a listing 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.

So with that, I'll turn the call over to José.

Jose Boisjoli

Thank you, Philippe. Good morning, everyone, and thank you for joining us. Building on the momentum we had over the last several quarters, we experienced a solid start to the year with record first quarter result, which came in above our expectation. This growth was driven by the fact that we are lapping a quarter in which our manufacturing operations were partially shutdown, coupled with ongoing robust demand for products.

Given these trial result and continue positive outlook for the business, we are increasing our normalized EPS guidance for the year by $0.50 to a range of $7.75 to $8.50 per share. We are maintaining a wider than usual guidance range, given the ongoing challenges we are facing with the supply chain. I will touch on this in more detail in a few minutes.

Now let's turn to slide four, for a more detailed look at key financial highlights for the first quarter. Revenue grew 47% to an all-time first quarter high of $1.8 billion, primarily driven by higher volume across all our product lines, especially for our parts and accessories business, coupled with lower than expected sales program.

In fact, our revenues not only surpassed the same period last year, but also increased 36% compared to the first quarter of fiscal year '20. Our normalized EBITDA was up three fold to $375 million and our normalized earnings per share reached $2.53. Not only were our financial results solid, but consumer demand remains very strong in the quarter, as you can see on slide five.

Globally, our retail group in all key region, while continuing to outpace the industry in North America, our Powersport retail growth accelerated from the fourth quarter up 39% or 49% when excluding snowmobile. We also had a strong performance in international markets with retail up 9% in Latin America, 32% in EMEA and 83% in Asia Pacific.

By product line, we grew across all of our lineups except snowmobile, as our dealer ran out of unit at the end of the season. For a side-by-side growth was moderate, more moderate, as it is also suffered from limited product availability due to low inventory. I will provide more color by product line in a moment.

Turning to slide 6, despite the strong demand in the first quarter, we expect retail growth to be limited in the second and third quarters, mainly due to the ongoing supply chain constraints, which are evolving very rapidly. When the last of the few in late March, one of our key challenges was the logistic congestion at different parts. Our team was successful at that dressing these issue by finding an alternative solution. To date logistic are predictable and manageable.

Currently, we are managing the tight availability and delivery delay for certain raw materials. In these case, we are working with our supplier to find substitute or new source of supply, which are creating some daily. For the past month, our main challenge has been dealing with the shortage of semiconductors. This is affecting some of our Tier 1, but also some of our Tier 1 suppliers, where we have less visibility. This is presently the main source of disruption in our operation because finding alternative parts with regard to technical changes.

Given these issues, some of our units will need to be retrofitted. This means the unit is missing a few components and it will move to final assembly, when the components are received. This situation will delay the timing of certain deliveries and temporarily increase our working process.

Regardless of these challenges, our objective is to deliver all orders by the end of our fourth quarter. Our plan are running at full capacity and we are in the process of increasing production capacity at Juarez and Querétaro to make this happen. We plan to work through these issue for the balance of the year to deliver our production schedule. Take note that all of this is increasing our costs versus last year, but it has been factored into our guidance.

Turning to slide 7, given those challenges and the fact, the impact on production, the other inventory will remain low throughout the year. To better illustrate the situation, we have provided statistic from the past few years. In fiscal year, '18, '19 and '20, you can observe on the graph that our level of inventory in our dealer network, wasn't synced with retail at about 175 days. During those years, our retail was growing below double digits.

In fiscal year '21, given the surge in demand, coupled with our two month production shutdown, an inventory drop to 80 days. In the first quarter of fiscal year '22, it dropped as low as 40 days. With the continued strong demand, we expect to remain at this level of inventory for the remaining of the year, which will limit our retail sales growth. Also, it is now clear that inventory replenishment will take place in fiscal year '23.

Turning to slide 8, we continue to experience strong consumer demand across all our product lines. New entrants continue to enter the industry representing 37% of buyers in the first quarter, compared to about 20% historically. This is good news for the industry and it doesn't seem to be driven only by the impact from the pandemic.

According to our survey, only 7% of new entrants said the purchase of Powersport vehicle as a COVID distraction. In fact, new entrants are a more diverse group representing younger people and more women and families. In addition, according to our survey, 82% of buyer are not making a trade-off, when purchasing a unit, contrary to our and general belief, only 3%percent of buyers declare to have purchase a unit instead of traveling.

There are multiple, multiple positive sign of sustained consumer interest. This is the fourth consecutive quarter of double digit growth for the Powersport industry. Website visits are up over 60% compared to last year for all our brands. And we have a strong demand for our products, including record snowmobiles per unit booking, the strongest start of the personal watercraft season in over a decade and our 3 wheels vehicle rider education program registration are trending above our target. These are all positive trends for the mid to long-term growth of our industry.

