Q2 2024 BRP Inc Earnings Call
Good morning ladies and gentlemen and welcome to the BRP Inks FY24 second quarter results conference call. For participants who use the telephone line it is recommended to turn off the sound on your device. I would now like to turn the meeting over to Mr. Philippe Deschenes.
Thank you, Julie. Good morning and welcome to BRP's conference call for the second quarter of fiscal year 24.
Joining me this morning are Jose Baujali, President and Chief Executive Officer, and Sebastian 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 the actual result could differ from those implied in these statements. Forward-looking information is based on certain assumptions and is subject to risk and uncertainties and I invite you to consult BRP's MD&A for a complete piece of these. Also during the call, reference will be made to the supporting slides and you can find the presentation on our website at www.brp.com under the investor relations section.
So with that, I'll turn the call over to show you. Thank you, Philippe. Good morning, everyone, and thank you for joining us. I am pleased to report that we have delivered a very solid quarter driven by continued trend in consumer demand for our lineup and the ongoing support of our data network. Solid execution of our plan led to an impressive market char game and record result for a second quarter. Given the strong performance and our positive outlook for the rest of the year, we are increasing our normalized EPS guidance to a range of $12.35 to $12.85.
Let's turn to slide four for key financial highlight. Revenue reached 2.8 billion, up 14% from the previous year, given by higher volume of pricing.
Normalized EBITDA grew 13% to $473 million and normalized EPS increased 9% to reach $3.21.
Turning to Site 5 for a look at our Q2 retail performance.
Our product portfolio continued to gain traction with consumers, leading to significant market char gain. In North America, our retail sales were up 41% compared to an industry that was up mid 10%.
Given our retail performance, this imply that BRP accounted for most of the industry growth in the quarter.
We were also very strong in international market, with retail up 23% in EMEA, 36% in Latin America, and 33% in Asia Pacific.
Looking more closely at the numbers, we see that demand for products remains robust, despite ongoing macroeconomic concern.
Not only was our retail up 41%, but it was up 37% versus Q2 of fiscal year 2020, showing continuous gain.
With this strong performance, we reach record market share for side-by-side, ETV and personal water craft.
All of this with retail incentive below pre-COVID levels. We believe those results are driven by the evolution of our customer profile over the last four years. The influx of new entrants remains high at 39%. We also continue to see high FICO score and the average household income from our customer survey is 40% higher than pre-COVID at slightly above $160,000. Those customers are looking for more high-end products which explain our momentum in this category across our lineups. Bottom line, the typical BRP product buyer remains in very good shape financially. This puts us in a favorable position entering the second half of the year.
Turning to slide 7 for an overview of key products introduced at our BRP club held in Atlanta two weeks ago. This year's club was one of the largest ever with 5,300 total participants in person and virtually.
The highlight was the launch of the Can-Am Mavic R, our flagship model in the sport category. It brings a new dimension to riding with an industry-leading 240-horsepower engine, and thus refers dual-clutch transmission.
a unique suspension geometry, and lots of enhanced technology. With this new offering, we are well positioned to gain market share in the high-end sports side-by-side category. But this was not the only product news, as shown on slide 8. We improved our entry-level offering with the first major evolution of the highly successful Seedu Spark since its introduction.
We also launched many new side-by-side models, notably the Can-Am Defender XT-HD7, as well as the Mavic X3 RS Turbo, the industry's most affordable mid-HP 72-inch wide side-by-side. These models offer a lot of value at price points that reach a wide range of consumers. We also continued to push innovation in the premium segment, which has seen the fastest growth in recent years.
We introduce a full range of high-end models such as the Many2 Explore Max 300 HP of P2 with dual Rotax engines and the larger Max deck.
the Seido RXPX and RXTX with 325 horsepower, and the Seido switch cruise limited.
We also added a touch screen with Apple CarPlay to our Spyder models. These additions represent an aesthetic level of product news, which will help us to gain more market share and grow our addressable market, while further improving our margin profile.
Revenue were up 8%, reaching $1.5 billion, driven by strong shipment of side-by-side vehicles and ETVs. At retail, Can-Am Side-by-Side had its strongest Q2 ever, with retail up high 20%, with retail up injury, tox is rising a 10% Evan
solid growth in all segments and price
We also finished the season with a 6-point market share gain to reach the high 20% range in North America.
With this performance, we are very close to delivering on our M25 objective of reaching a 30% market share by the end of fiscal year 25, but of course, we will not stop there.
Moreover, for the first time ever, Canam side-by-side reached the number one position in Canada with the market share in the high 30%.
As for ATV, our retail was up mid 30%.
