Q1 2022 BRP Inc Earnings Call

Sam a 49% when excluding snowmobile.

We also had a strong performance in international markets with retail up 9% and Latin America, 32% in EMEA and 83% in Asia Pacific.

Byproduct line, we grew across all of our lineups, except snowmobile as our dealer ran out of unit at the end of the season.

For our side by side growth was moderate more moderate.

As it has also suffered from limited product availability.

Due to low inventory.

We'll provide more color by product line in a moment.

Turning to slide 6.

Despite the strong demand in the first quarter, we expect retail growth to be limited in the second and third quarters, mainly due to the ongoing supply chain constraints, which are evolving very rapidly.

When we last update you in late March 1 of our key challenges was the logistic congestion at different ports.

Our team was successful at addressing this issue by finding alternative solution to date logistic are predictable and manageable.

Currently we are managing the tight availability and delivery delays for certain raw materials.

In this case, we are working with our suppliers to find substitute or new source of supply which are creating some delay.

For the past months, our main challenge has been dealing with the shortage of semiconductors.

This is affecting some of our tier 1 but also some of our tier 2 suppliers, where we have less visibility.

This is presented on the main source of disruption in our operation because finding alternative parts would required technical changes.

Given these issue some of our units will need to be retrofitted.

This means the unit is missing a few component and it will move to final assembly. When the component are received this.

This situation will delay the timing of certain deliveries and temporarily increased our work in process.

Regardless of these challenges our objective is to deliver all orders by the end of our fourth quarter.

Our plans are running at full capacity and we are in the process of increasing production capacity at you on ice and <unk> to make this happen.

We plan to work through these issue for the balance of the year to deliver our production schedule.

Take note that all of this is increasing our costs versus last year, but is that it hasnt been factor into our guidance.

Turning to slide 7.

Given those challenges and the fact the impact on production dealer inventory will remain low throughout the year to.

To better illustrate the situation we have provided statistic from the past few years.

In fiscal year, 2018, 19, and 20, you can observe on the graph debt our level of inventory in our dealer network was in sync with retail at about 175 days.

During those year, our retail was growing low double digits.

In fiscal year 'twenty, 1 given the surge in demand coupled with our 2 month production shutdown.

Inventory dropped to 80 days in the first quarter of fiscal year 'twenty 2 it dropped as low as 40 days.

With the continued strong demand we expect to remain at this level of inventory for the reminder of the year, which will limit our retail sales growth on.

So it is now clear debt inventory replenishment will take place in fiscal year 'twenty 3.

Turning to slide 8 we.

We continued to experience strong consumer demand across all our product lines.

New and trends continue to enter the industry, representing 37% of buyers in the first quarter compared to about 20% historically.

This is good news for the industry and it doesn't seems to be driven only by the impact from the pandemic.

According to our survey only 7% of new entrants said the purchase of power sports vehicle as a COVID-19 distraction.

New entrants are a more diverse group, representing younger people and more women and families.

In addition.

According to our survey.

82% of buyer are not making a tradeoff when purchasing a unit contrary.

2 our 2 hour and general belief only 3% of buyers declare through will have purchase a unit instead of traveling.

There are multiple multiple positive sign a sustained consumer interest.

This is the fourth consecutive quarter of double digit growth for the power sports industry.

Website visit are up over 60% compared to last year for all of our brands.

And we have a strong demand for our products, including record snowmobile spring unit bookings.

The strongest start of the personal watercraft season in over a decade and our 3 wheeled vehicle rider education program registration are trending above our target.

These are all positive trends for day mid to long term growth of our industry.

Now, let's turn to slide 9 for year round products.

Revenue were up 44% to $923 million, mainly driven by a higher volume lower sales program and the richer mix of side by side vehicle.

Looking at side by side vehicles season to date retail 10 months into season 'twenty, 1 the north American side by side industry is up high 20%.

While our can am side by side vehicle is up low 20%.

As we were impacted by limited product availability.

This is also impacting our retail performance in the international market as we deliver more unit to North America.

As a result, our retail performance was up high single digit in EMEA and mid teen percentage in Asia Pacific.

Still we are very happy with the strong consumer demand for our lineup and we look forward to ramping up production as we expect the <unk> III facility to come online at the end of the third quarter.

Turning to ATV day.

The North American industry is also 7 months into the season 'twenty, 1 and retail is up in the low 30%.

<unk> is performing in line with the industry with retail up in the low 30% over the same period.

For both ATV and side by side, our worldwide network inventory is that Easter at flow.

