Q2 2021 BRP Inc Earnings Call
[music].
All participants please stand by your meeting if not ready to begin.
Good morning, ladies and gentlemen, welcome to the be RPC Q2 fiscal year 2021 earnings call I would now let's turn the meeting over to Mr. exceeded their saying. Please go ahead Mr. design.
Thank you.
Good morning, and welcome Yorkies Conference call for a second quarter fiscal year 21.
Joining me this morning, so they've already president and Chief Executive Officer.
So thats MSS Chief Financial Officer.
Before we move to the prepared remarks that we'd like to remind everyone that certain forward looking statement will be made during that call assets are subject to a number of risks and uncertainties.
I invite you to read ERP isn't DNA for this thing of the.
Also during the call reference will be made to supporting slides and you can find the presentation on our website that GRP dotcom on 30 Investor Relations section.
That I'll turn the call over to shortly.
Thank you affiliate good morning, everyone and thank you for joining us.
Before I talk about our result, this quarter allow me to say that in this unusual year I'm extremely proud of the fourth of our people in our dealers in reacting with agility.
In order to respond to the crisis and preserve our business momentum.
Our result, this quarter are significantly better than our original projection.
That we made when depending make was first declare.
And confinement measure were put in place.
We were we were in an excellent position heading into this situation.
And we will emerge stronger from this crisis.
Based on our revised projection and better visibility, we are expecting revenue down 5% to 9% 40 year.
And our normalized EPS range of $3 65 to three Dollarsninety 540 year.
The ranges quite large because of the uncertainties we are still facing.
Let's start with the highlight of the quarter beginning with the financial results on slide four.
Although most of our site or shutdown in April and May our revenue came in but better than expected that's $1.2 billion only down 15% from last year second quarter.
Our normalized EBITDA ended the quarter up 28% to 214 million, resulting in a normalized earnings per share of $1.14 up 61% over last year.
This performance was driven by stronger than expected demand for our product and parts accessories and apparel.
That drove retail worldwide.
This has led us to deplete our yard inventory and reduce our promotional activity more than we had anticipated.
Our operational expenses were reduced have plan.
The highlight of the quarter was the strength of the demand for products.
As you know we have typically been increasing market share for the last several quarters.
We started Q1 with a strong retail momentum and our inventory was positioned to sustain that trend.
However, given the exceptionally high demand for our product and the production shutdowns, we ended up depleting, our inventory quickly into quarter, and therefore less some market share.
Our analysis shows that as travel option were limited to people begin to rethink how they will spend their free time.
Many have turned to parse sport as a way to spend quality time with friends and family, while respecting social distancing guideline.
This trend led to exceptional retail performance in all our key markets and all across our product lines.
Our retail sales were up 40% in North America, 41% in EMEA, 34% in Asia Pacific and 27% in Latin America.
As you can see on the slide ALD product line had significant growth.
Let's talk about the impact of the force closure of our plan on inventory.
As you can see on this slide our North American dealer inventory was down 51% at the end of July and our finished good inventory in our warehouse and then trends it around the world was down 38%.
Due to this trade how fast does depletion happen take a look at the graph to the right.
Side by side inventory decline in May and June as retailers ramp up and we felt the impact of the suspension of our production lines from the previous months.
For personal watercress, the effect is even more drastic.
Inventory was very low in June and July pending the season with almost no see two available due to the popularity of our brand.
Given the strong retail trends, we expect it could take several quarters before we get back to Upton low inventory levels.
Our team have done an incredible job of quickly ramping up production in this new on the Venezuelan.
Our focus is on managing the growth through how our operation, while ensuring that we preserve the health and safety of our employee and our business partner.
The strong retail demand in all our product line was in part driven by a significantly higher number of new entrant to the industry.
Early in August we conducted a global study with customers in seven countries, who have purchase unit during the quarter and the results are phenomenal.
As you can see on this slide when looking at our retail sales, 77% of our parse port customer purchase from VR fee for the first time.
We're presenting an increase of 51% over the same quarter last year.
By product line. It represents 74% formal RV, 65% for three will vehicle and 32% for personal watercraft.
Of these new customer, 41%, we're completing new to parse sport industry.
This represent almost three times the number of new entrant, we had over the same period last year.
These results are very impressive and presents a very good opportunity to grow our business.
Our focus is to ensure that the surge of new entrant is converted into lifelong customers.
Now, let's turn to slide eight for the year around product highlight.
Revenue was down 16% due to the temporary shutdown of our production sites.
Partially offset by favorable product mix Fourq tree wheeled vehicle driven by the introduction of the new Spider RT and by lower sales program.
On the retail site, the North American side by side industry and the season 20 on June Thirtyth.
With retail hop low 20%.
Can them side by side had another very strong season, which retail up low 40% solidifying our number two market share position in the industry.
We also performed well in international markets with retail for the quarter up almost 50% in EMEA and up about 30% in Asia Pacific.
Now not even five year after the opening of us to facility, we have tripled the size of the size of our side by side business.
And our momentum remain very strong to ensure we can maintain that momentum we have announced the construction of a second plan dedicated to side by side and you on ice.
This new plan will grow our capacity by about 50% and is expected to be operational by fall of 2021.
Turning to a TV.
The North America any PV industry also ended it season 20 on June Thirtyth with retail hub high teen percent days for the same period, our retail was up low 20% and ended the season with the number treat market share position in North America.
Our HCV business also performed well in international market, which retail up over 30% in Asia Pacific and over 50% in EMEA.
Now looking at three wheeled vehicles.
After a slow start to this season.