This performance was notably driven by strong growth in the mid-CC segment, reflecting the success of our newly introduced mid-CC Outlander platform.
ETV also closed its North American season with the strongest share of gain in the industry, passing the 20% mark for the first time ever.
We are pleased with the momentum of our off-road business and with recent product introduction, we are in a good position to continue outperforming the industry.
Looking at three wheel vehicle.
Retail was down high single digit compared to an industry that was up high single digit.
While consumer interest remained high, the Rikers' retail performance was softer in the quarter.
As seen across the industry, buyers of entry-level products are more hesitant to purchase at the moment.
Meanwhile, the Spyder F3 and RT model, which are higher-end, had solid growth.
With the upgrade on the model year 24, we are well positioned for next season.
Turning to seasonal product on slide 10.
Revenue were up 30%, reaching almost $900 million, driven by a higher volume of snowmobile and switch pontoon, as well as favorable pricing.
looking at our retail performance.
We had a very strong quarter for personal watercraft, which we tailed up about 60%, again an easy compatible a year ago.
Remember that we had limited product availability in the network during Q2
Still, this performance was exceptional from a historical perspective.
In fact, our season-to-date retail is the strongest in the last 15 years. These results demonstrate the strength of our lineup and our ability to create new segments with models such as the Wake, Fish and Explorer Pros. These products bring new entrants to the category which drives industry growth. With our new product introduction for 2024, we are well positioned to sustain our momentum. As for our C2 switch, our retail was up over 200% and we held the number 3 position in the US pontoon industry over the 3-month period ended in May.
This is a great example of how we can disrupt category by developing market shipping product. Finally, for snowmobile we are currently in the off season.
We are confident for the peak season with a high level of unit pre-sold to consumer. Moving on to slide 11 with powersport part accessories and apparel and OEM engines.
Revenue were up 14% to $294 million.
We continue to benefit from our growing product portfolio and vehicle fleet in use, which led to higher replacement parts and accessory sales driven by the Link ecosystem.
We expect a softer second half than originally planned for PA&E business.
as we anticipate dealer to destock inventory mainly for the C2 pontoon and three wheel vehicle lineups.
looking at our recent acquisition.
A key highlight was the introduction of Pinion Motor Gearbox unit, commonly called MGU, which combines a full-power electric bicycle motor and our industry-leading gearbox in one compact package.
This promising technology got excellent review following its introduction in June , notably winning the prestigious Eurobi-Gold Award in Frankfurt.
Now moving to MARIN on slide 12.
Revenue were down 5% to 125 million, reflecting a lower volume of boat shipment.
The revenue decrease is due to the slower than expected production ramp-up of the new Manitou platform, namely because of a supplier issue for an aesthetic component which limited product availability.
demand was affected by higher financing costs and poor weather in many markets, especially in the Great Lakes region which is key for both Alumacaraf and Manitu.
In addition, our retail performance was impacted by the supply issue for many too, and we still had lapping months retailing welded boat for Hallu Meccadah.
For Quintedex, detail was down in line with the industry in Australia. Given the slower production ramp-up for 92 and softer industry trend in the boating sector, we decided to realign our plan for this year, focusing on season 24.
While the year has not unfold according to plan, we are encouraged by consumer reaction to the new boat and we remain confident about our strategy for the marine business.
With that, I turn the call over to Sebastien. Thank you, Jose, and good morning, everyone.
We once again delivered solar results in the second quarter, driven by robust top line growth fueled by the sustained, strong demand for power-sport lineups, which continues to translate and market share gain and growing momentum with our dealer and network.
Our focus on efficiency also paid dividends as we ended the quarter with lower than anticipated turbulence costs and operating expenses.
These elements, combined with stronger than expected revenue growth, allowed us to offset inefficiencies on the marine side to deliver results slightly ahead of plan.
Our revenues for the quarter were up 14% versus last year ending at $2.8 billion.
Our normalized income reached $255 million, resulting in a normalized earnings per share of $3.21.
Our normalized income reached $255 million, resulting in a normalized earnings per share of $3.21, up 9% versus last year.
Our free cash flow generation was also strong at $387 million, driven by a strong operational performance and positive working capital contribution. With a healthy balance sheet and the expectation for future cash generation in the back half of the year, we are well positioned to continue investing in growth projects for the business, while retaining the financial flexibility to continue returning capital to shareholders. Moving to slide 15 for an update on dealer inventory. Our network inventory is in a good position, striking the right balance between having sufficient product availability, all the while operating more efficiently with a lower number of days of inventory compared to historical levels. In fact, our network inventory is only up 24% versus pre-COVID, while our retail volumes have grown 49% over that period, driven by industry growth, the addition of a new product line, the CEDU switch, and more importantly significant market share gains. We still have opportunities to further improve availability on ORV, while continuing to work through the remaining inventory for summer products as the season is winding down.