Now let's turn to slide 9, for year-round products. Revenue we're up 44% to $923 million, mainly driven by a higher volume, lower sales program and a richer mix of side-by-side vehicle. Looking at side-by-side vehicles season, to date retail, 10 months into season '21, the North American side-by-side industry is up high 20%, while our Can-Am side-by-side vehicle is up low 20%.

As we were impacted by limited product availability, this is also impacting our retail performance in international market, as we've delivered more unit to North America as a result, our retail performance was up high single digit in the EMEA and 18% in Asia Pacific. Still very happy with the strong consumer demand for our lineup and we look forward to ramping up production as we expect the Juarez 3 facility to come on-line at the end of the third quarter.

Turning to ATV, the North American industry is also seven months into the season '21 and retail is up in the low 30%. Can-Am is performing in line with the industry with retail up in the low 30% over the same period. For both ATVs side-by-side a worldwide network inventory is at [indiscernible] flow.

Now looking at 3 wheel vehicle, now six months into season '21, the North American three will industry retail is up about 90%. Can-Am 3 wheel vehicle is up to a very strong start. It is the fastest growing brand in the motorcycle industry. So far this season, which retail up over 140%. We are very happy with the momentum we have with 3 wheel vehicle.

The retail trend is very positive. The rider education program registration continued to trend above expectation, with registration up over 50% versus our internal target, which bode well for the system ability of consumer demand and we continue to attract a younger and more diverse consumer base, sorry, notably with retail to woman up 166% diverse community up 190% and new entrance up 180%. These are exceptional result and we are very excited at the outlook for the three wheel vehicle business [Indiscernible].

Turning to seasonal product on slide 10, seasonal product revenue were up also 44% to further $63 million driven primarily from higher shipments and richer mix of personal watercraft and lower health program.

Now looking at personal watercraft retail, only six months into the North American season 21, the industry retail is up in the low 70%. Sea-Doo retail is up mid 90% outpacing the industry and gaining market share in all the industry segments in which we compete. The trend is also very good in international markets, with retail up over 110% in EMEA, 130% in Australia and New Zealand and up over 30% in Brazil. This year is the strongest start of the retail season that we have experience in over 20 years. Given the strong start unit availability is already getting tighter heading into the summer. We expect to end the season with a very low level of inventory again this year, which should lead to strong shipment in the next fiscal year.

Turning to snowmobile, the North American snowmobile industry and the season 21 with retail up in the high teen percent. Sea-Doo retail was also up high teen percent over the same period and ended the season with the number one market position in every industry segment in which it compete and with its highest market share in history. Our momentum was also very good in Scandinavia and Russia, with retail up low 20% for the quarter.

Turning to slide 11, looking ahead, our snowmobile business is very well positioned for season 22 as we have a very strong lineup notably with the introduction of the Lynx brand in North America and the return of an all-time favorite, the Ski-Doo magazine. We ended season 21 with record low network inventory and unit pre-sold to consumer are up 157% over the last year.

As a reminder, spring units are special model only available at pre-order and allow us to better forecast volume for the upcoming season. This year, exceptional strong spring unit orders represent roughly 70% of the upcoming season volume compared to about 35% historically. This reflects the continued very strong consumer interest for Powersports product and snowmobile in particular.

Continuing on Slide 12 with the look of Powersports parts, accessories and apparel and OEM engine, which experienced a similar trend as vehicle. Revenue were up 91% to $300 million driven by higher volume of replacement parts due to increase product usage combined with strong unit retail, which generated increased accessories sales across all our product line. It is clear that our link ecosystem accessory strategy is driving demand and paying off. Despite supply chain challenges that's also affected PAME, we delivered exceptional results.

Now looking at Marine on slide 13 revenue, revenue were 11% to $122 million as strong boat shipment more than offset the impact of the wind down of [indiscernible] board engine. Looking at our different brands in term of retail performance for the quarter, Manitou was up over 80%. Alumacraft over 60% and Telwater was about up, was about up 40%. All in all, we are pleased with the performance of our both brands and are on track for the introduction of new products with the engine.

With that, I will turn the call over to Sebastien.

Sebastien Martel

Thank you, Jose and good morning, everyone. Revenues reached a record level for first quarter up $1.8 billion up 47% from the same period last year. Gross profit margin also reached a record level at 30%. Compared to last year our gross profit margin mainly benefited from lower sales programs and better fixed cost absorption while last year's first quarter margins suffered from the temporary production shutdown.