Due to the closure of writing school and license bottles and consequently, the major readjustment of our marketing plan.
When the situation turnaround our three will vehicle the retail picked up significantly starting in June and has continued through the summer.
Looking at the industry nine months into season 20, the North American three will have equal industry retail is now how high single digit wider can them retail is up low teen person.
With June and July performing significantly better than expected.
And the retail up over 90% over as riding school reopened.
We are planning a virtual launched a new cannon products on October Onest.
Overall, we are very happy with our can business.
Turning to seasonal product on slide nine.
Seasonal product revenue were down 25% impacted by temporary production suspension.
And a negative product mix for personal watercraft.
Which were partially offset by lower sales program.
Now looking at retail.
The personal watercraft industry also benefited from the strong consumer demand for outdoor activity that are compatible with social distance. Thanks.
10 month into season 20, North American industry retail is up mid teen percentage.
C personal watercraft retail was slow in April May and then took off in June.
As a result retail is also up mid teen percentage over the same period, notably gaining share in the industry largest sigman with the new cdti platform in the recreational segment.
Given production constraints and the very strong retail demand.
Who currently has its lowest level of network inventory in its history.
The same positive trends was also seen and then international market, which retail up for the quarter into high 30% in Latin America, and mid 40% in EMEA and Asia Pacific.
On September 10, we are hosting a virtual product lunch for all our dealer worldwide with some exciting personal watercraft product news.
We believe that the demand for next season, we'll continue to be strong.
With respect to snowmobile, we are still very early in the season, but retail is already hubs, 70% we.
We believe it is due to the same trends that have benefited our other product line.
We are now in full production and we'll be able to me dealer orders and had more unit if that condition warranted.
Continuing with to look at par sport parts accessories, and apparel and OEM engines.
Revenue were up 20% driven by a higher value of PA and eight coming from strong unit retail sales.
And higher replacement parts revenue driven by an increase use age of product by consumers.
We are up over 20% accessories are up over 30% and apparel is up over 40% compared to last year. The same trends affecting vehicles sales apply to these kept the goody.
Finally, looking at our marine business.
Compare year over year review of our revenue were down 25% due to the wind down of in those outboard engine and inventory is depleting faster than plan.
As retail is also performing well.
These results were partially offset by the impact of the additional revenues from the acquisition of tail water last year.
At the retail level as you might could ask is up high teens percentage. Many two is up high 30%.
And tell water is up 20 percentage.
The trend phenomenon of getting outdoor is also helping our boat brands.
We are progressing well with our discontinuation plan for outboard engine and remain committed to our marine by build transforms strategy, which we are pleased to see is on track.
We remain convinced that our best strategy is to focus our marine business on the growth of our boat brands.
Accelerated investment on new technology, and innovative products, including the ghosts engine family.
That I will turn the call to 17.
Thank you originally and good morning, everyone as Jose mentioned, our second quarter results came in much stronger than we were anticipating just three months ago, driven by the exceptionally strong worldwide demand for products throughout the quarter.
Our revenues ended the quarter $1.2 billion, a decline of only 16% from last year. Despite the significant impact from the production shutdowns or.
Our normalized EBITDA was up 28% to $214 million driven by improved adjusted gross profit margins and lower operating expense as a result that cost saving measures. We have implemented to preserve liquidity given the uncertain environment. We were operating in just a few months ago.
This resulted in normalized EPS of $1.14 cents up 61% from last years.
These better than anticipated results, coupled with the significant efforts deployed by our teams to preserve liquidity.
Led to the generation of $248 million of free cash flows so far this year.
And with over $900 million of additional financing we secured this quarter, we stand at a very solid financial position with about $1.1 billion of cash on the balance sheet.
While we remain cautious about the current environment are solid financial flexibility is providing us with ability to be opportunistic and accelerated investments in the business to drive long term growth for the company as highlighted by the recently announced construction of a new side by side plant.
Coming back to our revenue performance, our ability to generate growth in certain markets was driven by inventory availability in our yard.
International restart other quarter with a good inventory position given that the region was more impacted by quarter during the first quarters with revenues down 29%.
As the region rebounded with strong retail demand, we were able to ship you want to us from inventory and generate revenue growth of 15% for the quarter. Despite the production shutdowns.
The story was quite different North America, we started the quarter with lean inventory position in the yard and we continued running all quarter. Despite resuming production as retail demand continued to be very strong I will come back later with the outlook on how we expect to fulfill demand for our products going forward.
Our inventory of parts accessories, and apparel was at a better position, allowing us to seize the market strength and deliver revenue growth of 20% driven by strong retail momentum and increased consumer usage of their products.
Now looking in more detail of the gross profit margin on slide 15.
We gained 230 basis points of gross profit margin coming from volume mix pricing in sales programs in the quarter.
Foreign exchange rate variations were also positive or 40 basis points, leaving to our gross profit margin before the impact of every Rudolph board engines wind down and corvid of 25.2%.
Do you have enrolled wind down had a negative impact of 330 basis points and coded properly due to the temporary production shutdowns and under absorption of fixed costs had a net negative impact of 180 basis points.
Turning to slide 16, our courting normalized income was up $32 million from last year, driven by a 75 million dollar favorable impact coming from lower operating expenses, resulting from a cost saving initiatives, we have implemented and a favorable 8 million dollar impact from foreign exchange. These elements were part.
Offset by the negative impacts of $41 million coming from volume mix pricing in sales programs $3 million coming from production costs, and depreciation and $7 million coming from higher financing costs, turning to slide 17 for our looked at our network inventory position.
