Q1 2023 BRP Inc Earnings Call
Good morning, ladies and.
According to the VIP inks FY 'twenty first quarter results conference call for participants who used to telephone line. It gets recommended that you turn off the sound on your device.
I'd now like to turn the meeting over to Mr. Finish Shane. Please go ahead Mr. Dishing.
Thank you Julie good morning, and welcome to <unk> Conference call for the first quarter of fiscal year 'twenty.
Joining me this morning are.
President and Chief Executive Officer, and so Thats MSL 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 actual results could differ.
From those implied in the statement.
The forward looking information displays the uncertain assumptions and is subject to risks and uncertainties and I invite you to consoled Vips MBNA for a complete view of the year.
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 Joe.
Thank you Philip and good morning, everyone and thank you for joining us.
Our team once again demonstrated our ability to succeed in the tough on development.
We outperformed the industry in term of retail and delivered better than expected financial results for the quarter despite supply chain disruption.
The solid performance puts us in a good position to deliver strong growth for the year as we remain focused on achieving our guidance, which called for a revenue increase of 24% to 29% and.
On an EPS growth of 11% to 14% after accounting for the recently completed SIV.
Let's turn to slide four for the key financial highlights of the quarter.
Revenue reached $1 8 billion tabled stay.
Stable compared to last year.
Sales, we saw solid growth for side by side, which was offset by lower shipments of personal autograph and three wheel vehicle.
This shows our ability to optimize production by prioritizing certain product line based on component availability.
This resulted in a higher level of off road vehicle production in Q1, while the shipment of personal watercraft and three wheeled vehicle are expected to accelerate in Q2.
As anticipated inefficiencies caused by supply chain disruption put pressure on our profitability in the quarter.
Till we offset some of that pressure to our manufacturing optimization and tight expense management, resulting in a better than expected performance.
Turning to slide five for a look at our Q1 retail performance.
Our retail sales remain limited by product availability in the quarter.
Still we outpace the industry in North America, as our <unk> retail sales were down 9% compared to an industry that was down low 20%.
To put our performance in context, let's turn to slide six.
As you can see on the slide the retail decline does not indicate the lack of consumer demand.
Instead, it reflect limited product availability.
I would like to remind you in today's environment that the retail is directly proportionate to wholesales and our ability to manage the supply chain.
Our retail in Q1 was in line with our wholesale.
And we expect that to this trend to continue in the coming quarters as dealer inventory will remain low.
While our retail was down compared to last year first quarter is up about 30% compared to fiscal year, 2020 one levels.
And we are not seeing any signs of slowing demand website traffic and google's search for our product remains high.
Our customer preorder are slowing down being up 80% year over year.
This year preorder include the switch, which is a new product as well as side by side and ATV for which we were not tracking preorder last year. Excluding these preorder were stable.
So all in all we continue to see very robust consumer demand for our product.
Turning to slide seven for a quick update on the supply chain.
As expected we continued to operate in a volatile supply chain and vitamin throughout Q1.
Two points to keep in mind first we are dealing with tight component availability and higher cost related to logistic and commodities.
Second the situation in Asia is putting additional pressure on supply chain.
We expect these pressure to continue throughout the year.
To manage this situation we continue to seek alternative sources of supply if required.
Optimized production based on component availability.
<unk>.
Manufacture unit that are missing a few components and retrofit them when we received the parts.
Despite this volatility our plan for the year remains intact.
Now, let's turn to slide eight for a year round product.
Revenue were up 1% to $934 million in the first quarter driven by strong shipments of side by side vehicle, which were offset by lower volume of three wheeled vehicle as we shift production of that product line to the second quarter.
In term of retail can am side by side and its strongest Q1 ever.
Benefiting from the additional production capacity at <unk> III and the fact that we prioritize the production for that product line.
<unk> TV also had a strong quarter, although retail sales were down our results compare with Dougherty <unk> Q1 last year.
Both product lines have outpaced their industry in the quarter and season to date.
With our solid lineup and additional production capacity, we are well positioned to sustain that trend.
As for three wheeled vehicle.
Retail was down more than the industry in the quarter due to limited product availability.
Phil we continue to have strong traction with our different initiative to grow that business.
Notably as we further expand our woman of on road community and.
And as we see more solid momentum with the rider education program for which course completion are up mid teen percent year to date.
All in all we are well positioned to sustain our momentum with tree will vehicle as it will increase shipments in the coming months.
Turning to seasonal product on slide nine.
Seasonal product revenue were 400 $409 million down 12% from fiscal year 'twenty to Q1.
As a result of lower volume of personal watercraft.
