Q4 2023 BRP Inc Earnings Call
Good morning, ladies and gentlemen, welcome to BRT inks FY 'twenty first quarter results conference call.
For participants who use it.
As recommended.
On your device.
I would now like to turn the meeting over to Mr. Philip Shen. Please go ahead Mr. <unk>.
Thank you Julie good morning, and welcome to <unk> Conference call for the fourth quarter of fiscal year 'twenty three.
Joining me. This morning are show was it more sturdy president and Chief Executive Officer, and Sebastien Martel Chief Financial Officer.
Before we move to the prepared remarks, I would like to remind everyone that certain forward looking statements will be made during the call and that actual results could differ from those implied in the statements.
Forward looking information is based on certain assumptions and is subject to risks and uncertainties and I invite you to consult brt's MTN FERC complexities of these.
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 deal with it.
Thank you Philip and good morning, everyone and thank you for joining US please turn to slide four.
I am very pleased with our Q4 performance, which was our strongest quarter ever.
It allowed the ERP to conclude fiscal year 'twenty, three with record sales normalize EBITDA and normalized EPS.
It was a very dynamic year marked by our ability to respond to continued strong demand as far as you know they dip products was showing tremendous resilience.
By working to supply chain pressure and the cyber incident.
Our team once again demonstrated its incredible agility.
We adapted to evolving market condition and the executed diligently in a challenging environment.
As a result, we delivered solid retail growth and outpaced competition by recording an exceptional five percentage point market share gain in North American power sports industry.
During the year, we continue positioning the business for long term success.
We accelerated investment in product development completed our side by side capacity expansion project at <unk>.
And so I knew it was multiple market shaping products, notably our new how award winning pontoon generation and completed three strategic acquisitions.
As you can see it was a very busy year.
Let's turn to slide five for key financial highlights of the year.
With delivered record results on both top and bottom lines.
Revenues increased 31% from the previous year, surpassing the $10 billion Mark.
The first time in our history.
This was driven by higher volume and favorable pricing across the portfolio.
Normalized EBITDA grew 17% to $1 7 billion representing.
Representing a very strong EBITDA margin of 17%.
Normalized EPS increased 21% to reach $12 or five above the higher end of our guidance.
Thus far retail our North American power sports sales were up 6% for the year or 5%, excluding the cdos switch pump to compare two a decrease of about 10% for the industry.
We ended the year on a strong note as you can see with our outstanding fourth quarter retail performance on slide six.
In Q4, our North American retail sales were up 21%.
Our 19%, excluding the switch compare to a low single digit industry decline.
Our performance was also very strong in other market with retail up 36% in EMEA, 32% in Latin America, and 16% in Asia Pacific.
In addition to strong demand.
Solid performance was driven by our strategy to produce and complete units that were retrofitted at our plants or by theaters when missing component were received.
As the supply chain improved in the second half of the year, we were able to rapidly convert units to retail, allowing us to significantly outpace the industry in Q3 and Q4.
You can see this outperformance on slide seven.
We ended the year with nearly 35% market share in the North American power sports industry, representing a five percentage point increase for the year and a 15 percentage point gain since fiscal year 16.
Our performance was very solid across the product portfolio.
With important gains in off road and snowmobile.
We also maintained our leading position in three wheel and personal watercraft. Despite shipping model 22 units passed the peak retail season.
This performance was driven by sustained strong consumer demand across our portfolio, which demonstrate the strength of our lives.
On this topic, let's turn to slide eight.
In calendar 2022, we won 16 product awards, one of the best years for ERP.
The <unk> switch and the new many two pontoons, where notably recognized in multiple competition.
And just a few weeks ago, our new wrote that S. Outboard engine with <unk> technology won the outboard engine Innovation award at the Miami Boat show.
On top of these product achievement.
<unk> was named brand of the year by strategy magazine.
We celebrated the 100th year of success for our role attacks and we've launched a new corporate social responsibility plan with ambitious target.
I'm proud of these milestone that show that our innovation mindset is not just apply the product, but also across all the area of our business.
With these achievements we gained further traction with dealer as shown on slide nine.
Our success tenants from our ability to constantly innovate as we bring new product to market that drive consumer demand and by our unique value proposition, which drive dealer to sell our product to maximize their profitability.
Two such initiative, we have attracted the best theatre and gain floor space in their showroom.
Early in fiscal year 'twenty three for the first time ever we become the number one OEM in term of average retail unit per dealer.
<unk> that with further extended in the second half of the year.
Achieving this number one position was a great moment of pride for me.
When the ERP was lunch almost 20 years ago, becoming the best OEM in the industry for consumers in theater was one of my objectives.
Can see mission accomplished.
Turning to slide 10 for a quick update on consumer interest.
Like everyone else, we monitored the ongoing macro concern, but based on our indicator customer interest for our product remains healthy.
In fact, we've delivered our strongest Q4 ever in term of retail with growth across all our product lines.
And looking at demand indicator the trend remains positive.
Traffic at trade shows and a dealership continues to trend positively.
Early season, 'twenty for snowmobile booking is trending as expected.
The influx of new and trend remained high.
Website visit and Google search for our brands remain higher than pre COVID-19 levels.
We are monitoring the used vehicle market and value segments that are slowing down.
Retail trends also seems to indicate a return to a more seasonal patterns.
Finally, some OEM and theaters are beginning to offer incentives.
Certain models.
But in general consumer interest for our industry and more particularly for our product remains healthy.
Now, let's turn to slide 11 for year round product.
Revenue were up 47%, reaching $1 3 billion dollar in Q4, driven by strong shipments across all product lines.
As far retail sales can am side by side and it had the strongest Q4 ever.
Benefiting from additional production capacity at too high of a story.
And from an improving supply chain.
Our retail was up high 30% in the quarter and season to date significantly outpacing the industry.
I will get back to this category in a few moments.
