Q2 2022 BRP Inc Earnings Call

Yeah.

Good morning, ladies and gentlemen, welcome to D. B R. P Inc. Fiscal year 'twenty 'twenty, two second quarter results conference call for participants who use the telephone line. It is recommended to turn off the sound on your device.

I would now like to turn the meeting over to Mr. Philip Chan. Please go ahead Mr. He can.

Thank you Donna.

Good morning, and welcome to <unk> Conference call for our second quarter of fiscal year 2000.

Joining me this morning are.

President and Chief Executive Officer, and Sebastien Martel, Chief Financial Officer.

Before we move to the prepared remarks, I would like to remind everyone that certain forward looking statements will be made during the call and that future results could differ from those implied in the statements.

Forward looking information is based on certain assumptions and are subject to risks and uncertainties.

It should consult prp's MBNA per complexity assemblies.

Also during the call reference will be made to supporting slides and you can find the presentation on our website at <unk> com under the Investor Relations section, so with that I'll turn the call over to Joseph Thank you Philip and good morning, everyone and thank you for joining us I am pleased to report that we concluded the first half of the year on a very strong note delivering.

Record financial results again, this quarter driven by continued momentum across all our product lines.

Our team once again demonstrated incredible resiliency and successful men age through a challenging supply chain and logistic environment, while limiting the negative impact on our dealers and customers.

This resulted in the dealer in the delivery of more units than plant.

I would like to thank our supplier for their relentless effort and for going above and beyond to deliver in a very difficult environment.

Given these exceptional results are.

Our continued positive outlook for the business and factoring in the successful completion of our substantial issuer bid we are increasing our normalized EPS guidance for the year to a range of $33.0 to $84.0 per share.

It's now represent a growth of 53 to <unk>, 81% compared to last year.

You will notice that we widened our guidance range to account for the current environment and ongoing supply chain challenges.

Sebastian will provide further detail on this in a moment.

Let's take a look at key financial highlights for the second quarter on slide four.

Revenue were up 54% to $10.0 billion normalized EBITDA increased 94% to $415 million and normalized earnings per share were up one five time to $91.0

This robust performance was partly driven by higher volume across all our product lines lower than expected sales program due to the continued strong retail demand coupled with very low network inventory.

Turning to slide five for a look at our retail performance for the quarter.

Our north American bars, CT retail sales were better than expected, but were down 19% for the quarter as we were lapping a record quarter last year with retail up 40%.

Compared to the second quarter of fiscal year, 'twenty, which was pre COVID-19.

Our North American retail was up 14%, despite operating with significantly less inventory in the network.

This is a clear indication of continued solid demand.

In fact, our fiscal year 'twenty to Q2 retail is the highest ever recorded with the exception of last year.

A few words on our network inventory.

As we mentioned last quarter historic historically, we have been operating with about 170 days of inventory in the network.

Last year, we were down to about 80 days and in our most recent quarter were down to an average of 26 days.

These low inventory level combined with ongoing supply chain uncertainty are limiting our ability to grow our retail as a result, we expect retail to remain under pressure throughout Q3 and start to grow and improve in Q4, driven by limited by the timing of <unk>.

No mobile shipment and the additional production capacity from you on a street and Kid et cetera.

Looking at the global retail picture on slide six.

Although our north American retail sales were down in comparison to last year was still outpace the industry, which was down mid 30%.

You can notice that our lineup continued to perform well in North America as we've gained market share in most product lines.

Similarly in international market retail sales decrease in Q2 due to the lack of inventory combined with it being a very strong quarter last year, however, compared to their corresponding quarters two years ago retail was up 9%.

With our new product introduction combined with the additional capacity, we are very well positioned to continue to outpace the industry.

Another positive sign is the continued strong traction we are experiencing with new on trend as you can observe on slide seven.

To seize this growth opportunity, we are focusing on key initiatives to attract and retain new entrant.

Our strategy consists of continuing to strengthen our product portfolio and provide a broad lineup a broad lineup of entry level product through innovation.

<unk> and reinventing categories and generating value for customers.

Inspiring them to join power sport by leveraging our best Heather and expanding our offer within on charters Society.

Easing their learning curve to education with initiatives, such as the rider education program and how to videos content theories.

And growing and further developing our community with programs such as woman on the road.

With this strategy, we believe we are well positioned to leverage the growing interest of new customer in our industry.

A recent statistic in decade that <unk> trend represent 43% of our buyers in the second quarter compared to 41% last year.

As a reminder, it was roughly 20% is perpetually.

They are a more varied group than our traditional customer with younger and more diverse people, including more women and families.

In addition, our.

Assuming continued to confirm that these new entrants and intend to remain in the industry with only a mere 4%, indicating having purchased a product as a COVID-19 distraction also the repurchase rate of our customer is higher than what we typically observe.

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

Turning to slide eight for an overview of the key products, we introduced at our risk some virtual can am and sea Doo club that was help mid August.

Once again the event was extremely popular with over 85% attendance by our dealer from around the world. It's also allow us to reach our growing consumer audience at the same time.