Now looking at 3 wheeled vehicle.

Now 6 months into season 'twenty, 1 the north American 3 wheel industry retail is up about 90%.

Can am 3 wheeled vehicle is off to a very strong start.

It is the fastest growing brand in the motorcycle industry. So far this season with retail up over 140%.

We are very happy with the momentum we have with 3 wheeled vehicle the.

On the retail trend is very positive.

The rider Education program registration continues to trend above expectation.

Registration up over 50% versus our internal targets.

Which bode well for the system the ability of consumer demand and.

We continue to attract a younger and more diverse consumer base.

Sorry, notably with retail to women up 166%.

Diverse community up, 190% and new and trend up 180%.

These are exceptional results and we are very excited at the outlook for the 3 wheeled vehicle business appear from rising.

Turning to seasonal product on slide 10.

Seasonal product revenue were up also 44% to $463 million, driven primarily from higher shipments and richer mix of personal watercraft and lower sales program.

Now looking at the personal watercraft retail.

Only 6 months into the North American season, 'twenty, 1 the industry retail is up in the low 70%.

<unk> retail is up mid 90%.

Outpacing the industry and gaining market share in all the industry segments in which we compete.

Net trend is also very good in international markets with retail up over 110% in EMEA, 130% in Australia, and New Zealand and up over 30% in Brazil.

This year is the strongest start of the retail season that we have experienced in over 20 years.

Given this strong start unit availability is already getting tighter heading into the summer.

We expect to him this season with a very low level of inventory again, this year, which should lead to strong shipments in the next fiscal year.

Turning to snowmobile.

The North American snowmobile industry ended the season 'twenty, 1 with retail up in the high teen percentage.

Ski Doo retail was also up high teen percentage over the same period and ended the season with the number 1 market position in every industry segment in which it compete.

With its highest market share in this story.

Our momentum was also very good in Scandinavia, and Russia with retail up low 20% for the quarter.

Turning to slide 11.

Looking ahead, our snowmobile business is very well positioned for season 'twenty 2 how do we have a very strong lineup, notably with the introduction of the <unk> brand in North America and the return of the all time favorite the Skidoo magazine.

We ended season 'twenty, 1 with record low network inventory and unit pre sold to consumer are up 157% over last year.

As a reminder, spring unit or special model only available at preorder and allow us to better forecast volume for the upcoming season.

This year exceptional strong spring unit orders represent roughly 70% of the upcoming season volume compared to about 35% historically.

This reflects the continued very strong consumer interest for power sport product and snowmobiles in particular.

Continuing on slide 12, with the look of power sport part accessories, and apparel and the OEM engine, which experienced a similar trend as vehicles.

Revenue were up 91% to $300 million driven by higher volume of replacement part due to increased product usage combined with strong unit retail, which generated increase accessory sales across all our product line.

It is clear that our link ecosystem accessories strategy is driving demand and paying us.

Despite supply chain challenges that also affected <unk>, we've delivered exceptional results.

Now looking at the Marine on Slide 13.

Revenue were up 11% to $122 million as strong boat shipments more than offset the impact of the wind down of day, even route outboard engine.

Looking at our different brands in term of retail performance for the quarter. Many too was up over 80%, Andrew Matt could have over 60% and tailwater was about up was about up 40% all.

All in all we are pleased with the performance of our both brands and are on track for the introduction of new products with the goal with engine.

With that I will turn the call over to Sebastien.

Thank you Jose and good morning, everyone. Our revenues reached a record level for first quarter at $1.8 billion up 47% from the same period last year.

Gross profit margin also reached a record level up 30% compared to last year. Our gross profit margin, mainly benefited from lower sales programs and better fixed cost absorption of last year's first quarter margin and suffered from the temporary production shutdown.

Margins also benefited from the exit of the outboard engine business and our continued focus on introducing products with better margin.

When compared to our expectations for the quarter. Our gross profit margin was better than expected driven by a favorable product mix, resulting from stronger than anticipated P&A sales and lower than planned sales programs due to the strength of the retail demand and faster than anticipated inventory returns with a strong gross profit generation.

And lower than expected operating expenses, we delivered our strongest quarter ever in terms of normalized EBITDA of $379 million and this resulted in normalized diluted earnings per share of $2.53.

We generated $379 million cash from operations in the quarter and invested $153 million on working capital, notably for inventory, where due to supply chain issues are work in process inventory was higher.

This higher work in process inventory allows us to more efficiently manage our operations and the supply chain constraint environment and allows us to ship units to dealers quicker when the missing components come in.