As for ATV retail was up low 20% in the quarter driven by the momentum of the <unk> brand and improve product availability.
Looking ahead, we just introduced an all new platform for our cleanser mid cc lineup.
This long awaited platform is our most significant upgrades and ETV in almost 10 years.
Offer more performance comfort storage and ease of ownership for the category at a competitive price. Moreover, we introduced specific pro package that cater to a more utilitarian consumer base for which the men tend to be less.
Cyclical.
With this new platform, we strongly believe that Tennant is very well positioned to gain market share in the mid cc category.
Which represents more than 50% of the television industry.
Looking at three wheeled vehicle.
Although we are in the slow part of the retail season cannot retail was up over 150% in Q4, driven by improved product availability. Following late shipment of model year 'twenty two.
We are pleased with their retail trends for three wheeled and we are well positioned for the upcoming season.
On Slide 12, let me come back to side by side vehicle, which has been a key growth area in recent years.
We haven't been growing retail and gaining market share at the SaaS base since introducing the defender in 2015.
During that period, our annual retail volume has increased by almost four times.
The <unk> brand as gained traction with consumer as we experience a significant boost in brand awareness over the past years.
Their perception of the brand is also improving.
As you can see on the right side of the slide despite rapid growth and solid momentum, we still have plenty of market share gain opportunities, especially in the utility segment.
We believe our strong lineup and had the production capacity will support our growth in that profitable business.
Turning to seasonal product on slide 13.
She's a low product revenue were up 26% from last year, reaching $1 $3 billion, driven by higher volume of personal watercraft and the introduction of the <unk> switch.
Looking at the retail or retail or first of all of our personal watercraft in the quarter was up over 300%.
Driven by late deliveries of model year, 'twenty, two products, most of which were pre sold to consumers.
The trend is also very good in counter seasonal market with season to date retail up about 10% in Asia Pacific and mid 20% in Latin America.
As far as snowmobile with most of this season behind US we are pleased with our performance as our retail is up low single digits outpacing the industry, which is about flat.
With this achievement, our global market share now exceed the 65% Mark.
Turning to our retail snowmobile news.
For model year 'twenty four we further strengthened our lineup by expanding the Rev. Gen. Five platform to more models and then introducing new key technologies, notably the industry first water injection system for high performance model.
These additions were well received and early trends in spring.
In spring unit booking are as expected, which is <unk> for season 'twenty four.
Furthermore, we introduced our initial electric model, the skidoo Grand touring and links adventure electric.
For the first year. The snowmobile are designed exclusively for guide tour operators.
These are the first electric model to be introduced following our commitment made two years ago to lunch electric models in each product line by 2026.
We are proud of this first step which is a testimony of our market leadership.
Snowmobile industry expert tested the product and they were impressed by our technology.
They are riding experience and the fit for this segment.
Expect more product in production along these lines in the coming years.
Moving on slide 14, with power sport part accessories, and apparel and OEM engines.
Revenue were up 22% to $378 million for the quarter driven by our growing product portfolio.
In our parts and accessories growth strategy every new product is designed to be highly customizable with our accessory portfolio.
For example, the recently introduced can unlock lender platform is compatible with the 125 link accessories.
We are pleased with the performance of this highly profitable business segment.
Moving to marine on slide 16.
As mentioned last quarter Marin was the last business unit to restart operation after the cyber incident and combined with some supply chain issue. It impacted production ramp up for the new menu to into Q4.
As a result revenue were down 8% compared to last year, ending the quarter at $124 million.
Looking at retail sales in North America, Q4 is off season for boating with typically less than 10% of the annual retail.
While our retail performance suffer primarily due to the supply chain sector, we remain positive about our plans and prospects for that business.
As evidenced by the announcement of the new facility in Mexico.
As for Australia retail was down about 20% in the quarter in line with the industry.
We are excited about the future of our marine business.
<unk> are essentially introduced many coupons tune and wrote that S. Outboard engine with cell technology continued to win recognition from the media and the industry and consumer demand is very promising.
With that I turn the call over to Sebastien.
Thank you Jose and good morning, everyone. We completed fiscal 'twenty three with another record quarter as we continued to experience solid customer demand for our products.
And demonstrated strong execution and delivering our production plan.
Looking at the numbers our revenues for the quarter were up 31% versus last year, passing a $3 billion mark in a quarter for the first time ever we generated $788 million of gross profit representing a margin of 25, 6% slightly down in comparison to last year's level, primarily due to inefficiencies.
So the ramp up of production of the new mini two tunes and some overhead investments.
Worth, noting however for the first time in many quarters the pricing actions that we took over the last few months offset inflationary cost, but we were subject to and.
And we expect this trend to continue into next year.
<unk> down the P&L, we generated record normalized EBITDA for the quarter of $528 million.
Representing a margin of 17, 2% and our normalized net income reached $309 million, resulting in a normalized earnings per share of $3 85 for the quarter ahead of expectations and resulting in a full year normalized diluted EPS, but came in above our guidance range.
Supported by these strong results we ended the year with a robust balance sheet with over $200 million of cash and a healthy net leverage ratio of one five times, providing ample flexibility for further investments in the business and capital distributions.
One thing I want to highlight about our financial performance is the structural improvements we delivered in the recent years that significantly enhanced our normalized EBITDA margin profile.
You can see this on slide 18.
In fact, our normalized EBITDA margin is up 370 basis points over the last three years, primarily driven by sustainable improvements such as the wind down of the avid Rudolph Board engine business, which helped by about 60 basis points, the positive impact generated by volume mix and cost improvements coming from our volume.
Growth, especially as we leverage our Mexican manufacturing footprint.
Our richer product mix, notably driven by the growth of our SSP business and the development of our modular design across more models. These are elements helped our margin by about 110 basis points and we gained about 300 points coming from a more efficient operating structure driven by our ability to leverage our mark.
R&D and administrative spend across more product lines.
Full size.