In term of product launches on the personal watercraft side, we extended our fishkill lined up with the addition of two key model.

The fish growth frothy at top of the line fishing personal watercraft equipped with many of the key feature of full sized fishing boats and the fishkill scout a more accessible option.

This product has been very popular since its introduction in 2018.

It is the fastest growing segment in our personal watercraft lineup with over 65% of buyer being new and trends to personal watercraft.

With over 50 million anger engler in the U S and over 700 million worldwide. There is a significant market opportunity for the Fishbone lineup.

This is another example of our ability to identify market opportunities and create sub categories.

For <unk> our product introduction include the upgrade of Maverick our engine to 200, thus power, which is a first in the industry.

This new engine power couple with all our with our all new P. Derive roller touch system ensures that we maintain the performance leadership in the sports segment.

The fastest growing category in the industry.

We also introduced new engine option in our utility lineup with the HD seven and <unk> nine that offer leading class borrower and capabilities and we improved the ruggedness and capabilities of the Kingdom ryker rally to maximize performance and comfort off road.

These new product were very well received by dealers and the media and our booking results are tracking very strong.

Turning to slide nine the main highlight of the club was the official introduction of the game changing <unk> switch.

One way we entered the both industry in 2018, we realized there were many opportunities for us to <unk> the pontoon space.

Which account for about 30% of U S power boats and is quite sizable.

In addition, it has one of the fastest growing the rate in the industry with an 8% CAGR over the last five years.

Turning to slide 10.

The switch is a product that combine all the onboard space and stability of our pontoon with the driving performance and the watersports friendly capabilities of our run about.

It provide the most convenient accessible adaptable and fun boating experience.

One of the key innovative feature of this switch is plug in fleet legal inspires to stem <unk>.

Which provides flexibility to change around your interior layout to adapt to your needs as did the evolves.

The boat will also appeal to new borders as it is easy to use easy to duck and is the first ever both to come with the braking system.

It is available in a verity of Len and engine configuration with different package.

At the very accessible price of 17, 999 U S dollar and will be sold through our seafood Theatre network.

The protocols to represent a sizable opportunity for our accessories business.

It is highly adaptable with over 65 dedicated accessories available at lunch.

It is also compatible with all link system.

Production is planned to start in the latter part of the fourth quarter with deliveries expected for the next boating season.

Having talked to many dealers.

Having talked to many dealers. Many are already sold out of model year, 'twenty, two which is expected to be delivered to customers by the end of June and some are taking orders for model year 'twenty three.

We strongly believe that <unk> is a game changer for the boating world as it is a unique innovative product that is well positioned to attract new border and the younger generation.

Over the years, we have proven we are able to disrupt the industry by creating new segments.

We did it with this <unk> spark, which helped the personal watercraft industry grew 86% since its introduction.

And more recently with the ryker, which allowed the three wheeled vehicle industry grew 48% in two years following its introduction.

And now we believe we will do the same in the pontoon industry.

Now, let's turn to slide 11 for a year round product.

Revenue were up 54% to $966 million, mainly driven by higher volume lower sales program and the richer mix for side by side vehicle.

On Saturday July 17, there was a fire in the outdoor storage yard of the U S to Mexico facility.

We're side by side vehicle or produce.

All employee on site were safely evacuated and no damage was caused to the manufacturing facility.

Production resumed on the following Tuesday.

And once again I wish to essentially thank our employee for their quick response.

I am very grateful to the firefighter local businessmen local businesses and the <unk> for their help and support.

Now looking at side by side North American retail.

In the second quarter can am side by side retail was down low 20%.

Outpacing the industry, which was down mid 40%.

As a result can am side by side made some solid market share gain despite being constrained by very low network inventory.

Similarly with closed the North American season at the end of June with an increase of high single digits compared to mid single digits for the industry.

Note that this growth come over and above record level growth last year for the full season, when the industry grew low 20% wildcat them low 40%.

The future looks very from rising for our can am side by side business.

Tumor demand for our lineup remained very strong our new products are very well received and on and on August 23rd We started the production of our <unk> III facility on plan will.

We'll be ramping up through the end of the year to a full second shift and plan to have the full benefit of the additional 50% of capacity at the beginning of January 2022.

Turning to ATV.

And then North American retail was in line with the industry.

For both the quarter and full season.

Both were down in the low 40% for the quarter due to limited product availability and high single digit for the full season.

Now three wheel vehicle.

Ken <unk> will vehicles continued to perform well compare to the industry gaining market share both in the quarter and season to date each remained our fastest growing brand in the motorcycle industry. So far this season.

The rider Education program registration continues to trend above expectation.

In fact, we continue to be successful at attracting a younger and more diverse customer base with a high level of new and trend woman and visible minorities.

This trend is very positive and we are very excited at the outlook for three wheeled vehicle business.

Turning to seasonal product on slide 12.

So there is an old product revenue were up 78% to $575 million driven primarily from higher shipment a richer mix of personal watercraft and lower sales program.

Now looking at personal watercraft retail.

<unk> continued to gain market share in the quarter.

In North America in North American retail season to date is now up low teen percent compared to an industry that is down low single digits.

