Q2 2020 Earnings Call
All participants are consensus now ready to begin or good morning, ladies and gentlemen, and welcome to the B R. P. E X Y 22nd quarter results call I would now like to turn the meeting over to Mr. Felipe There Shannon. Please go ahead Mr. Jewish friends.
Thank you two weeks good morning, and welcome to be Rpcs conference call for a second quarter fiscal year 2020.
Joining me. This morning are shows they Borgia, <unk>, President and Chief Executive Officer, and said, that's it myself 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 that were subject to a number of risks and uncertainties I invite you to read the Rps Mdna for a listing of the Oh sold during the call references will be made to supporting slides and you can find the presentation on our website that be RP dotcom under the Investor Relations section so with that I'll turn the call over just deal with it.
They could it good morning, everyone and thank you for joining us I am pleased to report that we concluded the first half of the fiscal year on a strong note.
As our momentum continued in the second quarter, and we delivered solid results across the board.
Does that none of our product remains strong as we achieved another quarter of double digit retail growth for par sport.
Although we had core early spring weather, especially in a certain region like the Norton and Midwest portion of North America.
We were able to catch up in June and July for all product lines.
From a financial standpoint, we experience our best second quarter on the record.
Third delivering our highest revenue and normalized EPS diluted for that period.
On the back of this solid performance the successful completion of out of our substantial issuer bid and the closing of the total water acquisition, we are narrowing the range and increasing our year end EPS guidance to 365 to 380.
An increase of 18% to 22% year over year.
Now, let's get to let's get into the highlight of the quarter, starting with the financial results on slide four.
Our revenue reached a record level for our second quarter at $1.460 billion.
Representing a year over year growth of 21%.
Notably driven by year on product.
All regions contributed to the growth with revenue up 21% in the United States.
32% in Canada, and 14% for international.
Our normalized EBITDA was up 16% to 168 million, resulting in a normalized earning per share of 71 cents up 8% over last year.
Our retail momentum continued to be strong in North America, our fourth sports industry remain healthy and continue to perform well despite negative weather condition earlier in the spring posting mid single digit retail growth for the quarter.
Our product continued to outperform in the region as Weve delivered a second can ticket consecutive quarter of mid teen retail growth.
Internationally, we continue to be affected by political and economic tension in certain part of the world.
Mexico has slowed down but still remain up mid single digits with retail remaining generally strong in Latin America over overall and up 18%.
In EMEA, we are performing well with retail up 18%.
While the industry is down high single digits.
For a pack.
Our performance in China has been flattish and China is impacting the rest of the pack, where our retail is slightly down 2%.
And the industry down about 10%.
Looking at the North American retail by product line on slide six.
Again this quarter in general we outpaced the competition and delivered growth in our parse pork product line.
Side by side any TV had very strong quarter with retail hub in the high 20, and low teen percent respectively.
Two wheel vehicle continued their rubbers growth, which we ended up in the 90% driven by the introduction of Riker.
And finally personal watercraft was up low single digit affected by weather condition. This spring, which is better than the marine business and in line with the rest of the industry.
Turning to slide seven.
On June 4th we introduce our mother Deere 20, Ken them off road lined up the most complete and competitive yet.
The key highlights are the introduction of the Kennedy defenders six by six agency Tim.
Representing a significant addition to Ken them utility line up with its six wheel traction longer cargo box and industry leading torque.
This model wasn't in response to a need in the industry for increased cargo capacity.
The combination of the longer box and six will give this product and critical capability and the opportunity to create a new segment in the industry.
The cannon defenders six by six is also the eight new side by side platform introduced over the last four years delivering on the commitments. We made in 2015 of introducing a new side by side platform every six months for the next four years.
Now the Maverick extract suitable our our offers the best performance in the sport segment.
With its industry, leading 195, a power and improve off road many of our BDC.
Since its introduction in 2016, we continue to build awareness for domestic tree, our flagship side by side vehicles as the phase of racing present and future.
For example, we occupy the top six place earlier this month in the highly regarded best in the desert race from last Vegas to renew.
With our mother Deere 20 introduction, we now offer a more competitive lineup across the price spectrum with the introduction of a new been HBP and entry level high each be Maverick extrude package.
Very happy with those introduction.
And for a TV.
The upgraded cannot lender feature improved her flow with new in their Fender and side panel, making the temperature cooler and more comfortable for the writer.
With the introduction of the Ken them defenders six by six complete we plan to continue the same pace of innovation, which allow us to more than double our side by side retail over the past four years.
Our capability increase at you at Ace two is completed and we are now running at full line speed.
As you see on this slide we still have a lot of room to grow in the U.S city sport and recreational segments.
