Q1 2021 Earnings Call
Ladies and gentlemen, and welcome to the IP.
Hi, My first quarter conference calls.
I'd now like to see them over to Mr. Shane Glenn.
Thank you was really good morning, and welcome to be Rps Conference calls for a first quarter fiscal year 21.
Joining me this morning orders over the border <unk>, President and Chief Executive Officer, instead of the Chief Financial Officer.
Before we move to the prepared remarks, I would like to remind everyone that certain forward looking statement will be made during the called at par subject for a number up risk and uncertainty.
I invite you treat PRP some DNA for listing of the.
Also during the call reference will be made to supporting slide and you can find the presentation on our website that ERP dot com.
So with that alternative Colbert to deal with it.
Thank you for that.
Good morning, everyone and thank you for joining us.
About a month ago when were presented our year end result, we were up.
On that we were on the role.
I had incredible momentum with every product line the worldwide and we're anticipating another great year ahead.
Like the rest of the way we were faced with the southern impact of the Kuvin 19 crisis.
What's your browser rapid changes that significantly disrupted our business and operation.
And forced us to quickly adapt our plans.
It began when our dealer had to close their business as the situation the worsen in China in January.
Closure, followed in the Western Europe in February where local government enforce severe containment measure.
As you can see on this slide retail in North America had been strong until mid March.
Was negative for one month and the ones dealers Tarted Toady open.
Retail has been strong since mid April.
Our manufacturing as it he open or isn't the process of the opening and the we are adapting to the present reality.
With retail tracking better than expected. We are now focused on getting production back to capacity globally.
I am proud of the team Swift action taken to limit the potential impact of the crisis on our business and protect our financial flexibility amongst other.
We deployed global protocol to ensure that our employee can work in a safe and determine and reduce the risk.
We adjusted our production plan in line with government health regulation and the expected market the men.
We implemented cost mitigation measure, notably to temporarily a salary reduction and an exhaustive review of discretionary spending resulting in overhead savings of up to 450 million for the rest of the year.
We focused on liquidity preservation, notably focusing our capex investment on key project with high impact to return, resulting in a total capex target of 220 to 250 million for the year, representing a reduction of about 130 260 million from last.
Last year level.
And were successful in extending our term loan b by 600 million U.S. and maintain our covenant light condition.
As a result of these effort with our cash on hand, and 700 million of revolver availability. Following the completion of the term loan transaction, we had about 1.3 billion a financial flexibility.
While we remain cautious about the future. We expect that these different initiative will allow us to navigate to the uncertain times, while allowing us to continue investing for the long term growth of the company.
However, there was a measure do not come would sacrifice and the one of the toughest decision we have to make as we announced yesterday evening is the discontinuation of outboard engine production.
As you have witnessed over the last few years, despite his innovative technology.
Our board engine lined up as been losing share in the market that was already difficult.
Strength was in Dirty power segment, while the industry growth.
Was driven by the package sector, which led to continued share erosion.
Given this trend our outboard engine had fallen behind in term of profitability and cash generation potential.
As the current situation forced us to reduce our investment plan I reviewed downward our growth expectation for the business the path to profitability improvements for outboard engine was too low.
It became apparent that we had to discontinue production.
For evident with employee let me say that I'm very proud of the part do you have played over the past years and in particular the effort over the past 18 months.
Although we have made progress the impact of the Kuvin 19 as left US no choice.
I wish to take them for their dedication and commitment in helping us create the marine group.
This decision will allow us to refocus our marine investment on the higher expected return and sustainable project such as innovative technology and then in saying are both offer.
We remain committed to our marine strategy with an evolution to our approach.
Along with the announcement last night, we also announced a global supply agreement with Mercury, which is securing access to engine and is expected to support our dealer network development effort.
Our strategy has always been about building a strong marine business by offering customers a superior, but one thing experience to production to product innovation.
The discontinuation of outboard engine production does not change that objective.
The development of project goes and project and are progressing as planned and we are confident that they will be game changers in the industry.
Before we get into the quarterly results I wanted to provide you with an update on our manufacturing operation.
As you know, we suspended or slow down most of our operations starting in late March until mid may responding to local government amend containment measures.
This obviously limited our ability to ship product in the first quarter and impacted our financial results.
The good news is that we have been able to take extensive measure to protect our people why resuming capacity reduction as we started our is ramping up in most of our facilities and we are set to be operational everywhere starting next week.
As I mentioned, our result were significantly impacted by mandatory closure plan and leadership.
However, our retail performance was held in solid given the current context with North American par sport retail being up 4% or 10% when excluding snowmobile.
Contributing to that strong retail performance was our focus on supporting our dealers as we strive to continue delivering the best in class dealer value proposition in the industry.
Answering the health of our dealer network is a key priority and we made sure to find solution to ease the financial burden on our dealer, notably has we extended floor plan support extend then floorplan support until the end of June.
Adjusted performance target until the end of July to account for potential reduces the man.
We proactively adjust the dealer orders and we extended warranties for all our parse pork products.
We also implemented measure to simplify business processes for dealers and to drive consumer demand.
The rest been from our dealer network on these initiative was very positive and should help us to continue to gain momentum.
Now tucking, taking a closer look at the North American quarterly retail performance on slide 10.
Our product portfolio per from above our expectation during the first quarter.
