Good morning, ladies and gentlemen. Welcome to the BRP Inc.’s Fiscal Year 2022 Second Quarter Results Conference Call. [Operator Instructions] I would now like to turn the meeting over to Mr. Philippe Deschenes. Please go ahead, Mr. Deschenes..

Thank you, Natalia. Good morning and welcome to BRP’s conference call for the second quarter of fiscal year ‘22. Joining me this morning are Jose Boisjoli, President and Chief Executive Officer and Sebastien Martel, Chief Financial Officer.

Before we move to the prepared remarks, I would like to remind everyone that certain forward-looking statements will be made during the call and that future results could differ from those implied in these statements.

The forward-looking information is based on certain assumptions and is subject to risks and uncertainties and I invite you to consult BRP’s MD&A for a complete list of these. Also, during the call, reference will be made to supporting slides and you can find the presentation on our website at brp.com under the Investor Relations section.

So with that, I will turn the call over to Jose..

the FishPro Trophy, a the top of the line fishing personal watercraft equipped with many of the key feature of full-sized fishing boats and the FishPro Scout a more accessible option. This product has been very popular since its introduction in 2018.

It is the fastest growing segment in our personal watercraft line up with over 65% of buyer being new entrants to personal watercraft, with over 50 million angler in the U.S. and over 700 million worldwide. There is a significant market opportunity for the FishPro lineup.

This is another example of our ability to identify market opportunities and create subcategories. For Can-Am, our product introduction includes the upgrade of Maverick Turbo RR engine to 200 horsepower, which is a first in the industry.

This new engine power coupled with all our – with our all-new pDrive roller clutch system ensure that we maintained the performance leadership in the sports segment, the fastest growing category in the industry.

We also introduced new engine option in our utility lineup with the HD7 and HD9 that offer leading class power and capabilities and we improved their ruggedness and capabilities of the Can-Am Ryker Rally to maximize performance and comfort off-road.

These new products were very well received by theaters and the media and our booking results are tracking to respond. Turning to Slide 9, the main highlight of the club was the official introduction of the game changing Sea-Doo Switch.

When we reentered the boat industry in 2018, we realized there were many opportunities for us to reinvent the Pontoon space, which accounts for about 30% of U.S. power boats and is quite sizable. In addition, it has one of the fastest growing rate in the industry with an 8% CAGR over the last 5 years.

Turning to Slide 10, the Switch is a product that combined all the onboard space and stability of a Pontoon with a driving performance and the watersports friendly capabilities of a runabout. It provides the most convenient, accessible, adaptable, and fun boating experience.

One of the innovative feature of the Switch is it’s plug and play Lego inspired system, which provides flexibility to change around your interior layout to adapt to your needs as the day evolves. The boat will also appeal to new borders as it is easy to use, easy to duck and is the first ever boat to come with a braking system.

It is available in a variety of land and engine configuration with different package starting at the very accessible price of $17,999 and will be sold through our Sea-Doo dealer network. The product also represents a sizable opportunity for our accessories business.

It is highly adaptable with over 65 dedicated accessories available at lunch and is also compatible with all link system. Production is planned to start in the latter part of the fourth quarter with deliveries expected for the next boating season.

Having talked to many dealers, many are already sold out of model year ‘22, which is expected to be delivered to customer by the end of June and some are taking orders for model year ‘23.

We strongly believe that the Sea-Doo Switch is a game changer for the boating world as it is a unique innovative product that is well-positioned to attract new border in the younger generation. Over the years, we have proven we are able to disrupt the industry by creating new segments.

We did it with the Sea-Doo Spark, which helped the personal watercraft industry grow 86% since it’s in production, and more recently with the Ryker which allowed the three-wheeled vehicle industry to grow 48% in 2 years following its introduction. And now we believe we will do the same in the Pontoon industry.

Now, let’s turn to Slide 11 for a year-round product. Revenues were up 54% to $956 million, mainly driven by higher volume, lower sales program in the richer mix for side-by-side vehicle. On Saturday, July 17, there was a fire in the outdoor storage yard of the Juarez 2 Mexico facility where side by side vehicles are produced.

All employees on site were safely evacuated and no damage was caused to the manufacturing facility. Production resumed on the following Tuesday. And once again, I wish to sincerely thank our employee for their quick response. I am very grateful to the firefighter, local businessmen – local businesses and authorities for the help and support.