Due to supply chain disruption more shipments have been moved to the second quarter compared to last year.
Now looking at the retail starting with snowmobile.
Snowmobile completed its north American 22 season at the end of March with our ski Doo and Lynx lineup significantly outpacing the industry.
With gained six percentage point of market share for the season and held the number one market position in every industry segment in which we compete.
We also had similar success in Scandinavia.
Our market share is up by nine percentage points. So far this season.
This demonstrates our ability to manage our supply chain and gained share during peak retail season.
As for next season or spring booking campaign drove solid traction with consumers we.
We have already secure about 70% of our north American and 40% of our Scandinavian expected volume for next year.
With customer order unit.
This performance is similar to last year, which was also an all time high.
With very low inventory level in the network at the end of this season and strong spring booking we are very well positioned to have a solid 23 snowmobile season.
Turning to <unk>.
Our retail of personal watercraft and pontoon was impacted by limited product availability in the quarter as production was constrained by supply chain.
Phil This season is off to a good start.
With continued strong consumer interest.
To put things into perspective why.
Our north American personal watercraft retail was down in the quarter compared to last year. It was up about 20% compared to the first quarter of fiscal year, 2020 one.
In counter seasonal market demand demand remains very strong.
Late in the season with retail up low teen percent in Brazil, and Asia Pacific driving more market share gain in both regions.
All in all with strong demand around the world and a very high level of customer preseason certificates, we are well positioned to deliver another solid year for our <unk> business as we ramp up shipments throughout the rest of the year.
Continuing on slide 10, with a look at power sport part accessories, and apparel and OEM engines.
<unk> were up 14% to $344 million for the quarter.
We continue to benefit from the growing vehicle fleet, which lead to a higher volume of replacement parts.
Our accessories lineup continued to be well received driven by the link ecosystem offering.
Moving to marine on Slide 11 <unk>.
Revenue were stable at the $122 million has a more favorable product mix was offset by lower shipments of both and P&A.
Looking at retail sales. It is still very early in the season, but many two is seeing a decline in retail sales due to limited product availability.
So at <unk>, we decided to stop producing fully well both to focus on <unk> both models.
In the short term it reduced shipment volume and retail sales.
In Australia, the boating season, as just ended and tailwater retailer was down mid single digit percentage as we had limited inventory in the network.
Looking ahead, we are shifting our focus to the next generation of boat with the growth engine, which will be introducing at our dealer event in August .
To prepare for this launch we are optimizing our operation.
<unk> by expanding menu to manufacturing facility in Lansing, Michigan, nearly doubling its production capacity with our ramp up plan for the end of the year.
And we are reorganizing our St. Peter's site for a new mechanism to maximize production capacity for higher hand boat, including dose with the growth engine.
This upgrade should be completed in early fiscal year 2004.
We are very excited about this next step for our marine strategy, we believe it will bring significant customer benefits.
With that I'll turn the call over to Sebastian. Thank you Zee and good morning, everyone as anticipated the ongoing supply chain challenges weighted on our ability to increase our deliveries during the first quarter, which impacted our wholesale and retail performance.
Tight management of operations, a better product mix and lower expenses allowed us to deliver better than anticipated profitability.
Our revenues for the quarter were stable versus last year, ending at $1 8 billion.
Our gross profit margin was stronger than anticipated spending at 25, 1%, but was down in comparison to last year's level due to a less favorable mix of products sold and the impact of supply chain challenges, which caused additional costs.
In a less efficient use of our assets we.
We generated $272 million of normalized EBITDA.
And our normalized net income came in at $137 million.
<unk> and our normalized earnings per share of $1 66 down 34% from last year's Q1.
The decline in net income was primarily due to a lower volume less favorable mix of products sold and higher operating expenses.
As for the production cost inflation, while important it had little impact on our bottom line as it was more than offset by the pricing adjustments. We made over the last several quarters from a cash flow perspective, we had a negative free cash flow in the quarter as we continued investing in the business notably.
With $109 million of Capex to support our growth projects and $459 million in working capital as we continue operating our retrofit strategy, which is allowing us to better serve our customers and dealers, but requires higher investment in inventory.
Moving to our network inventory status on slide 14.
Year over year, our network inventory is up 20% driven by the strong shipments of missing components to dealers late in the quarter, notably for off road vehicles.
Still inventory levels remain very low from a historical perspective being down over 60% in comparison to the first quarters of fiscal years, 2020 one.
Given the continued strong demand for our products and the ongoing supply chain headwinds our view has not changed and we do not expect any meaningful inventory replenishment to take place this year.
Now looking at slide 15 for an update of the guidance for the year.