For instance, we gained efficiency in R&D by being able to develop technologies components and engines that will be leveraged across multiple product lines.
All of this unlocked by our modular design approach, we do the same on marketing by leveraging our website technologies CRM dealer event and our teams across multiple brands. We gained about 470 basis points driven by the structural improvements, bringing our normalized EBITDA margin to about 18%.
Now there were also all elements that were more temporary in nature that impacted our margin over the last three years, notably below our sales program different by the low product availability in the network.
And the tight supply chain environment, which drove higher inflation and turbines costs, especially in fiscal 'twenty three.
Some of these temporary elements, where the negative impact of about 100 basis points.
As these temporary elements normalized overtime the structural changes will mean that we will be well positioned to continue delivering strong normalized EBITDA margin of it.
17% in the coming years.
Moving to slide 19 for an update of our network inventory situations.
Driven by the better utilization of our production capacity and the improved supply chain environment, we have been able to continue increasing our throughput in Q4, allowing us to further replenish our dealers inventory.
As a result, we have seen a healthy increase of 66% in product availability at the dealership driven by SSG ATV and snowmobile.
And when you account for a slightly higher than usual inventory for three wheel and personal watercraft for this time of the year due to the delayed shipments of quality R. 22 units in the fall. Our overall network inventory is up 130% from last year's level still.
Still given our significant market share gains over the last few years, our network inventory remains below optimal levels.
Unit availability continues to improve across our product lines over the next quarter, we will be even better positioned to serve our dealers and customers and support our market share momentum.
Now moving to the guidance, starting with a bit of context on slide 20 as.
As we build our guidance for fiscal 'twenty four we are cognizant of the environment in which we operate with inflation remaining above historical levels and higher interest rates, while it is difficult to forecast. How these factors will evolve throughout the year and how they will impact the industry based on our current environment, we expect our industry to remain about stable when.
The fiscal 'twenty three.
Representing a decline of low single digit from pre COVID-19 levels.
Stop despite all the momentum we have with new entrants and the fact that we were not able to fully meet customer demand over the last year due to limited product availability.
Still in this context, we are well positioned to continue to grow as we enter the year with significant momentum.
<unk> gained five percentage points of market share in fiscal 'twenty, three driven by the robust demand for our product lineup, especially in side by side.
We have strong momentum with our dealers driven by unique data value proposition, which led us to reach the number one position in the industry in terms of number of units per dealer.
We have key new products, such as the CEO switched in the many two pontoons that have won multiple awards and are still in the early stage of their growth phase.
And we have demonstrated our ability to adapt and execute in a challenging environment.
Outperformed the industry, all the while maintaining strong margins.
Such we are well positioned to continue our growth trajectory in fiscal 'twenty four with expected revenue growth of 9% to 12% driven by continued market share gains in year round products. As we further gained traction with the cannon brand benefit from our increased production capacity for side by side.
Average, our new mid Cc platform for ATV and sustained our momentum with right.
Moreover, we expect our growth to be supported by the first full year of production of the CDO switch and the many two pontoons and by the continued momentum in <unk> driven by our growing fleet of units and usage and the continued innovation and our extensive lineup of accessories.
And to put things in perspective, while some may perceive fiscal 2004 to be less predictable than typical we're comfortable with our guidance given the full year impact of price increases. We did last year is expected to contribute to our revenue grow by low to mid single digits as usual, we have been conservative in our assumption for the upcoming snowmobile.
A lot of crop season.
Over 50% of our expected revenue for the year are coming from more predictable sources, such as utility products, new introduced models and P&A.
We also have a strong pipeline of exciting products coming out this year for which initial shipments to the network are expected to support our growth.
On the margin side, our guidance assumes a normalization of the supply chain environment and as such we expect the following impact on normalized EBITDA margin.
A reduction in turbulence costs for a benefit of 150 basis points at.
The positive impact from pricing net of inflation for about 100 basis points, which will be offset to a return of some sales program for about 200 basis points and a slight increase in opex as a percentage of revenue for about 50 basis points. As a result, we plan to deliver normalized EBITDA growth of nine.
And to 13% and to maintain our strong normalized EBITDA margin of 17%.
Turning down the P&L the increase in our normalized EPS is expected to lag normalized EBITDA growth due to higher depreciation and interest expense the.
The increase in both expenses is expected to represent an incremental dollars 35 per share still we believe the fundamentals of our business continued to be very strong estimate Australia by expectation of solid growth in normalized EBITDA, providing us with the means to offset these elements over time.
Moreover, fiscal 'twenty four is expected to be a solid year in terms of cash generation driven by a strong normalized EBITDA and the expectation for solid positive working capital contribution as we reverse some of the investments we made in fiscal 'twenty three.
In fact, we are very well positioned with the flexibility we have to consider multiple capital allocation options and fiscal 'twenty four.
Turning to slide 21 for capital allocation priorities for fiscal 'twenty four our priorities remain to continue investing in growth projects and to return capital to shareholders.
Such we expect to allocate between 750 to 800 million to Capex, focusing our investments on growth projects that have attractive expected returns.
Our ability to identify and execute on these projects is at the core of our success and is what is allowing us to outperform our industry. As you can see from the chart, which shows our track record of delivering very high return on invested capital.
Furthermore, we plan on continuing to provide strong returns to our shareholders in fiscal 'twenty four and as such we have announced the increase of our dividend by 12, 5% and we are planning to be active with share buybacks as we still have three 5 million shares available under our current in CIB program.
Note, however that our guidance does not factor in any share repurchases.
Now to wrap things up a summary of our guidance on slide 22.
As mentioned, we expect fiscal 2000 and for it to be another solid year for ERP with revenue growth of 9% to 12% and normalized EBITDA growth of 9% to 13% sustaining our strong normalized EBITDA margin of 17%.