Although our top-line growth may appear limited, I would like to remind you that we are lapping a period in which we had about a billion dollars worth of inventory replenishment, making it a difficult comparable.
Nevertheless, our results for the second half of the year are expected to be very strong from a historical perspective, reflecting the solid momentum of our PowerSport portfolio and the underlying strength of the demand for our products. In terms of cadence, we expect to generate roughly 45% of the remaining normalized EBITDA for the year in 2003.
resulting as usual in Q4 being our strongest quarter for the year. On that, I will turn the call back to Zoule.
in Q4 being our strongest quarter for the year. On that I will turn the call back to Zoule. Thank you Sebastian.
I am pleased with our performance so far in fiscal 24 as we continue to significantly outperform the industry.
Our strategy is simple. We focus on delivering industry-leading innovation across a diversified product portfolio and we team up with the best dealers.
This gave us access to a wide range of customer bases across all markets and regions.
Our ability to execute has delivered exceptional results over the past eight years, as you can see on slide 20.
We have gained market share almost every quarter during that period.
And we are now the number one OEM by a wide range, by a wide margin in terms of average unit retail per dealers. Looking ahead we will continue to execute that strategy.
The record level of new products introduced at FLAMM positions us well to continue our growth and remain the industry leader.
As for the remainder of the year, we expect demand for products to continue driving our market share momentum and we will stay focused for the rest of the year.
on executing and optimizing efficiencies to deliver a record year in terms of top and bottom lines.
In closing, I want to thank our employee for another strong performance this quarter.
I also acknowledge the support of our dealers who made us the leading OEM in the industry.
And that note, I turn the call over to the operator for question.
Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touch tone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speaker phone, please lift the headset before pressing any keys. One moment please for your first question.
Your first question comes from Mark Petrie from CIBC. Please go ahead. Good morning, thanks. I wanted to ask first just on the sort of competitive dynamics in the industry. Obviously there's a healthy rebound in sales volumes versus sort of constraints last year but I guess just you know commentary on sort of the competitive dynamic and then I know the sales programs are higher but still below pre-pandemic levels so is that just higher than what you sort of initially embedded in guidance or is it just higher from last year? Thanks.
Yeah good morning Marc, I'll take the question on the sales program. They are trending in line with our expectation. Yes the floor plan cost is higher because of interest rates are higher but from a retail incentive point of view we are trending according to plan. You might recall that we said we would expect about a 200 basis point headwind coming from retail incentives this year and that is currently the assumption we're working with so no changes there.
On the other question, Marc, there is not much change in the dynamic into the industry. All OEMs are getting better with the supply chain and basically what I believe makes us different than the others is our focus on technology and new product and pushing novelty, innovation. And on top of what is positive and we see more now the stability but the customers profile.
As I mentioned in my remark, the household income of our customers has increased by 40% since pre-COVID. And those customers are shopping for high-end products where we are good at.
And I think no big change in the dynamic of the industry with the other OEM, but I think
what makes us different is what we've been good at, pushing innovation, technology, and coming out with new product in new segment and more premium product.
Okay, thanks. And I wanted to ask about sort of the strength across the price points. I mean, you called Outriker as sort of underperforming relative to Spider. But curious if that's also the case in PWCs where obviously you have a range across price points. Is that the same dynamic?
It's a bit different. Those two products are entry-level products but the Riker customer is more, I would say, a mid-range household income. Sometimes those customers are definitely more concerned with the macroeconomic and the inflation and all this.
The watercraft spark customer is more high household income. It's people who have typically a cottage on the river.
the lake and divide two watercrafts for their family. Then it's a different profile.
Same type of product, entry level, but different profile in customers.
Okay, understood. And then maybe just one last one. Sev, you mentioned the supply chain is sort of a 50 basis point tailwind in the second half. Is there still an opportunity for this to be a tailwind in next fiscal year? Or will you be laughing stability by that point? Obviously, this year we are getting a huge benefit from a better supply chain. And I'd say also a.
The teams are very focused on coming back to more normal operations and they've outperformed our expectation. We have solid people running all our plans.
And so most of the benefit is going to happen this year. I might expect a bit of a benefit next year but a significant part is being materialized which is a good news this year.
Yeah, understood. Okay, thanks for all the comments, Capaciline. All the best.
Yeah, understood. Okay, thanks for all the comments. All the best. Thank you.
Your next question is from Robin Farley from UDS. Please go ahead. Great, thanks. I wanted to ask a little bit more about the sales promos that you highlighted kind of being tied to interest rates that partially offset some of the margin improvement. Can you give us some color around the mix of your buyers that are paying cash versus financing and how that kind of compares to pre-COVID?