All in all our production plan and expected profitability for the year remains essentially in line with our initial guidance.
We are therefore, reaffirming our target of delivering 24% to 29% growth in revenues and 12% to 15% growth in normalized EBITDA.
Taking into account the lower share count, resulting from the completion of our recent Seb our normalized EPS guidance is now 11% to 11 35, representing a growth of 11% to 14% over last year.
Our view for the full fiscal year remains mostly impact we now expect to continue having to deal with a challenging supply chain environment throughout the year when compared to our initial guidance. The added costs relating to the supply chain disruptions are expected to be offset by lower promotional spending.
In terms of year over year, we expect to continue incurring higher costs during the second quarter, resulting in a slightly lower than anticipated normalized EBITDA for the quarter, which should be flat to down low single digits compared to last year.
However, our plan is to continue producing substantially completed units that will be retrofitted as components come in and based on the visibility we have with our suppliers today, we expect to receive the necessary components can be able to catch up on the retrofit fund product deliveries in the second half of the year, especially with trough strong shipments in the fourth quarter.
<unk> on that I will turn the call over of factors Jose.
Thank you Sebastien.
To conclude I am pleased with our first quarter performance as we've delivered results slightly ahead of expectation, despite the volatile supply chain and vitamin <unk>.
<unk> of our product remained healthy with demand continuing to outpace supply.
<unk> and solid retail and the high level of preorders.
In this context, our product diversification, our modular design and manufacturing agility, our key competitive advantage that allow us to continue outpacing the industry.
The first quarter was also marked by continued progress on key strategic initiative.
Notably we had the very successful launch of our <unk> electric to wheel.
Vehicle teaser, which as generated significant interest from consumers dealers and the media.
Our expansion projects have been delivered on plan and we are ready to run at full capacity.
And we look forward to introducing our new boats with the Ghost project engine propulsion system later, this summer and taking a big leap forward in our marine strategy.
Looking at the rest of the year, we expect supply chain pressure throughout the year.
Still we remain confident in our ability to manage through these challenges and deliver another record year.
Looking beyond we are well positioned to deliver sustainable growth for our business.
We look forward to sharing an update of the <unk> 25 strategy and financial targets at our analyst and Investor Day on June 14, and 15 in Florida.
Additionally, we're essentially reiterate our commitment to corporate social responsibility with the launch of our CSR 25 program, which include tangible targets center around reducing the carbon footprint relating to product and operation.
And sharing a positive and sustainable impact in our communities and the daily lives of our employees.
And our commitment to high ethical standards and conducting operation in a sustainable matter.
I invite you to review our sustainability report, which was released this morning for further detail.
Also.
We will be hosting our dealer on August seven in line to Salt Lake City, Utah.
This will be our first in person dealer events since February 2020.
It will be a big event for our sport, but also a first with marine and integrated.
Forward to seeing our dealers and getting their feedback in person.
Lastly.
I wish to thank all our employees for their hard work and dedication in this very busy time, our supplier for doing everything they possibly can to meet our orders and our dealers for their patience and support.
On that note I'll turn the call over to the operator for questions.
Thank you at this time, if you would like to ask a question Press Star then the number one on your telephone keypad to withdraw your question Press Star one again, thank you.
Your first question comes from Craig Kennison from Baird. Please go ahead.
Hey, good morning, and thank you for taking my question.
I do take your point that retail trends seem to be the result of supply shortages.
<unk> would be much better if you could get more product out there.
But it does seem like there is something going on in the larger economy and that the fed needs to basically curtailed demand to get control of inflation. So I'm just curious how you reconcile some of the signals you're getting with your Google search trends and your web traffic and all of that with what we're seeing in the broader economy, which is clearly.
Leah will slowdown.
Good morning, Craig.
To be honest, we had a review with all our division.
Before obviously, our quarterly result.
And we challenge the team and we don't see right now.
Slowing down in demand.
Their customers and maybe it's because our customer our household income higher than the average the adult feel this impact interest rate.
We're getting.
Getting higher but still.
Very competitive in the big scheme.
The fuel price.
Has some impact and nobody liked the price of the gas at the pump but.
The dollar impact on our customer is not so big on the yearly season.
And when we look at all of this we don't see.
Much.
A reduction in demand.
The.
Cancellation of preorder are similar to last year.
Then so far so good.
And.
So when we see it as a R.
Our plan is continue to run our factory at full production.
Trying to do right. The first time, if we cannot we added to a fifth of the unit, but we're trying to meet customer demand as much as we can.
And so far the team are doing a great job to manage through the supply chain volatility.
Great. Thank you.
Your next question comes from Robin Farley from UBS. Please go ahead.
