Q4 2022 BRP Inc Earnings Call
Good morning, ladies and gentlemen, welcome to B R. P inks FY 2022 fourth 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. Phillipe Duchenne. Please go ahead Mr. Gershon.
Thank you Julien good morning, and welcome to <unk> Conference call for our fourth quarter and year end results for fiscal 'twenty.
Joining me this morning are.
President and Chief Executive Officer and <unk>.
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 the actual results could differ from those implied in the statements.
Looking information is based on certain assumptions and is subject to risks and uncertainties and I invite you to consult <unk> DNA for a complete lease up.
Also during the call reference will be made to supporting slides and you can find the presentation on our website at <unk> Dot com under the Investor Relations section, so with that I'll turn the call over to Jonathan Thank you for that.
Good morning, everyone and thank you for joining us.
Please turn to slide four.
I am very pleased with our fourth quarter performance, which concluded an exceptional year with delivered record annual financial result, reaching the highest revenue and profitability in our history.
Our team continued to gain market share in our product line in the <unk> industry.
While managing to supply chain pressure demonstrating solid execution once again.
In fact, our manufacturing of GDP allow us to better serve our dealers and customers alike.
Moreover, during the year with delivered capacity expansion project on time and on budget.
Our new <unk> III facility added about 50% of side by side capacity and our kitted that'll expansion added about 30% of personal watercraft capacity.
In addition, we strengthened our industry leading product portfolio.
We introduced several new market shaping product in our product line.
And the highlight of the year was the introduction of <unk> switch.
<unk> expanded our addressable market positioning us well to continue to grow in the coming years.
In short with delivered an exceptional year, despite the turbulence caused by supply chain disruption.
Now, let's turn to slide five for the key financial highlights of the year.
<unk> delivered a record financial result on both our topline and bottom line hitting is very high on several financial matrix.
Revenue ended the year at $7 $6 billion.
8% over fiscal year 'twenty one.
This growth was driven by higher volume across all our product lines and favorable pricing.
Likewise, our profitability reached new Heights.
Our normalized EBITDA was up 46% to $1 4 billion representing.
Representing a margin of 19, 1%.
And our diluted normalized earnings per share grew 84% to reach $9 92, ending above our guidance range of between nine and $9 75.
Turning to slide six for a look at our North American power sports retail performance and market share for the year.
As you know fiscal year 'twenty two was marked by continued consumer demand for our product.
However, our low level of network inventory, coupled with the ongoing supply chain constraints limited our ability to fully meet demand.
Fill in this context, our team allow us to outpace the industry.
Our retail was down 6% for the year compared to the industry, which was down mid teen.
As a result, we ended the year with about 30% market share gaining about 3% point over fiscal year, 'twenty, one and about 10 percentage points over the past six years.
This solid performance is a testimony of our continued agility to meet consumer demand.
Now turning to slide seven for a brief look at our Q4 retail performance.
Our retail sales continue to be constrained by product availability in the fourth quarter.
Taylor, who were able to outpace the industry in North America, representing over 70% of our revenue.
We're also able to outpace the industry and gain market share in snowmobiles.
As we prioritize the utilization of available components for that segment in Q4 is peak retail.
The retail season.
Let me elaborate further on this on slide eight.
Our modular design approach combined with our diversified product portfolio allow us to leverage common components across our different product line and according to seasonality.
We have illustrated on this slide.
As you can observe we have three model of gauged the compact the mid range and the high end with our utilized across our different product lines.
In collaboration with our supplier, we can prioritize the type of gauge we needed and our team can then decide on which product line it will be installed depending on seasonality.
This modular approach is a competitive advantage.
It provides additional flexibility to navigate to supply chain constraints, especially with the current limited availability of semiconductors.
In Q4, we prioritize our snowmobile and this allow us to outpace the industry in term of total retail performance.
Turning to consumer demand on slide nine.
Consumer interest for prior sport is not slowing down.
The momentum with preseason customer deposit for personal watercraft, and snowmobile is continuing and reaching a record level.
As of March 30, <unk> in North America personal watercraft customers certificate for season 'twenty, two are up over 25% and snowmobile spring unit booking for season 'twenty three are up over 100%.
In addition, there are many signs pointing to sustained strong level of consumer interest in power sports.
There is a continued influx of new entrants.
Website traffic remained elevated.
And Tito switch and can am off road vehicle are also seeing strong momentum with customer preorders.
So all in all we are well positioned to capitalize on continued interest in part is important.
Now, let's turn to slide 10 for a year round product.
Revenue were up 12% to $863 million into fourth quarter.
Let me provide a brief overview of our north American retail performance.
Our retail slightly lag the industry in Q4 for all of our product line, including side by side ATV and <unk> will equal as it was limited by supply chain disruption and our decision to prioritize snowmobile production.
However season to date side by side and ATV outpaces the industry.
While it is still early in the season three wheeled vehicle lagged the industry also due to a change in production schedules favoring snowmobiles.
All in all we are pleased with the momentum we are seeing in all product line.
Our well positioned to continue to gain market share driven by our strong lineups.
A quick update on capacity expansion project and side by side vehicle.
We have completed the ramp up of you at a street, which provide us with 50% more capacity compared to fiscal year 'twenty one.