We also invested $97 million on Capex and returned $288 million to our shareholders through share buybacks completing our previously announced normal course issuer bid.

Turning to slide 16 for a look of the key drivers of our normalized net income growth for the quarter as.

As you can see from the chart on normalized net income grew $199 million from last year's fourth quarter, driven by a positive impact on volume mix pricing and sales programs for $388 million, which was partly offset by negative impacts from production costs and depreciation expense for $30 million.

Operating expenses for $70 million as we continue investing for our long term growth and higher normalized tax expense for $89 million.

This resulted in $222 million of normalized net income for the quarter a performance that was stronger than we had anticipated driven by the continued strong demand lower sales programs and very strong <unk> sales.

Turning to slide 17 for a look at network inventory as you already mentioned given the exceptionally strong retail growth we have experienced over the last year on North American power sport dealer inventory ended the first quarter at a historic low level being down 73% versus a year ago.

This combined with our finished good inventory represents a decline of over $1.6 billion on inventory value compared to last year.

Despite increasing shipments in recent quarters, all our product lines are seeing significant inventory decline decline.

A decline for RV. The network inventory is down about 80% is the demand for Ken and brand is higher than ever and everything we ship is being retailed very fast for snowmobile skidoo had a very strong season, resulting in a record low level of inventory at the end of Q1 down 83% versus.

Last year.

And for our summer products, both Pwc and 3 wheel are off to a very strong start of the season with consumers purchasing their units earlier than typical.

Network inventories are down 64, 54% respectively.

These low levels of inventory are limiting our ability to grow retail in the short term, but the demand for our lineups remains very strong and we expect to resume market share gains more specifically for RV as product availability improves and the networks. Starting later this year.

Now turning to slide 18 for an update on the guidance for the year.

So as I mentioned, we are reviewing upward our yearend guidance driven by the stronger than expected first quarter results, notably for our P&A business. The very strong spring units booking for snowmobile and lower than expected sales programs throughout the year, given our very low network inventory position. We also expect.

We will continue dealing with supply chain constraints that are likely going to lead to delays in the reception of components, which in turn would lead to delays in the shipments of products based on the visibility we have to date, we believe that these supply chain challenges will impact the timing of product deliveries in Q2, and Q3, but our full year volume target.

What remains intact. We have included additional costs and maintain a wider than usual guidance range to account for the potential impact of the supply chain constraints and for commodity price increases.

Following these adjustments we now expect our total company revenue to grow between 28% and 33% on normalized EBITDA to grow between 27% and 35% and our normalized EPS to end between $7.75, and $8.50, representing a growth of 44% to 58% over last year.

Now looking at slide 19 for some additional color on the quarterly outlook for the year in.

In terms of normalized EPS as mentioned, we expect the supply chain constraints to weigh more on the second and third quarter, therefore, pushing more volume in the fourth quarter. Given this dynamic we expect to generate a modest normalized EPS growth in Q2.

A slight decline in Q3 and strong growth in Q4 in terms of our expected North American power sport retail as previously mentioned, our low level of network inventory, coupled with the impact of supply chain constraints and the fact that we will be lapping very strong quarters last year should lead to retail sales decline.

In Q2, and Q3 and a return to growth in Q4, as we benefit from improved unit deliveries and additional production capacity, notably for side by side with the Whitehouse III facility.

For the year, we expect our North American power sport retail to end somewhere between flat to up high single digit with <unk> generating the strong risk strongest growth on that I will turn the call over to shortly.

Thank you Sebastien.

To conclude.

Fiscal 'twenty, 1 was an exceptional year in day momentum continue into fiscal 'twenty 2.

Our team is doing an excellent job managing the ongoing strong demand for our product with all our facilities running at full capacity.

Despite the supply chain issue given the continued strong consumer demand and related lowered sales program, we are well position to finish the year with solid results and expect to deliver our increased guidance for the year.

In addition, we are continuing to position the ERP for the future by driving different project to.

To generate long term growth, including turning new entrants into lifelong customers pursuing new market shaping product introduction taking.

Taking advantage of additional production capacity with the ramp up of you on a street get at that and sort of <unk> as well as executing on our bold investment in electric vehicles.

I would like to thank all our employees for continuing to diligently follow our Covid safety protocol and for working longer hours, both in production and administrative functions.

I would also like to thank our supplier for doing extra work to meet our orders and our dealers for their patients and for managing consumer on the frontline.