We continue to outperform the off road industry with side by side retail growing above 40% and he TV retail being up high single digit driven by a strong first half of the quarter and very strong second half of April.
The tree wheeled vehicle category is suffering the most in the current context since the consignment measure taken have had the most impact on this category with the closure of writing school and cancellation of the more tours, Turkey project to support the growth of difficulty of this sector.
I will explain more on this in a moment.
Finally, while our bode down for the quarter personal watercraft and snowmobile outpace their respective industries.
As summer is approaching there appear to also be a clear trend that people will be staying at home for their vacation.
Or has the C a staycation, which would work in our favor.
We had this slide to give you some color on our retail and that is that we did showing that our retail performance was very strong in the region, where access to parse important dealer and playground remain more available during that containment period.
You can see a clear difference between the USA and Canada.
Where the provinces of Quebec, and Ontario, we're completely closed four six week.
The middle graft should the data taken April 15.
And as you can see the gaps in the retail between the dealer that were open versus flows and underwrite between the rural and urban dealers retail was up 20% when dealer. We're open for most of them on April and up 24% in rural areas.
When dealer our open sales remained strong.
This is bode well for our industry as gradually entered the confinement stages in many regions around the world.
Now, let's turn to slide 12 for the year round product highlights.
Revenue were up 2% driven by a strong start of the quarter, partially offset by the impact of the crisis.
On the retail site and money into season 20, the side by side industry was up high single digit.
The demand for our kind of them side by side was very strong and our retail was up low 40% season to date.
Got them side by side was also performing well in international markets. Despite the situation with retail for the quarter up over 40% in Latin America, and up over 20% in EMEA and 20% in Asia Pacific.
Third the Herenton. Thanks.
These are critical to result.
Turning to we TV.
The North American NPV industry was also 10 months into the season and retail was up low single digit.
For the same period cannot meet TV retail was up low teen percent, notably gaining share in the mid segment.
We are pleased with the performance of our off road business, which had a very strong end of April and the positive trend continued in may.
Now looking at three wheeled vehicle.
Early in season 20, the North American three will have equal industry was down low 30%, while we were down low 40%.
There are a few factor to note.
First we are lapping an excellent quarter due to the launch of their reicher last year.
As I mentioned the on the road industry suffered the most from containment measure due to the closure of writing screw and license issuer and the cancellation of demo tours.
We also had to cancel our marketing effort since we have no project to support new entrant into the market a key driver for disk category.
We have now lunch new marketing campaign that is adapted to the improving situation.
That's cool our reopening.
Demand for classes is growing and we are confident will regain traction.
Turning to seasonal product on slide 13.
Seasonal product revenue were down 14%, primarily driven by lower shipment as many dealer workflows.
Now looking at retail.
The North American snowmobile industry ended its season 20 on March Thirtyth.
Which retail down mid single digit percentage.
Our ski to line up continued to drive strong consumer demand, resulting in retail that's was up mid single digit percent stage and ended the season with the highest market share in its story.
It's Kenny Neviah 10 month into the season 20. This snowmobile industry is down mid teen percent driven by unfavorable snow conditions last winter.
Q2, and Lngs upper from all other brands, which retail only down high single digit percentage.
Our complete lined up and new product introduction, notably the new submit suitable models.
Puts us in a very favorable position in the industry with continued market share gain potential.
Although we had to cancel our demo tour. We are encouraged by the level of spring certificate unit sold to customers.
Our performance is very similar to last year, which is testament to the strength of our key do and Lngs Brent.
Now turning to pursue a little watercress.
At this still early in the season and the North American personal watercraft is flat with see do retail is up low single digit percentage.
Given the current situation, which how to manufacturing plus a cold spring our retail was affected and we reduced our model year 20 production plan by 18% compared to last year.
However, we decided to advance the cutoff of mother of your change and we will be ready to ship model year 21 unit starting this summer.
EMEA retails.
So far for watercraft has been very encouraging and with our production adjustment will be ready to supply the men as needed.
Good thing continuing with to look at par sport part accessories, and apparel and OEM engines.
Revenue were down 15% as a result of dealer closure due to the pandemic.
Parts order, which represent an important portion of our PD and a business are directly correlated to the ability of dealer to service unit and as a result suffered the most from dealer being close.
As dealerships started to reopen we saw an improvement in part sales.
Finally, looking at our marine business.
Revenue were down 26% due to a lower volume of outboard engine and bodes sold partially offset by the impact of the acquisition of tell water during last year.
At the retail level as you might get half was down over 20%, resulting from weak industry trend in key markets, while many to perform well with retail up low teen percentage.
With the confinement measure lifting and the spring weather are getting better we see retail improving for both many too and added Mehta.
With that I will turn the call over to service.
Thank you Charles a and good morning, everyone. As mentioned, we had a very strong start over quarter continue our growth trajectory from recent years until look over 19 pandemic led the global containment measures, resulting in dealer closures and suspension of production in most diversified starting in late March.
This impacted our ability to ship products, resulting in revenues that were down 8% from last year, a normalized EBITDA down 16%.
Our normalized EPS in the quarter at 26 cents.
As part of our initiatives to preserve our financial flexibility, we reprioritize, our capex plan for the year, resulting investments of $43 million in Q1 down $9 million from last year.