In addition, remember that last quarter, we announced the start of the phase two expansion of you on a street, which plan to effectively double production capacity at that facility.
The production ramp up is forecast to start in the first quarter of fiscal year 'twenty four.
With this additional production capacity, we are in a solid position to gain from the strong side by side demand.
Turning to seasonal product on slide 11.
Seasonal product revenue were up 56% in Q4 to $1 billion.
Let's start by looking at snowmobile.
11 months into season 'twenty to the North American snowmobile industry is down in the low teen percent.
While our snowmobile retail is up low single digit percent.
Significantly outpacing the industry.
We reached a record high market share in North America in Q4, and this momentum continue in February .
We are experiencing similar success in Europe , where we also reached a record high market share in Scandinavia season to date.
Turning to our model year 'twenty three lineup.
To sustain our momentum we continued the pace of innovation and introduce an all new Rev. Gen. Five platform available in trail in deep Snow segment.
As well as new model significantly designed for new and trends and younger riders.
Early trends in spring unit bookings are very strong, which is positioning us well for success in season 'twenty three.
Turning to personal watercraft.
While still very early in the season, the North American industry retail is down about 20%, while our CDO retail is down low 60% due to a lack of inventory in the network and our decision to prioritize snowmobile production.
However, we have good traction and counter seasonal market.
<unk> is performing very well with over 10% of the page point of market share gain in Australia, and New Zealand. So far this season and retail up over 20% for the fourth quarter in Brazil.
Many signs are pointing to positive momentum for personal watercraft business.
The traction in counter seasonal market and there continues very strong level of customer preseason certificates in North America.
Continuing on slide 12, with the look at power sport part accessories, and apparel and OEM engine.
This segment experienced a similar trend as vehicle <unk>.
Revenue were up 21% in Q4 and surpassed the $1 billion Mark for the first time.
This growth was driven by higher replacement parts revenue due to increased product usage combined with strong unit retail which generated increased accessory sales.
As you can see our appropriate Terry linked ecosystem continued to be popular.
Now turning to marine revenue were up 6% to $135 million in Q4.
Looking at retail sales.
<unk> water is in the core of its retail season in Australia and is performing very well with retail up mid teens percent for the quarter and about 10% year to date.
In North America, we are off season, but our booking for season 'twenty two are complete in <unk>.
We will be running at maximum production capacity all year.
We are pleased with the performance of our both brands, but the next big Leap will happen. This summer when we introduced new model year 'twenty three boat with the project gross engine technology.
With that I will turn the call over to Sebastien. Thank.
Thank you Jose and good morning, everyone. We completed fiscal 'twenty two with record results for our fourth quarter as we continue to experience solid customer demand for our products.
<unk> demonstrated strong execution and delivering on our production plan and also we optimize the utilization of available components to maximize the final assembly of substantially completed units.
With this our revenue has exceeded the $2 billion Mark for the first time in a quarter as they reached $2 3 billion up 29% over last year. Our gross profit margin ended at 26% a slight decline from last year's level due to higher logistics commodities and labor costs related to supply chain disruptions.
We generated $416 million of normalized EBITDA up 33% from last year and our normalized net income came in at $251 million up $89 million from Q4 of last year, driven by higher volume of unit deliveries and favorable pricing which were partly.
Offset by our production and logistics costs and higher operating expenses.
This resulted in a record normalized diluted earnings per share of $3 coming in ahead of our expectations and resulting in a full year normalized diluted EPS that came in above our guidance range would be strong results and a solid free cash flow generation for the quarter of $376 million we are.
Ended the year with a robust balance sheet, notably with $266 million of cash and no net leverage ratio of one two times.
Moreover, following the end of the quarter, we seized the opportunity to increase our revolver capacity by $300 million to bring the total available capacity to $1 1 billion further improving the strength of our balance sheet and our financial flexibility.
Moving to our network inventory situation on slide 15 year over year, our network inventory is up 21% driven by strong shipments of missing components to dealer late in the quarter. Our strategy of retrofitting units at the dealership is bearing fruit as these elevated shipments of components.
And towards the tail end of Q4 allowed us to deliver our strongest February in terms of retail still.
Still network inventory remains very low from a historical perspective being down 60%.
Comparison until the fourth quarter of fiscal 'twenty.
Looking at you had given the continued strong demand for our products and the ongoing supply chain disruptions, we do not expect any meaningful inventory replenishment to happen until late in fiscal 'twenty, three or even in the start of fiscal 'twenty four.
Now moving on to the guidance slide on page 16, as we continued to experience very good consumer interest for our products and we operate with low network inventory, we are well positioned to continue delivering growth in fiscal 'twenty, three notably with total company revenues that are expected to increase 24% to 29.
Percent looking.
Looking at the different product categories year end products are expected to grow between 30% and 35% primarily driven by side by side with the continued robust demand for lineup the new product introductions and supported by additional production capacity formalized three.
Three wheel and ATV are also expected to contribute to our growth seasonal product are expected to grow between 22% and 27% driven by the introduction of the <unk> switch and by strong momentum with both Pwc and snowmobile as you saw with the high level of preseason orders we have for both these product lines.
Power sport DNA and OEM engines revenue are expected to increase between 17% and 22% driven by the increase in used vehicles, resulting in higher replacement part sales and by the growing interest in our accessories lineup.