Our normalized EPS is expected between 12, 25% in 12 months 75, representing a growth of more than 300% over the last three years and making continued progress towards our 25 objective of reaching $13 50 to $40 50 of normalized EPS by fiscal year 'twenty five finally.
While we expect to deliver solid quarters throughout the year note that our stronger growth is expected to come in each one notably with Q1 EPS up between 40%, 50% as we are lapping a quarter that was significantly impacted by supply chain challenges last year on that I will return the call back to Jose.
Thank you Sebastien.
I am very proud of our team achievement in fiscal year 'twenty three.
We are now looking forward to a <unk> future and we are well positioned to deliver solid growth in the years ahead.
In fiscal year 'twenty four we will continue to progress on our strategic initiative.
We are confident that our investment in innovation and R&D will lead to further market share gain in the marine and power sports industry.
More particularly in side by side vehicle supported by additional production capacity.
Furthermore, in the past two years, we prioritize output over efficiency now.
Now with the supply chain stabilizing we are focusing again on the execution and efficiency.
Over the mid term, we remain on track to deliver our 25 objectives looking.
Looking beyond <unk>, we are maintaining our focus on the.
Three addressable market that we have presented last June at our Investor day.
And we are committed to growing sustainably as we make further progress on our journey towards electrifying our product lines.
In conclusion.
I want to thank all of our key contributor to our success.
This includes all ERP employees, whose dedication resilience and constant at Fort are second to none.
I also acknowledge the strong support of our dealers and suppliers, who help us get to market the industry, leading product that's forge our reputation.
On that note I'll turn the call over to operator for the questions.
Thank you ladies and gentlemen did you have a question. Please press the star followed by the one on your Touchtone phone. Please limit yourself to one question and one follow up.
And your next to withdraw your question. Please press star followed by the two if you're using a speaker phone. Please press the handset before pressing any keys.
Please for your first question.
Your first question comes from Mark Petrie from CIBC. Please go ahead.
Hey, good morning.
Hoping that you could just shed some more light in terms of.
In terms of the commentary with regards to consumer demand and I guess, specifically those areas, where you are monitoring and momentum in used units and value segments as.
As well as some Oems and dealers returning to more typical levels of incentives. If you could just share a little bit more detail on that would be helpful. Thanks.
Yes, good morning, Mark on consumer demand.
Obviously like I said in my intro and then we'll try to give you a bit more color. There is many many positive our Q4, our retail was up high numbers.
The traffic.
Shows and dealers are still good.
Better than what some were expecting.
Our snowmobile booking with dealers.
As expected and our.
Preorder sales and we're looking at the trend on a daily basis is tracking to.
Pre COVID-19 numbers, then very strong in on snowmobile.
About a third of our production typically is pre sold to consumers and our website traffic and Google search are again above pre COVID-19 numbers.
Now other element that we're watching the use market a slowdown obviously dealers CLO.
Used unit that.
<unk> trade at high value.
And the dealer or a tendency to maintain their pricing right now than the retail slowdown on the use unit dose.
Seasonal pattern is coming back to a more normal I would say pattern.
<unk>.
Some OEM and theater started to give some incentive.
When you look at all of this.
There is a lot of mixed signal in the.
The industry, but we feel confident that we can continue to grow despite the macroeconomic situation and if I could have you know the <unk>.
Unemployment.
Rates are still very low compared to many years ago and also access to credit is.
Pretty good.
Okay. Thanks, So I wanted to follow up on that on that last point, you mentioned I mean, when we get some of the developed recent developments in the U S around <unk>.
Liquidity and access to credit I'm, just curious to hear your perspectives on on the availability of financing for your customers and any views on that in 2023 or maybe any recent conversations with some of your finance partners that you could you could pass along alright.
Alright.
Good morning, Mark.
If I look at the Q4 numbers.
Right with what we were seeing.
In Q2, and Q3 saw no slowdown in terms of availability.
What we are seeing quarter to date.
<unk> number of applications is going up significantly and so people are curious and assessing what the credit market as an overall the closure rate that take rate is higher than what we've seen pre COVID-19. So.
One interesting trend that we see is that yes, obviously interest rates are higher so the cost is higher but what we've seen is that people have extended.
The financing terms, so instead of doing a 54 months. They will go to a 60 months and we're seeing that trend across all other product lines. So some of them are shopping for a monthly payment and the way to achieve their monthly payment with higher interest rates is to extend the W. The financing terms.
Hi, guys.
So the FICO scores are still trending.
Higher than pre Covid as well.
Yeah excellent okay, well. Thank you for all the comments and congratulations on a great year in the market share wins.
Hey, Mark.
Your next question comes from Robin Farley from UBS. Please go ahead.
Great. Thanks, I also had questions on kind.
Kind of.
You mentioned, the what competitors are doing with sales programs.
Would you describe that.
Hi.
Programs out there as being just kind of typical what they were pre COVID-19 or maybe even not quite that aggressive I wonder if you could characterize it and then so.
Are you seeing that from some of the newer entrants in the market or is it.
Really more that it took us more entrenched Oems may be responding to some of the newer entrants.
From a market share perspective.
Good morning Robin.
Why is the question.
But I would say.
Programs are not has aggressive as they were pre COVID-19.
But more than last year, obviously, and I would say is depend of the dealers and OEM, but I would say, it's about maybe halfway to what they were pre COVID-19 and.
And we don't see.
More program from some of the new Oems that are more.
Our president in North America.
So youre, saying, youre, saying youre not seeing it from the newer entrants sorry, just wanted ultra I understood.
No we don't see it.
Okay, Great. Thanks, and then just for my follow up question can you just remind us on your side by side capacity.
Thanks, Morris III kind of what.
How ramped up are you and what additional capacity you would have sort of by the end of the year or any other future planned additions just kind of remind us of here.
Sure capacity thanks.
Yes on the side by side on your Phase III, if you remember.
You are right.
A three phase one was having 50% more capacity and you've got a three phase.