Currently the brand holds the number one market position in all segments in the industry.

Based on the way the season is performing we expect it to.

<unk> with the very low level of network inventory again, this year, which will lead to strong shipment in the next fiscal year.

For snowmobile we are currently in the slow period of the season.

Our retail was down due to limited product availability as we ended last season with an all time low level of inventory in the network.

We are very well positioned for the upcoming season with a record level of unit pre sold the consumer.

Continuing on slide 13, with a look at the <unk> port part accessories, and apparel and OEM engines.

Revenue were up 19% to $249 million for the quarter year.

Year to date revenue increased by about 30% in each of our product lines.

This growth is driven by higher volume of replacement part due to increased product usage combined with strong unit retail which has generated.

So it generates increase accessory sales across all product lines.

Our extensive lineup of parts apparel and accessories, notably our appropriate Terry Lynx system is driving strong consumer demand.

Now looking to marine on slide 14.

Revenue were up 56% to $125 million.

The benefit from a favorable mix of both sold and lower sales program more than offset the lower volume of outboard engines sold due to the wind down of it in the room.

Looking at retail sales.

Both <unk> and many to sell retail decline in the quarter as sales were more made earlier in the season compared to last year. However, both brands are performing well year to date with North American retail up low single digits for a mechanism in the high teen percent for magnitude.

As for Cal water, we were at the end of the boating season in Australia retail continued to perform well and was up high single digit for the quarter.

We also host a virtual event with our new mechanism and many two <unk> three weeks ago.

Where we introduced our 2022 lined up.

It included improvements to our <unk> pro CD <unk> bolt into our menu to XT.

<unk> and Nellix models.

We are pleased with the progress we've made in our marine business and are looking forward to launching new boats with the growth engine in each of our three brands in the second half of 2022.

With that I turn the call over to Sebastien.

Thank you Jose and good morning, everyone as Jose mentioned, we carried our strong momentum into the second quarter and closed the first half of the year with very solid results that came in above our expectations.

This performance was broad based with robust revenue growth across all product categories and regions from a profitability standpoint, we had another exceptional quarter as we generated $570 million of gross profit on a $10.0 billion of revenue, resulting in a 29, 9% margin.

To last year, the gross profit margin benefited from better fixed cost absorptions as last year's second quarter margins suffered from the temporary production shutdown.

The exit from outboard engine business, especially as we had additional costs related to the wind down of evergreen in last year's second quarter.

And a positive impact from higher volume favorable product mix and lower sales programs, which were partly offset by higher production and distribution costs and unfavorable FX.

This strong gross profit generation and lower than expected operating expenses, we delivered $415 million normalized EBITDA and generated $91.0 of normalized diluted earnings per share worth noting that these were our strongest quarterly results ever.

From a cash flow perspective, we generated $417 million of cash from operations and invested $217 million in working capital, notably as we continue operating with higher level of work in process inventory and are managing through supply chain constraints.

We also invested $132 million in Capex and returned $361 million to shareholders, primarily through the successful completion of our SCB under which we repurchased three 4 million shares turning to slide 17 for a more detailed look at the key drivers of our normalized net income growth for the quarter.

As you can see from the chart our normalized net income grew $149 million from last year's second quarter, driven by a positive impact from volume mix pricing and sales program representing $393 million.

Which was partly offset by the negative impacts of increased production costs and depreciation expense for $66 million higher operating expense for $83 million as we continue investing for our long term growth higher normalized tax expense for 52 and unfavorable foreign exchange variation for $43 million.

This resulted in $250 million of normalized net income for the quarter coming in stronger than expected, mainly because we were able to ship more units than we had initially planned we benefited from lower than anticipated sales programs and we continue to diligently manage our spending which resulted in lower operating expenses versus our plan.

Now moving on to slide 18 for a quick look at our network inventory situation.

So as I mentioned, we continue operating with very low levels of network inventory, which is limiting our ability to generate retail growth.

Fact, despite increasing our production output in the quarter consumer demand for our products continued to outpace the capacity of the supply products and resulted in an inventory decline of 51% versus last year and 76% versus three years ago. While this situation is definitely not optimal we believe that low levels of <unk>.

Inventory are widespread across the industry and once we gain the full benefit of our additional production capacity in the coming months and supply chain disruptions are mitigated we will be very well positioned to take advantage of the sustained consumer interest in our products.

Now, let me provide you with a better context before getting into the updated guidance by looking at slide 19.

As you know many industries, including power sports have been dealing with supply chain challenges for the better part of the year. So far we have enabled to manage through this turbulent while limiting the negative impact on our business still we remain vigilant as the situation is constantly evolving with pressure coming from the semiconductor short.

<unk> Covid related factory shutdowns, especially in southeast Asia, and labor shortages in North America, while we have limited direct exposure to these issues many of our suppliers have to deal with such challenges on a daily basis.

Pressure on their operations and limiting durability to commit the firm delivery schedules for parts of.

As such we expect increased variability and the timing of reception of components from suppliers. During the second half of the year. This may impact our production schedules and the timing of product shipments over the next few quarters.