The margins also benefited from the exit of the outboard engine business and our continued focus on introducing products with better margin. When compared to our expectations for the quarter, our gross profit margin was better than expected driven by equitable product mix resulting from a stronger than anticipated P&A sales and lower than planned sales programs due to the strength of the retail demand and faster than anticipated inventory turns.

With this strong, gross profit generation and lower than expected operating expenses, we delivered our strongest quarter ever in terms of normalized EBITDA of $379 million and this resulted in normalized diluted earnings per share of $2.53. We generated $379 million of cash from operations in the quarter and invested $153 million in working capital notably for inventory where due to supply chain issues our work in process inventory was higher.

This higher work in process inventory allows us to more efficiently manage our operations in the supply chain constraint environment and allows us to ship units to dealers quicker when the missing components come in. We also invested in $97 million in CapEx and returned $288 million to our shareholders through share buy backs, completing our previously announced normal course issuer bid.

Turning to slide 16 for a look at the key drivers of our normalized net income growth for the quarter. As you can see from the chart our normalize net income grew $199 million from last year's fourth quarter driven by a positive impact of volume, mix, pricing and sales programs for $388 million, which was partly offset by negative impacts from production costs and depreciation expense for $30 million, higher operating expenses for $70 million as we continue investing for our long-term growth and higher normalized tax expense for $89 million. This resulted in $222 million of normalizing net income for the quarter, a performance that was stronger than we had anticipated driven by the continued strong demand, lower sales programs and very strong P&A sales.

Turning to slide 17 for a look at network inventory. As Jose mentioned, given the exceptionally strong retail growth we have experienced over the last year, our North American Powersport dealer inventory ended the first quarter at a historic level being down 73% versus a year ago. This combined with our finished good inventory represents a decline of over $1.6 billion in inventory value compared to last year. Despite increasing shipments in recent quarters, all our product lines are seeing significant inventory; client decline.

For ORV, the network inventory is down about 80% as the demand for Can-Am brand is higher than ever and everything we ship is being retailed very fast. For snowmobile, Ski-Doo had a very strong season resulting in a record low level of inventory at the end of Q1, down 83% versus last year. And for our summer products, both PWC and three-wheel are off to a very strong start of the season with consumers purchasing or units earlier than typical.

Their network inventories are down 64% and 54% respectively. These low levels of inventory are limiting our ability to grow retail in the short term, but the demand for our lineups remains very strong and we expect to resume market share gains more specifically for all the as product availability improves in the networks starting later this year.

Now turning to slide 18 for an update on the guidance for the year, as well as I mentioned, we are reviewing upward our year-end guidance driven by the stronger than expected first quarter results, notably for our P&A business. They're very strong spring units booking for snowmobile and lower than expected sales programs throughout the year, given our very low network inventory position.

We also expect that we will continue dealing with supply chain constraints that are likely going to lead to delays and the reception of which in turn would lead to delays in the shipment of products. Based on the visibility we have today, we believe that the supply chain challenges will impact the timing of product deliveries in Q2 and Q3, but our full-year volume target remains intact.

We have included additional costs and maintain a wider than usual guidance range to account for the potential impact of the supply chain constraints and for commodity price increases. Following these adjustments, we now expect our total company revenue to grow between 28% and 33% are normalized EBITDA to grow between 27% and 35% and our normalized EPS to end between 775 and 850 representing a growth of 44% to 58% over the last year.

Now looking at slide 19, for some additional color on the quarterly outlook for the year in terms of normalized EPS, as mentioned, we expect the supply chain constraints to weigh more on the second and third quarter, therefore pushing more volume in the fourth quarter, given this dynamic, we expect to generate a modest, normalized EPS growth in Q2, a slight decline in Q3 and strong growth in Q4.

In terms of our expected North American Powersport retail, as previously mentioned our low level of network inventory, coupled with the impact of supply chain constraints and the fact that we will be lapping very strong quarters last year, should lead to retail sales decline in Q2 and Q3 and a return to growth in Q4 as we'd benefit from improved unit deliveries and additional production capacity, notably for side-by-side with the [Indiscernible] facility. For the year, we expect our North American Powersport retail to end somewhere between flat to up high single digit with SSV generating the strongest growth on that.

I will turn the call over to Jose.

Jose Boisjoli

Thank you. So best to conclude the sculpt one and one was an exceptional year and the momentum continue into fiscal 22. Our team is doing an excellent job managing the ongoing strong demand for our product, with all our facilities running at full capacity. Despite the supply chain issue, given the continued strong consumer demand and related lower sales program, we are well positioned to finish the year with solid results and expect to deliver our increased guidance for the year.