Phase II was another.
Another 50%, that's basically compared to you with you on ice two and <unk> three together, we have doubled the capacity than we had with you it is too.
And right now it's up and running.
Yes, we've had quite a bit of capacity growth for side by sides of our business in the last several years since we've been work.
Marketed on site by site and every time, we've added capacity theaters have given us the force base.
Obviously gain market share so.
This new capacity, obviously coming online is another great opportunity to continue overall.
And I know that the.
The capacity the facilities.
Is it fair to say that Youre not.
And you still have room to go in terms of actually utilizing all the capacity that is available in that.
This new phase is that fair to say that.
Kind of incremental.
Absolutely we were probably running at.
In fiscal 'twenty, three with the supply chain constraints at 80% capacity and the plan. This year is to run now this with this new capacity probably running between 80 and 85%. So we will have more more room to grow.
If the market shows there.
Okay, great. Thank you.
Your next question comes from James Hardiman from Citigroup. Please go ahead.
Hi, This is Sean Wagner on for James Hardiman.
I guess going back to sort of the market share thing now that shipments in the power sports industry are a little more normalized across the industry.
How confident are you in your ability to protect particularly those side by side share gains and what's the risk of competitors being more aggressive than they are even now.
On pricing and promotions to regain that lost share.
First the industry is still healthy.
We gained share with the strength of our product obviously, that's the basis, but also with our momentum with the dealers and we will continue to bring new product to.
The pipeline we have.
We are investing quite investing a lot in R&D and parts, where the upside by site.
Then we are confident to continue to grow our market share with our product innovation and momentum that we have with the theaters plus the capacity that we just had.
Okay, and I guess to follow up on that.
Obviously, you've spoken about momentum and utility being a main driver for 2024, new products as well.
Your biggest competitor I guess is also identified those same two drivers, particularly.
Sort of increased shipments from them.
Due to sort of their supply chain issues improving.
Is there room for both of those to happen or is it just a matter of.
Have confidence in your business and your products and the execution that <unk> had in that.
<unk>.
We'll see how it shakes out from there.
I mean, it's our confidence in our execution you know last year, we were quite aggressive to run production at higher rates with producing units with missing part that we either retrofit ourselves towards the dealer, we're redoing it and I think it gave us a head start versus our.
Competition.
And this combined in this.
It is mainly <unk>.
One reason why with gain so much share last year for all of our product line.
Now we continue on this in the sense that now supply chain is stabilizing but we have the production capacity and again, we have very.
Competitive lineups.
Our innovative competitive lineup and we have the dealer momentum.
When you put all this together we are confident that we can continue to grow.
Okay.
Can you quickly remind us sort of what level of market share you would need to take with that expanded production capacity to be margin neutral given the higher overhead.
Well, it's obviously as you saw in them.
Margin bridge that I gave on the call. Our expectation is the SBS volume is going to increase we're going to see a positive coming from pricing, but we're going to see a positive coming from <unk>.
The reduction in turbulence.
We are going to invest in sales program. This year and so we our plan is to be above 50.
<unk> 50 basis points on gross margin.
And also a higher assessments and OPEC opex by 50 basis points from an EBITDA margin point of view.
<unk>, Yes, we are we are expanding the platform. These costs are absorbed with the additional volume that we.
Producing.
Okay. Thank you very much.
Thank you Sean.
Your next question comes from Matthew <unk> Landry from Stifel. GMP. Please go ahead.
Hi, good morning.
My first question is on the on the industry and in your guidance.
It looks like from what I read on your slides in the North American power sports industry was down low single digits in 2022 in North America.
And I think in your guidance, you expect stable industry growth and 23, so am I reading this correctly that you're expecting some sort of an improvement year over year in the industry in North America. This year.
No what we said.
The prepared remarks was a flat industry and that industry was actually sold.
So flat year over year and that would be down versus pre COVID-19.
Down single digits, so flat industry is the assumption.
Okay.
And I know, it's a tough question to answer but.
Yes sure.
<unk>.
If you look at the data.
The dynamic I mean, you see the demand and not just sensor to the first question about the consumer demand, but also gave you some other desktop the new and trends.
Still about 40% up versus pre Covid.
70% of those people are.
Our saying that the.
Are there to stay into the industry.
And those customer are more wealthy.
The basically the household income of our customers.
Is 235% higher than they were pre Covid. This is an incredible numbers and that's tough when you look at our you'll know that we are more high end and then three level and when we look at our customers.
Third of the population in U S earn hustle income below $100000.
And our customers to <unk> are above $100000.
Then new customer.
Higher household income and we are more high end, obviously, the low end and some of our competitor and I think we're well, we're well positioned to the industry to.
To continue to grow.
Okay. That's helpful. Thank you.
Thank you Martin.
Your next question comes from Sean <unk> from BNP Paribas. Please go ahead.
Hi, guys. Thanks for the question, maybe following up a little bit on that you've guided to flat industry credit for calendar 'twenty three.
Can you help us think about how much share do you think you can gain is it you gained five points of share. This year 22 is at the same level again in 'twenty three.
And are there any kind of different areas, we should be thinking about I mean, you could highlight utility but are there other kind of areas.
You should be gaining more share.
Yes, good good morning, well the first thing is from a share growth perspective.
On the seasonal product business or we're not expecting share growth, we are planning for conservative industry, which would be down versus pre COVID-19.
And we're already at 60% and set up our market share for these products around the world. So.
On that segment, we're not expecting.
Any any market share gains on the year round products business, if you work too.
Look at what where is the growth coming from just maintaining our market share in side by side. The one the market share that we've gained in fiscal 'twenty three.
Bring 7% revenue growth the pricing impact.
As a 4% revenue growth.
And.
Obviously, we will not stop.
The market share that we have.
In 2003, so our expectation is to gain further market share and that could be another 5% to 10%.