Over the years, we have set a solid foundation that positions us well to capture market opportunity and continue our growth trajectory.
Now, let's turn to slide nine for the year on product highlight.
Revenue were up 32% for the quarter driven by a higher volume of side by side, a need TV sold and the introduction of the can them Riker.
On the retail side, the North American side by side industry ended its season 19 on June Thirtyth with retail sales up mid single digits.
Canada side by side had a very strong and the season with retail up in the high 20% for the quarter.
Driven by our continued pace of innovation.
The strong momentum with our dealer network and greater visit availability of product.
For the full season, our retail was up 20% and for the first time, we are ranked second in the industry.
Our side by side business also continued to grow rapidly in international market.
Notably in the EMEA, and Latin America, where retail sales grew above 25% in the quarter.
Turning to a TV.
The North America any TV industry also ended the season 19 on June Thirtyth.
With retail down low single digits.
For the same period can be TV retail was up high single digits.
And ended the season with the number two market share position in North America.
We have a very strong momentum with the TV as we continued to gain market share in both the mid CCN to high C C categories.
Our TV growth is also a result of our growing Ken them off road offering.
Our dealer value proposition and overall improve brand awareness.
We have similar success in Latin America, and in Europe , where our retail grew 15 and 37% respectively in the quarter.
I am very pleased with our off road vehicle performance and confident we can continue our momentum.
Now looking at the three wheeled vehicle business.
Nine months into season 19, the North American three wheel motorcycle industry is up in the mid 30% range.
Our TNM three wheeled vehicle retail sales are up over 100% for the same period.
They are not alone in our lineup is driving the industry growth so far this season.
We are pleased with the momentum we have with weaker.
We are seeing strong consumer demand, especially in North America and in Europe .
And the awareness for the product continued to grow as it is attracting a lot of attention from the media and the online community.
We have made good progress with our rider indication program, which is now offered in the 189 school in 50 states and provinces.
And close to 17000 courses completed.
With the conversion rate that is trending above our 15% target.
All in all we are pleased with the launch of Riker and the progress we have made in the first year of our two year plan.
As well as with the different initiatives taken to unlock the full potential of our three wheeled vehicle business.
As you know our goal is to replicate the C. Spark success story and with seems to be on the right path.
Now turning to seasonal product on slide 10.
Seasonal product revenue were up 11%, primarily driven by favorable product volume and mix for personal watercraft.
Looking at retail sales historically retail sales have always been strongest foresee due in the North America East and Midwest versus the competition.
Which trend to perform well in the south.
With the poor spring weather condition, and sustain flooding or does that Vince age in these markets.
Despite this because of our strong lineup, we were able to catch up in June and July and finished the quarter in line with the industry.
The industry 10 months into the season 19 is up low single digit percent page and see do in North America retail is also up low single digits over this same period.
It does a similar situation in EMEA, where the market was slightly down driven mainly by Scandinavian weather condition.
Although see do continue to gain market share.
The C. Fish probe is also performing well in its first season with very good sell through in all our key markets around the world.
In fact, the fish fro, one and the <unk> and Australian good and thus trillion. Good design award for the quality of our design and this innovative feature.
For snowmobile the Scandinavian industry ended the season 19 on June Thirtyth with retail up low single digits.
Skewed to Enlinks combined retail was also up low single digits for the season and they maintain the number one position in the industry.
Continuing with a look at our sport packs and OEM engine on slide 11.
Revenue were up 18% in the quarter driven by continued solid momentum for parts and accessory business across all of our parks sport product line.
Our history business continued to experience strong growth with a 32% increase in revenue for the quarter, notably held by the success of the reicher accessories line up.
For which sales continue to trend above target.
The core of our success is our strategy to develop accessories, embeda, though with the vehicle, resulting in an extensive lineup of accessories that are already at the lunch well integrated into the vehicle and compatible with multiple model across all brands.
The defender six by six is a great example of this.
As we already introduced over 150 accessories available for this vehicle.
Under Rotex front.
During the quarter, we opened the first Rotex mags dome in Linz, Austria close to our manufacturing facility in guns attrition.
It is an innovative concepts that combined indoor electric go Karting racing with gaming technology augmented reality and virtual entertainment.
Carting is the perfect product for electrification because the distance range for charge in a controlled environment is nothing nishu compared to other product line.
By having the aspect of gamification it creates a whole new customer experience.
During the year, we will continue to improve the Max though model.
But our mid to long term plan is to extend this concept to other cities and countries.
This is our first venture in the direct to consumer experience and it provides us a useful learning opportunity both to the find this model and to potentially offer other experiential concept in the future.
Now looking at the Marine category on Slide 12.
Revenue were up 1% in the quarter due to the acquisition of a new Metcalf and many to last year.