In Marine revenues are expected to grow between 12%, 17%, notably driven by the planned introduction of new boats in each of our both brands with project goes in the second half of the year.
On the profitability side, our normalized EBITDA is expected to increase between 12% 15%.
Finally, we expect our normalized EPS to end the year between $10 75.
11, 10, representing a growth of 8% to 12%.
Note that the share count does not account for any potential future share repurchases.
Zooming in on profitability, our guidance calls for a slight contraction of normalized EBITDA margin as illustrated on slide 17 in fact over the last three years, our normalized EBITDA margin has improved by almost 600 basis points, driven by strong volume growth and favorable product mix and lower <unk>.
Low level of sales program, the leveraging of our efficient manufacturing footprint in Mexico as most of our growth has been produced in these factories and our ability to gain leverage on operating expenses.
These elements were only partially offset by the inefficiencies and additional costs, resulting from ongoing supply chain disruptions, which were mostly felt starting in the second half of fiscal 'twenty two.
While we have proceeded with price increases and surcharges to offset such additional costs. It remained a headwind to our margin percentage as the price increases and I'll cover potential margin on these additional costs.
Looking ahead to fiscal 'twenty, three and beyond we expect to continue benefiting from positive volume and mix impact and the leverage of our manufacturing footprint. However, we do cautiously assume that we will see a return to summer sales program activity.
Certain point as Oems start rebuilding inventory.
Moreover, we expect the ongoing inflationary pressure and supply chain disruptions will weigh more on fiscal 'twenty three as we expect these elements to impact us for the full year.
We do plan to continue utilizing our strategy of building substantially completed units and retrofitting them when components or receive.
While this strategy is accretive from a revenue and profitability standpoint, it is less efficient from a margin perspective.
With this our guidance calls for a normalized EBITDA margin of about 17% in fiscal 'twenty three.
Will that we believe is sustainable longer term for our business now turning to slide 18 for a look at the expected normalized a bit the split between the first half of the second half of the year.
We expect fiscal 'twenty three to be more similar to fiscal 'twenty, one with over 60% of our normalized EBITDA being generated in the second half of the year.
In terms of year over year growth, we expect our first quarter normalized EBITDA to be down in the 40% to 50% range as we operate through supply chain and inflationary pressures, notably, resulting from <unk> related disruptions of the start of the year and as we lapped a very strong first quarter last year, where such pressures were limited.
We're also plant we are also expecting our product mix to be negatively impacted in Q1, as we are planning to ship higher end <unk> and Pwc's in Q2.
While these supply chain challenges on their impacts are difficult to predict based on the information. We have today, we are comfortable with our plan and expect to return to strong growth starting in Q2 as the omnicare unrelated issues subside and we start lapping a more comparable and environment.
Finally, looking at our return of capital to shareholders on Slide 19, as you know our business generates significant free cash flow and we have always been diligent in managing our capital allocation decisions prioritizing organic investments in the business and returning excess capital to shareholders.
And as the business grew rapidly in recent years, we have returned over $2 $3 billion of capital to our shareholders over the last seven years, and notably returned over $700 million in fiscal 'twenty two in the form of dividend and buybacks as we repurchased over six 7 million shares.
We believe these actions are a strong way to enhance the return we provide to our shareholders and given our solid outlook on the business and the strength of our balance sheet. We are well positioned to continue applying the same capital allocation recipe into fiscal 'twenty three.
This is why we announced this morning, a 23% increase of our dividend per share and the launch of a $250 million substantial issuer bid.
We will not be taking these actions if we did not believe in our ability to continue growing the business in the coming years, and we look forward to providing you with updated and 25 financial targets as we are planning an in person Investor day in June on that I will turn the call over to Julie.
Thank you Sebastien.
Please turn to slide 21.
Before I conclude I want to highlight the exciting announcement, we made this morning regarding <unk>, which has been highly anticipated and expected from our customers and dealer network.
With the motorcycle industry shifting to electric we signed up our Tennessee to reclaim a lot.
Cycle every day and that he entered the market with an electric offering.
I am thrilled to confirm we are launching a family of electric two wheel modal cycle under the iconic <unk> brand.
Our new products are being developed with many different of riders in mind, we expect this model to be available to the market in mid 'twenty four.
With the two wheel motor cycle, we are entering a new global market.
This first family of products with address about 40% of the North American and European industry, representing an estimated 600000 units per year.
We firmly intend to grow in this market like we have done so many a time in the past with new product introduction.
We are known for generating growth by leveraging our technological knowhow, our strong brand and our manufacturing footprint and we are confident we will do it again.
What's more with this new product line, we are further solidifying our dealer value proposition and expanding our addressable market.
To conclude.
We had an exceptional fiscal year 'twenty two.
We're able to achieve these results thanks to robust demand for our product and our team ability to successfully manage to supply chain disruption.
We expect to build on this momentum and deliver another record year for fiscal year 'twenty three.
Our guidance calls for solid growth ranging between eight and 12% and diluted normalized EPS.
However, the first half of the year proved to be more challenging as the <unk> variant impacted several of our supplier in the early part of the year.
Creating increased lag time in the supply chain already under pressure.
That said we are confident we can achieve this guidance based on sustained consumer interest and power sports and marine.