Revenue growth driven from those those gains as we said obviously, we have a solid lineup, but we also have exciting product introductions that are coming this year, which will obviously help to fuel further market share gains and growth in that business.
Okay got it thanks, and then maybe on the Opex elaborate deleverage you mentioned 50 bps.
Can you just talk about some of those investments is it just the fixed costs from the.
Increased capacity or are you investing more in sales and marketing or R&D.
Some color on that would be helpful.
Well, obviously as you saw on our.
Our return on capital.
Slide that we showed this morning, obviously, we have a solid track record and that doesn't come by magic. It comes through investments and obviously talented people and so we will continue investing.
In R&D, continuing investing in marketing in order to drive future growth for this business.
We're in this business for the long term and so that's been our.
The secret of our success and will continuing got so as we grow the business expand into new segments, obviously comes with higher investments.
Okay. Thanks, guys. Good luck.
Your next question comes from Craig Kennison from Baird. Please go ahead.
Oh, Hey, good morning, and thanks for taking my question Slide presentation has been right. So thanks for that as well.
I wanted to ask about.
First time buyers, because hey, you mentioned that.
That metric has stayed strong I'm curious if you've been able to attract first time buyers from early in the pandemic purchase cycle and whether you've seen any behavior trends evolved in terms of.
Trade in cycles or their willingness or desire to upgrade.
Yeah. Good morning, Craig obviously, we doing a lot more.
So we are looking at is up more research about this on a quarterly basis, but basically before COVID-19 and we've said that number before.
<unk> trend.
Our product sold through new and trend was about 20%.
And now like I say.
In 'twenty fiscal year 'twenty, one 'twenty two it was.
Slightly above 50% and now its 42%.
Very very healthy and what is interesting is the antenna.
And tend to see in the industry have increased now its at 70%.
And the other factor is the household income.
We watching.
Carefully and I think Thats explained also.
Reason why access to credit remained high and when you combine all this together I know there is a lot of macroeconomic concerns in the macro environment, but we feel quite good where we stand in the industry.
Thanks, and I Wonder if I could just follow up and ask about the health of your dealer network clearly gained share dealers and you know the most significant.
And many of those dealers just maybe comment on the health of those dealers given that.
Their face tighter margin in some rising cost in terms of floor plan expense.
I mean overall, we're at the dealer meeting for snowmobile in the new ETV month, and a half ago now and then.
Dynamic is excellent.
And dealer like OEM that push and we introduce again on snowmobile a lot of novelties the electric snowmobile DC.
That transition to this new technology.
Coming in in D. C. The first products are reaching to the market.
They were very impressed with the new ETV like I said in my remarks, we were like more than 10 years.
Before since we invested in this.
We developed that platform then when they look all of this how dynamic we are in the health pushing we are and they're making more money with our product line than the relationship with have with our dealers.
The highest I never saw.
And when you sell this.
We feel happy obviously.
I would like to keep the margin that.
We had in the peak of the demand during the Covid, but they are realistic that this time is from the past and it will come back I will not I hope it won't be to what it was pre COVID-19, but then in between the pre Covid and what we had last year.
Great. Thank you.
I think youre correct.
Thank you. Our next question comes from Jonathan Goldman from Scotiabank. Please go ahead.
Hey, good morning, guys.
Yes.
Good morning.
I just wanted to circle back to the macro I guess it seems to be the topic as you are.
Some investors at least myself are looking into an analog to compare the current environment to past cycles.
Obviously, you have a much larger sample size with the company in the industry, but maybe looking at where we are right now and obviously a lot of uncertainty, but in formulating your guidance how does the current environment.
Compared to past cycles, and maybe what ways that the industry changed obviously, the PFC extreme event, but even cycles before that any changes structurally in the industry.
It would be helpful.
But like we said in the remarks, we see some.
Slowdown in <unk>.
The.
The used market, but I think this is a temporary thing everyone is on defense right now to maintain.
High value or high cost and I think when when spring will come some dealer will start to reduce their MSRP for use and this will come.
Come back to a more normal level. The other thing is.
A lot of Oems and dealers to talk about this slowdown into the entry level, we have the spark in the ryker, which is preorders is a bit lower than on the.
Hi, and watercraft and high end <unk> vehicle, but it's still higher than pre COVID-19 on the preorders and we're not much into the entry level segment. Most of our product line that we selling high end product with better margins for the dealer a lesson.
We dealt with I believe it will be less affected than the others then.
And then when I look all of this.
I think overall, we are in a good position if I would just add obviously the unemployment rates are still very healthy and obviously people have a job on that.
That is good for our business has been the biggest indicator of a slowdown when the employer unemployment rates go up but as the business ERP. Obviously, if I were to look versus other cycles that we've had we are very.
Very different business are much more diversified from a product line point of view from a geography point of view as well and from a manufacturing effectiveness or cost structure is not the same with the Mexican manufacturing footprint.
I would say a much more resilient business than we were 10 years ago and that obviously is a big plus if we were to face.
Certain economic slowdown.
No I appreciate that that's very helpful. And then maybe one more for use with FCA on the working cap.
I think last quarter, you mentioned you'd start to see some unwind as the build out at $500 million in the second half.
This year has that timeline a quantity.
Obviously, when you get the full 500.
Quantum changed.
Last call.
While the timing of it is unchanged so.
Yes.
We've invested a lot in working capital.
Last year due to the supply chain turbulence and having more raw material inventory as a buffer and having some retrofit unit.
In terms of overall opportunities I am looking for this year, obviously with our growing businesses.
Our guidance that we're expecting to grow again this year. It is going to require some investment in working cap, but I do expect that we will recover some of the investments we made last year. So it's north of $400 million.
Cash benefit that I'm expecting to see this year coming from better management of working capital.
So just to clarify that the 400 gross before investments.
Growing top line.
That will be a net.
Yes.
Perfect. Thanks, very much guys.
Thank you.