Still we continue to aim to deliver on all dealer orders, we have on hand, and we plan to continue to produce at capacity.

Store or ship to dealers, some unfinished products and retrofit them once missing components are received.

Based on the visibility we have to date, we expect that these supply chain issues will weigh in more on Q3, which will limit our wholesale in the quarter.

Nonetheless, we expect to be in a good position to retrofit most of the units in the fourth quarter, leading to a much stronger fourth quarter. While we are comfortable with our plan. We are operating with more visibility than we usually do which may lead to delays in shipments of units between Q3, and Q4 and even between Q4 and the first quarter of <unk>.

Next year.

This is why we have updated our guidance with a wider than usual range as you can see on slide 20.

In light of the better than planned results achieved so far this year and the continued lower level of sales program throughout the rest of the year, we are comfortable increasing the higher end of our seasonal and power sports PNA and OEM engines revenue guidance ranges and we're also maintaining the higher end of the year on products and marine revenue guidance ranges and tax.

Despite the potential supply chain headwinds note that we have lowered the bottom end of the year on products revenue guidance range to reflect the impact of the losses the units in the fire with these adjustments. We now expect total company revenues to grow between 27% and 35%.

We have also adjusted our profitability metrics to reflect elements previously mentioned and to account for higher commodity costs, which are mostly offset by pricing increases and additional cost, resulting from inefficiencies due to the ongoing supply chain initiatives.

Following the adjustments in accounting for our strong <unk> results, we now expect normalized EBITDA to grow between 30% and 47%.

After taking into account, our revised assumptions for financing costs and depreciation expense in.

And using a lower share count as a result of the ESI.

Our normalized EPS is now expected to end between 825, and <unk> 75, representing a growth between 53% and 81%.

As for expectations in terms of quarterly results for the back half of the year as I already mentioned our objective is to deliver on dealer orders, we have despite managing through supply chain pressures. We expect that these issues could weigh more on Q3, and then improve as the year progresses to provide more upside in Q4.

At the midpoint of our guidance, we would expect normalized EPS to grow about 40% in Q4 on that I will turn the call over to Julie <unk>.

To conclude we've delivered record result in the first half of the year.

We're able to achieve this thanks to our solid execution across the company and the very strong consumer demand.

Short term, we will concentrate on delivering a solid second half of the year.

We will focus on managing and mitigating supply interruption and deliver on our production plan.

Our objective remains to deliver all order on hand.

Based on this we are confident in our ability to achieve our revised guidance.

Furthermore.

We are confident about the future as we expect to benefit from numerous key initiative and trend including new.

New product introduction.

As the project goes and <unk> switch the.

The latter represents a new business for us and is already proving quite from rising.

You can expect more product introduction over the next three years than we have done in the past.

The sustained consumer interest in forest Port and marine.

Our strategy for a new entrant, which is progressing well every day that passes provide us with greater confidence in our liability to turn them into lifelong customers.

The upcoming significant inventory replenishment cycle that is expected to take place over the next 12 to 18 months.

The additional production capacity from you at Ace III and pivotal.

Which is expected to have a positive impact over the next two years starting in fiscal year 'twenty three.

And the electrification of all our product lines.

As you can see we are well positioned to drive long term growth and continued to outpace the industry.

We are confident in our ability to execute our growth strategy in fiscal year 'twenty three and beyond.

I insist.

On expressing my sincere gratitude to our employee dealer and suppliers for their collaboration commitment and patients during these challenging times.

In this ever changing world their agility dedication and capacity to six fully managed is impressive and truly make the difference.

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

Ladies and gentlemen at this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad again that is star one to ask a question.

Withdraw your question press the pound key.

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

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

Great. Thank you two questions, obviously, a fantastic quarter.

I'm wondering I mean, we hear a lot from dealers about some Oems that have made market share gains.

They don't have as much.

That's an availability issue.

Wondering some of them are newer entrants.

Into the offshore market and I'm wondering if those are accounted in your industry measure of market share in that data and then I guess sort of either way I Wonder if you have general thoughts on some of these new entrants.

You're kind of taking advantage of the lack of availability.

Just kind of.

To the degree that could be sort of making inroads into the future. Thanks.

Good morning Robin.

I mean.

For sure in the supplier restriction that we have in the network from time to time, we hear dealers that are saying that they have lost some customers but to be honest. It's minimal is quite small number.

And what we are very happy with like I said in my my intro.

This dose new and trends are growing we're at 43% in Q2 versus 401, and you know our historical average was 20%.

But more and more we surveyed them quarter after quarter, we see that <unk> intends to stay within the industry.

And that he purchase cycle is better than everything is is.

Pointing in the right direction to make them have lifelong customer and obviously right now when we do our projections for the future.

We call them in because we believe that that trend.

Trend is too strong.

Not to count them in our future planning.

Okay, great. Thank you that's very helpful.

Second question is looking at your comment about.

Retail sales for the quarter comparing to others comments about the June quarter, It looks like July.

With.

A bit worse in terms of product availability and retail not surprising.

Just looking at your guidance.