Offset by a lower volume of outboard engines sold.
The marine industry was the most impacted by the unfavorable weather condition.
We experienced during the spring and the early summer.
On top of that one third of our even through the new mechanism business and 50% of our many to business is in the great Lake region the area hardest hit.
Because of our current geographical concentration we were especially impacted.
Looking at retail the North American outboard engine industry ended its season 19 on June Thirtyth with retail about flat compared to the previous season, even road retail was down high teens percentage for the season.
In the marine business, both industry that is delayed and if not reported the same ways.
As for the engine and parse sport.
Regarding the boat retail for a period of April to June for our new Metcalf the aluminum fishing, both industry was down low teens and were down high teens.
For many to the pontoon boat industry was down high single digits.
And were down mid teens for the same period.
Finally, following the end of the second quarter, we completed the acquisition of tell the water the leading manufacturer of any medium both in Australia.
Our marine strategy is ongoing and the even through a new mechanism and many two teams are all working together.
To integrate the next generation of engine with the next generation of boats.
We are looking forward to sharing more detail on our strategy with you soon.
Considering this is our first year into the boat business. This has nothing exactly this season, we would have asked for.
However, we are satisfied with the progress the team have made on the integration of our acquisition.
And as a reminder, this is a mid to long term strategy and we are confident in our ability to deliver its high potential.
On that note I will turn the call over to service.
Thank you Jose and good morning, everyone. Our momentum continued in the second quarter as we delivered solid financial results came in.
This points from last years second quarter.
As a favorable impact coming from volume and pricing was more than offset by higher sales programs production costs and unfavorable product in region mix.
The normalized EBITDA was up 16% to $168 million and normalized EPS reached 71 cents.
We generated $75 million of free cash flow and invested $67 million on capex.
We were also quite active in terms of capital deployment over the last few months as we successfully completed the $300 million as hobby effectively repurchasing 6.3 million shares and we completed the Tel water acquisition.
To support bolster initiatives and to preserve our financial flexibility going forward, we raised a new term loan traunch of 335 million us dollars during the quarter.
Our balance sheet remains solid and our strong financial flexibility allows us to continue to invest in the business all the while maintaining the have the ability to opportunistically deploy different capital allocation initiatives.
Turning to slide 15.
Our quarterly normalized net income was up about $3 million compared to last year as it ended the quarter at $69 million in terms of year over year variations, we saw an increase of $72 million driven by a favorable impact coming from volume mix pricing and sales programs. These elements were mostly offset by higher production and distribution costs and higher depreciation expense for a total negative impact of $23 million.
Higher operating expenses for $41 million to support our different projects, notably the launch of new products, such as the Riker increased R&D costs for future product launches and higher SDN, eight notably associated with IP investments.
Higher financing costs and tax expense on FX for $6 million turning to slide 16 for our look at our network inventory position our network inventory position is up 16% versus last years first quarter.
Primarily driven by the continued strong demand for our off road lineup for which retail percentages were up low teens for a TV and high twentys for SSD in the quarter.
Remember that we had capacity constraints last year, which limited our ability to ship to meet demand and now with the completion of wise to capacity expansion, we have greater ability to ship products and sustain the retail growth.
Our contributors to the growth of network inventory, our riker for which retail is very strong and its first season and we are seeing some dealers already out of inventory.
And snowmobile as we ended the season with slightly more inventory than previous year and we also started shipments earlier this year compared to last year.
We have always been diligent in managing inventory levels with our dealers at the end of the second quarter, our inventory at our dealerships is in line with expectations and it is down 9% versus Q1, following a strong power sport retail performance in the second quarter.
So overall, we are very comfortable with the level and the quality of our network inventory.
Now looking at slide 17 for an update on guidance as I mentioned, we ended the first half of the year with solid financial results in line with our expectations and outlook for the year remains generally unchanged. Our industries are behaving as we had anticipated with the exception of the marine business for which as Jose mentioned suffered the most from the unfavorable weather conditions.
Given the strong momentum we have with us as V. In the competitiveness of our new lineup. We are reviewing upward the lower end of our year round products revenue guidance and the range is now up 16% to 19%.
As for Marine. The addition of tell water for the second half of the year is expected to offset the softer results, we experienced with our north with our current North American Marine business due to the weaker industry trends and so our revenue guidance for marine remains unchanged.
This results in a total company revenue guidance of up 10% to 13%.
As a result, the lower end of the normalized EBITDA guidance range has been increased and we are now expecting growth of 21% to 23%.
We have adjusted upward our net financing costs to reflect the additional debt the share count down toward following the completion of the us IB and reviewed upwards. The depreciation expense. These three elements result in a net positive impact of five cents.