We don't hear you Robyn.
Sorry about that yeah. Thanks.
Thanks, two questions one is.
Your language around the supply chain disruption.
<unk> talked about expecting it to be outlook to improve in Q2 now.
Here.
It sounds like it's going to continue throughout the year.
So is that.
I don't know if youre, just being conservative in your outlook or if you're seeing things continuing to worsen.
Also a much sort of.
Longer expectation right. It feels like over the last couple of quarters. It's always been the idea that it was within two quarters that there would be improvement and now it's at <unk>.
Much worse than that so just wondering how much worse.
What youre seeing is in supply chain.
And then also just a quick clarification on your <unk>.
P S guidance raise looks.
Primarily just from the share repurchase.
Is that does that include just the share repurchase that you have completed already.
Share repurchase that you might do that.
For later this year I just wanted to clarify that thank you.
And I will take the question on supply chain understood Best Kols talk about ETS.
If I gave you the big picture on the supply chain.
On the commodity side, there is no availability issue and the price start to stabilizing than this is positive.
Microchip has plan remain difficult.
And sometime you can find substitution, but sometime you cannot and.
This is what happened with watercraft in Q1 now we have a solution.
Logistics is difficult, but manageable when you have a problem with container vessel you can always.
Airfreight shipments around the world to production facility.
Was a bit surprising in Q1 was the lockdown in China with the Covid zero tolerance.
<unk> created more disruption for us, but also from our some of our supplier then.
In March when we've talked to you we're planning H, one to be difficult and improving in each to now we see that Q2 will be difficult Q3 will be difficult maybe some improvement in Q4, but we are planning for.
A difficult year that being said overall, we believe.
Net debt will remain difficult, but we believe also that we have.
A good way to manage this situation with the modular design of our product line.
The product seasonality than we can favor a product versus the other.
I believe we are well positioned to manage the supply chain challenge and.
And because of our footprint in Mexico labor availability is good.
We believe overall, we are in a good situation to manage the overall situation and Thats why we outpace the industry in Q1.
On your EPS guidance, such estimates, yes. It only reflects what we've done so far this year and it does not reflect what we could potentially do.
For the remaining part of the year.
Okay, great. Thank you.
Your next question comes from Mr. Landry from Stifel GMP. Please go ahead.
Hi, good morning.
You do talk a lot about supply chain that constrain your capacity. So I was wondering if you can give us.
A little bit of a picture of your capacity utilization during the quarter.
And also what you are.
Assuming in your guidance in terms of capacity utilization for the reminder of the year.
Yes, the capacity snowmobile was down in watercraft was running production at full capacity supply was different because of shortage ATV side by side. We're about 70% are planned for the remaining of the all year for all product line is about 85% of capacity.
Okay.
Sure.
What would you consider full capacity.
Would it be like 90% or something like that or.
With full capacity is 100%, but lets say when you operate.
Above 90%, 95%, we considered that full capacity.
Okay. Okay and then my other question is.
Where we're seeing interest rates rising and they are expected to continue to rise I was wondering if you can remind us what's the proportion of your units which are sold using credit.
Rather than in cash.
Yes, Bob.
Martha.
About 60% to 70% of our the units that we sell or finance either through the partners that we have agreements with or local partners with the dealer.
And so obviously it is a big ticket items with normal that.
Financing is used as a tool proposal transaction of one thing that is encouraging is when we look at the overall FICO scores.
The scores are higher than what they were two years ago pre COVID-19.
We're hovering in the range of 720 pre Covid and now last year. We finished at about 745, so and that trend is continuing.
From a credit rating point of view, so obviously people that are buying our products seem to be better off financially as well.
Okay, and do you expect rising rates to add.
The impact on your volume on a go forward basis.
The rates are still relatively low.
When you look at the overall cost of financing and yes, it's a big ticket item, but it's.
We're talking about items of $15 $20. So it does not have a significant impact on the monthly payment.
But the consumers made.
When did the slight to finance the product.
Okay. Okay. Thank you and congrats on the results.
Okay MSA.
Your next question comes from George <unk> from Scotiabank. Please go ahead.
Hi, Good morning, guys I think as you'll see on slide six you spoke about preorders being flat on a like for like basis. Just wondering are you would you expect that to maybe be up a little bit just your thoughts there and maybe you could talk a little bit about what.
What we're seeing under the Hood, maybe demand patterns.
What categories, and what geographies or maybe stronger or weaker than expected.
No.
Firstly, the preorders, we very happy because.
Snowmobile last season and this season is at an all time high.
Like I said in my script, 70% of our snowmobile production is sold to north to the North America, and 40% in Scandinavia and.