In addition, we are continuing to position BRP for the future by driving different projects to generate long-term growth, including turning new entrants into lifelong customers, pursuing new market shaping product introduction, taking advantage of additional production capacity with the ramp up of [indiscernible], as well as executing on our investment in electric vehicles. I would like to thank our employee for continuing to diligently follow our COVID safety protocol and for working longer hours, both in production and administrative functions.

I would also like to thank our supplier for doing extra work to meet orders and our dealers for their patience and for managing consumer on their front line. Lastly, I would like to thank them all for their agility, dedication and resilience in these unusual time.

On that note, I will turn the call over to the operator for questions.

Question-and-Answer Session

Operator

[Operator instructions] Your first question comes from the line of Robin Farley with UBS. Your line is open.

Robin Farley

Great. Thanks. I wanted to ask about the two things related to dealer restocking. One is, I wonder if you can help quantify the restocking opportunity, which I realize is, is kind of fiscal 23 events. And just thinking that maybe inventory wouldn't get back all the way to 175 days, but so if you can help us quantify that. And then also we had heard from, from dealers that potentially some production was limited by the availability of engines that were there, some shared engine capacity between snow and an off-road.

And so just, I wonder if you could kind of address whether that is limiting whether that will limit your snow production or your side-by-side off-road production later this year, is there kind of a trade-off that you have to make there? Because of the Rotax engine capacity. Thanks.

Jose Boisjoli

Good morning, Robin, I'll take the first part. I think Charles is going to take the second part in terms of a replenishment opportunity, obviously, as you said we were historically, we're running with the 170 days of inventory. Our, our guesses that the industry will be running lower, but obviously as the industry grows, as we gain market share in absolute dollars you're probably looking at an opportunity to have restocking in the range of well above a billion dollars.

So obviously it is quite sizeable. And as Josie alluded to in the prepared remarks, we believe that that restocking is going to happen next year because of continued demand for the products and the low levels of inventory you have now. And Robin to your second question about the parts availability, Arthrotec dealer are, right.

In the sense that we have limited capacity of engine component and we are trying to manage with them between product line to better optimize the situation. Then this is an ongoing discussion we having with our dealers, with our suppliers, try to maximize what we can do to respond to the demand and does depend a lot on the seasonability of the product. Dealer don't need now snowmobile. They will start to deliver it to consumer in October. Then this is what we try to manage the best we can, but definitively there is some, some challenges on the engine component.

Operator

Your next question comes from the line of Cameron Doerksen with National Bank Financial. Your line is open.

Cameron Doerksen

Thanks. Good morning. Just wanted to I guess, questions on the retail. I think Seb, you said that your expectation for the full year retail was flat to up high single digits. Just wanted to confirm that number and in addition to that, is there any way you can sort of give us an idea of what your expectation is for retail this year versus two years ago? Obviously last year was a bit of a bit of an anomaly.

Sebastien Martel

Yeah. Good morning, Cameron. Yes, that's correct. You correctly quoted me, so flat to up high single digit. Obviously the retail will vary on a quarter by quarter. This quarter, we had very strong retail with some pull forward from Q2 for personal watercraft in three wheel.

What I could tell you with, if I look at the second quarter when I compare it to two years ago, I believe the second quarter should be flat than retail compared to two years ago. So obviously two years ago was a strong quarter continued strong demand, but obviously we will be lapping a very strong quarter compared to last year and that's why we'll be down compared to last year.

Cameron Doerksen

Okay. And do you have any, I guess, a number for kind of the full year? I think that the expectation would maybe be in the high teens or even 20% versus two years ago for the full year?

Sebastien Martel

Yeah, for the full year, it'll be in the high teens to low twenties.

Cameron Doerksen

And just want to follow up with a question on the three-wheel market because you're doing obviously very, very well there ahead of plan. Is there any way to maybe talk about the difference in, in Vegas, in retail demand between spider and Riker, or is it, really broad base to cost the entire product portfolio?

Sebastien Martel

For sure the Riker is attracting a younger customer base because of the price point. But I would say that all the program we put together the program you know the people do the Riker Education program we have many Riker customer, but also many RTS 3 customer, you know the woman on the road [indiscernible] it's affecting all the models than Riker because of price point definitely attract a younger customer base. But I would say that momentum on three wheel is the tree model and we're very, very happy.

Operator

Your next question comes from the line of Craig Kennison with Baird. Your line is open.

Craig Kennison

Hey, good morning. And thanks for taking my question. It's really on allocation. What are you doing to I guess fairly allocate inventory across your dealer network, given the shortages?