Following these adjustments and the strong results with us as the we are tightening and increasing the normalized EPS guidance range.
The 365 to 380, representing an increase of 18% to 23% over last year.
The normalized EBITDA cadence between the third and fourth quarter is forecasted to be similar in size for both quarters.
Our guidance calls for strong second half of the year as the demand for our product remains solid and we have good visibility on our shipment volumes and operating expenses for the remaining of the year, we expect fiscal year 20 to be a record year for be RP and our business fundamentals are solid given up the confidence in delivering these strong results.
With this I will turn the call back to Joseph.
Thank you say best team.
We have had a record performance for our second quarter and I'm very pleased with the results and progress on our key strategic initiatives.
We are experiencing continued momentum by product line and the region and nice to see lots of growth potential for our business, especially in year round segments.
I'm also pleased with the conclusion of the Teleborder acquisition and the fact that this marked an important milestone in the advancement of the marine strategy.
Despite talk of an economic slowdown.
Our industry remain healthy.
Our dealer traffic is good and we continue to observe strong retail trend in August .
Our team continued to execute well on all fronts and I want to thank Dan once again for their hard work around the world.
We are looking forward to our next see do and Ken dealer meeting in a little over a week in Las Vegas.
And the introduction of more innovative product and old to see you there.
And finally.
As I mentioned earlier, we are confident that given our positive performance.
We will be able to deliver on our improved guidance.
I will now turn the call over to the operator for questions.
Thank you. Mr question. Please press star one at this time, if you have a question that would be a pace pause all participants that just soon we thank you for your patience.
Our first question is from Robin planning, Saudi Arabia. Please go ahead.
Great. Thanks, two questions one is.
Just looking at the commentary about.
The off road being kind of mid single digits.
Hi, guys others in the industry have talked about the June quarter being up high single digits I Wonder if you could just sort of.
If you saw.
Celleration in the growth rate in July or perhaps to not just any color on that and then obviously of course.
How August is also relative to that just in terms of acceleration or deceleration from those trends. Thanks.
Good morning Robin.
Obviously.
We cannot comment on the others, but what we saw in Q2.
Is it TV was basically flattish when side by side was up.
High single digit.
Obviously side by side has a big play in term of value.
And the second quarter than I cannot comment on the off road numbers that.
You heard in other.
In other calls.
But the July was not the soft for us it was a good retail quarter.
And we're seeing as there was a diluted into his opening remarks were seeing again, we don't see the industry for August , but we see our numbers and.
The trends are positive as well in August .
Okay, great. Thanks, obviously concerns out there about broader.
Macro factors and in the last two months.
And then just a longer term question.
With shipments maybe more falling into Q2, I guess or is two ramped up maybe faster than what you had initially guided or what expectations were for kind of what shipments would be in Q2. So.
Given that her shipment rate is there.
You could second half shipments also move up from from these levels. If it was a kind of a supply constraint issue keep pace in your original shipment guidance, maybe is now behind you.
Yeah, what we've adjusted the guidance for the year on products driven by side by side off the strong demand that we saw in the second quarter and so the guidance now reflects what we anticipate.
It's going to happen in the second quarter, obviously, if if demand was getting is continuing to be robust.
Good we adjust our shipments obviously, yes, we have that possibility of adjusting shipments if need be.
And increasing capacity before the end of the year.
Is there kind of a person capacity.
That's being utilized now versus what potential is still there and is that something.
And then but if I give you some color and again just to remind you what we said before in AIDS in H., one basically our capacity was similar to last year, because we shut down the effect 30 for two weeks to the model it and we had a slow ramp up going through net quality.
It was right then overall our H one capacity was similar to last year and in the second half Q3, Q4, we had like a 50% capacity possibility.
And right now we live running because Q3 is all the ways you know we introduced a new model year.
Q3 will be a strong quarter.
More to come on Q4, but this is the type of capacity that we have done on the full year basis.
Overall, if we will be using the full capacity will be about 25% up versus last year.
Okay, great. Thank you.
Thank you. Our next question is from Ben what profit Desjardins capital markets. Please go ahead.
Yes, good morning, gentlemen, and congratulations for the good results.
When we look at the retail inventory was up 16% year over year would you be able to quantify how much was.
Weather, driven and what should we expect in Q3.
In terms of inventory level.
Yes, well I when I look at good morning, but when I looked at the.
Inventory as I said again, we're we're very comfortable.
Retail was only softer.
For personal watercraft.
And that was impacted by weather, but it was again very strong free TV in super strong for side by side. So.
This is are we talking a few thousand units in inventory because of weather and thats, probably the than the size of it so not very material.