<unk> Scandinavia, just to give you a sense historically it was more about 10% to 15% now 40% of our very happy then the point was on snowmobile.
All time high on the watercraft all time high obviously, the 80% we show here was because last year, we didn't report switch.
To which is basically sold out in North America.
And for ATV side by side again different than our competitor.
We allow our dealers to only pre sell what we allocate to them then basically we give in the location for the next three months than the are able to pre sell only those three months to consumers. They are not allowed to.
Who pre sell something that they will receive in six months and we do that not to disappoint customer if something happens then overall, we are very very happy with the pre sales level in.
And like we see like we see on snowmobile.
When it's a call to action like on snowmobile the consumer new with the new lineup. We introduced in February that if the awards order would produce their unit.
If there is a customer or change in the trend is customer are ready to put their money down to secure delivery of their units.
Okay. That's helpful. Thanks, and just maybe one last 1%.
Last call you spoke.
You spoke to.
Better managed retail sales programs, some learnings needed through COVID-19.
Can you maybe talk a little bit to what those are and I think you also called out a 100 basis points being the margin headwind for sales program. If you looked at next year is that expected to be less or maybe a similar kind of drop.
Hey, good morning, when we when we talked back in March.
We talked about the margins and expect the margin decline this year about 200 basis points and so obviously with the guidance unchanged that remains.
In terms of expectation.
My expectation is that we would obviously be impacted favorably by higher volume by about 100 basis point inefficiencies by 200.
Saving.
Savings on sales program.
By 100, a lot of saving by the deterioration of sales programs by 100 <unk>.
Based on what we see today with the supply chain and the low inventory in the network our expectation is that.
That potential headwind from programs this year will not happen, but its going to be offset by a higher inflation and inefficiencies so call. It 300 basis points and efficiencies this year.
From a learnings from Covid obviously.
There is.
Better tools that are available to manage your retail programs.
Regionally.
And so using better analytics.
Targeted programs as well from a SKU level.
The teams are able to be more efficient and how the attributes.
Incentive on a regional and a product line basis, and Thats driving efficiencies.
Okay. Thanks for answers.
Your next question comes from Sean Kim from BNP Paribas. Please go ahead.
Hi, guys. Thanks for the question.
Can you talk about increasing capacity.
That's kind of helping.
But I guess curious how are you able to get some more component too.
Now to use that incremental facility, given where supply chain.
Maybe some help there.
Yes sure thing.
The.
Before you had a three we're producing everything on one site.
And the.
The complexity of the effectively the complexity of the the models, we're producing there were high.
We added a lot of the <unk>.
<unk> platform, the Maverick trailed in that export the Medicaid III and the defender.
And into the defender the utility you have the base and you have the one with cabin air conditioning. This is super complex.
<unk>.
The fact that having two factory now one is focusing on the utility.
The other one is focusing on the support platform and this has improve efficiency.
And we believe.
Even if we're not running those two facilities, 100%. We believe this have improve.
Efficiency.
And in term of right the first time and in term of quality.
And maybe just some color on the supply chain and its when we build and complete units.
One two or three components that are missing on these units sold the supply chain is able to when we work with them and seeing well down the road, we want to increase by 10% 15% 20%.
Youll get 90, 99% of the components and we know which components are more troublesome.
And so proactively we are working with our suppliers to make sure that they sourced from their tier two and tier three suppliers the necessary components. So that when we do ramp up production, we were able to supply. These these goods as well and obviously we have that flexibility was substantially completed units if we don't get.
At week, whatever 43 of the year, we will get them in and weeks of 46 to 47 and retrofit these units.
Also the two factory gave us chance to fit more unit.
Both factory instead of one.
Okay.
Helpful. And then maybe on that point on the retrofit maybe an update on where we are it sounds like youre, making progress towards the ones that are outstanding and you've got a nice boost at the end of the quarter.
Are there left out there.
How should we think about that flowing through in terms of timing.
Was there a shift between two yet.
I said in my prepared remarks, we did ship.
Quite a few components over the last few weeks of the quarters, which allowed us to.
Yes.
Get the components to the dealers and there'll be able to work on these units early Q2, and obviously, it's going to help rebuild in the second quarter. If you exclude these components that we ship that in the last few weeks actually the our inventory would be down.
25% instead of up 20%.
And so we've done very good progress, but again as we said we expect that we will be running with a high level of retrofit the inventory.
The year.
Until that situation.
Back to a more normal level.
Okay got it very helpful. Thank you.
Your next question comes from Joe <unk> from Raymond James. Please go ahead.