As I mentioned, our North American network inventory is down 51% from last year's second quarter as we experienced exceptionally strong demand for products since late April while our unit output was limited by temporary production suspension in April and May.
The products that were the most impacted by this situation, where SSV, a TV and pwc given the timing of the production shut down in the retail growth.
Inventory for these products is historically low and to ensure that we meet demand we have added production shift and increase line speed.
Looking further the second dedicated facility to us as the we recently announced should provide us with greater flexibility for that product line. When it comes online in the fall of 2021.
As for Pwc, We also plan on extending our production schedule, which will increase shipments in each one of fiscal year 22.
For three wheel, we were able to produce additional newness in June and given about retail only accelerated later in the summer inventory is adequate and we are maintaining our initial production plans for next season.
Finally for snowmobile given the current trend for power sport products, we are anticipating that demand may come in higher than our initial plan and we have extended our production schedule, providing us with the flexibility of increasing output to meet demand if required.
We are pleased by the strength of demand for our products, we gained market share when inventory for our product with available and we are convinced that as we build back inventory and sustain or fast pace of product introductions that we will continue outpacing our industry.
And now the guidance on slide 18.
With both network and our yard inventory being at historically low levels and the solid trend the power sport products continue to experience we have good visibility on the demand for products for the rest of the year and are comfortable issuing guidance looking at revenues, we expect year on products to be flat to down 4% for the year impacting revenues for the second half.
For the year to be flat to up 7% driven by growth in SSV and a TV, partly offset by a decrease in three we'll do a change in timing product and timing of production leading to shipments being more concentrated into h., one of next year and lower wholesale and international driven by product availability.
For seasonal products revenues for the year are expected to be down 12% to 15%.
When looking at the second half Pwc is expected to be down the increased production for the upcoming season will mostly benefit next year, and we expect snowmobile to be down driven by lower shipments in international markets power sports parts accessories, and apparel revenues are are expected to be flat to up 5%.
For the year.
And marine revenues are expected to be down 25% to 30% with a decline, resulting from the outboard engine business White wind down.
This is resulting in total company revenues are expected to be down 5% to 9%.
The normalized EBITDA is planned to be flat to up 5% and the normalized EPS to end between 365 to 395 down five to up 3% versus last year.
Our guidance range is wider than usual for this time of the year as we still face uncertainties related to the quoted while we have put in place strong measures to protect our employees, we're not immune to the potential risk, but the virus could represent on the economy, our dealers and our suppliers, which could lead to reduce demand more production or.
Increased costs, hence the wider range in terms of capital allocation, our priorities remain on investing for future growth and preserving liquidity for what May lie ahead for fiscal 21, we are expecting capex to be between 275 and $300 million with over $200 million to be spent in the back half of the.
Year, notably as we are ramping up the new SSV facility and continue to invest in product development.
Our other capital allocation priorities given the current context, we believe that preserving the strength of our balance sheet should be our priority and we plan on revisiting capital deployments alternatives, such as reinstating buybacks for the dividend after the third quarter.
Finally, turning to slide 19 for an overview of our expectations for each.
Revenues for the second half of the year are expected to be flat to down 7% as a stronger demand for products suspected to be offset by production timing, notably as we shift a higher proportion of Pwc and three real production at the fiscal 22 for the future retail season.
Lower wholesale international markets as yard and in transit inventory is very low going into Q3, and we expect it will take a few quarters to get back to more normalized levels and more outboard engine revenue, resulting from the wind down of all week.
For the normalized EBITDA is expected to be down five to up 4% with Q4 coming in slightly stronger than Q3.
The key drivers in the back half the year are expected to be a contribution from the stronger demand for products and the wind down of Evan would our board engines, which will somewhat offset by other elements highlighted previously and an increase in operating expenses as we resume certain investments in the business given the positive momentum we are just.
Variances.
All in all in light of the current environment, we expect a solid second half of the year and expect the momentum to continue well into next year when factoring the shift of personal watercraft and thrill production to next year, the need to replenish dealer inventory around the world and the new SSV plant, which will come online in the fall off.
Next year with this I'll turn the call back to utilization.
Thank you so best team.
We have been fortunate in the current context that despite the real hardship for many people the demand for our product is high.
We anticipate that for a certain period of time, we will need to continue to manage risks such as answering health and safety in our facilities and potential disruption to our supply chain.
I would like to again express my gratitude and duration to our dealers for their resilience in for our employees will have gone the extra mile in respect thing all the additional health and safety measure we ask what's in place.
This has been and we'll continue to be critical to our business continuing.
So.
We are pleased with the performance of all our product line and the progress we have made on our different initiatives.
Based on the overall momentum we are experiencing the new trend that have emerged and RF and the consumer base. We are expecting the second half of the year to be similar to last year ended bode well for the year ahead.
We are committed to ensuring that these new entrants and first time owners are converted into lifelong customers. Once they have experience our vehicle and boat.
Although we expect that will be a lot of volatility in the next few months in the mid to long term. We believed that we are better positioned than ever for success and on that note I will turn the call over to the operator for questions.
Okay.
Thank you.
Please press star one at this time, if you have a question, yes, we will be a brief pause while the participants register for questions. We thank you for your patience.
First question is from Steve Arthur from RBC Capital markets. Your line is open. Please go ahead.
Great. Thank you and and good morning.
Just wondering if you can elaborate a little bit more on the current status of the operations at your plants.
Just some sense of what level of utilization you're running at now and how much of it impacted local health measures are having in particular in Mexico and I guess finally, just how the utilization should trend through the balance of the year.
Good morning, Steve.