We managed working capital leading to $100 million of positive working capital contribution and $169 million of free cash flow for the quarter and as there was a mention following the another quarter, we secured a 600 million dollar us terminal and with a covenant light structure that matures in 2027 with.
The added term b, we have significantly strengthened our liquidity position, allowing us to focus on managing the business through these uncertain times and continuing investing for the long term growth of the company.
As I mentioned, our revenues were impacted by our ability to ship in certain markets.
Our retail remained strong in the United States as many dealers were able to stay open, allowing us to continue shipping products, which resulted in Q1 revenues that were up 5% for the region. However, the situation is different and other key markets, where a higher proportion of our dealer networks have to close leading to retail decline and more shipments.
This was particularly true in Europe, where we had a very strong started a year, but the trend worsen early in March of contain measures were more comprehensive and we're putting in place much earlier than in North America.
Our gross profit margin was also impacted by the situation, notably due to the closure of our manufacturing sites in late March and all of April.
On a comparable basis, our gross profit margin was up 10 basis points from last year as a negative impacts from volume mix pricing in sales programs and production cost and depreciation or more than offset by favorable foreign exchange rate variation. However, cobot 19 had a 350 basis point impact on our mine.
Margin, primarily driven by less efficient fixed cost absorption due to production shutdowns and higher yard inventory depletion.
Turning to slide 19, our quarterly normalized an income was down $30 million compared to last year, driven by negative impacts of $62 million coming from volume mix pricing sales programs and $16 million from production and distribution costs.
Which were partly offset by lower overhead, resulting from our cost mitigation efforts offset in part by higher depreciation for a net positive impact of $38 million lower net financing costs and normalized income tax expense for $3 million, an unfavorable foreign exchange rate impact for $7 million.
Also given the impact of Cowen 19 on the outlook for our industries. We took 871 million dollar noncash impairment in the quarter for marine business, which is facing more challenging industry dynamics compared to when we acquired them. This amount accounts for the revaluation of the bulk companies we have acquired over the past couple of years.
And the impact of the decision to discontinue to the production of outboard engines. This amount has been excluded from our normalized metrics.
Now looking at network inventory on slide 21.
Our network inventory was up 7% over the same period last year well positioned despite the current situation as we experienced better than expected retail trends across most of our product lines.
The increase was primarily driven by three wheeled vehicle as it was the most impacted product line within our portfolio due to the closure of writing schools, Daimler tours and more dealers being will get closed in urban areas.
SSV industry was also up as we had positioned the network inventory early in the year for the expected continued solid retail growth. This allowed us to support the strong consumer demand, we experience with retail being up over 40% for the quarter.
Spice that we had to suspend our production due to the pandemic.
Our number of days of inventory are lower than usual for both SSBN.
TV, which may lead to certain models being difficult to access in certain regions.
But with our operations restarting, we expect to be able to sustain the continued strong consumer demand for our lineup.
Our network inventory growth was partly offset by our lower level of inventory of Pwc due to the production shut down still we believe the level of inventory is appropriate for the expected demand and as Jose mentioned, we will be able to produce and ship multi year 21 earlier than usual if there is under additional demand.
And lastly for snowmobile, we ended the season with a healthy inventory position, allowing us to start the next one and a good place finally, turning to slide 22.
The coming weeks and months will be determinant in the how our fiscal year 21 will play out.
As many regions of North America, Europe, or deacon, finding and restarting the economies, we will get greater visibility on the potential impacts of the pandemic on consumer demand, which will be impacted by the severity and length of economic uncertainty.
The agility of the global supply chain and its ability to adapt to resume operations in a safe and sustainable manner.
And People's confidence, which will undoubtedly be linked to the evolution of the riders and we will impact both demand and workforce availability across multiple industries.
Given the uncertainty related to these elements, we're not in a position to provide guidance for fiscal year 21 at the moment.
However, we are sharing with you our high level view on how we expect the year to progress. This outlook assumes the restart of our manufacturing operations a schedule.
No further closure operations, and our factories or suppliers and our dealer network and continued positive positive consumer demand in North America, but lower year over year overall demand in other regions of the world.
Based on this we anticipate a challenging second quarter as revenues are expected to be down about 40% due to the production suspension across most of our sites during April and May and then a progressive ramp up to resume full capacity and replenish replenish yard and dealer inventories and the.
Impact of the discontinuation of outboard engine production.
We expect the trends to progressively improved for true three in Q4 as we complete our production ramp up however, revenues are still expected to be down year over year, 10% to 20% in the second half of the year due to the in due to the anticipated lower demand for our products on international markets and the impact of the discontinuation.
Wallboard engine production.
We expect capex for the year to be 220 in $250 million depreciation of about 265 million net financing cost of about $135 million and the effective tax rate to be between 26 and 27%.
And finally end the year with a diluted share count of about 89 million shares while our results for the year will suffer from the pandemic. The fundamentals of our business remains solid as we continued to outpace our industries and gain market share. Furthermore, our ability to secure our financial flexibility is allowing us to continue investing in our grow.
Both initiatives the put the company in a solid position for the rebound in years to come.
With this I'll turn the call back to levels.
Thank you so vesting.
These are not easy time, but what makes me happy and proud is the GDP and resilience of our employee suppliers and dealers.
I would like to 10 them for the efforts and continued dedication.
Going forward are pretty our focus on two thing.
How we manage in response to the current environment and making sure. We are prepare for what the future holds.