Thanks, Hey, guys. Good morning, I guess first.
Question Big picture, obviously, the industry was down low Twenty's as you mentioned this quarter.
What are you guys baking in in terms of.
For fiscal 'twenty three.
Good morning, Joe It's a tough a tough one to call because it's very dependent on how the other Oems are performing as well.
Go back to Q4 results the industry was down low teens, we were down minus 7%. This year. This quarter as you mentioned low Twenty's, we were down minus nine so we seem to have found a way to navigate through the supply chain.
Uncertainty.
But it's really a question of how other Oems are performing and how we're performing as well, which will drive overall industry.
Retail are weak or calling for obviously strong wholesale and our guidance. This year and obviously this should translate in good retail for us as well.
Okay understood.
On that last point in terms of guidance, obviously coming into this quarter. The thinking was that things are starting to get better.
Q2, it sounds like that's more like a Q4 event yet your revenue guide your EBITDA guide.
Akshay.
Does that reduce your visibility at least you're confident in the outlook. This year given that Karen has been pushed out effectively two quarters.
While from.
On overall consumer demand, obviously, we have a strong order book strong order book from the dealers strong.
Our low level of inventory sold and our ability if we produce these units to get them sold is very high about confidence, but obviously, we are we are dependent on many suppliers and we are working proactively with them to make sure we get the components.
But could there be an event in two or three or four months thats beyond our control, which influences our output absolutely.
But from what we see today, we are obviously confident in our ability to deliver the guidance for the full year.
Okay. Thanks, guys.
Your next question comes from Ben <unk> from Vishal Day. Please go ahead.
Yes, good morning, everyone.
First question I'm just wondering.
Due to stronger than expected normalized EBITDA.
Versus earlier comments made back in Q4 about the EBITDA could be down 40%, 50% and just wondering why the EPS beat in Q1 does not slow.
And to the guidance raise for the full year or is it mostly a timing issue.
Alright.
Well, obviously, we're we're more.
More managing operations tightly and we finished the quarter better from.
The Opex point of view, so less expenses coming from tight management, so thats a timing element.
And the other amount the mix was also more favorable from a side by side point of view and Thats also a timing element. So that's the reason why we did not feel it was the right time to adjust the guidance.
Okay, Okay, perfect, Okay, and given your comments made on the.
No big inventory replenishment that for the year I was just wondering if you could talk about the potential working capital release, we might expect for the full year and in light of your comments about <unk>.
Inventory, which should more expect working capital release due to up in the next year or any thoughts about the movement in the working capital expected for the coming quarter.
Yes, as you saw in the first quarter, we did invest.
Quite a bit in working capital.
We expect to run at high levels of working capital investments as we said in our prepared remarks, and some of the questions. We answered and so I'm not expecting a cash flow release coming from a reduction of working cap this year.
Obviously, hopefully would happen next year as.
As the supply chain normalizes.
Okay, Okay, perfect and any thoughts about.
How the supply chain issues impact your electrification strategy and our ability to deliver the project goes.
No impact.
Predict goes going into production. This fall we have no <unk>.
<unk> electrification, which still obviously the.
With planning in two years, and I hope to supply chain will get better.
By that time.
Okay. Thank you very much part of it.
Thank you.
Your next question comes from Joseph Spak from RBC capital markets. Please go ahead.
Thank you.
Maybe just in the quarter.
The point and a half of organic growth.
I know you said a lot of that was priced from within <unk> can you give us the breakout between price and volume and then.
How much.
Of that of the inflationary cost you incurred in the quarter did that price offset.
When I look at the.
Overall margin bridge.
The margin is down the 490 basis points in the quarter.
Mix was.
Unfavorable by 240 basis point pricing.
<unk>.
500 basis points.
That compensated the inflationary and turbines cost we had from the supply chain.
We're not for a negative 500.
We were not running our plants at full capacity, so obviously less efficient for minus 250 basis points.
Okay.
And so you talk about some of.
The supply chain issues last thing a little bit longer than you expected the pricing you've put in place to date.
Compensates for that or are there potentially sort of additional actions.
Needed.
We should.
Should compensate for it if you look at what we've done from a pricing point of view last quarter I talked about the MSRP increases by 4% versus a year ago, and we have surcharge as well which is another about 2%.
Grows 6%.
Call it pricing increase.
And that should offset the inflationary costs that were that were being hit with and the turbulence cost as well for the year okay.
And then just one more on rates, but maybe from a from a different perspective, because I believe.
Most of your financing costs are from the term facility, which is variable and I know you have hedges in place, but you did raise your net financing cost is that just a mark to market on current rates or are you also embedding a continued rise in rates.