I guess, what gives you the confidence that Q4 logistics would be getting so much better I mean is it just that you feel like it can't possibly get worse or I guess just to try and get that.

That conviction that things sort.

Sort of continue to be at these difficult levels.

Q4 potentially.

And then obviously right now.

Like Sebastien said, there is three area of challenges to semiconductor.

<unk> is a restriction impact on manufacturing operation into South Asia, and the labor Sharp age mainly in North America and the second one.

The COVID-19 risk jurisdiction in South Asia.

OEM over they are a company, who manufacture components are getting better with <unk> measure most of them vaccine themselves their employee.

And we believe.

Are we going in the right direction.

In terms of semiconductor.

Many chips are produced in those country.

And there was a fire in Japan.

After that there was a few factors that he was shut down in Malaysia.

Now those <unk> are back to normal.

We've talked to our supplier who supply to us electronic component like engine computer or a cluster for the vehicle.

We believe with what they know today that this situation will improve on the backend of 2021 and through 2022.

I don't think it will come back to normal in 2022, but we are confident in the <unk> from where we are today.

Situation will improve in the next two.

<unk> to 18 months.

And Thats why our guidance as a wide range because of with what we know today.

We will be closer to the high end if there is some other uncertainty it will be more difficult, but that's why we decided to widen the range.

Okay, great. Thank you very much.

Your next question is from the line of Joe <unk> with Raymond James.

Thanks, Hey, good morning, everybody.

First question is back to the guidance EPS guidance in particular, the raise looks to be largely margin driven along with a lower share count to some degree.

Better than you thought so far this year from a profitability standpoint is it mix is it.

Input costs et cetera.

Good morning, Joe obviously, there are many factors.

That are driving the financial results there are a lot of pluses and minuses, but the big the big pluses are obviously.

Sales program or the promotional environment is still very healthy for Oems.

And for dealers as well and so we don't have to offer as much promotions as we initially anticipated and thats what drove the better results in the second quarter.

Obviously with the high level of demand in this.

We'll call it the scarcity of production.

Oems and we are more selective in which product we make in the us that makes us a richer as well.

That's a plus.

Obviously, there are some headwinds that we're seeing on commodity cost and logistics, but we're able to offset some of that with.

With pricing.

And surcharges as well.

Got it that's helpful and just maybe secondly, I apologize if I missed this.

In terms of your full year outlook for retailers, it's still flat to up high single this year.

Yes flat high too.

Hi.

Low single digit.

Right number obviously year to date were flattish Q3 is going to be a tough one because we are growing into the third quarter with Super low network inventory and with the supply chain challenges that Joe just talked about is going to be a challenge.

The expectation is for Q4 to be up and for the full year to be flat to low.

Low single digits.

Okay, great. Thank you.

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

Okay.

Hi, good morning.

I just wanted to get a bit more clarity on your guidance for the back half.

Youre seeing that you expect Q4 EPS to increase at 40% year over year using the midpoint.

So that would suggest that.

Q3 would be weaker.

And it.

Could be down even.

<unk> lowered in two years ago.

So just.

Just trying to understand exactly.

What's what's.

Whats putting pressure on your Q3.

Looking at your inventory levels on your balance sheet it doesn't look super low.

As there have been some pull forward sales into Q2 or late just a bit of color would be helpful. Sure.

Good morning.

First yes, as I said earlier Q2 ended better because we shipped more units.

Some of that was pull forward. So we had finished good inventory that we were able to.

Wholesale in the quarter, so that obviously reduces the units available for sale in the third quarter, but the big challenge in the third quarter is as I mentioned earlier, it's the supply chain and our ability to produce finished goods. We have we will have more retrofit units at the end of Q3, then we have at the end of Q2.

These units will be reworked and the our expectation in the fourth quarter. So from a volume perspective, obviously that is going to impact Q3, and thats why the profitability will be down.

But as <unk> indicated we talked with our suppliers and we have they give us visibility as to when.

And the ranges of supply and so we're confident that Q4 is is.

Is the number that we can deliver.

Okay.

And then again, you've got some comments talking about 2023.

23 talking about Youre expecting further growth just to clarify when you're talking about a shorter quote are you talking about revenue growth or EPS growth.

It's both.

We itemized what the opportunities are for next year, obviously, we have added capacity.

We have to do switch.

We have as well new products that we'll be introducing and there is a obviously.

Extremely low level of inventory in the network that needs to replenish so from a topline perspective, we anticipate growth in from a profitability perspective as well.

You take the midpoint of the guidance for this year.

Our expectation is that we are able to generate double digit EPS growth next year.

Double digit EPS growth for 2000 for fiscal 'twenty three.

Okay perfect. Thank you.

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

Hi, good morning, Thank you.

I wanted to talk about your distribution process.

So you don't ship preorders Polaris points to its use of preorders is.

An asset as well since retail flow management can you talk about Europe process, and how you distribute and why it's better than the competition.

Yes, good morning direct than maybe.

My answer would be a bit alone, but I will give you the big picture as <unk> said.

The main challenges right now are semiconductor COVID-19 restriction in the southeast is labor shortage in North America and.