Lastly, I would like to thank them all for their agility dedication and resilience in these unusual time.

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

Thank you ladies and gentlemen at this time, if you would like to ask a question. Please press Star then the number 1 on your telephone keypad.

If you would like to withdraw your question. Please press the pound key.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Robin Farley with UBS. Your line is open.

Great. Thanks, I wanted to ask you about the.

Key things related to dealer restocking.

I Wonder if you can help quantify the restocking opportunity, which I realize this is kind of a fiscal 'twenty 3 events.

And just thinking that maybe inventory wouldnt get back all the way to 175 days.

So if you can help us quantify on.

That and then also.

We had heard from Trent Taylor said.

Chile, some production was limited by the availability of engines that where there is some.

Shared engine capacity between snow and.

In off road, and so just I wonder if you could kind of address whether.

Whether that is limiting and whether that will limit your production or your side by side also production. Later. This year is there kind of a tradeoff that you have to make there because the growth engine capacity. Thanks.

Good morning, Robin and I will take the first part I think Charles is going to take the second part.

In terms of our replenishment opportunity obviously as you said we were historically, we're running with a 170 days of inventory.

Our guess is that the industry will be running lower but obviously as the industry growth as we gained market share in absolute dollars.

Youre, probably looking at an opportunity of restocking in the range of.

Well above a $1 billion.

So obviously it is quite sizable and as <unk> alluded to on the prepared remarks, we believe that debt restocking is going to happen next year because of continued demand for the products on the low levels of inventory you have now.

And Robin to your second question about parts availability on <unk>.

Dealer are right in the sense that we have limited capacity of engine component.

And we are trying to manage with them.

<unk> product line to better optimize.

The situation.

Then.

This is an ongoing discussion we are having with our.

Dealers with our suppliers try to maximize what we can do to respond to the day men and does depend a lot on decision on the ability of the product.

Dealer don't need now snowmobile day.

It will start to deliver it to consumer in October then this is what we're trying to manage the best we can but definitely there is some some challenges on the engine component.

Okay, great. Thank you.

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

Thanks. Good morning, just wanted to I guess questions on the on the retail.

I think Sam you said that your expectation for the full year retail was was flat to up high single digits, just wanted to confirm that number.

In addition to that is there any way you can sort of give us an idea of what your expectation is for retail this year versus 2 years ago, obviously last year was a bit of a bit of an anomaly.

Yes, good morning, Cameron, Yes, Thats correct.

You correctly quoted me, so flat to up high single digits.

Obviously, the retail will vary on a quarter by quarter. This quarter, we had very strong retail there were some pull forward from.

From.

From Q2 for personal watercraft and 3 wheel what I could tell you is if I look at the second quarter.

I compare it to 2 years ago I believe the second quarter should be flat in retail when compared to 2 years ago. So obviously 2 years ago was a strong quarter continued strong demand, but obviously, we will be lapping a very strong quarter compared to last year and thats, why we won't be down compared to last year.

Okay and do you have any I guess, a number for kind of the full year I mean, I think debt.

On the expectation would maybe be in the high teens or even 20% versus 2 years ago for the full year.

Yes for the full year, you'll be on the high high <unk>.

Teens to low twenties.

Yeah.

Yes.

Okay.

Excellent and just I just wanted to follow up question on the on the 3 wheel market because youre doing obviously very very well. They are ahead of ahead of plan.

Is there any way to maybe talk about the difference in Vegas, and retail demand between Spider and ryker or is it really broad based across the entire product portfolio.

Yes for sure the ryker is attracting a younger customer base because of the price point.

But I would say debt all the program, we put together you know.

The debt.

The program, where the people do the rider education program, we have.

Have many reicher customer, but also many <unk>.

Customer.

The woman on off.

The woman on the road.

The community is affecting all of the models, then ryker because of price point definitely attracting a younger customer base, but I would say the momentum on <unk> as the 3 models and we're very very happy.

Okay, very well thanks very much.

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

Hey, good morning, and thanks for taking my question.

Really on allocation.

Are you doing to.

I guess fairly allocate inventory across your dealer network given the shortages.

Yeah. Good morning, Craig we don't I mean, we don't favor 1 dealer versus the other we try to be has.

Equitable to everyone because.

Short term you could do.

February is them, but we don't do that because it's not helping.

Ed the second dealer and mid to long term will be will be impacted by this debt. We're trying as much as we can to allocate obviously by countries and after debt by region in after that.

By dealers, but we're trying to be a very fair.