Now, looking at side by side North American retail, in the second quarter, Can-Am side by side retail was down low 20% outpacing the industry, which was down mid-40%. As a result, Can-Am side by side made some solid market share gain despite being constrained by very low network inventory.

Similarly, we have closed the North American season at the end of June, with an increase of high single-digits compared to mid single-digits for the industry. Note that this growth come over and above record level growth last year for the full season when the industry grew low 20%, while Can-Am low 40%.

The future looks very promising for Can-Am side by side business. Consumer demand for lineup remained very strong. Our new products are very well-received and on August 23 we started the production of our Juarez 3 facility on plan.

We’ll be ramping up through the end of the year to a full second shift and plan to have the full benefit of the additional 50% of capacity at the beginning of January 2022. Turning to ATV, Can-Am North American retail was in line with the industry for both the quarter and full season.

Both were down in the low 40% for the quarter due to limited product availability and up high single-digit for the full season. Now, three-wheeled vehicle, Can-Am three-wheeled vehicle continued to perform well compared to the industry gaining market share both in the quarter and season to-date.

It remained the fastest growing brand in the motorcycle industry so far this season. The Rider Education Program registration continues to trend above expectation. In fact, we continue to be successful at attracting a younger and more diverse consumer base, with a high level of new entrants, woman and visible minorities.

This trend is very positive and we are very excited at the outlook for the three-wheeled vehicle business. Turning to seasonal products on Slide 12, seasonal products revenue were up 78% to $575 million driven primarily from higher shipment or richer mix of personal watercraft and lower sales program.

Now, looking at personal watercraft retail, Sea-Doo continues to gain market share in the quarter in North America. In North American retail season-to-date is now up low 10% compared to an industry that is down low single-digit. Currently, the brand holds the number one market position in all segments in the industry.

Based on the way the season is performing, we expect it to end with a very low level of network inventory again this year, which will lead to strong shipment in the next fiscal year. For snowmobile, we are currently in the slow period of the season.

Our retail was down due to limited product availability as we ended last season with an all-time low level of inventory in the network. Still, we are very well positioned for the upcoming season with a record level of units pre-sold to consumers.

Continuing on Slide 13 with a look at Powersports Parts, Accessories & Apparel and OEM engines, revenues were up 19% to $249 million for the quarter. Year-to-date, revenue increased by about 30% in each of our product lines.

This growth is driven by higher volume of replacement part due to increased product usage combined with strong unit retail which is generated – which generates increased accessory sales across all product line. Our extensive lineup of parts, apparel and accessories notably, our proprietary LinQ system is driving strong consumer demand.

Now, looking to marine on Slide 14, revenues were up 56% to $125 million. The benefit from a favorable mix of both sold and lower sales program more than offset the lower volume of outboard engines sold due to the wind down of Evinrude.

Looking at retail sales, both Alumacraft and Manitou saw retail decline in the quarter as sales were more made earlier in the season compared to last year. However, both brands are performing well year-to-date with North American retail up low single-digit for Alumacraft and high-teen percent for Manitou.

As for Telwater, we were at the end of the boating season in Australia. Retail continued to perform well and was up high single-digit for the quarter. We also host a virtual event with our Alumacraft and Manitou dealers 3 weeks ago, where we introduced our 2022 lineup.

It included improvement to our Alumacraft PRO Series Bass Boat into our Manitou XT and LX models. We are pleased with the progress we have made in our marine business and are looking forward to launching new boats with the Ghost engine in each of our three brands in the second half of 2022. With that, I turn the call over to Sebastien..

Thank you, Jose and good morning everyone. As Jose mentioned, we carried our strong momentum into the second quarter and closed the first half of the year with very solid results that came in above our expectations. This performance was broad-based with robust revenue growth across all product categories and regions.

From a profitability standpoint, we had another exceptional quarter as we generated $570 million of gross profit on $1.9 billion of revenue, resulting in a 29.9% margin. Compared to last year, the gross profit margin benefited from better fixed cost absorptions as last year’s second quarter margin offered from the temporary production shutdown.

The exit from outboard engine business, especially as we had additional costs related to the wind down of Evinrude in last year’s second quarter and a positive impact from higher volume, favorable product mix and lower sales programs which were partly offset by our production and distribution costs and unfavorable FX.

With this strong gross profit generation and lower than expected operating expenses, we delivered $415 million of normalized EBITDA and generated $2.89 of normalized diluted earnings per share. Worth noting that these were our strongest quarterly results ever.