When we look at the overall trends from our financing partners there is not a significant change in terms of proportion of who's financing versus who's paying cash.
So we're still in the range of, with our partners, about 30%, but we know that dealers have arrangements where there are local credit unions and banks and another 30% is being done through retail financing there as well. So about 60 to 65% is done through retail financing, the other is cash. But we are seeing higher FICO scores versus pre-COVID and that obviously is being highlighted as Jose said through the average household incomes that are higher as well.
But the acceptance rates are in line with pre-COVID and with COVID, and we don't feel that our retail partners have tightened on the credit as well.
Thank you. And then just one follow-up. You talked about the higher demand, your higher customer income level, and obviously a lot of demand at the higher end. Can you talk a little bit about what's happening at the entry level and whether it is a share shift to maybe some lower priced OEMs, some other imported product, or is it, do you think, just overall just less entry level? In other words, is it more of a share issue or a size of the pie issue at the more entry level? Thanks.
I think it's obviously the inflation that we've been through in the last 18 months and the pressure on the macroeconomic and the uncertainty is scary for people who are buying entry-level product. It could be scary but you know our job is to make sure that we are competitive in the entry level and you know
We're focusing a lot on the premium because that's where we shine, but we still have, you know, C2Spark and Skidoo MXM Neo below $7,000. We have many, many side-by-side models and Commander and Maverick between $13,000 and $16,000 in the switch.
because that's where we shine but we still have you know Sidu Spark and Sidu MXN Neo below $7,000 we have many many side by side model and commander and maverick between 13 and $16,000 and the switch which is
entry-level pontoon at below $24,000 then what we're trying to do is always keep good offering in the value product and pushing again technology and innovation for the high-end product.
For us what happened in <unk>.
Yes.
I don't want to talk too much about it but we had we were a victim of the cyber attack last fall the operation in Marine that was the last to be fully integrated after that we had that supplier difficulty in when we started to really ramp up with good volume production in may.
Dealer were already.
High inventory of other brands.
At the end of the day, we were pushing too much then we decided to slow down for season, 'twenty three and the refocus everything on season 'twenty four.
Why we are happy overall is.
<unk> the product is well received.
The product that we ship in season 'twenty three.
We have introduced the dual engine many too that was very well received by the dealers at club two weeks ago.
The factory is now up and running and we are engaging the dealer and realigning aldis for season 'twenty. Four then it's a question of all this and obviously the effected in Mexico, we pushed by one year with less basically a season.
Because of the industry and our.
We were behind our plan.
And this was just the logic move to do.
Makes sense. Thank you.
Okay.
Your next question comes from Kamran Dark from National Bank Financial. Please go ahead.
Yes. Thanks, good morning, just trying to get at maybe a little bit better handle on what youre seeing in the retail I mean, obviously, it's still very strong.
For you I'm just wondering if you could maybe talk about how retail performed through the quarter or was it fairly steady throughout.
And then what have you seen so far I guess in August .
Obviously, youre facing a much tougher comp in your fiscal Q3, but maybe you can just talk about retail trends so far in the third quarter.
And then the retail as you if you.
If we look at the year retail was soft in.
February and March but picked up.
Very good and.
In April and continued through the whole summers.
And I know that.
Some of you were concerned about the model year, 'twenty, two three wheel and watercraft, but.
We've been able to sell most of them and we're very happy the way the season unfold.
For the third quarter or what is our expectation and I don't want to go into too much detail and get into the EBIT, providing guidance every quarter for what's coming but.
Overall.
We are we are in a good position for the second half because on the off road.
We have the new <unk>, we have the additional defender entry level product.
<unk> entry level product on the extreme.
And when I say entry level product in this in the side by side category, which is high and we have the TV cc platform that is extremely well received.
The snowmobile lineup as we've said about half of our production is already pre sold then we feel very good.
About fraud and snowmobile, obviously, you can expect in each to lower retail for watercraft in two wheel because last year, we ship the 22.
In Q3, then.
When we look at the overall, we are planning the industry to be flattish.
Thus when you consider all of their product line, some reduction on watercraft and <unk> and.
An increase in off road and slow.
We are targeting to be around mid single digit growth.
For <unk>.
Okay, that's very helpful.
And just secondly, just maybe switching gears just wanted to talk a little bit about the the EV rollout I guess at the at the club you kind of describe that.
The final product that you introduced on the.
Electric side is going to maybe be delayed by about a year and there's been some I guess challenges in developing the technology can maybe just talk a bit about what the challenges are that youre facing there.