Our strong product portfolio, including the risks and product introduction.
Additional production capacity from Johan <unk>, III and <unk> total.
And the upcoming significant inventory replenishment cycle, which is now expected to start in the back half of fiscal year 'twenty three at the earliest and will last for about 12 to 18 months.
We are well positioned to outpace the industry, given our strong brands manufacturing agility and to benefit from additional product shouldnt capacity.
In addition.
We have multiple levers to sustain growth in fiscal year, 'twenty four and beyond.
We look forward to sharing more details with you in June .
Finally.
I would like to thank all our employees for their relentless efforts during this challenging period.
Our suppliers and dealers for their collaboration and the resilience.
And our customers for their loyalty.
On that note I will turn the call over to the operator for questions.
Thank you if you'd like to ask a question. Please press star followed by the number one on your telephone keypad.
To withdraw your question. Please press star one again.
Our first question comes from Mark Petrie from CIBC. Please go ahead. Your line is open.
Yes, good morning.
I just wanted to follow up on the discussion with regards to margins for fiscal 'twenty, three and then and then sort of the longer term outlook how much of the compression. This year do you think is structural.
Versus versus more temporary with the supply chain and then could you just talk about the dynamics with regards to with regards to pricing how much of that is in the market today and what you think the.
The opportunity is as we progress through the year.
Yes, good morning, when I look.
Out for next year.
We did talk about like a 200 basis point decline in margin.
The volume is going to be.
Positive tailwind for us probably 100 basis point increase in margin coming from volume.
Programs.
No.
Being more conservative.
We expect some inventory buildup in the network and so obviously, we want to make sure that the right level of programs are set there.
About 100 basis points of a headwind in the structural Aman coming from inflation and then efficiencies. We believe we will be with us for most of fiscal 'twenty three and that's the both the 200 basis point headwind for us.
In terms of pricing, we've done pricing adjustments in January and obviously thats reflected in our guidance.
And we do anticipate as well to adjust pricing further come the next model year changeover that happens usually in the.
Late.
Second quarter period, usually we do a 1% price increase but this year, we anticipate that the price increase will be obviously higher than the standard 1% to account for higher inflation.
Understood. Okay, that's helpful and.
And Joe you highlighted the strong growth that you got.
Continue to see in terms of new entrance or new customers entering the power sports industry, but I'm wondering if you could just talk about sort of what youre seeing from existing customers.
I think there's been some ups and downs.
With that cohort just based I think mostly on limited product availability. So what's your perspective.
For this year.
Either versus last year or versus sort of pre pandemic levels.
Good morning, Mark to be honest not much change.
Again for new entrants with tracking we're still tracking about 30% versus historically, 20%.
And repurchase intent.
It's <unk>.
Is remaining.
<unk>.
Then not much change with the existing customers.
One trend is out there.
Is the customer.
Customer more and more are ready to preorder a unit to give a deposit to secure the delivery and we saw like a sudden my my my notes.
And then mobile pre sales is 100% above last year watercraft is about 25% above last year.
It was two very successful year last year, then we don't see much change in existing customers except.
The customer.
Customer is more ready than never before two to secure their purchase sooner than never before.
Okay understood I appreciate the comments and wish you all the best thank.
Thank you.
Our next question comes from Robin Farley from UBS. Please go ahead. Your line is open.
Great. Thanks, two questions. One is and you talked about inventory being down about 16% versus pre pandemic.
And I think you've also talked about that probably doesn't need to go all the way at today's levels, how should we think about.
The amount of shipments did you need just to restock dealers to kind of whatever that new normal if you could help us quantify that into percentages.
Retailer shipments here.
Just kind of how we should think about what that restocking demand.
And then Lee.
The second question.
Electric bank market.
And with that introduction in 'twenty, four is that fiscal or calendar 'twenty four.
The market when you refer to the 600000 addressable market.
Thanks for the question engine motorcycles today the east.
Or can you.
How big the electric bike market, specifically might be let's say calendar 2020.
Yes.
Good morning, Robyn sub I'll take the first question that George.
I will take the second one on the restocking opportunity. It is a big opportunity for four ERP too just to replenish the inventory obviously the industry has grown our market share has grown as well.
But to put it in simple terms when I look at the restocking opportunity, it's about a quarter's worth of wholesale revenue.
That's how big of an opportunity it is so.
And when is that going to happen.
Most likely as I said, it's going to happen next year in fiscal year 'twenty four.
So with that I'll turn it over to Julie.
Good morning, Robin and then just to make sure that.
I will repeat.
What I've said in my notes in the Central then first what we inducing this morning, it's our first family of products.
<unk> basically.
We are targeting at the beginning North America and European market.
Then.
It's the industry that we are addressing with that family of product in the North America and Europe is about 600000 unit a year. This is combustion motor cycle to date.
That being said, we believe that the.
The motorcycle industry.
<unk>.
Faster to electric than other product line and a few <unk>.
Your reason first those product run above zero Celsius, then it's easier to electrify.
The net drag on the motorcycle and the product line and obviously, it's easier access to the chargeable patient.
And if you can project.
Kind of what's happening in the car industry. Many city our countries are restricting access to downtown with combustion engine card, we believe could happen also.
Two wheel then because of all this.