Okay, Okay, perfect and ordinary occur you've been able to do ramp up successfully the the product and also with the milling. You also could you maybe provide more color about what you learn from ban related to do brand.
The desire to have the two will earn a vehicle and also how the u. riker as opposed to the Spider in terms of commuting versus a pure abhi.
That's a loaded question than one.
Let's say, it's a bit early to.
To conclude on the reicher with Super happy about the reception of the units.
And as you know today are.
Our TNF tree orders are in have reached 59 years old.
And we're targeting consumer between 35 and 55.
And right now very preliminary but the average reicher user our buyer is about 10 years younger.
Then the Rtn if tree than we are attracting definetly younger people.
That being said.
It's a bit early into this season you have early adaptor you have people, who all always wanted to have the tree will and could not afford.
And our TR nfthree debt.
Decided to buy a riker then very difficult to to conclude at this point then the intent is to finish the season because there is still.
Retail going on than we started shipping them other year 20.
In August and there is still some reicher I mean, we're still some retail going on and we'll have a complete analysis of the season.
Later in December .
And when we meet you at the.
And that is the in October and will it be able to conclude more.
At the end of the next year, Okay, that's great color and when we look at marine.
You are over indexed to the us northeastern and Midwest region could you talk a bit about your dealership expansion strategy.
How it goes so far.
Yep, we basically there is three type of expansion there is.
And you might get AFE or many to dealers or even the need to take another brand.
There is no conversion to even through the new mechanism or.
Many to dealer would take given the rude and there is white space and again, we'll share with you more about the detail of our strategy in October but basically we add the goal. This year in fiscal year 22 had about a 120 150 room and it could be and then you make it have dealer taking youve includes our and the new mechanistic in many to our white space and we are about halfway there then we going we tracking quite well.
Obviously like I said in my remark and mean being many many too is that even the Midwest.
And then you might get asked east and we had.
More difficult season than the weather were had hoped for but again the marine strategy is a long term strategy.
I am very happy with the work that the teams are.
They are worried that the team have done so far on on the and on developing the next generation of boat with the new generation of Andrew.
And we feel confident in the future Okay last one for me.
From a capital deployment standpoint.
The stock is down significantly since the completion of this substantial issuer bid. So I was wondering if you could tell a more about the room to perform further currency IB and given the devaluation right now and strong outlook.
Yes, obviously, we are are.
Very disappointed with where the stock price is trading obviously is not reflective of the performance that we've had over the last several years than last quarters. As you said the momentum is there.
And so the valuation is attractive for buybacks and obviously, it's something that we will consider and entertain.
In the next few quarters, Okay. Thank you very much quantify.
Thank you. Our next question is from Tim Conder from Wells Fargo Securities. Please go ahead.
Thank you.
Gentlemen.
Any commentary that you can kinda give us really into the promotional activity is that the.
You may have done during the the fiscal Q2.
Or that you're seeing in the market right now and again, maybe across the product lines. The on on the Marine side and then on the TV in the <unk> and the side by side product lines. Thank you.
Good morning, Tim.
If we start by off road I would rate that yellow.
LTV was very similar to the last few years and on the side by side.
You need to understand that is the first here, where we can we have some product availability.
And is the first season, where we had like some non core in at the end of June than we had for the first time.
Some normal promotion on defender and have a family.
And and.
Some of our competitor complain about it but the rebate we were giving is in line with what every OEM is doing at the end of the season.
Dan I would consider offroad yellow.
Watercraft, we have we have reacted.
On the back end of the summer.
Because we were behind than.
Last year was green this year, we invested a bit more than last year nuts ridiculous, but they did more than last year and three will I will consider a dream.
We if you remember we adjusted our pricing NRT Nfthree last year and our promotion for mother Deere 19 started only in August like it should be then this is overall the detail on that and then on the boat side we were.
A bit more generous than in the past two year, but again in line with the other OEM.
Okay, and Jersey, any any color geographically, whether you want to look at North America collectively are Canada versus.
The U.S. and then the basically the rest of the world, we want to say Europe , or just broad geographic regions as far as promotions and collectively or if you do want to break them down by by the product categories, Yes, well. They give you Tim is applying to Canada United stayed the situation was about the same in both country. The whatever was the weather and that we catch up in the June July on the retail front.
I've International.
So a lot of moving pieces.
Scandinavia was similar to what we saw in North America in terms of weather.
Then we had a slowdown in in the watercraft and Scandinavia off road was not affected that being said in the western Europe watercraft have done extremely well.
Because they had warm summer.
And we're very happy with the overall.
Other than that.
Some adjustment in APAC.
But overall I would see very similar to last year, except North America and Scandinavia.
Okay, great. Thank you for the color.
Yes.