And we believe all the OEM are facing the same challenges that were not better than the others.

But the way we do it first we.

We keep we try to keep what we control our production planning very stable, we don't want to change production schedule.

And for watercraft, and snowmobile and three wheel, we allocating product for one year.

<unk> gave us the mix and the wish list, but when the booking is done we freeze it we tried to freeze it for the year on our site.

For ATV side by side right now we are locating the product by a period of three months and again, we try to freeze what we produce to minimize.

Interruption from hour hour and.

After that as we work with suppliers to optimize the supply.

And because we have a diversified product portfolio and the geographic diversification, we try to allocate and prioritize component.

Spending of the retail season right now if we have a cluster.

Put it on the snowmobile instead of a watercraft because nobody to watercraft me.

The peak season is next next spring then this is how we prioritize component between product line.

And also we took the decision with the dealer we consult a few key dealer to retrofit to.

To produce with missing part then we will retrofit unit in our factory and at the dealer level.

And the goal is to other all orders and our team is very agile, but disciplined to implement those principal then that.

That's how a recipe.

So far.

Obviously, perfect, but it's working quite well.

Okay, and one more just could you quantify perhaps the order of magnitude the contribution expected from switch and we hear sellouts and mildly yourselves, but.

But I really don't have any idea of how to model switch right now so.

What should we anticipate in terms of top line contribution.

But here the boating industry, you know is a $20 billion.

Plus business and this is a big opportunity for us and just to give you a sense.

We estimated that this calendar year of 2021, the pontoon industry in North America will be about 80000 units.

But there is a fleet of used product. It's about 600000 units that had been produced in the last 15 years and we know what that switch like spark will we'll have to track to the us market the <unk> <unk>.

We believe quickly switch could grow the industry from 80 to 100000 units a year, let's see in the next three years.

And we targeting 15% market share.

And then.

We believe that twitch could become a $500 million of business.

In about two years midterm.

Timeline.

Okay. Okay, I can work with that thank you.

Thank you.

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

Yes. Good morning, just with regards to the labor situation just wondering if there's any effect.

In your in your Mexico.

Operations.

Good morning, Mark to be honest.

The labor situation in Mexico is good.

It's.

We don't have any labor shortages in Mexico and this is obviously with now four factory in the country. This is giving us some flexibility.

In Europe, Finland contribution.

The same thing not much labor difficulty, obviously, Canada and United States are more difficult affecting all of our manufacturing side about thus far supplier, but in Mexico is very well very good.

Okay excellent. Thanks.

And then could you.

That last answer was very helpful with regards to the switch.

Can you give us a sense of how the capacity for that will be ramping and then also anything you can comment with regards to the same idea for ghost and then also how that factors into your Capex plans for fiscal 'twenty three.

And then some of the capacity.

And in.

In any of our new product line, where all the ways.

And our capacity our capacity into phase than right now phase one is ready.

As Youll remember the hall the month arise hall will be assembled indicated that all shipped to sort of <unk> and the production will start at the end of Q4.

But capacity with what we see right now the demand obviously is very good.

Units are already pre sold to consumer and we are ready to.

Two to increase the second phase of capacity, if we see that the demand is there it's a bit too early to call the shot but.

Like I said I mean, we and then we believe that the pontoon industry North America could be in the range of 100000 unit.

Fast and we are targeting.

15% market share then we're ready to grow if we needed to invest in more capacity if the need is there.

On your question for Capex for next year.

This year is a big year for Capex investments almost $600 million of.

High end of the range.

We are investing this year in the assembly line capacity, we will have investments next year on the manufacturing side.

Powertrain Pwc, so I'm expecting to get to to have a sustained investments next year.

Probably in the range of where we are this year, obviously, we're investing in new products as well.

And thats requiring capex so.

And Julie mentioned that where our pace of introduction is going to be high in the next three years and so obviously that comes with Capex.

Okay. Thanks, very much I'll pass along.

Thank you.

Your next question is from the line of Xi'an, <unk> with Exane BNP Paribas.

Hi, guys. Thanks for the question.

I wanted to dig into slide 19, a bit more.

So you show how much you have expected production I'm just curious how does that compare to production and there were no supply chain disruption full capacity, how does that 20% higher 30% higher.

I think it will be.

Matt.

Yes, when I'm looking at Q3 versus a year ago capacity is expected to go up.

DIGIPASS.

That's we'll call it the total output.

As units that are going to be available for sale and also units that would be retrofitted.

And if youre looking at Q4, Youre going to see that line actually up versus Q3. So further increase happening in Q4. So we are running at almost full capacity, we could produce more of the supply chain disruptions or not.

As Bob but we are taking advantage of all of our all of the ships available to produce units.

Okay got it and then can you maybe put into context Q to.

Q4.

You're showing you're talking about improving the supply chain.

Is it.

Even better than Q Q2, or is it kind of getting back to Q2 after it maybe Q3.

Although I think the first half of Q4 is still going to be tight probably in the bottom end of Q4, that's when things will be more normalized in terms of output. Obviously Q4 is going to be higher than Q2, because now we have the new personal watercraft capacity, that's coming online and we also have.