Thank you. Our next question comes from Fred.
From Wolfe Research. Please go ahead.
Hey, guys I just wanted to come back to the EBITDA margin bridge it sounds like you're baking in 200 basis points of incremental headwinds from promos.
Next year versus this year, but I think that that was a 300 basis point tailwind. So what gives you the confidence that you'll be able to hold onto some of that favorability, especially just inventories normalizing and competitors starting to promote again.
Well, we're not obviously we were already.
Two months in the new year, and yes, there is a bit of promotion, but we're not seeing the levels of promotion that we've seen in the past and what we are seeing as promotion is much more targeted towards.
Interest rates.
We'll call it subsidizing interest rates for retail financing.
So what we're seeing now.
And providing some contingency for the end of the year, we believe that holding at least 100 basis points of sales program saving is certainly feasible and also we've got more sophisticated in how we manage programs over the last few years and that sophistication is helping us to be much more targeted and when youre targeted U.
You'll get some savings because you're not spread.
Spreading the butter the money in regions that is not needed. So that's another reason why we're confident in that ability you're protecting the 100 basis points.
Makes sense and then just to come back to the used commentary. It sounds like you guys are expecting used pricing to come down as we move into the spring and I know that.
Trade in values, maybe arent quite as important or via some other vehicle categories, but do you think that that is going to result in more negative equity and potentially impact the trade in cycle as we move through the spring or not.
I think this will go very fast.
The dealer will start to reduce their miss RFP I think.
The trade in will will restart at a faster pace, but the treatment is kind of protected as well there has been very very high pricing increase that have been done over the last two or three years, something like 14%, 15%, 16% and some product lines and so some of the use of value will be protected by those increases in MSRP.
As well so yes, there are very high.
Values, there will be a normalization happening, but not because of those price increases I'm not seeing a significant.
Devaluation and he was asking was that we'd be equal to what it was pre COVID-19.
Okay. Thank you.
Okay.
Our next question comes from Joe <unk>.
Hello.
James Please go ahead.
Hey, guys good morning.
I guess first question is on the inventory I'm trying to figure out how much below optimal your network inventory situation as I said I think you mentioned its about 8%.
So where it was in fiscal 'twenty, but give me your retail growth where should it be or maybe asked another way where a dealer turns today.
Where should they be it seems like there's still a channel fill opportunities. So I think any color. You can you can provide there would be helpful. Thank you.
And if we give you in this this debt though is at the end of Q4, then if he gave you.
Some colors.
On the ATV side, we're about 20% in units were about 20% below pre COVID-19, but then days because we've been growing so much during the COVID-19.
During the last two years.
In days were minus 40% versus pre COVID-19.
On a side by side with somewhat equal in units, but we still.
Number of days, 50%, because when we look at the growth we had.
You just need more inventory to fuel the retail.
For watercraft entry will slightly above pre COVID-19 volume because of the model year 'twenty two.
But the preorder.
For watercraft is like four times pre COVID-19 numbers and three wheeled three times pre COVID-19 number although slow season 'twenty three will end at the end of March we believe we will be at about the pre COVID-19 volume.
Our booking with dealer is on plan and the tracking for preorder to consumer is also tracking to more normal and when we look at all of this week.
We feel confident that we are in the right position.
With inventory byproduct line.
And in terms of filling the pipeline should be done by the end of Q1, yes, absolutely.
Thank you very helpful and maybe just a follow up on that 25, you mentioned earlier, you're tracking well there.
Is that still.
Even with the higher interest expense and higher depreciation as you can imagine there's $1.35 a share or are we still looking at a $14 number and in in fiscal 'twenty five.
Yes.
Yes, obviously.
We have solid momentum, we have exciting product news coming out.
This year and next year and so we're in line to deliver on our 25 commitment of $13 50 to $14 50 EPS.
25.
Okay, great. Thank you guys.
Thank you.
Your next question comes from Jamie Katz from Morningstar. Please go ahead.
Hey, good morning, I have just one quick one I know it was mentioned in the prepared.
And then there were some production inefficiencies and higher production costs and.
I'm curious how you guys expect that to play out over the course of the year given that the hands could be sort of a lumpy lapping the introduction of the switch and all.
Also.
Sure.
The closure certainly.
Slower manufacturing maybe at certain points.
In fiscal 2023, so I guess, how does the expense leverage or pressure starting to play out over the course of the year.
While we.
We've seen some favorable.
Sure.
Results of the fourth quarter coming from the turbulence so year over year that was favorable so thats expected to continue in Q1, because Q1 last year was.
The more challenging quarter from a supply chain point of view, so we're expecting some benefits to materialize.
This quarter.
Already.
But the back half theoretically could be much weaker on the top line.
And so maybe there is a little bit more pressure at least from our grasp.
Yes.
There could be a bit of pressure, but overall, we're expecting solid quarters.
Throughout the year.
So.
Again, depending on how the end of the year materializes.
But there is obviously going to be a big benefit coming from the lower turbulence.
Our fiscal 'twenty four.
Thank you.
Your next question comes from Derek <unk> from Canaccord Genuity. Please go ahead.
Yes, hi, thanks.
A clarification on you keep mentioning.
Flat industry, but is that is that volumes, you're referring to and then on top of that you are expecting to get the low single to mid single digit benefit from pricing.
I'm, sorry, I didn't.
Full year question, Derrick, Yes, sorry, just on the flat industry.
Expectation that you have is that volumes that you're referring to.
Yes, yes.
Okay.
Okay, Great and then.
Just coming back to that to the cash flow statement, a little bit the incremental capex. This year and the 750 to 800 given that the business has gotten bigger and it seems like you have a material innovation pipeline is that level sort of what we should expect us as a new normal for the next few years.
Yes.
Should be the new normal.
Okay. Thank you very much thank.
Thank you.
Your next question comes from Kamran Dark from National Bank Financial. Please go ahead.