We felt that it was the right thing to do to to lunch Ken on the wheel.
And I would like to highlight again that it's leveraging our knowhow. The electric by a fact that we are developing for all of our existing product with a modular approach will fit.
This lineup of what a cycle is the <unk> brand.
The existing dealer network, we might have to open up new dealers.
In Europe , but in North America, most of our dealer would could carry.
Two wheeled vehicle and obviously its beverage our manufacturing footprint for us.
I would say a very good addition to our plans and.
As though we continue to intend to grow.
Is there.
Person, even if it's a ballpark of what you saw.
Thank you.
What percent of it.
From combustion engine today would be electric.
Hey, Tony.
Yes. This is a tough question Robin.
How fast.
The customer will accept the electric.
It's very difficult to predict we see right now in the car.
Quick a very fast acceleration of.
Those trends obviously there is <unk>.
More offering than never before on top of it there is some restrictions that are.
Coming in many countries.
And it is trending.
More people want to ride.
Electric then we don't have much.
Don't have much hard that down this but we want to be.
In front of the wave to make sure that.
We are one of the first to benefit.
This trend.
In terms of consumers and.
We believe it is the right thing to do it in a very good opportunity for us.
Okay, great. Thank you very much.
Next question comes from Martin Landry from Stifel. GMP. Please go ahead. Your line is open.
Hi, good morning, everyone.
My.
My first question <unk> on your revenue guidance of growth of 24%, 29% I'm wondering if it'd be possible to break down.
The growth between units and pricing.
Yes.
Is that your only question or.
No no I have another question.
You'll have a boat.
Just in terms of pure pricing.
Next year full year compared to this year, you have about a 4% increase coming from pricing.
Bill. Please go ahead.
So okay.
That's helpful. Thank you and then.
I believe you mentioned that.
17% EBITDA margin.
Implied in your guidance for fiscal 'twenty three it's a level that you see as sustainable on a go forward basis for future years.
It's much higher than your EBITDA margins that you had before COVID-19 , which were around 12% 12, 5%. So.
I'm wondering if you could bridge for us.
Difference.
The puts and takes that explains that uptick in your profitability.
Yeah. If you go to slide 17, which I shared this morning.
There are several puts and takes but the main one is obviously our business has grown.
Compared to where it was pre COVID-19 .
And also hold our footprint our manufacturing footprint has also changed.
We are leveraging our Mexican operations, we have grown in Mexico and that obviously provides us with a huge opportunity.
To improve margin.
The more efficient and better cost operations.
And also the third element I think is the overall environment around sales programs. There were a lot of learnings that came out of Covid that we will continue applying going forward and so there is a few hundred basis points that will be coming from a I guess a more.
Manage.
Retail programming environment, better manage inventory as well at the dealer network. These would be the three main.
Elements that would drive.
Sustained margin growth and when you look at other or other Oems in the past.
Many of them have been able to sustain these types of margins as well.
And one of the big drivers was.
The volume that came with their businesses. So that's obviously something we're benefiting from.
Okay. That's helpful. Thank you and congrats on the great results.
Thank you Mike.
Our next question comes from Craig Kennison from Baird. Please go ahead. Your line is open.
Hey, good morning, Thanks for taking my questions.
Looking at World headlines Theres, certainly troublesome to say the least you've got war oil inflation and Central Bank policy. I guess first have you seen any change in consumer trends since the outbreak of war and then secondly, if we do enter a recession one of the key pages of your recession.
Book for management.
Good morning, Craig first.
We didn't see since the beginning.
Any change in customer interest or behavior for our product line as you know we stopped delivery into Russia.
But for the fuel price you know a lot of people talk about fuel price, but.
The increase in fuel cost is quite high but this is a low impact.
In the in the cost for a customer that gave you some some number.
Our snowmobile customer and this is coming from our warranty that to.
The average customers on snowmobile spend about $500 a season average on fuel and.
And then if you increased 30% that's $160 ETE.
The customer is a 200 dollar a season than the 30% translates to $60 more for a season than the.
The fuel price, obviously, nobody likes it but it's like a minimal impact on the.
The customer ownership for a season.
<unk> D D.
The rate of inflation.
Another relevant tissue of interest rates are quite low.
Then when you combine all of this.
Didn't see yet and the slowdown on any of.
Customer interest.
And if I talk about.
Question on recession, obviously were a much different company than we were 10 years ago.
At the last recession.
From a just a pure balance sheet point of view, obviously, we have a very strong balance sheet with low leverage up to one two times.
When you look at the overall power sports industry and the environment. There is very low inventory in the network that means no need to put promotions in.
You were able to continue to ship units to dealers. So you don't have to shut off operations. So drastically that what happened in the interim.
<unk>, obviously is a business we're much more diversified as well.
<unk>.
Our product line more product lines.
We also have different product offering in terms of price points entry level models that are there that weren't there back in a way to an online or.
Business from a geography point of view as well as a well diversified with over $2 billion of revenue in international.
Two other points, obviously, our manufacturing footprint in Mexico offers us with a lot of leverage opportunity in terms of efficient manufacturing and I guess.
The last point on the key point is that it.
Our lineup, we have a super Super good lineup that is very competitive.
So why is that.
As a player in the market, we believe that we would come out very strong.