As always we are committed to ensuring a safe working environment for employee globally and now more than ever.
We also focus on thing a giant.
All right GVT allow us to react quickly to the crisis and now to successfully ramp up again, while making sure our dealer network is healthy and ready to be back in action.
We will maintain our market leadership to our best in class marketing go to market and retail strategy.
It has never been a better time to promote the customer experience writing our products.
Now to prepare for the future we need to continue our growth objectives.
Thats good to this new reality.
Although we do as our Capex, we are predicting our key drove project an initiative to maintain our momentum in the industry.
And to do this will need to reading.
Now, how we do business and add that to the new normal.
In our operation our strategy and our mindset.
We believe this new reality will give us opportunities to demonstrate our leadership as thing we'll continue to evolve for example.
We believe that we people purchase as definetly change with more interest than ever in E Commerce.
With global travel remaining restricted in the short term more staycations prolong social dispensing and fewer large gathering and event consumer will look for TV days that can be practice closer to home.
With our product our know how and our solid financial flexibility, we are well positioned to navigate through the crisis respond to new trends and emerged stronger than ever.
Lastly, I would like to domain, you will make the high deal product from social distancing.
On that note I will now I'll turn the call to the operator for questions.
Thank you.
Good.
Correct.
Your next question.
Question.
Hey.
The question.
Your first question comes from the line.
With RBC capital markets go ahead.
Yes, thank you very much.
First we just more color on what you're seeing with some of the retail trends into may and use it sounds like a strong recovery starting in late April and continuing but just any comments on what you're seeing now.
Dealer traffic levels of restrictions that they're working through in such in the US and also the patterns that you're seeing emerging now in Canada and Europe.
Good morning, Steve.
Obviously for competitive reason, we will not give you all.
All the data that we see but I will give you. Some a first our dealers right now about 90% of our dealer our reopened in United States. There was still some state.
In the east and in California that are close, but 90% plus our open and in Europe, where everything was closed for a period of time in the Germany, France, Italy, and Spain about over 80% of our dealer our operational there now.
Ill give you the detailed by product line or by country.
Since the beginning of me, we are up about 35% worldwide between all product line and all country.
Then we don't know how loan this will continue but the deferred definitively a trend.
That is positive for our type of product.
So I guess, just squaring that if retail into.
Two may is that strong versus the net look for for down 40%. In Q2 is the difference there I guess is the lag in terms of production versus retail production in six weeks, yes. That's for sure that's for sure yes.
Okay.
Okay. Good points, just secondly, just in terms of the production ramp is that your primary facilities in Mexico sounds like you're ramping up notices any comments on the level of utilization you right now.
And how you see that ramping what's a limiting factor or whether its local restrictions or supply chain or or just matching demand.
But the in Mexico, the government gave us deal Kate to restart on June Onest switches next week.
And that we've been working on the ramping up the production.
For the last two we've done were allowed to let our people and prepare for ramping up that's what we're doing right now because you don't just flip the switch on that.
But that we will be fully operational in dollar tree factory.
Starting next week.
Obviously.
We expect to have some difficulty here and there with suppliers because.
We're managing about 550 key supplier around the world.
And I think we'll go to some difficulty.
Overall for the rest of the year, but.
As we speak right now everything looks good that everything will be operational next week.
And just a final one thank you.
Final lent on.
On an operating costs and overhead savings.
Pretty aggressive with that.
Under $50 million production.
Reasonably as things start to ramp back up.
Some of those costs come back online, but any sense of how much of those savings might be permit or structural in the business, though and therefore support longer term margins.
Yes, good good morning, Steve what we've communicated is we we have plans in place to reduce our expenses up to $450 million versus what we're planning initially for fiscal year 21.
Obviously, we will remain agile and adapt our plans.
We'll see how things are trending.
One thing I can tell you with the discontinuation of the outboard engine.
Business, that's a reduction of about $80 million of overhead and so thats going to be recurring year over year.
And as things evolve will be nimble as we've been in the past and the last few months and we'll balance the short term financial priorities with our long term aspirations and so the good news as we have flexibility to adjust accordingly.
Okay. Thank you very much.
Your next question comes from the line of Craig Hallum barred. Please go ahead.
Hey, good morning. Thank you for taking my questions. So I think you just mentioned some metrics regarding the.
The engine business that you're exiting could you share with us the annualized revenue and margin profile of that business. So we can try to excluded from future results.
Well actually on the OE business, there's actually two component Theres, the unit business and as the parts business and the parts business is a business that we're going to be continuing obviously, we're going to be servicing our dealers for warranty, but also for our consumers that are no longer under warranty, but need service. So that business is going to keep going on.
As previously mentioned the unit business, although the actual engine was a business that we were subscale, we've been losing market share over the last few years.
And from a margin perspective, it's a business that.
Was almost breakeven.
And from a profitability. It was a business that was actually at a loss position and Thats why we took the decision to discontinue with when you look at all we in terms of.
The whole portfolio of our marine segment.
The engine business is about 45% of total revenues. So a few carved out part out.
It should give you a good appreciation of what the remaining businesses.
What would you estimate your market share to has been in that.
All in the in the mid single digits.
Thanks, and then.
Going back to the comment on on May retail trends, which appear to be really strong is there any way to look at.
That data and deconstructed for whether you're seeing an influx of first time buyers.