Yeah. Thanks. Good morning, just wanted to follow up on the I guess, the working capital you mentioned the $400 million tailwind. So can you give us any kind of sense as to when we might see some of that unwind.
It's more of a second half of the year or is that something we might see in the next couple of quarters.
Yes, good morning, obviously.
Said, we've invested in.
Keeping somewhat finished inventory on the books last year and also higher raw material.
As we wanted to have greater safety stock too.
To adjust for any unforeseen changes in supplier capacity.
We will still run with some buffer.
H, one and so my expectation is that the.
The benefit of the working capital.
It will happen in the second half of the year.
Once we.
Work with our suppliers stabilize their production.
<unk>.
Adjust their capacity as well to ship obviously, the logistics is improving.
That's what we're seeing in each two benefits happening with us.
Okay. That's helpful. And then just on I guess sort of debt.
Debt and interest expense I mean, obviously you've had this big investment in working capital. So you've had as you know more and more money here to fund that.
Free cash flow profile looks quite strong for at least the next couple of years I'm. Just wondering what can you do I guess too.
To reduce debt and by extension reduce your interest expense because I think your guidance assumes a fairly healthy increase in net interest expense.
Well from a balance sheet point of view first I mean, we are we are at a healthy point I mean, our leverage is one five times at the end of the year. So I would say, it's a healthy leverage obviously, we've experienced higher interest costs coming from the adjustments in the base rate.
We have the advantage that some of our debt is hedged. So overall, we're assuming an average LIBOR of five 6% and even if the rates were to go up an extra 1% that probably have an impact on policy.
$5 million on the P&L.
So the priority is not to deleverage.
Some point interest rates will come back down.
And obviously, we have strong EBITDA growth, which is allowing us to offset more than the increase in interest expense and depreciation that we're seeing.
Right so from a capital deployment priority.
I would I guess, what youre, saying is that maybe in CIB as a higher priority item than deleveraging.
Absolutely the returns are much higher to do in CIB and we plan on being active on the CIB This year.
As we have in the past years as well.
It's a much better return of capital to shareholders.
Paying down debt.
Okay makes sense, thanks very much.
Thank you.
Your next question comes from Brian Morrison from TD Securities. Please go ahead.
Thanks, Good morning, I want to follow up on Cameron's question.
With your financial guide and your reversal of working capital that's $1 billion of free cash flow in the last two years, you've done in <unk> and what's the trigger point historically to proceed with this form of return as opposed to NCI.
Well, obviously, we've been we've.
We've been active in both in terms of in CIB in that site.
CIB there is a certain maximum you could do.
Within a 12 month period the current in CIB. The maximum shares we can buy back three 5 million shares.
So as you said our expectation is for solid free cash flow and we've always executed opportunistically on the ESI.
Obviously today.
Our multiples are lower when you compare to historical averages.
So any option is off the table, but we plan on being active with buybacks this year.
Okay.
As you reiterated.
<unk> and 'twenty five targets valuations, probably slip to 2025 any granularity on the details there or is there any change to your $7 billion a year round in your $1 billion of marine it looks like your EBITDA margins a bit higher than your high sixteens earlier granularity on changes within that guidance.
No.
No material change obviously the plan.
As we communicated about six months ago in June at the Investor meeting.
The good news is some of the momentum we were planning to have over the three year period up to 2025 happened more quickly and side by sides, so giving us the confidence that we can achieve our 25 target with the more rapid momentum we saw in certain product lines, and obviously from a dealer value proposition point of view.
Dealers like doing business with us and they see that we're bringing new business to them and just if you look at the last few months, we've announced the switch that's a brand new product line for them, we have announced the CDO rise as well.
It gets a lot of market and dealer excitement so.
Or everything is lining up from a product line dealer point of view for us to be able to deliver on our.
Any increase your $500 million target on the switch.
For now.
Thanks very much.
And your next question comes from Sam <unk>.
From RBC capital markets. Please go ahead.
Okay, great. Thanks, and good morning, just a quick question I guess on the Marine progress obviously, a big growth number you are giving for next year, but it seems like you called out some supply chain issues. Maybe if you can share some color on what specific kind of parts areas are having issues and maybe the cadence of this ballpark, 50% growth that you are.
Wanting to for this year.
Yes, good morning.
I mean I won't go into detail.
Because it's between us and suppliers, but I won't go into detail, but basically it's a brand new platform.
We were quite innovative we designed the product to obviously.
Reduce costs and give to the customers.
Features.
With one supplier parts clearly, it's more difficult than what obviously we had planned.
And we are in the middle of resolving it then we believe that things will.
Improved in each one.
Okay, Great and then just a quick one on kind of the power sports DNA side.
There's a view out there that.
Sales of this segment could go up during a downturn as maybe people spend on lower cost periphery items.
If there is a macro slowdown is there some sort of that sort of expectation built into your number here for the guidance for fiscal 'twenty. How are you thinking about the evolution of that segment.
Through the cycle at least over the next year and a half.
Well, obviously you are right that when there was a slowdown.
That is.
More sustainable.
Because people still are still writing and there is still.
Need to maintain and repair their vehicles.
But again in our assumption that we're not building, we're not building an assumption for the economic slowdown in the guidance. The growth is obviously coming from me.
Number of units that are out there being used by our customers and also.
The introduction of new models like the can am ATV that were on that we've just launched obviously has a high accessory attachment rate.
That's obviously drive accessory sales up.
And so that's where the growth is coming from both pricing as well.
Alright, thanks very much thank.
Thank you.
There are no further questions at this time I will turn the call back over to Mr. Dan at this time to close the meeting.
Thank you Jay and thanks, everyone for joining us this morning and for your interest and we'll look forward to speaking with you again for our Q1 earnings call. Thanks, again, everyone and have a good day.
Ladies and gentlemen, this concludes your conference call for today, we thank you for joining and you may now disconnect. Thank you.