As demand for the innovations that we've introduced recently is very good then we expect that it would continue to outpace the industry.
If a recession were to happen.
That's very helpful. Thank you and then just to follow up on the electric motorcycle strategy could you give an indication for what you think the margin profile of that business might be when it's fully maturing versus what.
Maybe your core business performs and.
Well, obviously, we're entering in this business because we believe it's the <unk>.
A good opportunity for us and two it's a profitable opportunity.
In all our businesses, we have obviously multiple product lines in the hall have varying degrees of profitability.
And we're not entering into this business because we believe it's going to be an underperformer versus our other product lines. We are leveraging some of the obviously our footprint our supply chain our dealership our brands and so that provides us with an opportunity to be cost efficient and as you know and as we've said in the past we are in sourcing the technical.
Knowhow as we've done for internal combustion engines, we're doing the same thing with electric electrification of our products and.
And so that also provides us with a cost competitive advantage in order to own this knowhow obviously youre.
Usually better better profit. So overall, we're excited about the opportunity.
And.
It could be a sizable opportunity for us down the road.
And also would add to <unk>.
We like to push technology and innovative.
I mean, we intend to come with.
Product that will while with their customers.
We came out with some idea that we believe will make a difference.
We feel that it's a good opportunity.
Great. Thank you.
Our next question comes from Sean <unk> from BNP Paribas Exane. Please go ahead. Your line is open.
Hi, guys its Jan here. Thanks.
Thanks for all the details maybe on market share gains how are you.
Thinking about that for 2020 for fiscal 'twenty three you mentioned some limited available.
Availability of hurt any share in some categories in the quarter, but then maybe that catches up and then you had strong volume expectation.
Some help on how you're thinking about that for next year and within that I guess, what are your expectations for retail sale in fiscal 'twenty three.
Then.
The retail or market share gain right now the demand for our products.
And the <unk> unit are so high that the market share gain depend more on our ability to supply and which product line in which quarter and I gave an example in Q4, because we're getting into the peak of the snowmobile season, we favor snowmobile.
At the depend of watercraft in North America because in.
The north.
The snow belt, you don't need a watercraft in Q4 now shifting in Q1 and in Q1, obviously the snowmobile production is done and we are shifting to watercraft then.
Starting from probably for the next 12 months you need to be careful not to look at the retail by product line by quarter, because it depends a lot more.
What we prioritize versus.
The need for the industry and the supply chain constraints, we could have and Thats why.
I gave the example of the Gage family to better explain.
The idea that in term, obviously I cannot give you.
This morning, the market shared with planning.
By product line, but you see the type of growth. We are planning on the topline then this will obviously reflect on market share gains.
To the extent I could answer your question.
Okay got it yes.
Makes sense and then maybe on the retrofit.
This quarter you had a nice increase in the units kind of driven by that.
Gave them the parts.
I guess, how many more units are out there in terms of retrofit I know youre, adding more but.
How many more units.
Do you think about that retrofit.
Evolution through the year.
We will continue using that strategy for the year it will vary depending on.
On the product line in the quarters and a month just to give you an appreciation of what it meant for Q4 that hit will fit unit. The impact on revenues was about to slightly above 5% impact on revenue as our ability to.
Accelerate the retrofitting of units that were there in Q3 that we retrofitted in Q4.
So that's the magnitude of it and I'm not expecting it to vary that much quarter over quarter.
But again the strategy is to run the factory.
At maximum capacity.
And when we have the missing part that's easy to fit we preferred to ship it to the dealer because that's easier to shift to components and you have a lot of.
Theater repairing the unit then.
To serve our customer to deliver our unit to their customer in the season that is faster and this is a strategy that.
Dealer prefer that we do this versus reducing our production and reducing their orders.
Okay got it thank you.
Our next question comes from Brian Morrison from TD Securities. Please go ahead. Your line is open.
Alright, Thanks, very much couple of softball story, just within those retrofits can you just break down by product line is that mostly <unk> at this point in time.
It's very so we ship.
We are in the peak peak personal watercraft season. So if were missing component in home water crop. It is something that could be refitted at the dealership will ship personal watercraft.
Barry.
Okay and then in terms of your working capital you've got a pretty big tailwind I'm wondering in dollar volumes. What do you think the unwind will be this year and if I look to fiscal 2024 should I expect capex still in that $700 million range.
For Capex, Yes, you should expect it in that range going forward.
And yes, this year Theyre working cap should be a tailwind probably in the range of $2 to $300 million.
Okay, and then last question just with.
Kind of building to a previous question. This morning, just with portable bench is there any change to your geographic allocation like is Europe still going to be 15% to 20% of your.
Forecast revenues that whats in your outlook.
Well, obviously, we've reflected the our decision to exit Russia and our guidance.
Russia was probably a business of about $250 million or 5% less than 5% of our revenues call. It 200 to 250.
And so obviously, we're not expecting a lot of revenue to be generated from that market. This year, but the good news is we're able to reallocate. These units to other markets that are in need of units. So we're not expecting a negative financial impact from our decision to pause shipments in Russia.
Alright, and then just the cadence of switches that still 500 million target over three years and how you should get there.
Linear.
It's still the target.
Thank you.