Hi, there may be some kind of catch up demand from earlier periods, where dealers were closed just trying to get a real feel for.
The extent to whereas the which this outdoor theme is really capturing new eyeballs.
Yes.
We we've done some survey.
Both the customer purchase our units in the last month.
And we see more new entrant.
Typical typically we have about 20% of our sales is to new and trend.
Smart survey and again, it's a small sample, but we are more around 30% right now than there is definitely a trend there were.
Some people who.
Was not considering our type of product.
We.
We see them.
Entering into our type of industry. Then this is very positive.
There is obviously a lot of money.
In the system a lot of government invested.
In the economy.
And with again, the staycation into social distancing.
Canceling vacation travel restrictions there is definitely hi, there then this phenomena is there we can see as we can see lid.
On the other hand.
We can nothing yard that the unemployment rate.
Is going up consumer confidence is low and housing start as reduced then all of this at one point will catch up.
That we feel pretty confident for the next few months, but how this will play on the second half of the year, that's a bit difficult to predict.
Great. Thank you.
Your next question.
John.
Michael.
Hey, Good morning, guys couple of questions first you're talking about lower demand in rest of world just.
Elsewhere looking for outdoor recreational products just like we're doing hearing us in North America is this just North America phenomenon.
I think direct there is some timing like let them right now is though but the coded hit Brazil and Mexico later than.
In in Europe, and in North in Canada, and use that I think it's just a question of timing those those country were hubby later than North America, then, Canada, U.S., sorry, and now they are in the middle of it then it's I think it's only have questioned the timing thing to fund them a nice executive team.
Yes, the onshore markets bigger in Europe, and Asia compared to Latin America, what about those what about those market yet, yes, obviously that.
The what we what we're seeing is that the confinement measures were more I.
I don't want to say drastic for severe and so is there a bigger aftershock event there for the consumers we're not seeing the pickup that we're seeing in the west in terms of retail.
Okay. Okay.
Going back say two years ago would you have acquired these both brands as you did not have you have entered business.
Absolutely.
I mean, when the new so you saw the few presentation, we've done about the both strategy but.
Be RP.
He is a diversified company and we are I think this is one of our strength and we needed to diversify outside bar sport.
The marine is a good complement to what we do and you see.
How many customer Baie TVC do our snowmobile are buying both and we see a big opportunity into both industry.
Lastly, our tanking is about creating new experienced by pushing innovation and technology and Thats what were doing right now.
By redesigning the complete lineup of new Mecca, many too and tell water both.
Then for us it's a bit.
That we discontinued the production of the even with the outboard engine, but we will continue to invest in new technology in the new boat.
Because we believed that our long term strategy.
Make a ton of sense.
Okay. So project dose was not reliance on you have any outboard engine technology.
Product goes and I will tell you the detail about it but project goes in projects and our ongoing right now.
Okay. Okay.
With that.
Very much.
Good.
Your next question comes from the line that Robin Farley.
Both.
Great. Thank you Ive two questions first on the offered business.
You mentioned, well I guess, you Didnt give specific product line, but you mentioned sales very strongly so far in may for assuming a lot of that off road.
But with the restart just taking place next week I guess.
How long.
Thanks.
Retail from here going forward is going to be lower than it would have been in other words. If there is there not enough product, it's going to impact your retail negatively in the next month.
Is that.
Six weeks from now that you feel like you would have enough inventory in the system to be able to meet the level of retail demand.
How long will that period last thanks.
Well as you saw Robin at the end of Q1, our inventory was up in the network there both 7%.
In part of that was driven by side by side, so year over year side by side at the end of Q1 was up.
Mid teens and so we had we had good level of inventory obviously, the retail is very strong, but we had anticipated strong retail when we started the quarter and we had.
Just filled the network with some inventory it might be tight for a few models in some regions.
But.
Well the retail and May continues to be strong and as you mentioned next week, we're going to be in full production and we're going to be starting shipping units. The dealers again, obviously will be shipping them. The units that are in high demand and so we believe that we'll be able to meet consumer demand and continue driving.
Strong retail in the second quarter as well.
Okay, I guess, just looking at side by side inventories at mid teens.
Retails pacing.
Seems to be pacing.
40%.
In may.
Is that and I know theres are on different based.
Retail pay for the inventory base or are different numbers. So do you have enough inventory in the mid teens increase.
End of Q1.
Enough to support that kind of retail through Q2. It. It's it's enough to support strong retail we'll worry we are going to finished Q2, probably with inventory down year over year.
I said in my prepared remarks, we might run out of certain models in certain regions and so unfortunately, some consumers may not as 30 have the choice of color. They wanted.
But we believed that there was going to be enough inventory in the network to meet the overall demand and as we rebuild our per as we restart production and refill the pipeline.
We believe that we'll be able to sustained momentum. So are we losing retail maybe in the second quarter, yes, but.
We believe that with our production ramp up we'll be able to catch up pretty quickly.
Okay great.
Helpful. Thank you and then just another question.
We thought that do the.
This this was operating loss and you kind of confirm that can you quantify.
In addition to Sq got chips from maybe taking that loss out.
Does that add to that the bottom line.
Yes, good question.
When I look back to fiscal year 20.
And I car involved we business I'm looking at a 60 to 70 cents negative EPS impact.
Great very helpful. Thank you.
Okay.