Just how the <unk> rollout and then.
Development is going.
Yes at first.
Cameron I would like to remind you that we did love being our own technology and we are developing our own battery pack motor inverter Charger software and we believe by doing this.
All up by Ourself, we will be a better integration and performance than buying component that you need to put together and.
And it will be more cost effective in doing this it's about people and supplier working with supplier.
Then this is going on there is overall some delay but it's not.
We had planned for some delay in some area, but and I just want to remind you that last year when we disclose the rise in the two wheel model cycle, we've said to the dealer that the product would be available in 2024.
And some dealer because we had some prospect dealer mainly from Europe in Atlanta wanted to see was be RFP, what are the rest of the lineup.
And we wanted to be very clear with the dealers and we could had this site.
To show the spec the prices the location and our plan for network network fulfillment.
But we felt it was too much information against the competition, then we said very clearly.
All the detail will be unveiled at next summer.
And delivery for both the rise in the two wheel will happen in the fall of 2024.
Then we're not delaying by one year.
You could debate some we're expecting to have it earlier in the summer but.
We are basically overall on plan.
Okay. That's helpful. Thanks very much.
Thank you.
Your next question comes from.
Greg Craig Kennison from Baird. Please go ahead.
Hey, good morning, and thank you for taking my questions. It's been a good call I wanted to ask on the credit side do you have an understanding our read on the percentage of your buyers that are exposed to student loan repayments in the U S.
I know it's.
It's been it's been on the I guess, the newest peds recently changes to student loans, but we don't have that visibility.
Craig what percentage have.
Outstanding homes.
Okay and then maybe just then said more broadly I'm wondering if.
If there's a way to measure affordability in terms of monthly payments if you will.
Look at a similar unit this year versus maybe pre pandemic.
How much more expensive visit per month relative to like the income of your consumer.
Do you see that.
Consumer getting pinched.
And the climate.
Today.
Yes, good morning.
I will give you an example of the <unk> switch.
Because we were expecting the question and obviously for ourselves to better understand.
The dynamic, but many of the buyer by boat finance 15 to 20 years.
And if you think of Sea-doo switched and we've took a model switch sport 21 feet.
If you were financing and again the rate could vary.
Depending of your score, but high level. If you were financing Sea-doo switch in Gen 22 Euro rate was 7%.
If you were financing your switch in Gen 23, this year Youre right was eight 8%.
And in August here rate was close to 12%.
And the difference between let's say Gen 22, it was around $350.
And it was $100 more.
In August 23, then you can debate the $100 for someone who really Walter product.
Some will.
Just if I it but when you commit for 15 or 20 years, it's a loan payment and I think the rate increased so much in the last 12 months that some customer are reflecting.
If they will buy or nothing that's why that's what affected I believe that both industry.
That's a really helpful example, thank you.
Your next question comes from Martin Landry from Stifel. Please go ahead.
Hi, Good morning, guys, maybe just.
A follow up to that.
Okay.
The power sports industry has been has been has been very resilient.
When you compare to the boating industry and also when you compare it to the RV industry.
And.
Is that resilience just related to the price point is that it is that the main explanation why the power sports industry is not seeing much sign of weakness versus other industries.
But the big difference between power sport in Marine is in the power of sport typically the people, who finance will be three to five years.
Your commitment is shorter.
And the other thing is.
The OEM or it's easier for the Oems to subsidize or to do a sales program to support the customers.
Then I gave you. The example for US today, we have depending of the product line for model year 'twenty three we have some some offer.
Eddie from 2% to 4% 436 months to 60 months.
And this is very different than the example, I gave in to the marine business or both.
Were obviously the rate is higher the period is higher and it's more difficult for the Oems to justify the subsidizing and I think this is a big difference between the two industry.
And lastly, if I could add one extra element there if we look at what has happened to msrp's on the last call over the last four years.
Since the onset of Covid.
We saw much higher increases in MSRP, and the marine and the RV sector than we've seen.
In the power sports sector and I'll just give you. An example, if I look at personal watercraft.
<unk> 'twenty commodity of 24, we've increased pricing by 17, 4% in the U S.
Whereas the boating industry as increased pricing by over 40%.
So that obviously makes the ticket item much higher for marine than for power Sport I think Thats one factor that's also helping to power sports industry.
Okay. That's good color thats helpful.
And.
Maybe on changing gears to your guidance.
Your back half guidance implies strong EBITDA margins, I think higher than 18% according to our math.
And Sebastian you touching your opening remarks.
Heading into fiscal 'twenty, five with strong momentum.
<unk>.
Just trying to understand those strong margins in the back half is there.
Seasonal.
<unk> here or Kennedy's hi.