All operation right now are running at full capacity.
And we are able to operate without inefficiency less.
There were no will.
Then we're quite happy and them very very impressed with the are people who accept.
To put a lot of safety measure and the health care measure.
And operate efficiently in this whole context.
It's remarkable so in terms of adding.
New shifts in new lines and such as that.
On top of what you're doing now or is that 100%, reflecting those additions.
No.
I mean, we running right now at full capacity everywhere, then obviously if.
I mean, we expect to have some here and there difficulty with supplier tar deliver tight delivery our stuff like that but this is thing that we can manage.
Let's see like so by say explaining the guidance we can.
We can overcome some small difficulty obviously, if there would be a hole.
Some fineman in their country around the world that would be more difficult.
But the very very happy with the we are people are operating our operations.
And just a final one just very interesting your service customers and and new customers in particular, 40% new to power sports.
I guess on that has there been an active marketing efforts. So far trying to attract these people or is that just the natural flow people looking for new things. This summer and I get all has been a new.
Looking ahead I will say good yes definitely went.
When all of this started and we saw the surge of new demand.
We've done a detailed survey in March and we've done another one beginning of August and basically.
To better understand who is buying.
And try to talk to them.
Directly and encourage them to try our product.
And obviously for competitive reason I cannot give you all the detail of our plan but.
Obviously, we are in contact more and more with new customers, knowing what would they are.
Trying to promote the experience they could have with our product and just an example in July we have lunch and initiative called the Unchartered Society.
If you go on our website that VR Pete on chartered Society Dot Com, you will see we partner with a lot of operator in North America.
We believe we partner with the best into the industry offering safe and the safe ride and high quality, but right now I mean, you can book snowmobile right.
In the in the Rocky Mountain in Utah.
Could the we have a rightful woman on road right in San Gabrielle month than in California, with the Riker one of my favorite is that and Kiddos adventure and began canyon I'd cylinder then we trying obviously to do cross sale between consumer if someone purchase a side by side we try.
Turning to promote dose tour that leaves you can try a watercraft for a snowmobiles in the winter.
I can tell you are our marketing people are extremely.
Active to try to talk to dose customer and tried to make them lifetime.
Customers.
Good so thank you and congrats again thank you.
Thank you.
The next question comes from Mark Petri from Sidoti. Your line is open. Please go ahead.
Hi, good morning, and congrats on the excellent excellent result, I just wanted to ask a bit more just a follow up on the on the outlook for snowmobiles wondering if you could just you ran through a lot of.
A lot of statistics, there and just wondering if you could sort of summarize.
The the production capacity right now I know inventories are lower at the dealer level, but do you expect that to be sort of normalized in the coming months and just sort of an overview of the of the of the outlook for snowmobiles for this season.
Good morning, Mark, but first of the snowmobile season ended very quickly mid March last year, you should remember most of the 12 system workflows mid March.
Because of the government.
Regulation then we ended the season at all the OEM ended the season with more inventory than.
Previous year.
And we took orders from our dealers in April in the middle of the the crisis and we restarted in our case in led cool and in Finland, where you started production admit later.
Than originally planned because we needed to produce some three will vehicle in the May and June then right now we are schedule.
In both of our factory in Finland, and then in invent cool.
To run full capacity still at Christmas time, we added capacity to meet.
The order that we took from the dealers.
And like subs have said on his.
These intro, we have some capacity to had done.
If there will be a demand from a dealer will follow that trend closely.
In October and November and we plan some material to be able to react quickly if there is indeed.
Okay, Thanks for that and just from.
Some of the competitive standpoint in terms of marketing and promotion.
I understand sort of early on you guys were.
Fairly aggressive in terms of marketing and engineered promotions and financing deals when did those get ratcheted back and then how are you or whats your expectation for how the industry is going to approach the snowmobile.
And we'll be hosting.
Yes for over our good morning, Mark overall.
We we ended the first quarter a bit more up the cautious and are planning for retail and so we have provided for some programs.
But these programs were not needed specialty that the retail was very strong and when you look at next season, there's less noncurrent inventory.
And so where the way we look at a second half of the year. We we believe that promotions will be a tailwind to our results.
There will be a lesser opened need for.
For retail incentives.
Less non current as well so it should be a positive 11th and thats factored into our guidance number.
Okay. Appreciate the comments all the best.
Thank you.
Thank you. The next question is from Ben Wyatt Wacky from Deutsche Bank Capital markets. Your line is open. Please go ahead.
Thank you very much and congratulations for the very impressive quarter. So jewels equal you mentioned some color on how the Doug the appendix impact your five year plan.
Was wondering whether its postpone some product introduction or.
To put in advance on product introduction translating.
Into a bigger market, especially with the new entrants coming to the power sports industry.
Good morning by the way.
For sure.
When everything shut down in March.
In the 12 shutdowns for two months, we had to tweak a bit.
Our our R&D effort than our product planning, but the sense of wet.
We believe we'll make a big difference in the industry have not changed than overall.
All the program going from other near 20% 21. This year our ongoing as plan. There is a few tweaking hair here and there but.
Some shift maybe a month or two but nothing nothing.
Nothing that we believe will affect.
Our five year plan.
To be honest I'm very impressed.
You know the working from home.
How we were able to be efficient in this whole context.
Because obviously there is things that are easier to do by phone, but there is when when you talk about product development, you need to touch and feel try it's a bit more complicated than the team have done and then great incredible jumped to 40 tough.
And then no change on the five year plan.
Okay, and with respect to capital deployment, and Unfortunately, you gonna be revisiting DNC IDN dividend with the third quarter results, but given the new plan built in Mexico, who could you talk a little bit about the.