<unk> III thats going to be online in the third and fourth quarter. So so higher than Q2 in terms of output yet.

Okay got it thank you.

Thank you.

Your next question is from the line of Dan Katz with Morningstar.

Hi, Good morning, I actually just wanted to piggyback on that question because.

Thank you.

Looks like there's a little bit.

Flat.

And the capacity utilization in manufacturing chain, but I think you articulated that.

It would be something like 12 to 18 months until on the dealer channel was replenished and I guess I was expecting it to be a bit longer given that.

Recap retail demand when theoretically be significantly higher.

That was actually inventory in the channel sell.

Is there a way to reconcile those.

Right.

Can you feel more confident that that's the right timeline to get back to the appropriate inventory levels.

And good morning, just to come back on Europe capacity use typically.

If you look historically, our second half is always has been stronger than our first half because we introduced new product, let's see.

For the new season, and typically our factory for watercraft and snowmobile oldest seasonal product in year round product are running at full capacity obviously.

Right now with Covid that all new line for watercraft.

And you want a three that is.

Ramping up.

Capacity will be more in fiscal year, beginning of 2022, but we always been using our.

Our factories almost up Max on each.

Okay from there maybe on your inventory question.

We finished Q2 with the lowest level of inventory there since the beginning of the pandemic inventory in Q2 was actually down 25% compared to Q1.

So our expectation is that there is going to be no replenishment. This year recognition thats going to start next year at the end of next year and into fiscal year 'twenty four thats, our expectation for core replenishment.

Okay, and then for with inventory does that can you sort of walk us through your expectations of what that looks like over the next few quarters.

The supply chain becomes less strangle. Thanks.

It's still going to be it's still going to be tight Thursday, obviously, there is a.

A tailwind of demand there consumers are waiting for their products. So everything that we shipped to dealers in the.

The next few quarters.

Most likely going to be retailed very quickly you mentioned that a lot of dealers are resold bolt on switches, which is going to be holds a wholesale up into June next year or so our.

Our expectation is that as there is a backlog of demand.

We won't see inventory replenishment happening in the next few quarters and it's only in the back half of next year that we should see.

Inventory starting to build up.

Okay.

First of course.

Thank you.

Your next question is from the line of <unk> <unk> with Chardan capital markets.

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

With respect to fiscal year 'twenty three.

You may be talk a little bit about the margin expectation and also could you quantify it.

The size of the inventory replenishment and whether it's still $4.0 billion of potential revenue over a 12 to 18 months period.

Well, obviously for next year, we are expecting some headwinds.

Obviously commodity are going to continue to be a headwind, but we should be able to offset that through pricing.

If I look at this year expected EBITDA margin is about 17% to 18% I would expect that next year as well programs are going to be probably a headwind for us, but obviously, we'll be benefiting from the increased volume and better asset utilization better operational leverage and also.

Our mission 2020, you all know that we have some cost saving targets. We'll also be getting those as we introduce new products with better margins. So our expectation is that margins should be similar to what we've had this year.

Okay, that's great and would you be able to quantify the size of the inventory replenishment.

Yes.

Well as I said the inventory is extremely low.

This at the end of Q2 was a record low.

When you look at the historical levels, where we were obviously the industry has grown have grown a lot.

See if I can simplify it for you the inventory replenishment opportunity is almost equivalent to a quarter of wholesale that's what it could be.

Okay, Okay, perfect and last one for me you already provide some color about the switch in terms of market size.

The road, but could you maybe provide some color about the mix and level of accessories orders, so far versus the initial expectation.

Yes, good morning by the way.

Difficult.

If you remember just to give you a sense for where all the analysts and the investor.

The switch if you go the low the low end there come back 113 foot, it's starting up $18000.

The 21 foot crew will go up to 36 five.

But you can have some package as you know we have three package we have.

The.

Tree package, if I gave you. The example of the water Sport and fund package then it's a package of $7000 then you should say.

Our crews 21, which retails for for the $36000 and you had the water and fund package you ending up at $43000 than it is anywhere between 18, and I would say $45000.

And right now it's a bit early.

Let.

Let a few order into the system, but I would say, we tracking slightly above $30000 U S.

Okay. That's great color. Thank you very much again and congratulations.

You bet.

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

Hey, guys. Good morning, I just wanted to follow up on some of the expected tailwind from the Juarez facility. I think you made the comment that youre still expecting that 50% capacity boost by January just given how tight the supply chain is today can you maybe give us a sense for when you started to make some orders with suppliers just how good the line of sight as to ramp it.

It seems like a big ask for four months from now.

Yes. Good morning, then then obviously the again I'm coming back to the.

The supply chain right now the main difficulty is semiconductor.

At the beginning of 2021 and we had lots of different component that was difficult.

But you know going from one plastic to the others.

I think that now we manage well and sometime its more expensive, but we're doing well and right now the roadblocks that we see for growth next year as the semiconductor and like we've said.

That's fire and unite into Japan factory.

Some difficulty with some macro chips supplier in the <unk>.

Asia, but now situation is getting better then went from where we start today.