Higher margins be sustainable long term.
Well customarily, we have usually higher margins in the back half of the year Q3 is a quarter, where we have strong margins.
The mix is very strong and snowmobile.
And also we're expecting very strong mix in the side by side.
And as I said the teams are like as the teams are over performing from a operations point of view and from a procurement point of view, which is also driving good savings, which will be there next year.
And as you know next year is RMB <unk> 25.
Anniversary date, and so where we have ambitious financial objectives and our plans are still very much in line with the 25 objective.
When you look at what we have delivered since we've done our Investor meeting last June <unk> last year.
On the side by side side, we are just shy of about 30% market share objective that we had.
Given ourselves, especially with the recent product introductions.
I don't want to obviously drive continued market share gains.
We finished very strong the season with 20% market share.
And there's going to be continued momentum as we've just started delivering the new platform we.
We finished the season with record market share in snowmobile and personal watercraft and that obviously bodes well for next year.
<unk>, which we said we want this to be a $500 million business. This year, we will be at $500 million. So again continuation next year. So everything in power sports is in line and even better than our plans.
And again, if I want to put things into perspective, if you look at the last 12 months, we've gained about six points of market share in the power sports industry and every point of market share. We gain is about $190 million of revenue.
And so with the recent product introductions the momentum the brand the dealer engagement we.
Our well positioned for next year marine a softer than expected, but we are obviously, making the necessary steps to position it well for next year. The lien is going very well as I mentioned.
The modular design is paying off and we have a greater proportion of vehicles being produced in Mexico.
So all in all.
If the industry remains the same.
And consumer demand is maintained we feel very comfortable with our plans for next year.
Okay.
As helpful. Congrats on your results.
Yes.
Your next question comes from Jamie Katz from Morningstar. Please go ahead.
Hi, Good morning, I Hope you can just dissect your outlook on gross margin a little bit more just on the ability to take pricing the premium premium innovation of the next and then.
How much more.
<unk> are left.
Had that not sure Cai thanks.
Yes, obviously, we had a very good gross margin in the second quarter when I look at the puts and takes of the margin.
Obviously pricing net of inflation.
Was the big driver of that was a tailwind of 170 basis points.
Offset by programs.
We set our expectation for the year was 200 basis point headwind this quarter was 170 basis points.
<unk> costs are higher as well, that's a headwind of 100 basis point and in terms of turbulence. We're looking at 250 basis point tailwind.
Big tailwind in Q1 Big tailwind in Q2, that's going to taper down in Q3 and Q4 as even last year Q4, we saw benefits from from turbulent costs, but overall in line with our.
And our plan plus adjustments, we've made in the guidance and as we mentioned we had FX, which was a headwind for a 100 basis 100 180 basis points.
In the quarter so.
Obviously strong strong gross margin strong EBITDA margin.
Driven by <unk>.
Again, the great Mick.
Products that command these margins and as well with greater operational efficiency from from the teams.
And then are there any inefficiency that Samsung question.
So its ability out that will weigh on gross margin next year in Belgium, and buildout of that marine facility.
Not significant when you look at the cost to build a plant, yes, theres some operating expenses associated with it but.
When you look in the Grand scheme of things.
Not that material.
Thanks helpful.
Yes.
Your next question comes from Joe <unk> from Raymond James. Please go ahead.
Thanks, Hey, guys. Good morning, just.
I will go back to your comments regarding M 25, He mentioned power sports is.
It's trending well marine not so much.
You mentioned, you're pushing back capacity expansion by 12 months is it safe to assume that we should think about the marine and twenty-five targets is getting pushed back.
Here as well.
Long term outlook for that segment changed at all.
Yes, if you remember in the employee five we were targeting by the end of fiscal year 'twenty five to be at $1 billion.
It's too early to say.
If we.
What will happen next year, I think we need to wait to see how the industry will unfold.
Beginning of the year the boat show in all of this.
But you know.
For me this is short term.
For the Marine Division that we have.
Is working it's just a matter of execution this year and will be aligned for next year, then I think it's too early.
For.
The $1 billion in 'twenty, five or fiscal year 'twenty five for marine.
But it doesn't change the overall picture like Sebastien described for the overall <unk> 25 objective next year.
Okay. That's helpful. And then maybe just a quick question for Sam, but I wanted to better understand.
How you see overall gross margins versus Opex, playing out this year I think the prior expectation with gross margins would be up 50 basis points Opex up 50 basis points since they sort of offset but it sounds like that's still the case on the gross margin line.
But we were looking to see maybe some lower.
The increase in Opex. So I'm curious, if I have that right and where that's coming from.