Our next question comes from Joe <unk> from Raymond James. Please go ahead. Your line is open.
Thanks, Hey, guys. Good morning, just a few.
<unk> is on the outlook I guess first you talked about EBITDA and how that kind of progress throughout the year could you give us a sense for what the cadence is for revenue, particularly in Q1 I'm trying to understand it.
The decline in Q1, EBITDA is mostly margin related or is there some revenue impact as well.
Some of it is.
Some of it is revenue related as well.
We expect revenue to be.
In line with what we had last year.
Obviously.
<unk> impacting impacted by the supply chain.
As well.
Obviously, we've had a few price increases compared to last year, which should compensate.
But the flattish revenue.
Okay, that's helpful and maybe secondly.
The implied EBITDA decline in Q1.
It sounds like it's mostly supply chain is there some commodity impact there as well and then secondly, I assume this is industry wide, it's not ERP specific type of what youre seeing in this quarter.
But what happened is beginning of the year a few of our supplier mainly in the Asia was hit by the Omnichannel variant and some were operating it let's say 50% of capacity.
And that created like a hole into the supply of their component, which will reflect in the in the beginning of Q1 and this is why.
We gave you some guideline on how the Q1 will be affected.
Okay.
Some of the commodities.
Taking in any commodity inflation.
Yes.
In the in the <unk>.
<unk>.
And my.
Question I had earlier about a 200 basis point impact coming from commodities and efficiencies this year got it.
Great. Thanks, guys.
Our next question comes from George <unk> from Scotiabank. Please go ahead. Your line is open.
Hey, good morning, guys, congrats on a strong quarter and outlook so can.
Can you maybe quantify the dollar value that we've incurred in terms of costs for supply chain in fiscal 'twenty two.
Well.
Obviously, the math is pretty easy to do I'll just pull out my.
And my numbers, if you look at the overall margin impact coming from.
From <unk>.
Cost and efficiencies are I'd call. It a 300 basis point impact coming from inflation.
And inefficiencies.
Okay.
Yes.
And obviously most of them happened on say probably in the last.
Eight months of the year earlier in the year. It was more a more tempered in terms of inflation.
Okay got it and if you were to look beyond fiscal 'twenty three.
The restocking can you maybe quantify some of the margin pressure or headwind that you face.
From future I guess unfavorable mix and sales programs kind of coming back.
Obviously, we've introduced a lot of new products with a richer mix, so I'm not expecting mix to.
To significantly impact us negatively.
I am expecting programs too.
To increase obviously, we benefited from a lower promotional environment and my expectation is that next year, we'll probably have a 100 basis point negative impact and thats going to continue on.
In the years to come after.
Okay, Thanks, and maybe for sure.
With a $500 million of revenue goalposts that you guys put up for switch.
When you maybe care to put a venture out there in terms of when how many years, you think will need to obtain that number.
But like I said, when we introduced switch.
We're targeting to be north of $500 million.
Within three years, and we are tracking to be there.
Okay awesome, Thanks, a lot guys.
Yes.
Our next question comes from Ben <unk> from.
From <unk> capital markets. Please go ahead your line is open.
Hey, good morning, everyone and congrats for the good quarter.
Just coming back on the electric to will a market could you talk about where do you see the rate of new opportunity.
Three to five years down the road, how sizeable it could be any thoughts about the potential market share and the average selling price overall.
Yes, obviously by the way.
We are two year the production will start in mid the delivery will start mid 2020 for it than we are two year in advance and we don't want to for competitive reasons give too much color on all of this what I can say is again.
Phase one off product and.
Phase one of the market strategy is North America and.
European market 600000 units a year and you can expect.
That in time, we could introduce that family in other region, but we don't know yet we need to.
Better do the analysis and the other thing is there could be other family of products to come but for this first family of products in North America and Europe .
Introducing it in mid 2024, we would be disappointed if we would not be north of $1 billion in sales by 2030.
Okay.
Okay. Okay, that's great color and would you be willing to disclose where those units will get manufacturer chosen.
Got it.
Okay great.
Okay and now if we look at Pwc, obviously, there are some peers some of your peers that struggle in 2021.
We're able to gain some market share in one of your biggest fear announcement production costs of 30%.
Production for 2022, so could you talk a little bit about how.
Steve.
French state from your peers, whether youll be able to grow up further market share gains for <unk> in the upcoming season.
Like like I said, the NOI a few minutes ago.
Retail demand is so strong and there is so many unit pre sell that.
The market share depend more on our ability to two.
To supply the product then our strategy has been to run our factory at maximum capacity.
And then if we have back order, either we retrofit them or the dealer retrofit it.
That's a different strategy than some of our competitors have done they prefer reducing.
<unk> production, but our goal.
Is to run <unk> Delta with maximum capacity.
And to deliver as many units as we can in fiscal <unk> and <unk>.
<unk> 22 in season 'twenty three fiscal year 'twenty three.
Because that's a great opportunity on top of it I would say that our product is.
Is extremely popular.
Watercraft is benefiting.
Benefiting us.
A lot of popularity B right now the fish flow is doing extremely well.
And we will introduce in fall other new product than we are right now.
I would see.
Very exciting period for watercraft, and we'll try to benefit as much as we can from it.
Okay, that's great and last question with respect to capital deployment, obviously, if we take into account your site.