All of the dealer network to make sure we protect the mid to long term and we talked about our dealer value proposition on what are the key elements of our Oems system. The order management system and that is I would say an objective model where.

Dealer places on order, but the orders are also correlated to what their market share targets are so that obviously make sure that everyone's treated fairly.

Yes.

Thanks, and then what systems are in place to help dealers either trade new inventory or even used inventory among themselves is there anything you can do to help facilitate against better liquidity.

To help your dealers help themselves.

I mean in each region. The dealer has each dealer has a network of.

Other dealer, where typically trade between themselves.

But that being said in the last 12 months.

Was definitely less trade than typical because every dealer want to hold to ever unit day Kent.

Great. Thank you.

Your next question comes from the line have been on what's Lockheed with Desjardin capital markets. Your line is open.

Yes, good morning, everyone and congratulations for the good quarter.

Could you talk a little bit about the capital deployment strategy in light of your favorable market environment strong balance sheet and whether a substantial issuer bid is something that you could consider.

Good morning.

Obviously.

Sound capital allocation strategy has been.

Part of our success.

As you said, we do have a strong balance sheet that provides us with flexibility.

As we've always said our priority is to invest in the growth of the company and when you look at our Capex guidance for the year up to $600 million of investments we maintain that.

That disciplined approach.

As you also saw on our Q1, we completed the NCI, we invested almost $300 million on share buybacks that completes the NCI b that we started last December we purchased about $4.3 million shares.

So the next opportunity to do in CIB would start in December.

And until then while as you said the good news is we have a strong balance sheet.

We have that flexibility and if we decide to be opportunistic in buying shares though we do have we do have that possibility.

No decision taken now but.

Obviously as I said there is a.

Volume between now and the next on CIB window.

Okay.

Great and you talked about the supply chain constrained I was wondering if you.

There is also impacting the ramp up at <unk> III Okay.

<unk> also started and with respect to the new project.

And given the strong consumer demand and the new capacity increase require either bulk or in Austria to deal with the <unk>.

Good morning, Ben first so you on <unk> III is on plan.

Then this is doing good then we are planning to ramp up production on the back end of Q3.

Project, Chem and sort of and is also on plan.

Manufacturing the motorized hall will be made in <unk>. This is on plan and disturbing facility at events is also on planned in Q4, we'll start production then.

And in terms of engine and maybe 2.2 to complement on what the answer to Robin and the first question overall of the engine.

Have a very good dealer net supplier network, we manufacture our key component ourself and we were already in and then investment mode.

You too.

To satisfy for the growth, we had and obviously there is some timing of equipment, but the engine capacity.

<unk> is in a very short period.

Margin ratio upgrade of time than.

And overall, we're happy with you need to realize that in fiscal year 'twenty..3 you on <unk> III will be fully running kt of total with watercraft, 30%, there will be projects and with tweaking to optimize production in other sites. Then we feel we have the right capacity.

For fiscal year 'twenty 3.

Okay. That's great. That's it for me thank you.

Let's see.

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

Hey, guys. Good morning, Thanks for taking the question I just wanted to look back at sort of the commentary you provided last quarter for your retail expectations I think you've talked about high single digit retail and if we look at what you posted you came in quite a bit above that for the full quarter. So what does that mean for these retail parameters that you sort of outlined here for <unk> and <unk>.

What drove the outperformance was better than expected consumer demand better availability.

In terms of supply.

How does that shake out for sort of the guidance that you've given us.

Yes, good morning, Fred.

Youre right that we did call out that.

Retail would be a bit soft more softer than what we actually delivered in terms of numbers I think the surprise was in the accelerated retail for personal watercraft and 3 wheel and obviously.

Production is set at a certain level so whatever we retail in Q1 as retail that we lose in the second quarter and so that acceleration provided for stronger growth in the first quarter versus what we were expecting obviously, it's going to impact our retail expectation for the second quarter.

Yes.

Makes sense and just circling back to the allocation question from earlier can you talk about how pre sold units sort of factor in to the internal allocation system.

And if you've seen any change in sort of dealer order patterns tied to pre salt unit specifically.

First of all we're trying to we're trying our goal is to Warner every pre sold unit to the consumer like.

<unk> give you. The example for snowmobile our record of pre salt.

Our next production season.

<unk> unit is at a record high and we are trying to owner every single unit that is pre sold for every product line.

We have less visibility on a flow, but we still have the team is doing their best.

We'll make sure we protect that everything is this pre sell to the consumers.

Got it thank you.

Your next question comes from the line of Matt.