From a cash flow perspective, we generated $417 million of cash from operations and invested $217 million in working capital. Notably, as we continue operating with higher level of work-in-process inventory and are managing through supply chain constraint.

We also invested $132 million in CapEx and returned $361 million to shareholders, primarily through the successful completion of our SIB under which we repurchased 3.4 million shares.

Turning to Slide 17 for a more detailed look at the key drivers of our normalized net income growth for the quarter, as you can see from the chart, our normalized net income grew $149 million from last year’s second quarter driven by a positive impact from volume, mix, pricing and sales program, representing $393 million, which was partly offset by the negative impacts of increased production costs and depreciation expense for $66 million, higher operating expense for $83 million as we continue investing for our long-term growth, higher normalized tax expense for $52 million, and unfavorable foreign exchange variation for $43 million.

This resulted in $250 million of normalized net income for the quarter coming in stronger than expected mainly because we were able to ship more units than we had initially planned. We benefited from lower than anticipated sales programs and we continue to diligently manage our spending, which resulted in lower operating expenses versus our plan.

Now, moving on to Slide 18 for a quick look of our network inventory situation. As Jose mentioned, we continue operating with very low levels of network inventory, which is limiting our ability to generate retail growth.

In fact, despite increasing our production output in the quarter, consumer demand for products continued to outpace the capacity to supply products and resulted in an inventory decline of 51% versus last year and 76% versus 3 years ago.

While this situation is definitely not optimal, we believe that low levels of inventory are widespread across the industry.

And once we gain the full benefit of our additional production capacity in the coming months and supply chain disruptions are mitigated, we will be very well positioned to take advantage of the sustained consumer interest in our products. Now, let me provide you with a better context before getting into the updated guidance by looking at Slide 19.

As you know, many industries including Powersports have been dealing with supply chain challenges for the better part of the year. So far, we have been able to manage through this turbulence while limiting the negative impact on our business.

Still, we remained vigilant as the situation is constantly evolving, with pressure coming from the semiconductor shortage COVID-related factory shutdowns, especially in Southeast Asia and labor shortages in North America.

While we have limited direct exposure to these issues, many of our suppliers have to deal with such challenges on a daily basis, putting pressure on their operations and limiting their ability to commit the firm delivery schedules for parts.

As such, we expect increased variability in the timing of reception of components from suppliers during the second half of the year. This may impact our production schedules and the timing of product shipments over the next few quarters.

Still, we continue to aim to deliver on all dealer orders we have on hand and we plan to continue to produce a capacity, store or shipped to dealers some unfinished products and retrofit them once missing components are received.

Based on the visibility we have today, we expect that these supply chain issues will weigh in more on Q3 which will limit our wholesale in the quarter. Nonetheless, we expect to be in a good position to retrofit most of the units in the fourth quarter, leading to a much stronger fourth quarter.

While we are comfortable with our plan, we are operating with more visibility than we usually do, which may lead to delays in shipments of units between Q3 and Q4 and even between Q4 and the first quarter of next year. This is why we have updated our guidance with a wider than usual range as you can see on Slide 20.

In light of the better than planned results achieved so far this year and the continued lower level of sales programs throughout the rest of the year, we are comfortable increasing the higher end of our seasonal and Powersports P&A and OEM engine revenue guidance ranges.

And we are also maintaining the higher end of the year-round products and marine revenue guidance ranges in tax despite the potential supply chain headwinds. Note, that we have lowered the bottom end of the year-round products revenue guidance range to reflect the impact of the losses of the units in the fire.

With these adjustments, we now expect total company revenues to grow between 27% and 35%.

We have also adjusted our profitability metrics to reflect elements previously mentioned and to account for higher commodity costs which are mostly offset by pricing increases and additional costs resulting from inefficiencies due to the ongoing supply chain issues.

Following the adjustments and accounting for our strong H1 results, we now expect normalized EBITDA to grow between 30% and 47%.

And after taking into account our revised assumptions for financing cost and depreciation expense and using a lower share count, as a result of the SIB, our normalized EPS is now expected to end between 825 and 975, representing a growth between 53% and 81%.

As for expectations in terms of quarterly results for the back half of the year, as I already mentioned, our objective is to deliver on dealer orders we have despite managing through supply chain pressures. We expect that these issues could weigh more on Q3 and then improve as the year progresses to provide more upside in Q4.