Yes. The initial estimate when we issued guidance was that we get a tailwind on gross margin of 50, and we get a headwind on opex of 50, So net flat EBITDA margin year over year at 17% now with the revised numbers gross margin it will be a tailwind of about 100 basis points and we'd get the tailwind from.
From Opex of 50.
Pardon.
Yeah and so.
So that would be for this year.
Delivering strong EBITDA margin this year.
Okay, great. Thank you guys.
Your next question comes from Luke Hannan from Canaccord. Please go ahead.
Thanks, and good morning, I'll start off with a quick one, especially I believe you said last quarter that for the year you expected working capital Okay.
Roughly 400 million.
He said if you had mentioned it earlier in the call, but do you still expect to see that level of talent for the year.
Yes, we've generated strong cash flow free cash flow since the beginning of the year over $500 million for the first six months.
Total free cash flow.
With minimal working capital benefits as I said.
We're still running with higher levels of inventory.
I won't call it safety stock.
But obviously with the good results that we're seeing from the supply chain turbulent. The expectation is that we will be able to achieve our $400 million working capital benefit.
At the end of the year.
Okay, and then a higher level question here I appreciate the commentary earlier in the colleges.
The market share that you've been able to gain in SSD and particularly in Canada, but I guess, just taking a step back and from a higher level structurally when it comes to the competitive dynamics or anything else.
And to that product line specifically.
Any reason why longer term you wouldn't be able to achieve a market share in SSD similar to what you have right now.
In snowmobiles and personal watercraft.
There is no reason.
Yes.
You know, we're going step by step the end 25, the objective was to reach 30% market share.
We almost there and then we will pass that 30% next year.
And that for that.
Momentum that we have and the product innovation. There is we will not stop there like I said in my prepared remarks.
For us, it's always a bit like I said in some some investor many investor is asking why are you gaining so much versus others that are not table, but as we said in 2015 when.
When we introduced the defender.
We wanted to convey a strong message about our commitment in the side by side industry and Thats, where we come into the new model every six months for the next four years and that message.
<unk>, many theaters to convert more space to be ERP.
And with our capacity to come out with innovative product pushing technology bushing design combined with debt commitment. It was like a big wheel that did start in motion and today. The wheel is really in motion.
And I believe that.
Our continued push on <unk>.
And helping the dealers and working with the dealers.
To continue to grow.
This is what explains the success then definitly will not commit this morning about the any specific number four and eight days, but I can assure you will not stop at 30%.
Great. Thanks for the commentary.
Your next question comes from Brian Morrison from TD Securities. Please go ahead.
Hey, good morning, Thanks for all the clarification comments I have one further question to clarify, though said you mentioned in slide 18 in your prepared comments that you are lapping each to fiscal 'twenty Street Street, there is a $1 billion of inventory replenishment.
How much of that how much was.
Inventory replenishment revenues in fiscal 'twenty three.
Do you estimate will be in fiscal 2024, and how much is there to go in the second half I understand that retail unit sales are well access still of the increase in inventory at retail.
As of today, Brian I'd say, we're pretty much done on inventory replenishment.
Obviously, theres going to be some seasonal elements, where we might find okay, theres snowmobile thats going to be there.
Q3, more than last year, but from a overall business point of view their inventory replenishment is not a tailwind for us.
Growth in inventory will come with growth and market share growth in industry, but not from putting more units at the dealership.
Okay, and how much replenishment.
Sure and last.
Well last year was a billion, we probably you did $250 million at the beginning of this year.
And in fiscal year 'twenty three either.
I'd have to check but not that significant.
The same than this year probably seemed in this area.
But obviously the okay.
This is the second half of last year.
Alright, and then on Slide 17, you said theres lower shipments of pack primarily.
CD pontoon can you just reconcile that with the strength of the switch was it just a prebuilt because the product was isn't infancy last year.
Well last year as you know we under delivered in terms of switch.
Switch pontoons and with dealers, we under delivered units, but we delivered the dealers.
Dealer set order the parts and accessories and so they had quite a bit of inventory on hand.
And so this year they were able to cycle through their inventory get it through the dealers, but they still have a bit more inventory and so dealer levels are higher from a P&A.
Syed.
And so they will be adjusting their dealer inventory and therefore ordering less from us.
Simply timing okay. Thank you very much.
Your next question comes from Justin Thomas Martin from BMO Capital markets. Please go ahead.
Okay.
Hi, Good morning, just one question for me.
Our dealers are approaching holding inventory or maybe ordering over their off season is any different given how elevated floor plan call Sir.
It's a bit funny.
If you thought I was again with thoughts for dealers and marine dealer two weeks ago, and if you'll talk to dealer like I said in the question before they don't like the inventory in dollars and the interest.