Duffy with Stifel. Your line is open.

Hi, good morning, everyone.

My first question is on your parts apparel and accessories.

It increased twice as fast as your revenues during the quarter. So I was wondering if you can give us some color on what explains that strong performance.

So it makes us 2 thing.

Product usage customer views the product is using the product a lot more of them typical we saw it during.

During the snowmobile season, this winter than product use ages as 1 element. The second 1 is the accessories.

The link ecosystem that we've put together, where many accessories can fit many product line. The same accessory can fit many product line. This is really this is doing extremely well and it's a combination of those 2 things that are generic <unk> to growth.

Okay. Thank you.

And my other question was on your survey you shared some very interesting data point on on the consumers you are quoting 3% of buyers.

Purchase a unit incentive traveling and you were mentioning 7% of new entrants and purchase a vehicle only 7% as a COVID-19 distraction. So.

Were you surprised by these results and <unk>.

Staycation in Covid.

Explain just a small portion of the growth.

And then what does explain the surge in demand that <unk> seen for power sports products. This year.

Then first adjusted.

As a reminder, every at the end of each quarter, we do a survey about the thoughts on customer purchase.

Our new unit during the quarter.

Yes, we were surprised by a few numbers new and trend is growing 37% in Q1 fiscal year 'twenty 2 versus historically 20, but last quarter fiscal year 'twenty, 1 Q1 quarter was up 30% debt. This is increasing.

The 2 numbers that we were also surprise is the 7%.

Debt only 7% said that it was COVID-19 distraction than a big portion, it's true interest to the sport and the other 1 is the 3% debt.

<unk> 4.4 traveling than those are extremely strong.

The result.

And we are very happy and you need I think we need to give to our marketing team.

Very good they've done a very good job too if you look at our website today versus what it was a year ago, our website are better craft too.

Make it easy for the people, who don't know the industry.

We try to educate the customer our winter wear to ride.

We try to educate them to make sure they select the right product and we encourage them to ride.

Promoting <unk> day, and the woman off on the road and the deep the program.

Writing Education, then I think it's a combination of all of this debt is giving dose incredible result.

Okay and was that the first time that you were asking these questions about <unk>.

Purchase instead of traveling and Covid distraction just to see if if we have some benchmark has that evolved.

This is debt was the first time, we're asking that question and every every quarter.

If you want to do a good server you need a certain number of question that to many but not too little and we tried to remove the 1 that are less critical than it had.

The most relevant 1 on the traveling was the first time, okay perfect. Thank you.

Thank you.

Your next your next question comes from the line of Shawn Collins with Citigroup Research. Your line is open.

Great. Thanks, good morning, gentlemen.

Good morning.

My question is on today's unique inventory environment and connect on on retail results.

Today's lack of inventory on our scarcity of products is certainly a challenge maybe a high class challenge, but still a challenge I wanted to ask if there are any comparable period.

Curious in the past, where you experienced a similar environment.

I'm curious how that may have played out price off itself.

Any historical context might be helpful. Thanks.

Then I would say this.

<unk>.

Interesting question I would say that I saw periods like we're going through with our product line I remember.

<unk> started producing watercraft.

1988.

And in the mid 90, we're not able to supply to the demand for 3 or 4 years. There was no use out there in.

The growth was incredible the nice over the years in our industry 1 product line is taking off versus the others.

But having the whole industry all product line like this I think is the first time in history of force Port.

Okay understand that's helpful. So it really is truly unique maybe just a brief follow up.

As you experienced supply chain challenges on some rising input costs, just curious any any commentary on how well on successfully you are kind of cash on those costs.

Costs Tvs to the consumer.

Yes on the cost side.

Just to give you a sense on the marine where aluminum costs in woods are very critical.

We already announced.

A special surcharge.

That was effective June <unk>.

On the price increase will be announced shortly.

<unk> being effective July 1st with day model year change.

On the power sports side.

Obviously right now many of our supplier our edge.

This all year, we are partially hedged.

And every year, we increase our pricing between 1% to 2% that's typical.

On.

The model year change for RV is July 1st and for watercraft since September and will announce price increase at the model year change than that.

We planned it.

For the.

The <unk> for all of those product lines.

Great that is helpful. Thank you.

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

Hi, good morning.

Can you talk about going back to <unk> can you talk about the ramp trajectory of those extra 50000 units is that a methodical ramp or do you hit the ground running and then also in terms of current tariff same question for Pwc and when will that commence running is that a Q4 Q1 event.