Jose Boisjoli

We don't, we don't favor one dealer versus the other. We try to be as equitable to everyone because short term you could do favoritism but we don't do that because it's not helping the second dealer and the mid to long-term will be will be impacted by this. Then we're trying as much as we can to allocate obviously by countries and after that by region and after that by dealers. But we trying to be very fair between all the dealer network to make sure we protect the mid to long-term.

Sebastien Martel

And we talked about our dealer value proposition and what are the key elements OMS system, the Order Management System and that is I would say an objective model where a dealer places an order, but the orders are also correlated to what their market share targets are. So that obviously make sure that everyone's treated fairly.

Craig Kennison

Thanks. And then what systems are in place to help dealers either trade new inventory or even used inventory among themselves? Is there anything BRP can do to help facilitate, I guess, better liquidity to help your dealers help themselves?

Sebastien Martel

In each region, the dealer has -- each dealer has a network of other dealer where they typically trade between themselves. But that being said, in the last 12 months there was definitely less trade than typical because every dealer wants to hold to every unit they can.

Operator

Your next question comes from the line of Benoit Poirier with Desjardins Capital Markets. Your line is open yet.

Benoit Poirier

Good morning, everyone and congratulations for the good quarter. Could you talk a little bit about the capital deployment strategy in light of your favorable market environment, strong balance sheet and whether a substantial issuer bid is something that you could consider?

Sebastien Martel

Obviously a sound capital allocation strategy has been a part of our success and as we said, we do have a strong balance sheet that provides us with flexibility. As we've always said, our priority is to invest in the growth of the company and when you look at our CapEx guidance for the year up to $600 million investment, we maintain that disciplined approach.

As you also saw in our Q1, we completed the NCIB. We invested almost $300 million in share buybacks. That completes the NCIB that we started. Last December we purchased about 4.3 million shares. So the next opportunity to do NCIB would start in December. And until then, while as you said, the good news is we have a strong balance sheet. We have that flexibility and if we decide to be opportunistic in buying shares, we do have that -- we do have that possibility. So no decision taken now, but obviously as I said, there's time between now and the next NCIB window.

Benoit Poirier

Okay. That's great. And you talked Josie about the supply chain constraint. I was wondering if there's also impacting their ramp up at Juarez 3, at the whole, and also Sturtevant, which respect to the new Project M and given the strong consumer demand and the new capacity increased require either at Valcourt or in Austria to deal with the road tax?

Jose Boisjoli

Good morning, Benoit. First Juarez 3 is on plan. Then this is doing a good then we planning to ramp up production on the back end of Q3 and Project M Sturtevant, is also on plan manufacturing the motorized hull will be made in Querétaro this is on plan and the Sturtevant facility revamp is also on plan then end of Q4 we start with production then and in term of engine and maybe to, to compliment on what the answer to Robin in the first question.

Overall of the engine we have a very good dealer network supplier network. We manufacture our key component ourselves and we were already in an investment mode to satisfy for the growth we had. And if you see there is some timing of equipment, but the engine capacity is a very short period, as far as ratio, very tough time.

Then overall we're happy with, you need to realize that in fiscal year '23, Juarez 3 will be fully running, Querétaro with watercraft 30%. That will be project M and we are tweaking to optimize production there's a site, then we feel we have the right capacity for fiscal year '23.

Benoit Poirier

Okay. That's great. That's it for me? Thank you. Let's see.

Operator

Your next question comes from the line of Frederick Wightman with Wolfe Research. Your line is open.

Frederick Wightman

Hey guys. Good morning. Thanks for taking the question. I just wanted to look back at sort of the commentary you'd provided last quarter for your retail expectations. I think you talked about high single digit retail. If we look at what you posted, you came in quite a bit above that for the full quarter. So what does that mean for these retail parameters that you sort of outlined here for 2Q and 3Q, what drove the out-performance was a better than expected consumer demand, better availability in terms of supply and how does that shake out for sort of the guidance that you've given us?

Jose Boisjoli

Good morning, Fred you're right. That we did call out that retail would be a bit soft, more softer than what we actually delivered in terms of numbers. I think the surprise was in the accelerated retail for personal watercraft and 3 wheel and obviously production is set at a certain level. So whatever we retail in Q1 is retail that we lose in the second quarter and so that acceleration provided for stronger growth in the first quarter versus what we were expecting. Obviously it's going to impact our retail expectation for the second quarter.

Frederick Wightman

Make sense. And just circling back to the allocation question from earlier, can you talk about how pre-sold units sort of factor into the internal allocation system? And if you've seen any change in sort of dealer order patterns tied to pre-sold units specifically?