The working capital movement expected them to sick enough and maybe some color about capex expected for fiscal 2002.
Yes, good good morning, Ben.
First half of the year, we generated solid free cash flow.
[music].
Coming from obviously the good results working capital was a positive as well with the inventory reduction and they are that we collect the back half of the year I'm expecting inventory to rebuild they are rebuild will will offset some of that from the accounts payable so probably cash to generate free cash flow Gen, probably let's say 100 million.
For the back half of the year.
Capex as you see back half of the year is going to be very loaded with about 200 million dollar of investment.
Obviously, when the crisis started we adjusted some of our plans for this year unsold Capex is lower than what we were expecting when we were looking at our budgets and let's see back in January when there was very little talked of call. Good.
Obviously some of that as can be portion next years from expecting next year to be.
Pretty an important year in terms of investments obviously, we have.
Side plans on we're investing in and more investments. So it will be a record year in terms of capex investments for us for 22.
Okay and last question for me when we look at slides 15 with respect to the gross margin.
You quantified the impact of even route outboard engine wind down and also the coveted 19 I would just be curious what we should expect can be there's anymore.
Cost of with respect to EBIT grew Wang Tao and coveted 19 impact for the second.
Very very little costs related to the wind down we took all of that in the in the first core in the for some in the first and most of it in the second in terms of will kind of the cash costs. When I look at the back half of the year or the full year or you see my normalized EBITDA margin. There is should improve by 130 to 140.
Basis point, just based on the guidance.
What's going to be driving that improvement about 50 basis point from operating expense and the rest will be coming from margin, but the one.
Okay perfect for the full year right they'll want to get 30, you get one as.
Okay. Thank you very much fortifying the gentleman thanks.
Thank you.
The next question is from Robin Farley from.
Your line is open. Please go ahead.
Great. Thank you.
Trying to think about.
Dealer inventory declining all retail rising and those charts you had I wonder if you can give us.
Color.
There.
Great. Thanks change and that retail through June July.
What you've seen.
Most of August.
And then.
Thank you about.
Is there.
Just sort of mathematically on where retail for you go in Q3.
Based on.
She is fairly depleted.
Inventories their server natural cap that even though you're.
Capacity everywhere.
Based on what you're able to ship.
Where dealer inventory is that we shouldn't expect.
Bye.
Strong demand is there just kind of natural cabin near term. Thank you.
Yeah, good morning Robyn.
Obviously, yes, the retail decline.
Well the recent was very strong in the beginning of the quarter and that retail growth slowed down as far as we saw our inventory go down.
August is still very good.
Remind you that Q3 of last year was a very very strong quarter in terms of retail, especially in the month of August.
Fight that despite the low inventory, we're still up on retail.
For all three business, obviously as you mentioned the inventory for Pwc is Super Super League and sold retail and the in August is down.
When I looked at Q3, and the expectation for retail limits, but im not a key there's a certain ceiling, yes, so what the retail could be.
With low inventory and personal watercraft snowmobile shipments that are bit later than last year.
We expect good retail.
But.
Not to the level, where it was last year in terms of retail growth because of the whole inventory situation and as we go into Q4 as the inventory, yes, replenished, we should see retail pickup but for us and as I mentioned in my prepared remarks, a lot of the units that we will be producing specialty for personal watercraft, and we will will be ship.
Next year and that's when we'll come back to more normalized inventory levels.
So we'll take a few quarters before we we stabilize the inventory in the network.
Okay and just thank you for that and just make sure I understood.
Thanks.
So is shipping later and personal watercraft inventory Super Lean and you said two retail will be lower there.
You are seeing retail.
They're just for the seasonal but not for year cost per year round, yes.
Okay, and I guess are you at the point.
Where you're starting to see retail.
And I guess I'm thinking specifically of off road or.
Out here.
Where you're actually able to see retail levels, starting accelerate a little bit as you ship more or not.
Please.
While it's still early I mean, weve, a low inventory in the retail is still up and so we're still very lean inventory levels in the network.
As I said it'll take a few quarters before we come back to more normalized levels and when I say few quarters. That's next year fiscal year 22, when we when we have the new plant running.
And so our expectation when I look at the inventory outlook in the network for Q3 in Q4 improvements still expecting it down to it to be down significantly year over year at the end of Q3 in Q4.
But but maybe to give some colors last year.
I would like CMS dimension last year in August just to give you some numbers.
If I understood watercraft to do the comparison, because we don't have a new watercraft this year, but last year in August our retails between all product line, except watercraft was up about 40%.
And the right now so far in Dogus, we are up excluding watercress again, a bit higher than 20% and that's despite were not up to mom in inventory in some product line.
Then we believe the men will be there we believe.
Every OEM is struggling with the with the filing the inventory, but the demand is there no doubt about this.
That's great.
Very helpful. Thank you.
Thank you.
The next question is from Craig Kennison from E. I R&D. Your line is open. Please go ahead.
Yes, hi, Thank you for taking my questions and congratulations on the quarter as well one of the follow up on Robin's question, just so I understand the retail comment regarding Q3, seven I think that you said.
Not to the level of Q3 of last year did you mean, the level of growth last year or the absolute level of detail the level of growth last year.
Thank you and then wanted to dig into your.
Survey, which is really interesting on first time riders in.
I do you have any data on the follow through a first time riders I'm imagining that people who buy out.
Maybe into R&D year, some power sports equipment.