Your next question comes on line of Mark's question.
Go ahead.
Hi, good morning.
I just wanted to follow up on on two things first.
With operational constraints and social distancing on manufacturing does that ultimately impact youre sort of capacity or throughput or do you expect to be able to ramp to previous levels.
Good morning, Mark No I mean, I mean, obviously.
We're lucky enough to restart engineering in Canada above five weeks ago.
Because.
We we needed to plan the transition from London, near 20% 21, and we cannot lose the momentum we had.
Then we developed a lot of the good.
Measure to make sure that our employee are safe and the right. Now we are implementing this protocol everywhere, where we have factory and we believe that.
In terms of assembly and all the manufacturing operation will be has efficient has before that being said.
As the best explained that we need to rebuild the inventory our own inventory to be efficient and shipping.
We need a certain level of product and we are lucky we have many product lines and right now when we ship we have the mix of watercraft TV side by side, we are optimizing the load for Q dealers in certain area. This will take a time to the Bill then in the factory our efficiency will go back quickly I think it too.
I'll take a few months before we are overall as efficient as before.
Okay. Thanks, and then wondering if you could just give any other comments around.
Of the type of demand.
You are sort of seeing at the dealer level in terms of price points and the type of product and then maybe by at least within side by side like Rick sport utility, how the demand profiles or the sales performance varies.
By the sub categories.
I would say it's all over.
The demand is strong for every product line.
Was a bit difficult for tree will because we had to step up all our dyffryn activity to continue our momentum.
Even today you can the.
Have a license or you can that plate your vehicle because.
License office are still flows.
But except for tree wheel and now it's ramping up low I think we will recover the year, but the demand for all the product line.
Our strong.
Okay, and then just last one.
Have you had mentioned sort of the positive working capital flow through for Q1, just wondering about expectations for the balance of the year.
As production ramps up and inventories given Vera.
Yes, I'm expecting Q2 to be a consumer of cash on the working capital side as we we pay offs suppliers, we rebuild inventory.
So thats going to be a negative probably in the range of 100 million Bucks and then for the back half of the year I'm expecting things to stabilize as they were in.
In prior years in prior quarters.
Okay. Thanks look I thought about.
Thank you.
Your next question comes on line, that's Tim Condor Wells Fargo Securities.
Hi.
Thank you good morning, gentlemen.
A couple of items just wanted to can just to clarify and confirm.
Prior question here. So 70 said that for fiscal 20, the impact of the engine business that you're the tier discontinuing was about 60 to 70 cents and earnings yes.
Okay.
And.
Gentlemen, can kinda talk about the.
Potential incremental investments you may be making in E commerce either.
At the company level or with the dealer network that has maybe that you said is youve reexamined things through coming through the trough of Covidien now on on hopefully the the continued positive slope of recovery.
So we may be need some more additional investments on E. Com here, both again at the company level at the dealer level.
And Tim it's more rebalancing.
Our portfolio by key investments obvious the we've we believe that there might be a continued phenomenon of people working from home of people, preferring to obviously, everyone sees that I've I've seen the trend of people shopping online and so how do we make sure that we have the best tools for consumers are dealers. So it's shifting of money, but it's not a.
Huge capital investment that we're talking about more prior tight.
Okay.
Okay.
And then.
They are set whoever wants to take this.
The pricing and promotions.
In any way to bucket, what you're seeing what you saw in Q1 and are expecting here.
Over the balance of the fiscal year.
And to what may be let's call it normal.
Promotions X cobot, and then covert related which are having to do because of co but in any way to that I mean, it's maybe a difficult question, but any way to sort of parse that.
Yes, so difficult question.
Let's say that.
Promotion was quite aggressive on Noncurrent.
Like it's always do a frode, obviously, everyone want to benefits of the situation.
Encouraged that was see it's about similar to what we see.
From some of our competitor over the last few years.
Then I would say no big change.
Before and that sort of corvidae.
Noncurrent very aggressive.
And some model in the current.
We were aggressive on retail promotion for consumers.
With.
Very good financing offer a zero interest for five years and that definitely help.
The retail because.
Two weeks ago, we didn't know how does this would fleet.
Overall off road watercraft I would qualify it as normal entry will as normal.
Going forward is very difficult to predict anything right now Avenue, we and our chasing capacity and want to make sure to ramp up than most likely people will.
Maybe a bit less aggressive on program, but the very difficult to predict what will happen in the coming months.
Okay. Okay.
Helpful and then two last questions one.
What do you see any further further into of working relationship with Brunswick outside of the supply agreement.
On the Marine side, and then lastly.
Your thoughts on the potential of when you could potentially returned to fiscal 20 levels in terms of revenue or.
I would think profitability may have a quicker ramp given the at least 80 million of structural savings on the engine signed that you've eliminated.
And your question about Brunswick.
And the Brunswick, obviously is the perfect partner for us because they don't compete.
In par sport then it's a very good company and then.
We obviously are happy with the.
The even rude.
The aboard supply agreement.
We have with them and we could in the future exchange technology, but we'll see how this will play in the future.
And on the our Youre. Your question, obviously I'd love to give enhanced with this morning.
You want to the rest of the organization of ERP.
There's obviously as you can appreciate there's still a lot of uncertainty how things will pan out how the economy will react too.
Massive job losses, and so today I'd say, it's much too early to call. When we believe things will come back to normal the good news is again.