No what I compare to.
Versus the guidance, we issued back in.
March obviously, we did not factor in for the <unk>. So that's a cash use and also a higher level of working capital use. So we will be using the revolver more than what we were planning back in March.
Adjustments that we did on financing cost is a reflection of that.
So it's just a greater use of the revolver or not an increase in the.
The cost of that revolver.
That's correct, maybe a bit of a bit of cost there, but the majority of the variation comes from greater usage.
Okay.
Thank you.
Your next question comes from Kamran Jackson from National Bank Financial. Please go ahead.
Yeah. Thanks, Good morning, Wonder if you could talk a little bit more about the the seasonal products I guess, how the revenue is going to play out I guess for the remainder of the year.
<unk> is up 22% to 27%, but you had.
Obviously negative year over year in Q1, so you sort of implies a really huge so the second half of the year for seasonal products. Maybe you can just talk a bit about.
How youre going to get to that number.
Yes, good morning, obviously the.
When you look at the remaining part of the year, obviously, the revenue growth probably in the range between 30% and 38 overall for ERP.
Year round, much higher but strong growth for seasonal.
It will be.
More towards Q3, and Q3 or Q4 will be strong with snowmobile deliveries Q3 is going to be personal watercraft and also personal watercraft in Q4, So we expect it to be.
More skewed towards Q3 and Q4.
Okay.
That's helpful.
Just a question maybe on the I guess, the the inventory levels at the dealer do you have I guess, an idea of where you stand relative to some of your big competitors in many of our UA.
Better positioned on the dealer inventory worst position just trying to get a sense of.
With the retail performance might be relatively.
As it's driven by.
To some extent.
What's available at the dealer level. So do you have an idea of kind of where you stand relative to your peers.
US we're about 70% versus pre COVID-19, but we believe we are a same level than the competition.
Okay. That's helpful. Thanks very much.
Thank you.
And your next question comes from Brad <unk> from Wolfe Research. Please go ahead.
Hey, guys. Good morning, I, just wanted to follow up on the comments about the.
Component shipments late in the quarter, I mean, thats pretty similar to what you saw last quarter as well the language looks pretty much unchanged. Just wondering if you are actually seeing an uptick in retail and if we should expect sort of similar outsized market share gains this quarter as well.
While the expectation on deliveries this quarter is from a wholesale perspective is better than Q1.
And so obviously starting out the quarter with some inventory that is will be available.
When we look at the retail numbers for the quarter.
The start of the quarter there are very good.
Obviously, a lot of consumers are waiting for their personal watercraft and that's what we're delivering and in.
In may and Theyre happy that obviously receive them.
Perfect and then you guys have included.
No data points and slides on new entrants for a while now but it didn't look like there was anything in this quarter.
Slides is there any way you could just give a comment about new entrants and what youre sort of seeing versus plan or what you've seen in recent history.
Just to give you a sense, new and trend if we look at it by product line.
<unk>.
Same than the previous two years and just to give you a summary, historically about 20% new and trend last two year, Turkey in Q1 were low 20%, but if you look at it as a product mix. If you look at it by product line.
<unk> mobile is theoretically low new and trend when the watercraft and <unk>.
Close to 50%.
And it's just a question of product mix when we look at it by product line.
Is the same level than what happened in the last two years.
Perfect. Thanks, guys.
Thank you.
Your next question comes from Brian Morrison from TD Securities. Please go ahead.
Yes. Good morning, just want to ask a follow up question, maybe for just say on slide seven and go back to the supply chain challenges I understand yes.
The heightened supply chain challenges, but within other components.
We are seeking alternative sources what are those key components.
Can you provide some insight into your visibility into securing time, we supply in order to meet your targets, which are all for a big second half.
Yes, then basically first were working hand on them with suppliers and because we have good visibility on our direct supplier, but sometime on the tier two we don't have visibility then we said to our supplier. If you have a problem or if one of your supplier has a problem. Let us look we'll try to help and we.
Have three consultant company in the world working for Us to find alternative then.
I mean, if you have a problem of short dated with commodity now.
Quite easy to find a replacement.
And even in microchip sometime when it's a generic micro chip you can find alternative when it's a more specific microchip, it's more difficult than that.
Basically it's working with our suppliers tier one and tier two two.
Have a good communication and try to work together to find alternative.
The advantage that we have versus I believe some of our competition I give you an example.
In Q1, we had a.
The short stage in a specific component for watercraft than when we assemble those watercraft, we didn't put the cluster.
The cluster was available for side by side any Tvs, then thats helped the overall I think this is an advantage.