Yes, let's start with you on a story you on a 3 construction is ongoing we already have a team.

<unk> training employee and the ramp up will be on the backend of Q3, then the way you can see it.

Let's say you see the production where the run.

3.4 months. This year. This fiscal year, then you can probably accounts, maybe at 60% something like debt.

Next year, obviously in fiscal year 'twenty, 2 you can calendar, 50% additional capacity, thus far you Ash Street.

Got it that all day and selection will be done for the start of production.

In the fall.

Net mean when production restart in August.

There will be some.

Additional capacity for watercraft.

But project M, which is a new product this is coming in Q4.

Okay, and then changing gears to the cost side of the equation.

The $300 million on cost savings from <unk> 25 is that put on hold or deferred at all with the current dynamics or can you update us on where we are with that.

More on that entails.

While obviously there were many levers to the $300 million cost saving as I said the last time, obviously the team refocused on on.

Making sure we are producing all the units that we can produce.

But 1 of the big pillars of.

$25 million to $300 million is also introducing products with better margins and obviously as you see on.

Performance. This quarter was very strong and some of that is driven by the the engineering that we've done on our product the modularity approach. So so.

So I'm not worried about our ability to get to that $300 million.

Especially with.

We will have again low levels of inventory and what we're learning on sales programs. There are some learnings that will stay with us even when the industry comes back to a more normal way of operating.

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

Or again tough to call, Brian will obviously look forward to updating.

Investors and analysts in the near future on our end 25 plan and we'll give you more color on that.

Thank you very much.

Okay.

Your next question comes from the line of Derek <unk> with Canaccord Genuity. Your line is open.

Yeah, Hi, Al just 1 for me just on the gross margin.

Obviously, we've seen some strong gross margin before on the tier which.

Limited promotional spending and sales programs.

Normalized gross margin in your view changed going forward. It was sort of call. It mid 20% prior to the pandemic has that stepped up in your view.

Well for this year.

We finished last year very strong gross margin on our expectation for this year is that we should be slightly up compared to fiscal year 'twenty 1.

As part of our end 25 planned win and our target to deliver $300 million cost savings some of that margin improvement.

Obviously this quarter, we benefited from a higher proportion of <unk> sales and so that is lifting the margin.

But going forward, yes, I do believe that as we.

We are.

Doing a better usage of our assets.

Continue introducing products with better margins.

We've exited the outboard engine business as well. These are all elements that will help bring the gross margin up.

Okay now Thats helpful and then actually just 1 more on.

R&D tenant typically wrong on like a 4.5% on revenue.

On a percentage of that something we should expect to continue going forward as well.

Yes, yes.

Yes.

Great.

Thank you very much.

Thanks.

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

Hi, good morning.

No question.

Thank you.

Yeah.

Whether or not the supply chain.

Alright.

So would you be wrong.

It's a little bit about that or whether it would be.

Hi.

Slightly Michael.

Guttman.

Yes, good morning, Jimmy Yes, all product line are affected.

And.

And depending obviously on the seasonality.

But between all product line, it's about the same the same.

Challenges that we're facing.

After that and that's where I think our team is doing an excellent job working with our suppliers sometime we try to.

We will allocate the parts to 1 product line versus the others. An example, right now we don't need snowmobile, we producing snowmobile with some missing part that will the veeco will need to be retrofitted, but we have time because.

Snowmobile retail is starting really in the October NAV.

And thats the type of thing.

To optimize the situation, we need to work with our suppliers and we need to work in.

Turning to leave between product line to make sure that we optimize the situation.

To first deliver on consumer orders and try to owners.

All orders from consumer and dealers that we have on that.

Okay.

I think I heard the number but have you guys laid out.

That increased commodity costs.

Sure.

Costs are you on what the law accounts for this year.

Hello.

No I haven't given any color.

On more than happy to do so if I look at Q1 logistics commodity cost side on impact of about 190 basis points on the margin and I am expecting debt to continue.

For the rest of the year, obviously with the higher volume sales.

Sales programs.

Good mix will be able to offset.

A lot of that but the expectation is what we saw in Q1 is going to continue for the rest of the year.

Okay, and then is there any.

On <unk>.

How you think your market share will pan out at the end.

Will you be able to sort of outpace steel competitors on selling the channel is on fall in or on.

Christine can sprinkled equal across the industry.

<unk>.

While obviously with a significant increase in production capacity in the fourth quarter with side by side.

We believe that we have.

Provide us with an important competitive advantage.

And our ability to replenish inventory in supply to demand so that should be driving market share gains.