Yes, I believe we aren't we aren't much better positioned than we were back in a way to nine with a great recession.
You guys I understand well the leadership positions, we have in all through all our brands and when we believe that momentum is going to continue.
As we are seeing is continuing when things come back to normal soul.
Do we believe we'll come back to fiscal year 20 levels someday absolutely.
But today, it's too early to give any outlook.
Thank you gentlemen.
Your next question comes on line of.
For example.
Yes, thank you very much and good morning, gentlemen.
With respect to the engine contribution in fiscal 14 was.
The 70 cents on EPS was positive or negative contribution.
Okay, perfect and now with respect to the goals project in the project I understand the timing is unchanged everything but could you talk more specifically about who will be responsible of providing the engine and.
Whether there's exclusivity or is it mercury does mercury need to to build the new engine for this particular projects.
Good morning, but obviously, but for competitive reason I can go into detail of your question.
The only thing I can say as project goes and project and our ongoing.
And we are confident about our Andy.
Oriented our strategy, but it will be an internally source technology, but.
That's will be manufacturer biomarker, all we won't affect we won't we won't go into the detailed but it's again our partnership with a Brunswick this forward to supply of.
Traditional outboard engine.
And our plans for goes so do not change on our plan for project them do not change as well.
Okay perfect. Okay, that's great color and Josie you mentioned that Capex will come back in will be reduce obvious yen. The spending will be made on key project. So would you maybe share some color on what you would consider as key projects right now and maybe if you could share some this.
Caution you add with the dealers.
Following the announcement around the electric.
Electric bikes last fall thanks.
But no I mean, we have.
We had before coded an incredible momentum with all our product line around the world.
And in dose reduction that we made we didnt make sure that footprint thick as much as we can.
Our five year lineups for all product line, there is some adjustment here and there but globally.
We are very confident with the what we're planning for the years to come.
Lot of Capex was related to.
Planned to maintenance equipment.
Turnover.
For will slow down for a period of time, but we predicted.
Our five year lineup.
Electrification is ongoing.
And again, we didn't disclose when those product will be offer.
But we'll see how all of this will Lee and how fast we can come back to the level that we had.
Before decoded 19.
Okay, perfect and now when we look at your Kids line up could you let us know how these product line is doing these days and how would you compare your kids product lineup.
Against your peers right now in terms of product offering.
You're talking which product line, Oh, I'm talking about the kids lineup sold the DS nine either DS of any to 25 I believe so you have on the TV side, you don't have your snowmobile for kids anymore, but just wondering what are you seeing more momentum around the kids products.
And what are you job the good offering as opposed to to peers.
I mean, we have I think we have a competitive lineup in their risk segment that we are competing.
And we decide to compete.
And the overall.
I mean, we didn't see any drastic change with what happened in the last month and a half.
For those product lines like I said before right now the surge in demand is touching every single product line every price point low and high end.
We didn't see a surge on the.
You product product for you'd people.
Okay, perfect and last one for me I bet.
Moves that we need to move to the next caller on the line general getting.
Perfect. Thanks.
Thanks.
Your next question comes on line that Greg.
Well.
Hey, guys. Good morning, its spread whiteman on from Greg just one quick one from US if we look at the share gains and side by sides in the quarter that was a big acceleration versus what we've seen over the past few quarters. So how should we think about that gap going forward and what is driving that as it really just product availability in the channel or is it something else.
I mean again, the we have I believe we have very good competitive product and that kind of them brand is more and more known the awareness is improving people like the quality of our product.
And how they ride that thing, it's all those things that.
Our happening then again, good product dealer and making good money.
Better margin with our product line then it's a combination of all this that created the momentum.
Great. Thanks.
Sure.
Your next question comes from the line up.
Good point of course.
Hi, guys just a quick one for me just in terms of year.
Dealer network.
Okay have any of them decided not to reopen due to the financial distress that was cause that to some of them over the over the past month or two.
We've been very lucky and none of our dealers have have defaulted on their obligations with five or financial institution or the four find partners.
Obviously the deals came in through this in a very good financial position because.
Obviously, our business with them has been growing and they've made a lot of money with us.
We've been proactive as well early in the early in the coal that 19 by supporting our dealers with extended for plan.
Working with Tcf also to provide extended payment terms on interest that may be do so the deferred payments by over 90 days.
And now with the the retail that we're seeing obviously, that's providing good industrials dealers. So as of now we're not seeing anything.
Anything concerning on the dealer health side.
And is that more specific to you guys. The fact that you had zero of them have half to close or what did you see overall in the industry.
Well, obviously, we know what our dealers Howard Eurs are performing and how other dealers is thought I mean, thats not a business that we're looking at closely but obviously, we work hand in hand, with Tcf, they're very proactive and in in assessing dealer health.
And.
Overall I think.
As I said given that the dealers are have made money with us and our maybe had a period of two to three weeks, where things were tougher, but things restarted pretty quickly.
I'm sure that brought a breath of fresh Serge will lot of our dealers.
Okay. Thank you very much.
Your next question comes next Gen Katz with Morningstar. Please go ahead.
Hi, good morning, Thanks for taking my questions.
Curious on.
Piggybacking on Tinder next question.
We don't know when we get back to 2020 level is are you guys basically tabling. The 2025 plan for now and we thinking it or do you think that Theres enough second road ahead of us that we can.