Ended by one for the family, but May buy more as time moves on so one question you just what's the follow through typically have a first time buyer either buying a new unit to replace that unit or adding units to the garage because it's such a green activity.
But like we said on our.
On the slide that we had into package 22%.
Our customer purchase in Q3 in Q2, our existing customers.
This is lower because we had a surge of new entrants.
In the quarter, but there is no doubt Craig debt.
We are all surprised by did.
Surge of new entrants and we're doing everything we can to.
Gave them a idea how to ride our product to do cross product selling.
And the to encourage them to write in different ends. It on that then this is the our marketing effort and we believe that opportunity will be therefore I.
No I.
I think we always knew that who were competing again leisure and when I see leisure on that we're not the specialists, but if we take cruise.
Airline and amusement park.
This is huge industry NDR significantly down.
Then I think there is an opportunity there that will remain for probably a few years and you'd the analysts say that it will take two years to dose.
And just to go back to normal then right now our Fourq is to make sure that we make it was customer lifetime customers.
Thank you and then again regarding your survey I'm wondering to what extent you tapped into the behavior of your core riders and specifically I'm wondering whether some of your existing writers who might have been in the market to replace their unit. This year, maybe instead, just said I'm going.
To ride this year no need to compete with everyone else to buy units that are scarce in the channel because I'm really wondering whether that customer deferred demand in the next year, perhaps which would create a more sustainable trend going forward.
Yeah, I don't have Craig top of mind that level of detail I'm sure. Our team has it but for me I don't have it.
A couple of our mind.
Maybe one interesting data we can give you and again, it's not for Q2 is from March.
15 to the end of July.
The number of people purchase.
Who are between 18 and 44 years old.
The number of people increased by 49% versus last year.
Woman.
Again from March 15, two the end of July plus 62%.
Family people to purchase a product to use it with family.
Plus 53% then it's coming new end trend and we attracting more D var diverse customer base, which we believe is very healthy for everyone in the industry.
Great. Thank you.
Thank you.
The next question is from Brian Morrison from TD Securities. Your line is open. Please go ahead.
Hi, Good morning, I, just a couple of call offs script specific prior question. So.
As per said in terms of the dealer catch up with you on inventory being down 51% can you maybe just give us the dollar value of that had to get back up to the optimal level.
Power sports overall, and maybe specifically for Pwc.
Well it if you look at the the outstanding inventory that that's there and as disclosed that we haven't our balance sheet I mean were down almost $1 billion in terms of.
Inventory.
In the network and so in terms of dollar figure that that's that's what it represents what is quite sizable in terms of reduction.
Okay, and then in terms of your Capex, it's going to be at all time levels for next year I presume, that's greater than $400 million, Yes, that's fair.
Okay and in terms of your leverage.
I'm sorry about reviewing the dividends are in shabby.
What would your target leverage be assuming you have visibility going forward.
Well, we've operated pretty much in the range of a net debt to have a double two times and that's an area, we're comfortable and going into the crisis that provided us with flexibility of getting additional financing and so obviously, we'll we'll continue having discussions with the board on what's the optimal leverage level, but.
The lesson learned was that at these levels and with the type of debt structure that we had in place with a covenant light and long term maturity was something that served us well during.
The last few months and I think it's something that we will try to preserve going forward.
Okay and then last question just in terms of obviously power sports very well, but also marine boat sales were.
Kind of the strong as well just maybe an update on the boat inventory as well where you stand on that front.
Yes, the both inventory decline a bit.
But.
Not test drastic as what we had in the far sport business.
Declined by about 25%.
Thank you very much congratulations.
Thank you.
Yes.
Thank you. The next question is from Greg Badishkanian.
From Wolfe Research. Your line is open. Please go ahead.
Hey, guys. Good morning, it's actually a trend whiteman on Greg if we look at the three key retail color that you guys gave that was really helpful. But how should we think about market share against that backdrop should we expect more share loss into next quarter.
It all depends on the on the inventory position of our competitors are that's something we do not have visibility on.
Yes, I said, we believe we started with a leaner inventory position going into this crisis, because our retail was super strong in January February and March where we outperformed the industry and even outperform what our expectations were our units Shaw flew off the shelf if I can say early.
In April and May.
We were shut down for a few weeks longer than most of our competitors in Seoul with taller question of inventory replenishment.
But when we look at our situation going in we were a market leader we had the innovative products. We have agreed you'd around your proposition and so there might be some share loss driven by inventory availability in the short term, but we believe that.
When things come back to more normal and were able to meet demand with our capacity.
That will continue that momentum going forward.
I would like to put the a bit of colors on this.
At international level, where we had enough inventory because we had chip prior the shutdown.
We have gained market share we've lost some market share in North America, because the timing of the production shut down into shipment.
Was for North America, but we don't talk massive numbers I was talking a point or two here on there.
And it's something that we believe we'll we'll catch up when the right level of inventory.
We'll be there because the fundamental of our strategy didn't change.
And it's about product, it's about the value proposition for dealer and that has not changed.
Okay, that's fair.
Maybe just simplistically given the inventory destocking in the retail momentum why arent you guys expect a more topline growth in the back half the year isn't the way to think about it that that's really just sales in shipments shifting into next year, given some of the disruption or.
I want to what is sort of the way to the frame that.
So that's one of the big elements, where we're shifting more units for the upcoming season into fiscal year 22, when the other one is international where we need to replenish inventory. We finished the second quarter varying both in yard in transit inventory, obviously the ship something in Australia. There was a few weeks on the water that you need to factor.
And so there's that element as well just rebuilding that inventory in our yards just to be able to.
Supplied to the man.
Great. Thanks, guys.