Thank you next question is from Garrett Johnson from BMO capital markets. Please go ahead.
Hey, good morning.
Looking at your own inventory up 22% can you discuss the puts and takes there. Thank you.
Yes, good morning Garrett.
Well as you probably saw the second half of the year implies a very strong.
H.
From volume growth as well and strong profitability growth and so.
We are.
We have produced some of the units for shipments in Q3.
And so that is the main driver of the increased inventory.
Yes, as the business is going strong we have also a strong international business with longer transit times and that business is growing as well.
And so that needs to be accounted for in our planning as well and therefore that results in higher inventory levels.
Okay. Thank you for that and one one more thing that you don't seem to talk about I'd like to hear about is.
Your initiatives in Texas, and how that.
New offices going and.
Some update on what's going on with your stuff and tax effects.
Overall I mean, we are on plan.
We ramp up the number of people in Dallas.
And we changed the structure of the management team we divided.
The United States, and three region, and we have a leader on each region that give us.
In the past where were managing United States a lot.
I mean east to west.
South to North and now we have like more a regional focus which gave US an important thing to add some tactical.
Tactical.
Focus on on different region or different.
Different opportunities and overall very happy with the Dallas.
No Thats office, and we believe that.
We have a lot of people there that are better connected.
To the us market versus when will remain aging in the United States from Canada.
Great. Thank you.
Thank you. Our next question is from Mark Petri from CBC. Please go ahead.
Hi, Good morning, I, just wanted to ask about the dealer base in the U.S. and I guess, specifically, mostly on the side by sides, but I think you're sort of at relative maturity in terms of dealer count the gaming floor space and mindshare Wonder if there are any metrics you can share that would help us gauge that and how you sort of continue that momentum and obviously there is a combination of factors, but as the focus sort of in continuing that momentum more on just generating demand or is there still more to do around engagement.
Improving systems and that sort of thing.
On the number account we believe we have about the right number of dealers. If you remember we signed a lot of dealer in the last few years and now we have about 1200 50.
In North America, there is always some turn.
25 to 30 years.
That is happening but.
The focus is more on what you said.
Continuing to gain space into the dealership and gaining efficiency better engage with our dealers have the dealers.
To become better retailer.
And it's we work with them hand on hand.
Then this is the focus and we doing I believe a pretty good job.
To have business discussion with dealers and helping them to raise the bar.
And do you think broadly speaking obviously, there's lots of different factors, but in terms of driving that engagement is it more a matter of continuing to create consumer demand and obviously the dealers are going to respond to that or is it in terms of how you engage with the dealers.
Managed their profitability improving systems ordering systems inventory supply and those types of those types of levers.
I think we see it.
We tried to help the dealer who ordered a right product mix.
And we were money to bring more and more their inventory, helping them to understand their retail and make sure that they have the right model at the right time in the theater <expletive> .
Also the service part is getting more and more important.
There is a lot of money tied into the service part and the dealers some dealer do we do with extremely well others not as well.
Then it's working hand in hand with the dealers.
To help to be more efficient in what they do.
And so far we don't see the need to.
Increased the number of dealer it might happen.
If we continue to grow in the side by side business, where we have some maybe maybe today, we have a dealer.
Supporting Big region, and maybe in time, we need to.
But forward to this year the focus is more working on the efficiency.
Of the dealer.
Okay I appreciate it.
Thank you. Our next question is from Craig Kennison from Baird. Please go ahead.
Good morning, Thanks for taking my questions I wanted to ask about your view of the US consumer a lot of talk about maybe a slowdown maybe that's especially true.
With wealthier consumers, but you have an interesting for John the World what are you seeing.
Yeah, Good morning, Craig.
I mean again, there is a lot of talk about a slowdown but.
You know the thing that we are watching that we believe could affect our business.
But I give you some statistic us on the unemployment rate in July was 3.7% very low.
The housing slow down a bit but it was up 8.6% in July versus a year ago.
The us consumer consumption remains strong it's was.
Up 3.2% in June and 2.4% in July .
And to be honest I mean, we don't see.
Slowdown in our power sport business I mean, the Q1 the industry was up high single digit than in Q2 were mid single digit.
Dan This is and you know we're not economists, but this is the thing that we believe.
That is affecting our business and so far we're very happy.
With this this state of the economy and the consumer.
Thanks, and with respect to tell water I apologize if I missed it but could you frame the revenue and margin profile of that business and detail what's included in guidance.
Yes the.
So when guidance we have.
Six months of revenue built in there on an annual basis total water is a let's 80 to 90 million dollar business Canadian dollars.
Margin profile is very similar to what you see in other gold companies in the U.S. So.
Lower gross margin.
Lower level of operating expenses, but similar EBITDA margins.