Jose Boisjoli

Yeah. First we try to -- we try and our goal is to order every pre-sold unit to the consumer. I'd like to give you an example for snowmobile. Our record of pre-sold -- our next production season, the pre-sold unit is at a record high. And we trying to order every single unit that is pre-sold for every product line.

We have less visibility on it, but we still have the team is doing their best to make sure we protect everything is pre-sold to the consumers.

Operator

Your next question comes from the line of Martin Landry with Stifel. Your line is open.

Martin Landry

Hi, good morning everyone. My first question is on your parts, apparel and accessories. It increased twice as fast as your revenues during the quarter. So I was wondering if you can give us some color on what explains that strong performance?

Jose Boisjoli

It's a mix of two thing. The product usage, customer have used the product -- is using the product a lot more than typical. We saw it during the snowmobile season this winter, then product usage is one element. The second one is the accessories. You know, the, the link ecosystem that we put together where many accessories can fit many product line, the same accessory can fit many product line. This is really, this is doing extremely well. Then it's a combination of those two things that are generic thing to growth.

Martin Landry

Okay. Thank you. And my, my other question was on the, on your survey you shared some very interesting data point on, on the consumers. You, you you're quoting 3% of buyers purchase a unit instead of traveling and you were mentioning 7% of, of new entrance purchase the vehicle only 7% as, as a COVID distraction. So were you surprised by, by these results? And and if, if staycation and COVID explained just a small portion of the growth, then, then what does explain that the surge in demand that you've seen for Powersports products this year,

Jose Boisjoli

Then first, just as a reminder, every at the end of each quarter, we do a survey about the thousand customer who purchase a new unit during the quarter and yes, we're surprised by a few numbers. A new entrant is growing 37% in Q1, fiscal year '22 versus historically '20, but last quarter fiscal year '21 Q1 quarter was up 30%. This is increasing the two number that we were also surprise is the 7% that only 7% said that it was COVID distraction, then a big portion.

It's true and to the rest of the Powersport and the other one is the tripper percent that the trade-off for traveling, then those are extremely strong result and we are very happy and you need, I think we need to give to our marketing team very good did done a very good job to -- if you look at our website today versus what it was a year ago, our website are better craft to make it easy for the people who don't know the industry.

We try to educate the customer out when, where to ride. We try to educate them to make sure they select the right product and we encourage them to ride promoting community and the woman off on the road. And the, the program for writing education, then I think it's a combination of all this that is giving those incredible

Martin Landry

Great. And were, was that the first time that you were asking these questions about purchase instead of traveling and COVID distraction just to see if we have some benchmark as that evolved?

Jose Boisjoli

Yeah, this is that's one of the first time we're asking that question and every, every quarter if you want to do a good survey, you need a certain number of questions, not too many, but less, too little. And we try to remove the one that are less critical and had the, the most relevant one. And the traveling was the first time.

Operator

Your next your next question comes from the line of Sean Collins with Citi Group Research. Your line is open.

Sean Collins

Great. Thanks. Good morning, gentlemen. My question is on today's unique inventory environment and its impact on retail results. Today's lack of inventory or scarcity of products is certainly a challenge, maybe a high class challenge, but still a challenge I wanted to ask if there are any compute, comparable period, periods from the past where you experienced a similar environment and I'm curious how that may have played out resolve itself, any historical context might be helpful. Thanks.

Jose Boisjoli

Then I would say that's an interesting question. I would say that I saw a period of like, we're going through with a product line. I remember BRP started producing watercraft in 1988 and in the mid '90, we were not able to supply to the demand. For three, four years, there was no use out there and the growth was incredible. Then I saw over years in our industry, one product line taking off versus the others, but having the whole industry, all product line like this, I think is the first time in history of Powersport.

Sean Collins

Okay. Understand that's helpful. So it really is truly unique. Maybe just a brief follow-up as you experienced supply chain challenges and some rising input costs just curious any, any commentary on how well and successful you are to kind of pass on those, those costs to the, to the consumer? Thanks.

Jose Boisjoli

Yeah. On the cut side just to give you a sense on the Marine, where Alumacraft and watercraft are very critical? We already announce a special surcharge that's was effective June 1 and the price increase will be announced shortly for being effective July 1 with the modular change, on the Powersport side, obviously right now, many of our supplier, our edge, then this whole year, we are partially hedged and every year we increase our pricing between 1% to 2% that's typical and the model you change for ORV is July 1 and for watercraft it's in September and we'll announce price increase as the model you change, then that's the way we plan it for the [Indiscernible] for all those product lines.

Sean Collins

Great. That is helpful insight. Thank you.

Operator

Your next question comes from the line of Brian Morrison with TD Securities. Your line is open.