At the midpoint of our guidance, we would expect normalized EPS to grow about 40% in Q4. On that, I will turn the call over to Jose..

Thank you, Sebastien. To conclude, we have delivered record result in the first half of the year. We are able to achieve this, thanks to our solid execution across the company and the very strong consumer demand. Short-term, we will concentrate on delivering a solid second half of the year.

We will focus on managing and mitigating supply interruption and deliver on our production plan. Our objective remains to deliver all order on end. Based on this, we are confident in our ability to achieve our revised guidance.

Furthermore, we are confident about the future as we expect to benefit from numerous key initiatives and trends, including new product introduction, such as Project Ghost and the Sea-Doo Switch. The latter represents a new business for us and is already proving quite promising.

In fact, you can expect more product introduction over the next 3 years than we have done in the past, the sustained consumer interest in Powersports and marine. Our strategy for new entrants, which is progressing well, everyday that passes provides us with greater confidence in our ability to turn them into lifelong customers.

The upcoming significant inventory replenishment cycle that is expected to take place over the next 12 to 18 months. The additional production capacity from Juarez 3 and Querétaro which is expected to have a positive impact over the next 2 years starting in fiscal year ‘23 and the electrification of all our product lines.

As you can see, we are well-positioned to drive long-term growth and continue to outpace the industry. We are confident in our ability to execute and our growth strategy in fiscal year ‘23 and beyond.

I insist on expressing my sincere gratitude to our employee, dealer and suppliers for their collaboration, commitment and patience during these challenging times. In this ever changing world, their agility, dedication and capacity to successfully manage is impressive and truly make the difference.

On that note, I turn the call over to the operator for questions..

[Operations Instructions] Your first question is from the line of Robin Farley with UBS..

Great, thank you. Two questions. Obviously, fantastic quarter. I am just wondering we hear a lot from dealers about some OEMs that have made market share gains where they don’t have as much as an availability issue. And I am wondering some of them are newer entrants into the offered market.

And I am wondering if those are counted in your industry measure of market share in that data? And I guess sort of either way, I wonder if you have general thoughts on some of these new entrants kind of taking advantage of the lack of availability and just kind of the degree that could be sort of making inroads into the future? Thanks..

Good morning, Robin. I mean, for sure, in the supplier restriction that we have in the network from time to time, we hear dealers that are saying that they have lost some customers, but it’s – to be honest, it’s minimal, it’s quite small number. And what we are very happy with, like I said in my intro, those new entrants are growing.

We are at 43% in Q2 versus 41% and our historical average was 20%. But more and more, we surveyed them quarter after quarter. We see that they intend to stay within the industry. And the repurchase cycle is better than everything is pointing in the right direction to make them have lifelong customer.

And obviously, right now, when we do our projection for the future, we count them in, because we believe that the trend is too strong, not to count them in our future planning..

Okay, great. Thank you. That’s very helpful. And then second question is, looking at your comment about retail sales through the quarter comparing to other’s comments about the June quarter. It looks like July was a bit worse in terms of product availability in retail, not surprising.

So I guess, just looking at your guidance, I guess what gives you the confidence that Q4 logistics would be getting so much better is, I mean, is it just that you feel like it can’t possibly get worse or I guess just to try and get that conviction that things won’t sort of continue to be at these difficult levels into Q4 potentially? Thanks..

And then obviously, right now, the – like Sebastien said there is three area of challenges the semiconductor, the COVID restriction impact on manufacturing operation in the South Asia and the labor shortage mainly in North America.

And the second one, the COVID restriction in South Asia, OEM over there are companies who manufacture component are getting better with sanitary measure, most of them vaccine themselves, their employee. And we believe we are going in the right direction. In terms of semiconductor, you know that many chips are produced in those country.

And there was a fire in Japan. After that there was a few factories which shutdown in Malaysia. But now those factories are back to normal.

When we have talked to our supplier who supplied to us electronic component like engine, computer or a cluster for the vehicle, they believe with what they know today that the situation will improve on the back end of 2021 and through 2022.

I don’t think it will come back to normal in 2022, but we are confident than once we – from where we are today, the situation will improve in the next 12 to 18 months.

Then that’s why our guidance as a wide range because with what we know today will be closer to the high end if there is some other uncertainty, it will be more difficult, but that’s why we decided to widen the range..

Okay, great. Thank you very much..

Your next question is from the line of Joe Altobello with Raymond James..