But at the same time.
You know when we take an order it's like a discussion between.
Your growth and what you're planning in the basically orders in line with our expectation.
Why we said the volume is in line with expectation, but with a richer mix.
Then it's a bit funny, the products' port dealer right now most of them complain about.
The interest bill at the end of the month, but the cylinder the understand that to support the growth do you need to invest in working cap.
The other thing is that dealers do trust us, but we'll make the right decisions.
One thing is important is that we do support the inventory in the first 60 to 90 days when the unit is shipped so obviously that is a burden that they do not have and we have and we accept that and the other thing is in the past. If we've ended the season with too much inventory, we have always been there to step in and.
Fort the dealers with their floor plan financing.
And that's something that we've done and Thats something that we will continue to do with.
If a season would end up to be not as good as expected that did have more inventory. So there is a level of trust there that exists between us and the dealers on that side.
Okay, well, they're complaining more but theyre not changing their habits got it. Thank you.
I mean, they've lived the perfect world for two years, they had no floor plan financing costs until they forgot what it was now.
They have inventory, which they are happy because that allows them to sell but there is a obviously higher interest rates and higher floor plan.
That comes with it and so there is a sticker shock, but it's a cost of doing business like.
Like meal of the restaurant more expensive, but you still go.
Sounds good thank you.
Your next question comes from Michael <unk> from Deutsche Bank. Please go ahead.
Good morning, and congrats on the strong strong results just one quick one for me maybe on the snowmobile Brent I think you mentioned, 8% had been pre sold the same figure that you had mentioned last quarter have you seen any early signs of cancellation or is everything so they got setting up well from a strong season in your point of view, especially with one of your.
Competitors, saying that they're going to exit the market.
No no sign of.
Every year, you'll have some fallout.
And some cancellation, but I didnt heard any dealers, saying that this year was worse than previous year.
And then mobile customer are different than the others is some.
We'll save money and that's the last thing they will cut their budget because it's a passion.
And we believe we are in good shape for the snowmobile season.
I appreciate the color. Thank you.
Your next question comes from Jonathan <unk> Goldman from Scotiabank. Please go ahead.
Hi, Good morning, guys. Thanks for taking my questions. Most of them have been answered just two housekeeping ones.
You talked about possibly exceeding the 30% market share in side by side next year I just wanted to see if you can revisit the capacity that you have.
And side by side currently and coming online what market share could that support over the next two years or year and a half.
Oh, that's a good one first.
We have plenty of capacity for next year's season.
We'll not to reach the maximum of our capacity.
As Youll remember, we build USA is one you added two sorry in.
Two phase and you're at a 3% to phase then we have plenty of capacity for next year for sure and now we even looking how we could.
Weak and may be optimized the capacity between within those two factory I think there is ways where are with small investment you can even increase the capacity above what we had planned.
Two years ago.
Perfect. That's helpful. And then just I guess one for use of SG&A reduced Capex guide by $108 million does that change your thinking around capital allocation for this year at all.
No.
We're still going to be generating strong free cash flow, even before the reduction of capex.
And obviously, we've been active with buybacks, we still have about 900000 shares to buyback under the CIB.
But the priority as we've always said is investing in growth and any excess free cash flow will be used to obviously return it to shareholders, which we've.
Been very good at doing in the last few years.
Okay. Thank you that's it for me.
Ladies and gentlemen.
Should you have a question. Please press the star followed by the one.
Your next question comes from Brandon <unk> from D. A Davidson. Please go ahead.
Good morning. Thank you for taking my quick question, just circling back to the fiscal year 'twenty five earnings targets and revenue guidance could.
Could you just speak to your level of confidence that those targets I feel as though.
There is a view out there it's going to be impossible for you to hit even the low end of that.
Earnings range I know you talked about the market share gains, but just overall.
Where could there be some downside to the current guidance and are you still comfortable hitting those earnings targets. Thanks.
Well actually as I said.
Two two marketplace question when we look at all the.
Positive that's been happening there has been a lot. We're ahead of plan.
A lot of the elements.
And again, if the consumer sentiment is to remain as it is today.
We strongly believe that the M 25 target is achievable now if there was going to be.
A soft landing and everybody calls or a recession, obviously, we would revisit our plan.
I mean, we can't manage the business and one foot on the gas and one foot on the brake and today.
When we look at the great momentum we have there is no reasons why.
We could not achieve the target next year.
Great. Thank you.
There are no further questions at this time I will turn the call to Mr. This time to close the meeting.
Thanks, everyone for joining us this morning and for your interest in PRT. We look forward to speaking with you again for our third quarter conference call on November 30th 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 your lines. Thank you.
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