Brian Morrison

Hi, good morning. Can you talk about going back to Juarez 3, can you talk about the ramp trajectory of those extra 50,000 units? Is that a methodical ramp or do you hit the ground running? And then also in terms of Querétaro, same question for PWC and when will that commence running? Is that a Q4 or Q1 event?

Jose Boisjoli

Yeah. Then let's start with Juarez 3. In Juarez 3 the construction is ongoing. We already have a team training employee and the ramp up will be on the backend of Q3. Then the way you can see it the, let's say you say that the production will run three, four months this year, this fiscal year, then you can probably count maybe at 50%, something like that.

Next year, obviously in fiscal year '22, you can count the 50% additional capacity, that's for Juarez 3. Querétaro the selection will be done from the start of production in the fall. That means when production we start in August, there will be some additional capacity for watercraft, but project M which is a new product, this is coming in Q4.

Brian Morrison

Okay. And then changing gears to the cost side of the equation, said the $300 million in cost savings from M25, is that put on hold or differed at all with the current dynamics? Or can you update us on where we are with that and what more that entails?

Sebastien Martel

Well, obviously there were many levers to $200 million cost saving, as I said that last time, obviously the team is very focused on making sure we, we are producing all the units that we can produce. But one of the big pillars of M25 the $300 million is also introducing products with better margins.

And obviously, as you see our performance this quarter was very strong, and some of that is driven by the, the engineering that we've done in our product and modularity approach. So I'm not worried about our ability to get to that $300 million especially with -- we'll have again, low levels of inventory and what we're learning on sales programs. There are some learnings that will stay with us even when the industry comes back to a more normal way of operating.

Brian Morrison

Can you just give us a sense of how far you are through it at this point in time?

Sebastien Martel

Well, again, tough to call Brian, we'll obviously look forward to updating investors and analysts in the near future on our M25 plan. And we'll give you more color?

Operator

Your next question comes from the line of Derek Dley with Canaccord Genuity, your line is open.

Derek Dley

Yeah. Hi all, just one from me, just on the gross margin. Obviously we've seen some strong gross margin performance here with limited promotional spending in sales programs. Has the normalized gross margin in your view changed going forward or it's was sort of call it mid 20% prior to the pandemic. Is that stepped up in your view?

Sebastien Martel

Well, for this year we, well, we finished last year, very strong, gross margin. And our expectation for this year is that we should be slightly up compared to fiscal year '21 as part of our M25 plan when and our target to deliver $300 million cost savings.

Some of that and it'd be margin improvement. Obviously this quarter we'd benefited from a higher proportion of back sales. And so that is lifting the margins but going forward, yes, I do believe that as we are doing a better usage of our assets, we continue introducing products with better margins, we take that had the outboard engine business as well. These are all elements that will help bring the gross margin up.

Derek Dley

Okay. No, that's helpful. And then actually just one more R&D kind of typically like a 4 -- 4.5% of revenue, percentage is that something which we should expect to continue going forward as well?

Sebastien Martel

Yes.Yes.

Operator

Your next question comes from the mind of Jaime Katz with Morningstar. Your line is open.

Jaime Katz

Hi, good morning. Thanks for taking my questions. I don't think it was clearly delineated, whether or not the supply chain issues that you were seeing were as pervasive for the boat, the Marine business. Would you be willing to talk a little bit about that or whether the throughput has been slightly more consistent in that segment?

Jose Boisjoli

Yeah. Good morning, Jaime. Yes, all product line are affected and depending obviously of the seasonality and -- but between all product lines, it's about the same, the same prob challenges that we're facing, after that and that's where I think our team is doing an excellent job working with our suppliers.

Sometime we try to allocate the parts to one product line versus the others. An example right now we don't need snowmobile. We producing snowmobile with some missing parts that will, the record will need to be retrofitted, but we have time because snowmobile retail is starting really in October.

Then that's the type of thing to optimize the situation. We need to work with our suppliers and we need to work internally between product line to make sure that we optimize the situation to first deliver on consumer orders and try to towards all orders from consumer and dealers that we have on it.

Jaime Katz

Okay. And then I don't think I heard the number, but have you guys laid out what you expect increased commodity costs to cost for you or what they'll account for this year in your opinion?

Sebastien Martel

No, I haven't given any color, but I I'm more than happy to do so if I look at Q1 logistics, commodity costs had an impact of about 190 basis point on the margin and I'm expecting that to continue for the rest of the year, obviously with the higher volume sales programs, given mix will be able to offset a lot of that, but the expectation is what we saw in Q1 is going to continue for the rest of the year.