Thank you and then finally again with respect to tell water to what extent do you intend to Ron how water alumina craft and Manitou separately.
Very soon is trying to leverage any commonalities between among those businesses.
In terms of R&D and other factors to get efficiencies, yes, absolutely I mean, we are working right now on the metrics organization, where obviously there will be a leader for each bold brand.
But you have cross functional function like design R&D.
Operation where.
Company will share the best practice.
What we like about the tree acquisition is the our boat.
The three of them are involved in aluminum both construction.
And there is definitely synergy between each of them to be gain and comparing the way to do the do D. do team.
On top of it.
In term of product development, we have team right now working on the next generation of boat and engine to make sure that we have the perfect integrated product then.
Basically it's a metric structure where.
There is a.
Responsible for each bold brand.
But you have some cross functional function.
Who held the synergy.
Very helpful. Thank you. Thank you.
Thank you next question is from Brian Morrison from TD Securities. Please go ahead.
Hi, Good morning, I think I understand the increase in inventory and the power sports industry on content with that maybe with the inclusion of tell water in the flat.
Revenue guidance and Marine now maybe you can just walk through or help us understand the marine inventory both in the dealer network and internally and potentially with the industry softness that you're going through right now and albeit potentially temporary whether your appetite for M&A might be heightened or whether you're content with your current portfolio.
Yep then.
Again, the Diovan rudimentary have decreased by 10% into the quarter than we are comfortable with our level of inventory.
On the boat side.
Yeah. The two brand that we manage in North America are very different many too it's a high ticket item and we used to have five to six months of inventory at the dealer ship.
The turn their inventory typically a bit more than two times a year and right now we have about six months of inventory out there about 10% higher than typical than we're comfortable with that I'd Mackinac, it's a lower ticket item.
There are normal inventory is more in the 12 months about the same them.
The industry average and were a bit maybe 5% to 10% more than typical but we are comfortable on bold brand.
On the boat.
Inventory at the theater at our factory very minimum minimum all I mean this is.
Being a boat is a big piece of equipment and we have minimum inventory in our yard at both many to a new mechanism.
For Cal water, it's about the same again, we've done officially the acquisition on August Onest.
It's the same pattern not much inventory at the manufacturing facility.
And I believe determined inventory quite high, but I don't have enough data to be.
To answer your question.
In term of acquisition in the boat space for the time being we are happy with those three both company.
And the focus in the next I would say 12 months will be to make sure that.
We maximize the synergy and we maximize the integration and how we can maximize the the work between the tree both company and be happy to again deliver on the both strategy then don't expect both acquisition in the next 12 months.
Okay. Thanks, just to clarify in terms of the inventory that should we expect promotional activity in the back half of the year and I can only presume that that's factored into your current guide.
Yes.
Promotional activity should be similar year over year, obviously, some times our promotional activity may be influenced by weather, especially when we look at the snowmobile season that is upcoming.
But.
The guidance reflects what we believe is appropriate.
Appropriate promotions and or drive the retail.
That ultimately drives our wholesale numbers.
Okay, one last housekeeping item, maybe Sebastian and.
In terms of your.
Net income adjustment.
Can you maybe just clarify it it's modestly change but includes excludes this includes an FX change maybe just on a normalized basis can you just tell me what's changed here.
Yes, the only FX change that you see in our a normalization of net income and normalization of if it relates to the long term debt so as our debt which is.
Nominated in U.S. dollar gets revalued every quarter that creates a FX non cash FX variation in the piano.
And given the materialize materiality of the depth and the swings that we often see in currency. It does create noise and the BNL and Thats why we normalize that item, yes. So just on a normalized basis as net income changes up or down.
Well the net income for the bridge is.
Up $3 million at 69 million. If you look at the bridge that we have in the webcast sorry, I'm talking about the guidance.
Oh the guidance sorry.
The normalized net income is up to reflect the EBITDA adjustment than we did on the bottom end of the range.
Thank you all right.
Thank you next question is from Greg Badishkanian from Citigroup. Please go ahead.
Hey, guys. Good morning, its actually Fred Wightman on for Greg Just wondering if you could talk about what if any impact you're seeing in terms of the supply chain either product disruptions or pricing changes just given the tariffs and trade back and forth. We're seeing in North America, and then what that means for the implied back half increase in output that you guys are expecting in guidance.
Yes, as we've shared.
With with all of you in the last few quarters.
The whole Derrick.
Dispute between Us and China.
Is is having minimal impact on our results led to the way forces that were just announced we're probably looking at a worse, a 5 million dollar impact for us and we'll all the terrorist when you combine them off for the full year.
So from we want to wait for you're probably looking at $15 million for full year.