Q.
Thank you. The next question is from Mustain Liberty from Stifled JMP. Your line is open. Please go ahead.
Hi, good morning.
My first question is on the on the supply chain, obviously, what I would call vid everybody in the supply chain has been stretched and I'm wondering if you can give us some color as to how to situation has evolved this summer and how confident you arent that.
And the supply chain is solid to help you out for instance capture the debt that strong someone snowmobile season coming up.
Yeah. Good morning, nothing for sure I mean, it's a rocky it's a reckon role here for the people in the in operation I mean in Canada, you had the railway blockage in this spring we had the Puerto Montreal last month.
We had California supplier were shutting down a long period of time then.
But at the end of the de we've been able to overcome all those.
Those difficulty.
Sometime we could have the backorder parts for a deal or two would prefer to assemble back order and.
For the past the parts on the vehicle a few days leader, but overall, we are able to manage this situation.
And like we said.
If there is a few hiccup like this and the back half we believe it's manageable.
Obviously, if a country would shut down for a month.
That could be more difficult, but we cannot plan for this and we plan in we're planning for some hiccups, but the.
Not a big shut down and so far a team have done a great job to managing.
Okay. Thank you and I may have missed this but.
You're guiding for marine revenues to be down 25% to 30% dead and this year, if we exclude Evan rude what would that look like.
Well if in ruled full year is about 140 million dollar reduction last year was a 200 million dollar impact on our revenues. So if you.
This year will be obviously, we sold some units on the first quarter.
And so net is about 140 million.
So so so the the shortfall in revenues. This year is hundred $40 million Yep. So all of us to wallboard engine, Okay and last question on your on your customer survey.
No, you're saying, 40% or new to the industry. What is usually the proportion of new customers and the industrial in normal conditions.
HM Okay, I'm not sure, 100%, but I think it's one third of that.
If I think there to 40% yep.
Okay.
Okay perfect. Thank you. Thank you.
Thank you.
The next question is from Cameron Doerksen from National Bank Financial Your line is open. Please go ahead.
Thanks, Good good morning, I, just wanted to dig maybe a little bit further into the margins.
In the quarter, a normal normally Q2 would be a I guess, a lower margin quarter for you. Obviously there were a lot of puts and takes.
This quarter, but I don't if you can provide any more.
Color around.
Looking ahead to next year and a Q2 I mean is at 25% gross margin I guess adjusted something that that's an achievable number and it kind of a normal year whatever that may be but I do you any kind of I guess color you can sort of put around what what is from a more normalized margin might be here going forward.
Yes, good morning, let deep World was probably give you obviously, there's noise as you said between Q1 in Q2 was won't give you the full picture for the six month of the year.
So last year, we were at 22.5.
In six months this year, we're at 23 before any or we wind down or cold weather impact.
So about a evolve only 50 basis point improvements volume was negative. So I was you hope that can go away next year.
The plus that we got was on the sales program. So for a full six months is about 120 basis point positive impact.
It all depends on how next year is going to go are we going to see that benefit with them about 100 basis points next year on our gross margin because of a a still a good demand for products in a less competitive environment.
Were less noncurrent inventory, so still early to call. What next year is going to be like into our gross margin, but with better capacity utilization and potentially a better sales programs, we might see a 100 basis point improvement in margin on a full year basis.
Okay and is there any of the I guess, a sort of the cost savings you've achieved outside of the selling and marketing.
Our some of these more more permanent says you've learned to do things more efficiently.
Maybe there's more remote work on things like that Im just wondering if you can talk about sort of more permanent cost reductions will be important one is the our decision to exit the outboard engine business as we said the in Q1, it's about a 60 to 70.
Cents EPS impact this year, we should probably get about a 40 cents benefit of it and that's going to obviously rollover into next year and we'll get the full year benefit.
Thats a comes from a obviously the saving comes from operating expenses that are going away.
And yes, there are some lessons learned but obviously we are focused on growing this business and so.
There's no no big cost saving from working from home I mean, theres a structure that someplace that needs to be supported a we'll have some employees.
Working more remote next year, but a lot of them will still be in our premises.
Hopefully.
And obviously, we continue focusing on being efficient how we run the business and that's part of our what we do every year. So we'll we'll continue driving a margin improvement.
Okay, Great and just finally from me.
Shifting gears.
I Wonder if you can talk a little bit about the used market for off road vehicles and.
And the person walk out maybe snowmobiles as well I mean, our understanding is that there's some very low availability of abused.
Product out there in the market. So I'm wondering if you have any data on on that twice what the sales of use products have been.
Well, maybe difficult to track, but any data on that and what do you think that means for new products sales as we look ahead to next year.
Yeah. As you said, we don't have any data of the inventory out there by region, but one thing is sure I mean, we heard a lot of dealer, saying they are empty.
Watercraft was totally empty a this summary North America.
And I believe is the same thing far froze snowmobile to season is just timing.
But I was talking to a dealer Saturday and the there is a surge of customer at the leadership right now and obviously the salespeople are seeing by now because we'll be out of inventory. So then.
I think it's all of this is very healthy for the industry.
And the foreign to dealers and the will all gain from it.
Okay No that's great. That's all for me thanks very much.
Yes.
Thank you.
Next question is from directly from Canaccord Genuity. Your line is open. Please go ahead.
Yeah, Hi, Thanks, and just one for me in terms of.
Given that the strong demand pull forward here that we've seen.
Are you guys seeing any change in early stages here in terms of dealer order patterns like our dealers looking now that potentially hold more product on the on their floors, just given that there really strong demand that they're seeing.