Jaime Katz

Okay. And then, is there any thoughts about how you think your market share will pan out at the end of the year, we'd be able to sort of outpace your competitors and sewing the channel going forward, or do you sort of perceive the constraints with equal across the industry at this?

Sebastien Martel

Well, obviously with a significant increase in production capacity in the fourth quarter with side-by-side we believe that we – they will provide us with an important competitive advantage and our ability to replenish inventory and supply to demand. So that should be driving the chair gains foresight of business.

Operator

Again, if you would like to ask a question, please press star, then the number one on your telephone keypad, your next question comes from the line of Gerrick Johnson with BMO Capital Markets Your line is open.

Gerrick Johnson

Hey, good morning. I sort of have the inverse question to Greg. As Greg asked about retail ordering and do you have in place, what do you have in place in policing over ordering since product is so difficult to get at the dealer level. And the other question I had was about your own inventory with your inventory down 34%, but your materials and weapons 64 have you had mismatches like that before your past and is there any risk to sort of obsolescence of the width that you have on the books right now,

Sebastien Martel

Good morning, Gerrick. I will have answered the first question set then I will see the second. On the allocation question, obviously seasonal product are very different than off-road or a year round product. Seasonal product like we have a pretty good idea of we know exactly how each product line performing out each region and each dealer perform and we can plan for a growth the following year and that's why we have like a target for each dealer.

And after that, depending on how the dealer pre-sold a unit or depending on how much you want unit for the following year, is a discussion with, with the, the sales people. Then it's not like give me your order in new your wish list. We try not to disappoint the dealer by letting dream about the big numbers that we cannot deliver. And this have worked very well for everything that the seasonal product.

On the off-road site right now, we're working on that location. And it's our job to make sure, like I answered to Craig that we don't favor a region versus the others. We try and also to be fair on product mix, but off-road will be on the location till the end of the year.

Gerrick Johnson

Okay.

Sebastien Martel

And on your question on raw material, yes. A raw material in whip is over $200 million this quarter compared to the gen 31st, no concern on opposite license. So that inventory around very quickly. So it's a question of getting the missing parts in and then retrofitting the units. So obviously the number is high, but well under control.

Gerrick Johnson

Okay. And then just one more, if I could see some near the rear here on that number 37% new entrance, he said the only 7% said the purchases were as a COVID-19 distraction, kind of curious don't if you asked him, but maybe the second driver derivative of that, how many of those people had friends who bought as a COVID distraction last year? Cause that was kind of the boat case going forward. You have a bigger install, base, more friends keeping up with the Joneses, things like that.

Sebastien Martel

I don't know. I don't have, maybe my team has, but I don't have the answer to this. Quencher direct for sure. We see that the, we see that there is more, if I, I have a statistic that I can share with you, but the, the new entrant are younger than that purchased her a 42% versus 30 to 40 purchaser more woman and more family oriented than which is all positive, but I don't have the answer to exactly what you're asking for.

Operator

Your next question comes from the line of Mark Petrie with CIBC. Your line is open.

Mark Petrie

Hey, good morning. And thanks for all of the commentary so far. I just wanted to ask about your expectations with regards to the promo programs over the course of time. What's embedded in your guidance with regards to the back half of the year. Do you expect the current levels to sort of remain in place and then looking forward into fiscal '23 you expect that the industry sort of evolves a little bit in terms of how the pricing programs are utilized or do you expect that, that normalizes over the course of time? Thank you.

Jose Boisjoli

Good morning, Mark. When we talked back in March, I indicated that in fiscal year '21, we had a positive tailwind from programs of about 200 basis points. And we were expecting that 200 basis points to remain in fiscal year '22, obviously with a strong performance we had in Q1 we've adjusted that assumption. So now we're looking more at a 250 basis point tailwind coming from program.

Next year, obviously when we turn on the switch and it's February 1, the inventory is still going to be leaned. We're thinking about inventory replenishment in fiscal year '22. So it's going to happen more probably in the back half of next year. So maybe expecting the first half of next year to still to be favorable on the commercial side.

And obviously, as I said, there are some important learnings that we are from COVID and how we tailor our programs that will stay with us going forward and I will provide benefits to obviously the bottom line, how much, too early to call.

Operator

There are no further questions at this time. I turn the call back over to our presenters.

Philippe Deschenes

Super, thank you all for joining us this morning. And just before we let you go, we wanted to take the opportunity to invite you, to join us for our virtual Can-Am off-road and 3 wheel vehicle and see new product introduction, events will be out on August 11 and we'll also feature that the official launch of the project Can-Am. We look forward to sharing with you more information about this over the next few weeks and we hope you will be able to join us with that. Thanks again and have a good day.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.