It'd be an upcoming free cash flow generation for fiscal year 'twenty three you've gone ahead of the year, which still are what I would see a very strong balance sheet. So any.
Thoughts about capital allocation and whether two times leverage is still.
Level.
Would target longer term.
As we've said we're comfortable operating within a range of one five to two times.
You've mentioned, yes, we have obviously, a strong balance sheet and good financial flexibility to continue returning.
Capital to shareholders as you saw this morning with the <unk> is a good indication of this obviously we have.
Confidence in the business.
Confidence in our growth as well, but we're able to deliver and we believe that announcing DSI.
It was a good.
Good step in that direction.
Perfect that's great color thanks for the time.
Thank you.
Our next question comes from Derek <unk> from Canaccord Genuity. Please go ahead. Your line is open.
Yes, Hi, and I'll Echo my congratulations on a great quarter and outlook.
Just as it relates to the R&D spend.
Historically, it's been in that sort of four 5% range as a percentage of revenue should we expect something similar next year or will that will that be going up with the electric motorcycle.
Project.
We should expect something very similar next year. When you look at the overall decline in EBITDA margin that will come from gross margin, but from a overall operating expense as a percentage of revenue should be very similar to what we have in fiscal year 'twenty two.
Okay. That's helpful.
And then just in terms of and I know this is a tough one but in terms of that you guys are calling for supply chain issues too.
Relent in the back half of the year in the back three quarters of the year I mean, what is kind of giving you confidence that that's going to be the case are you seeing some incremental improvements on that.
On the edges today.
I would say right now the main difficulties semiconductor.
The rest there is always some.
Some of the ups and down, but it's more manageable than right now.
Semiconductor debt remained more difficult.
Our supplier.
Our main key supplier believes that it will get better in the back half of calendar year 2023.
And the other one that is a bit difficult.
The shortage of container and transit time that sometime is not unplanned.
But this is why.
Because of our supplier of semiconductor believe it will get better we believe it will get better in the in the fall of 2023.
Okay, great. Thank you very much.
Sure.
Our next question comes from Kamran Jackson from National Bank Financial. Please go ahead. Your line is open.
Yeah. Thanks, Good morning, I guess just to follow up on the on the supply chain question.
Is there any I guess incremental risks that you see to the supply chain just from this this war between the U K and Russia. I mean is there any European suppliers that are that are cause for concern or is there any incremental risks around semiconductors that that you're concerned about.
First we have no we have no supplier either in Russia and Ukraine.
That's at least positive.
<unk>.
Obviously, a lot of people talk about neon we know.
Ukraine was a big producer of Neon for semiconductor company in the electronic company, but it seems right now to the seems to have found ways to.
To manage that debt.
Then so far.
No big supplier or supply issue caused by Russia and Ukraine.
Okay perfect.
And just my second question, just going back to the I guess the EV motorcycle.
Sort of touched on some of these some of these points, but obviously theres quite a few other manufacturers and startups trying to build electric motorcycles. So I'm just wondering if you could maybe detail a little bit more what is going to differentiate <unk> in that market, which right now looks to be a pretty crowded market.
And obviously at Cameron.
We wont disclose too much of this morning, we are to a year before shipment but I.
I mean, it's you know our track record with products like spark product like the ryker product like to see the switch.
And again.
The new <unk> electric motorcycle will leverage the existing.
PARP electric <unk> developing for the other product line than for us.
You benefiting of the modular electric power back that will build in house.
And we found ways.
Belief too.
To come out with some interesting innovation.
Into the motorcycle industry leveraging again.
The brand manufacturing footprint, the dealer network than for us.
In addition, low.
The product line that.
Is continuing to build our product portfolio that makes a ton of sense.
And we believe and this is.
Our track record and prove it we believe we will become a legitimate.
OEM into the motorcycle industry.
Okay, and just a follow up.
I guess, obviously your original plan was to rollout electric vehicle versions of basically all your products over the next several years.
This is obviously the first announcement here, but is it still your expectation that youll keep to that timeline for electric product introductions across the product portfolio.
Yes, all product line will be will offer some electric model by the end of 2026.
Okay, great. Thanks very much.
Yes.
Our next question comes from Fred Wightman from Wolfe Research. Please go ahead. Your line is open.
Hey, guys I just wanted to follow up on the semi finished inventory commentary I think last quarter, you gave us sort of a bridge from the reported dealer inventory number to what that would look like with the semi finished units is there any chance that you could do that again this quarter.
Yes.
Obviously, we had very little inventory in the dealership that was.
Finished obviously what occurred is that we were able to ship a lot of components.
In the back half of Q4.
Just to give you some color if we had not shipped these these components into dealership inventory year over year would have been down into 'twenty.
20% range instead of up 21% so obviously.
Big Big play in Q4 in terms of inventory availability is and as I said. It obviously helped retail in February as we had a record month from a retail point of view this past February .
Perfect guys. Thank you.
Okay.
We have no further questions I would like to turn the call back over to Mr. Chen for closing remarks.
Super Thank you and thanks, everyone for joining us this morning and for your interest and we look forward to speaking with you again for our first quarter conference call on tumor burden.
So have you with us at our upcoming Investor Day later in June Thanks, again, everyone and have a good.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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