For side by side business.

Okay.

Again, if you would like to ask a question. Please press Star then the number 1 on your telephone keypad.

Your next question comes from the line of Derrick Johnson with BMO capital markets. Your line is open.

Hey, good morning, I, just want to have the interest question to what Greg Craig asked about.

Retail ordering and.

Do you have in place what do you have in place and policing over ordering since the product is so difficult to get.

At the dealer level and the other question I had was about your own inventory with you on inventory down 34%, but your materials and went up 64.

Have you had mismatches like that before year passed and is there any risk to sort of obsolescence of the wins that you have.

On the books right now.

And good morning Derek.

I will have I will answer the first question set us in the second.

On the allocation.

<unk>.

Obviously seasonal product are very different than.

Off rose on a year round product season on the product like <unk>.

We have a pretty good idea of I mean, we know exactly how each.

Product line performing now each region and each dealer perform and we can plan for our growth the following year and Thats why we have like a target for each dealer and after that depending of how the dealer pre sold a unit or depending on how much you want <unk>.

Unit 4 the following year, it's a discussion with the salespeople then it's not like.

Give me your order and new Youll wish list, we try not to disappoint the dealer by letting dream about the big numbers that we cannot Denver and this have worked very well for everything that this seasonal product on.

On the off road side right now we are working on the location and it's our job to make sure like I answered to Craig that we don't favor a region versus the others.

We are trying also to be fair on product mix, but off road will be on the location till the end of the year.

And on your question on raw material, yes, raw materials and weapons up.

Over $200 million this quarter compared to <unk> 31, no concern on obsolescence that inventory turns around very quickly. So it's a question of getting the missing parts in and retrofitting units. So.

Obviously, the number is high but.

Well under control.

Okay, and then just 1 more if I could see some near the rear here.

On that.

Number of 37% New entrants you said only 7%.

So the purchases were as a COVID-19 extraction kind of curious Don if you asked them, but maybe the second driven derivative of that how many of those people had friends, who bought as a COVID-19 distraction last year, because that was kind of the bull case going forward do you have a bigger installed base more friends keeping up with the joneses things like that.

Yeah.

I don't know.

I don't have maybe my team has but I don't have the answer to the sequential garik.

For sure we see debt.

We see that there is more.

I had a statistic that I can share with you but.

The new entrants are younger.

And then the day purchaser, 42%.

Versus 32% for the purchaser.

More women.

And more family oriented which is all positive.

But I don't have the answer to exactly what you're asking for.

Okay. That's fine. Thank you very much guys.

Net income.

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

Hey, good morning, and thanks for all of the commentary so far I just wanted to ask about.

Your expectations with regards to.

On the promo programs over the course of time, what's embedded in your guidance with regards to the back half of the year on <unk>.

Do you expect.

Current levels to sort of remain in place and then looking forward into fiscal 'twenty 3.

Do you expect that the industry sort of evolved a little bit in terms of how the pricing programs are utilized.

Or do you expect that that normalizes over the course of time.

Good morning, Mark.

When we talked back in March.

I indicated that in fiscal year 'twenty, 1 we had a positive tailwind from programs of about 200 basis points and we were.

Expecting debt 200 basis points to remain in fiscal year 'twenty, 2 obviously with the strong performance we had in Q1.

Adjusted debt assumption. So now we're looking more at a 250 basis point.

Tailwind coming from program.

Next year, obviously, when we turn on the switch on its February 1 the inventory is still going to be lean.

We're thinking about inventory replenishment in fiscal year 'twenty, 2 so it's going to happen more probably in the back half of next year.

We're expecting the first half of next year. It is still to be favorable on the commercial side.

And obviously as I said there are some important learnings that we are seeking from from Covid.

And how we tailor our programs that will stay with us going forward.

And that will provide benefits to obviously the bottom line.

How much too early to call.

Understood. Thanks, a lot.

Thanks.

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

Super. Thank you all for joining us this morning, and just before we let you go we wanted to take the opportunity to invite you to join us for our virtual <unk> and treat will vehicle and see new product introduction.

The event will be held on August 11, and will also feature to the official launch of the project and we look forward to sharing with you more information about this over the next few weeks and we hope you'll be able to join us with that thanks, again and have a good day.

Ladies and gentlemen. This concludes today's conference call you may now disconnect.

Okay.

Okay.

Yeah.

Yes.

Sure.

Okay.

Yes.

Yeah.

Yeah.

Okay.

Okay.

Okay.

Yes.