Thank you guys can get back on track to achieve calls thanks.
No I mean, we don't know.
We we are.
Pillar of the Mtwenty five plan are still there, but before de situation stabilize and the situation we have a better view on.
When we'll go back to what we call new normal.
We don't want to commit on anything done at the right time will definitely.
If there is a need.
Airline and 25, but for the time beings too early and Jamie when we announce some 25 last fall we didnt get the questionable happens if theres a recession, then and what we said that and it's still relevant today as well if a recession happens maybe it's going to slow us down by year, our year and a half, but the ultimate goal does not change.
And today, that's that's still our position.
Okay, and then at the end of the Mdna discussion.
Some commentary that internal controls for financial reporting where ineffective and it looks like there were no material restatements surrounding that but I'm curious what the timeline for the mitigation.
That.
Just to sort of get my head around what the timeline as maybe anything.
Hi, Brad might come up with every state.
Yes, obviously, when we listed in the us.
On NASDAQ the we were obligated to comply with a soft performance.
Over the control environment.
Related to a financial reporting obviously, we've always had 18 audit opinion.
You have seen and so there are the quality of our numbers still remain and jewels and I signed them every every quarter and we stand behind them.
Related to.
Material weakness that was noted is around access controls around our systems, obviously, we have compensating controls but.
The nature of the preventative controls need to be strengthen.
And the timeline to do this is over the next the next two years or objective is for fiscal year 22 to be fully compliant.
Thank you that's very helpful.
Your next question comes from the line that's Klarman Brexit.
Financial Please go ahead.
Yes. Thanks. Good morning, just just really one question for me just with regarding gross margins and you talked about in Q1 kind of a 350 basis point impact from I guess cobot 19 related stuff.
How should we think about gross margins in Q2 with with revenue down 40%.
I guess, maybe also if you could talk a little bit about what the second half of your gross margin profile might look like on lower revenue, but on the offset you've got the upward engine thats not going to be there. So just some commentary about gross margins in Q2, but also the second half the year.
Yeah, well I'm expecting gross margins to be to be impacted quite significantly in the in the second quarter. Obviously will our plan is going to be closed for a month out of a full quarter.
Inventory ramp ups should help a bit on the margin side, but obviously with a significant reduction in volume margins will be hip.
When I look at the full year and I'll go through probably the EBITDA margin. There again, if we hit those revenue numbers that I talked about I'm expecting my EBITDA margin probably to be in the range of what we reported back in fiscal year 18 fiscal year 19 there.
Those would be the numbers that I would expect it to meet for the full year camera.
Okay. That's very helpful. I'll leave it there thanks very much.
Thanks.
Your next question comes from line of Bryan Maher.
Please go ahead.
Thanks, very much I'll keep this quick.
I appreciate your comments on working capital just in terms of free cash for the year based on.
That is it fair to say that you're looking at breakeven to slightly positive.
Well free cash what we'll call it free cash flow from operations.
Brian, Yes, breakeven, but obviously with the discontinuation of outboard engine, there will be a cash outflow coming with that.
Do you expect the cash outflow was about 60 to 85 billion that we reported in our financials.
And so thats going to be a.
Headwind to cash generation, so I'm expecting to work to burn cash this year.
With the closure of a board engine.
Okay. Thank you and then just market share with the growth that you've had side by side vehicles.
Thank you are.
The bucket can you repeat your question this the sound as Ben.
Sorry, just say just in terms of your market share with side by side vehicles. What you think your current market shares with the with the growth.
Specifically utility side.
But obviously for competitive reason, we don't disclose details, but we are around 20% market share globally. Thank you.
Thank you very much.
Your next question.
Brandon.
Please go ahead.
Good morning, Thank you for squeezing me in here.
Our conversation with dealers actually Memorial day weekend indicated a lack of inventory four to six seat units for side by sides.
Just from a surge in demand of families wanting to get into or fees could you talk about I guess the timing for production ramp up for those units and.
Any risk you see from.
You may be families going to alternative.
Maybe go into boats are rvs are going away from.
Because of lack of inventory of those larger seated units. Thank you.
Yes, I mean like suppressing explain for sure. There is some customer will show up at the dealership and will not have.
The executive modeled that is looking for.
You won't have the Blue order read that he is looking for no doubt about that.
If the customer won't exactly what they need the might be unhappy that being said, we try to encourage transfer of inventory between dealership.
And again like we said, we're ramping up production, we restarting production.
This coming week.
And we'll try to we feel that pipeline as fast as we can but again, we know that in some area. Some model will be out some product.
Okay. Thank you and there was some fears that one of your competitors was ramping up production, maybe a week or two before you when they have product in the field.
You see that as the concern at all.
But for sure I mean.
Like I say presented our inventory level at the end of the quarter was higher than last year.
Then we feel.
We have sufficient of inventory.
And we believe that for restarting the factories, we are all about the same timing because we always being forego regimen.
To give us the greenlight to restart than maybe a week apart but.
Overall, we are in the same situation.
Okay. Thank you for that Colin.
Oh, no further consumable Scott.
The call back.
For closing remarks.
Great. Thank you and thanks, everyone for joining us this morning with imports speaking with you again for acute to call on August 27.
Thanks, again have a good that.
This concludes today's conference call you may now disconnect.
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Okay.
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