For this year and that's if that were to be applied on a full year basis, you're looking at probably maximum $20 million again, we source very few over components from China.
When we look at our whole supply chain and product quality.
It doesn't necessarily always fit to source in China, because were not necessarily on meeting the specs that we want to meet or those lead times on out there.
And so thats why we source very few over components from China and were not as impacted as other companies.
That's that's really helpful. And then there is a call out in the slide specifically for the Maverick sports dealer inventory impact how much is that specifically on a percentage basis fall off the top my head that I wouldn't be able to give it to you all probably give it to you offline, but last year, we have very little Maverick sports in the network.
With a new product.
And as we were.
Obviously capacity constraints, we privilege the shipment of litho, the Maverick X three and the defender.
Which are higher margin products and Thats why this year now with the capacity we have we ship more into the network.
Okay, we'll follow up thank you.
Thank you next question is from Derek Dley from Canaccord Genuity. Please go ahead.
Yes, Hi, guys. Good morning, just following up on.
Just a question in terms of dealer inventory. There is also commented there just in terms of snowmobile.
Sales, having earlier shipments so should we expect some sort of a timing adjustment between Q2 and Q3.
No again, it's a small volume.
We always does your snowmobile volume shipments are expected to be higher than last year, and so given the season and the production schedule is.
Their recondense.
You have the abilities to either produced earlier in the second quarter earlier in the fourth quarter.
And depending on when engineering release are ready that's going impact when we ship in there for this year.
Because of those factors, we shipped more units in the second quarter.
Okay. That's helpful.
And and Sebastian.
I think in the past you've provided a bit more color.
Just in terms of some of the puts and takes in the magnitude of each of the impacts on gross margin that you called out in the press release commodity production distribution wondering if you could give us that bridge again.
Yes sure.
So as you all saw margins are down 70 basis points. This quarter volume was a positive impact as you saw the revenue growth year over year as well, that's almost a 200 basis point plus two.
To the margin mix was unfavorable and sales programs as well were unfavorable mix driven obviously by Riker and also we are we did ship less X threes in the quarter as we knew that we were coming out with a new x. three at 195 horsepower. So we kind of held back on some of the shipments of X threes now was a negative combined there the mix and the sales programs 140 basis points production cost negative 80 basis point half of it coming from added depreciation.
The other half coming from.
Obviously now we're running a bigger plant.
We've kind of done two waves of increases on a year over year basis without being reflected in our operating costs.
So that's 80 basis points in the last item FX for 50 basis points.
Great very helpful. Thank you very much.
Thank you. The last question is from Cameron Doerksen from National Bank Financial. Please go ahead.
Thanks, very much I just wanted to I guess clarify the question earlier on the I guess some of the inflationary cost headwinds and then they have the tariff impact I think in the past the number that you talked about it was kind of 35 million in inflationary cost some of that was missed tariffs and some other things that youre, what's what's I guess the equivalent number now on a kind of a full year basis, well, we talked about 35 million dollar impact in the past for.
We'll call we call it inflation freight commodity and tariffs. So you could add an extra 5 million to that.
Cameron Okay perfect that's great.
And just on either the side by side.
Business.
Just thinking about the product portfolio now you've you've introduced the <unk>.
Eight platform, which you had been targeting over that that period I. Just wonder if you can talk a bit about just just on a product basis, where you think you're still underrepresented or is it just really more of a kind of growing market share in the sub segments that you are in now is there anything else that you feel as though.
That you need to I guess increase the product portfolio to continue to grow.
Yes in the last four years basically we introduce new platform in almost every segment into the industry and.
There is still white space for us in the side by side business and you can expect in time.
Other new platform not that the base of one every six months, but you can expect also variation of model trying to create new Sigmund like.
An example, the fish probe.
I mean, the watercraft, we're good to create new segment in that product category.
That will be our main focus.
And still if you look at our product portfolio today, we have the base, but we can.
We can.
Continue to expand our offering to the consumer and and delivering a new trend or new request for quotes humor.
The other and some investor is always asking the question will you stop there for sure.
I mean, we intend to keep the same pace of investment that we've done in the last four years.
Forward.
Obviously like I said, it's not necessarily a new platform every six months, but you can expect that to we'll continue to push in the side by side industry.
Okay. That's great that's very helpful.
Thank you very much.
Thank you. So Mr. Addition, this was our last question I will now be turning back over to you for closing remarks.
Thank you ladies and thanks, everyone for joining us. This morning, we want to invite you to join US at our dealer event in Las Vegas in September 10, and 11 and that art.
Investor Day in October 28, and 29, Thanks, again, everyone and have a good day.
Thank you for your conference has now ended please disconnect your lines at this time, we thank you for your participation.