Good morning directly first.
We believe that in general dealer or don't like inventory and the some were complaining we had too much inventory they had too much inventory before the Corvidae. Then we believe that this this old surge of demand could give us an opportunity when I see us the dealer and us too.
Maybe we're a bit the inventory in the network it will take a while before we get there.
But this is an opportunity that all of us to get or the other OEM the dealer in us well run leaner on inventory and be more efficient, but it will take a while before we get there.
Okay Thats helpful. Thank you very much.
Thank you.
Next question is from Jamie Katz from Morningstar. Your line is open. Please go ahead.
Hi, good morning.
Give us a little bit more color in the Canadian market. It looks like this out there the shipment.
Hello, gentlemen.
Yeah Yeah.
Wondering maybe.
Reaccelerated in caught up in the other geography.
Okay. Thanks.
Hey, good morning, Jamie.
Canada was down in the quarter, obviously coming from one the leaner inventory and the shipments of personal watercraft that we had to reduce but the other big factor is a is probably in snowmobile shipments we ship less snowmobiles into second quarter then.
Then last year. A these are you in itself will be shipping in the third and fourth quarter.
Okay, and then maybe Unchartered society.
Around that you mentioned earlier you guys.
It's a great learning units.
The providers and then that's the case shipments.
I have on maybe that we should think about.
Initiated.
I'd like to flex and I look like next year shipping into that program.
First definitely I mean, we partner with people that we believe our divesting the industry and obviously the use our product.
We don't think it's meaningful in the overall thing.
Do you have the fleet the vehicle that did turn.
Probably once a year.
But it's not meaningful than the whole thing.
Thank you.
Thank you.
The last question is from Gerrick Johnson from BMO capital markets. Your line is open. Please go ahead.
Great. Thank you for the last three questions.
First question.
Your decision well the announcement on the new factor is made in early July so when when was that decision made was that's something we're contemplating pre covert back January February or is that something that.
The demand you've seen since the pandemic that that trigger that decision.
Good morning, direct I mean, as we've said I mean, you are part of the I know this call last September.
We were starting to plan for it obviously when the covert thing happened in March we put everything on the whole, but when we saw the surgeon demand we have a restart the program then it was.
Plan, that's something that with a grow that we had equal vid, that's something that Oh, we did henne, how but a that's why in the middle of all this so we decided to announce and move forward.
Okay, Great and then a follow up on Fred's question.
For the second half sales to be flat to up seven I can you talk about other variables that would go into that guidance, specifically I'm thinking about the retail demand you're expecting and also where you are planning on dealer inventories to end up at the end of a.
In January it into the year.
Yeah, as we said, we're very focused on on producing many units as weekend in the second quarter. There is going to be an international inventory replenishment, which I mentioned about one item. We didn't talk about is as parts and accessory.
Performed very well in the second quarter.
Obviously, driven by the strong demand in our products.
It was soft in the first quarter was actually down in the first quarter impacted by coal business. So.
Are there opportunities there for the second half of the year, our guidance calls for let's say down to two up 7%.
Some of it than the second quarter was probably a tailwind.
He dealers being closed in the first quarter and more a more cautious more cautious planning from them. So.
So, we'll see where that ends.
But we certainly like to see the performance that we had in Q2 continue wind.
And the team is very focused on the on making sure we delivered strong growth on the pack site.
Okay, well Jos I mentioned earlier that you're going to run leaner run leader on inventory says I mean, the optimal level of dealer inventory is lower than it had been.
In the past.
Well in absolute again depends on the overall industry and the number of days.
Reduce the overall number of days by let's say, 25%, yes, but doesn't mean that the inventories going to go down by 25% probably not because obviously the industries are growing our market share is growing so that's something we need to factor in when we look at the overall total inventory by towards a comment was one in terms of reducing the number of days out there.
Okay, and then my last one I was little bit more specificity on the on a cost savings you outlined on last call 450 million of total savings I guess, the ongoing number excluding avenue to be about 370 million that was.
Overhead costs that you are taking out through layoffs hiring freezes salary reductions.
Now where are we now are those cost cutting back on line I assume that factory 70 number would be lower what what's the number of cost savings to expect going forward.
Yes. It will you saw let's sit for a and we'll look at Opex for the first half the year, we when you compare year over year, it's an $80 million savings that we have when we talked about the Fourfifty was 450 versus our original plan for fiscal year 21.
Not a year over year reduction.
I'm expecting Q3 to Opex to also be down as we continue seeing the benefit of the cost reductions.
But obviously as the business is a much better than what we were anticipating and the outlook for next year as well is favorable we we need to continue invest in growth and so Q4, I'm expecting opex to be flat year over year.
Okay. Thank you specialty.
Thank you there are no further questions at this time, so I'll turn the meeting over to you.
Great. Thanks, everyone for joining us this morning, and we look forward speaking with you again November 26 or third quarter results. Thank you bye.
Thank you.
Frank has now ended please disconnect your lines at this time.
Thank you for your participation.
This conference is no longer being recorded.
Let's just put modest single family homes it does that.
[music].
FIFA.
Please note that this conference call has ended please disconnect your lines at this time. Thank you.
Okay opinion because.
How many.
She would funding.
[music].
Okay Fair enough on 55. Please note that this conference call has ended please disconnect your lines at this time. Thank you.
Thank you.
<unk>.
She was pending.
[music].
I don't process before.
Note that this conference call has ended please disconnect your lines at this time. Thank you.
Okay opinion I guess.
If you tell me.
Yes, she will trending.
[music].
[music].
[music].