We believe in our component suppliers say the same debt this will improve with some ups and down and we are right now planning with them too.

For our growth in fiscal year 'twenty three.

And right now this is our plan.

Planning for the growth and we will manage to reach there.

Makes sense, if we just take a step back and look at some of the sort of the macro side of the equation the consumer confidence numbers in the U S for August pretty big step down versus July are you seeing.

Some of the forward indicators, whether it's sales leads or credit applications start to mirror sort of that broader macro backdrop or is the vehicle space still sort of a good contra indicator to where if people really are spooked about delta traveling that theyre sort of pivoting towards.

Some of these safer.

Nickel discretionary purchases.

And I think our industry might be a bit different than general consumer demand and a sense of that.

The COVID-19 restrictions forced many people to stop traveling.

Now people are restarting to travel but.

<unk> it will be more complicated it will take maybe a few years before it's back to what it used to be pre COVID-19.

And for US, we're still happy to see that.

The ratio of new entrant buying our product.

And when we look at those new on trend and.

And we serve them.

They are more family oriented.

More women they are younger and even their household income have increased.

Versus the traditional buyer that we had.

I think thats why we are quite optimistic about our future because.

We believe that those new and trends could change the dynamic into our industries.

Okay. Thanks, guys.

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

Hi, good morning.

Thanks for taking my question and I think we'll get there can start date.

And for him today.

Couple of questions for you guys could you speak to your capital allocation preferences going forward after that wrap up off the wire thats complete.

Yes, good good morning, obviously.

<unk>.

Where we prioritize capital deployment, we've invested in Capex and that's always been a priority of us investing in organic growth, but we've been active in terms of deployment for share buybacks as we've done in the last quarter.

Our balance sheet is very strong.

So we have obviously options to deploy capital going forward.

And we're always mindful of what's the best opportunity for the business that drives the better returns. These are discussions we have regularly with our board and with management and as I said next year. Our expectation is we will have another big year in terms of Capex investments as we continue investing in new products, such as electric but all.

So just new introductions that we've done with the switch.

That's really helpful. Thank you.

And then as a follow up.

I know limited promotional activity. It was a factor this quarter in terms of the gross margins, but what do you view as the.

More normalized gross margin target looking forward.

This quarter, we benefited from a good mix and also a better sales incentive my expectation for the full year is that we will probably get a 300 basis point positive coming from programs that would be versus fiscal year, 'twenty not last year, but versus fiscal year, 'twenty and going forward the.

One is that we probably keep a 150 basis points of that.

That's great. Thanks, a lot.

Thank you.

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

Thank you. Good morning, this is negative that on for Brian.

Understandably there are challenges in securing semiconductors and components, but can you just talk about your ability to secure those components given the planned increase in your capacity and did that contribute at all to the outperformance relative to the industry in Q2 and any thoughts you have all that dynamic for the second half of the year.

Then on securing obviously with the shortages that is happening in the world.

Paul.

Electronic supplier are asking for better visibility long term then.

We gave to our suppliers our need for our fiscal year 'twenty three a few months ago. There was no surprise, there and we have to commit maybe a bit longer than typically.

In the past.

Then that's why our supplier know exactly.

What we expect to produce next year.

We know the <unk>, where it will be tight and we're working to improve either capacity you invested more tooling.

We are been working on this for the last few months.

And that's why we are again, we believed us from where we are today thing will improve with some ups and down but with what we know we believe it will be better but it will last probably till the end of 2022 and on your question on the on our performance in the second quarter compared to the overall industry.

Obviously, our teams have been doing a phenomenal job, but it is I don't want to say a nightmare to manage but it's a daily battle to make sure we get the parts necessary to build the units than we've seen in certain product lines, where we've gained significant market share in the second quarter and we believe it's because we've been able to produce more units that meet consumer demand.

And other Oems.

And so obviously, that's a kudos to our team.

But obviously, we need to continue focusing on delivering great results in the next few quarters.

And just secondly is there anything you can call out in terms of the operating expenses being below expectations in the quarter. Thank you.

Tight management of expenses, obviously last year, we went through Covid, we reduce cost significantly. So this year. This quarter, we saw an increase in overhead expenses.

But obviously, we're mindful of making sure that we spend money if necessary.

Especially on the marketing front.

Obviously, there is scarcity in the network, there's good awareness for our brands and so sometimes we modulate what expenses, we do based on.

On what's needed.

Thank you.

Your final question comes from the line of Craig Kennison with Baird.

Hey, Thanks for taking my question. This has been a very helpful call. Just a quick one well the supply chain issues that youre seeing have any impact on your electric vehicles timeline.

For the time.

No. We obviously we are at the period, where we are building.

Where we're developing the product.

And it's the engineering work and building for the type of <unk>.

No delay on that program.

Great. Thank you.

Thank you very much.

That ends the question and answer session are there any closing remarks.

Yes.

Thank you all for joining us today, and we look forward to speaking with you again for our third quarter conference call on December one thanks, again, everyone and have a good day.

This concludes the DRP Inc's second quarter results conference call. Thank you for your participation you may now disconnect.

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