The fact that we have modular design and the fact that we have seasonality. This is an advantage that we have versus some of our competition.
So soy is there more work to be done or do you have good visibility into securing timely supply for the second half.
We have good visibility the thing is sometimes change, but we have good visibility.
And then last question maybe for Seth in terms of or just so you mentioned that cancellations were flat just in terms of consumer customer preorders.
What are typical for deposits and Penn lease for deposits I've seen from you all.
It appears that cancellations remained very low.
I mean us the way to work the customer gave a 500 dollar deposit and this is refundable until the product is planned in the load building their shipments.
Then.
Historically, we always had.
Let's see.
Mid single digit overall.
<unk> right now.
If you look at the cancellation on the global retailers low single digit if you took it on certificate, it's mid single digits in line with what we had in the last two.
Two years.
Thank you very much.
Your next question comes from Chris Hudson.
Edgewater research. Please go ahead.
Yeah, guys. Thanks question on dealer inventory I was curious if you would differentiate at all by product segment. There. It seems like at least on a year over year basis side by side.
<unk> got a little better.
Three wheel and personal watercraft, a little different but I know a year over year basis isn't the perfect way to evaluate that right now so I'm curious with a bigger picture view you differentiate at all between any categories getting a little bit better.
Or still notably more challenging thanks.
Yeah.
Yes, if I could I could comment overall.
From an inventory point of view, it's still extremely low, yes, slightly better for side by side and ATV, but three wheel down that we would like to have more three wheels in the network today.
And personal watercraft.
Is it flat year over year.
But it's a unit that turns quite quickly when it gets to the dealership and so we shipped less in the first quarter of these units would have been retailed anyhow.
And the expectation is that's going to improve.
This quarter as we shipped more personal watercraft and three wheel.
Great. Thanks.
Your next question comes from Brandon Ross from D. A Davidson. Please go ahead.
Good morning, and congrats on the strong quarter I.
I had a couple of questions around your cost of goods sold could you break out what percentage of your shipping costs.
Diesel represents and maybe what percentage of total cost of goods sold.
Loss represents.
Yeah.
<unk>.
Good one this morning, I don't have the granularity, but when I look at the overall increase that we've had.
In the quarter and it was coming from we'll call it supply chain disruptions disruption not particularly related to fuel.
Because.
Fuel related costs, we're able to pass those a surcharge.
But the overall freight.
Is up approximately.
40%, if I would compare this quarter.
Two years ago. So, it's obviously quite a sizeable increase.
And overall freight total youre, probably looking at is on a quarterly basis, our freight in and freight out those well probably in the range of $175 million to $200 million a quarter, but that includes everything the goods coming in from our suppliers and when we ship to our consumers as well.
Okay, Great and then just finally on the Marine segment could you talk about some of the demand trends youre seeing there in the markets. We participate on thank you.
Same Dunbar sport demand is very very high.
To give you a sense in Australia. We just ended the season, we ending the season right now and the inventory level is very very low then.
It's well positioned for next year in Australia.
And in North America, obviously.
It's all about supply many bold build or like us are struggling with their suppliers to be cleaned up both business supplier are smaller than we had some difficulty but demand remains very strong.
Your next question comes from Gerrick Johnson from BMO capital markets. Please go ahead.
Good morning, especially and I was just curious about your comments on the negative mix shift affecting gross margin is side by side PMA seem to outperform so what was the mix shift impact.
The major one was personal watercraft.
It's obviously, a very good product line for us and given the lower level of deliveries that we've had in the second quarter.
<unk>, obviously had an impact on the mix.
From side by side it was more of the obviously the product line on it on a standalone basis is very good but the margin varies by the models, we ship and so.
The model mix was not as rich this quarter for side by side.
Okay, which are a less rich models and side by side.
That's something we'll keep for ourselves.
Okay.
Future growth.
But obviously the lower end of core pricing models, usually have a lower margin than the higher end yes.
Okay, and then on switch any shipments in the quarter, what's the cadence for switch going forward.
Yes, we had same then watercraft there was a component that affect both and we will we accelerating right now the shipment of switch.
Then it will be.
Strong quarter for switch in Q2.
Okay, great. Thank you thank.
Thank you.
And there are no further question at this time I will turn the call back over to Mr. Shang to close the meeting.
Thank you Julie and thanks, everyone for joining us this morning and for your interest in VIP.
As I mentioned, we will be hosting our Investor day on June 14, and 15 in Orlando, Florida, where we will be providing an update on our end 25 trading note that presentation will be available online.
We'll be able to more information on this next week.
Also note that our Q2 earnings call is planned for September 14th Thanks, again, everyone and have a good day.
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