Thanks. Hey, good morning everybody. So first question is back to the guidance, EPS guidance in particular, the raise looks to be largely margin driven along with a lower share count to some degree.

What’s been better than you thought so far this year from a profitability standpoint? Is it mix? Is it input costs etcetera?.

Yes. Good morning, Joe. Obviously, there are many factors that are driving the financial results. There are lot of pluses and minuses. But the big pluses are obviously sales program. The promotional environment is still very healthy for OEMs and for dealers as well. And so, we don’t have to offer as much promotions as we initially anticipated.

And that’s what drove the better results in the second quarter..

Obviously, with the high level of demand and we will call it the scarcity of production, OEMs and we are more selective in which product we make and yes, the mix is richer as well. That’s a plus.

Obviously, there are some headwinds that we are seeing on commodity costs and logistics, but we are able to offset some of that with pricing and surcharges as well..

Got it. That’s helpful. And just maybe secondly, I apologize if I missed this.

In terms of your full year outlook for retail, is it still flat to up high single for this year?.

Yes, flat high to low single-digit. That’s the right number. Obviously year-to-date, we are flattish. Q3 is going to be a tough one, because we are going into the third quarter with super low network inventory. And with the supply chain challenges that Jose just talked about is going to be a challenge.

The expectation is for Q4 to be up and for the full year to the flat to high – to a low single-digit..

Okay, great. Thank you..

Your next question is from the line of Martin Landry with Stifel GMP..

Hi, good morning. I just wanted to get a bit more clarity on your guidance for the back half. You are seeing that you expect Q4 EPS to increase at 40% year-over-year using the midpoint. So, that would suggest that your Q3 would be weaker and could be down even lower than 2 years ago.

So, just trying to understand exactly what’s putting pressure on your Q3 looking at your inventory levels, on your balance sheet, it doesn’t look super low as there have been some pull forward sales into Q2 or like just a bit of color would be helpful?.

Sure. Good morning, Martin. First, yes, as I said earlier, Q2 ended better, because we shipped more units. Some of that was pull forward. So, we had finished good inventory that we are able to wholesale in the quarter. So that obviously reduces the units available for sale in the third quarter.

But the big challenge in the third quarter is as I mentioned earlier is the supply chain and our ability to produce finished goods we have – we will have more retrofit units at the end of Q3 than we have at the end of Q2. These units will be reworked in our expectation in the fourth quarter.

So from a volume perspective, obviously that’s going to impact Q3 and that’s why the profitability will be down. But as Jose indicated, we talked with our suppliers and we have they give us visibility as to when and the ranges of supply. And so we are confident that Q4 is a number that we can deliver..

Okay.

And then again, you have got some comments talking about 2023 – fiscal ‘23 talking about you are expecting further growth, just to clarify when you are talking about further growth, are you talking about revenue growth or EPS growth?.

It’s both. We itemized what the opportunities are for next year. Obviously, we have added capacity. We have Sea-Doo Switch. We have as well new products that we will be introducing. And there is obviously extremely low level of inventory in the network that needs to replenish.

So from a top line perspective, we anticipate growth and from a profitability perspective as well. If you take the midpoint of the guidance for this year, our expectation is that we are able to generate double-digit EPS growth next year..

Double-digit EPS growth for fiscal ‘23?.

Yes..

Okay, perfect. Thank you..

Your next question is from the line of Gerrick Johnson with BMO Capital Markets..

Hey, good morning. Thank you. I want to talk about your distribution process. And so, you don’t ship pre-orders, Polaris points to its use of pre-orders as an asset as well as its retail flow management.

Can you talk about your process and how you distribute and why it’s better than the competition?.

Yes. Good morning, Gerrick. Then maybe my answer would be a bit long, but I will give you the big picture. As Sebastien said, the main challenges right now are semiconductor. COVID restriction in the Southeast and labor shortage in North America and we believe all the OEM are facing the same challenges that we are not better than the others.

But the way we do it, first we, in our – we keep – we try to keep what we control our production planning, very stable. We don’t want to change production schedule. And for watercraft, snowmobile and three-wheeled we are allocating product for 1 year. So dealer gave us the mix and the wish list.

But when the booking is done, we freeze it – we try to freeze it for the year on our site. For ATV side by side right now, we are allocating the product by a period of 3 months. And again, we tried to freeze what we produce to minimize the introduction from our end.

After that, we work with supplier to optimize the supply and because we have a diversified product portfolio and a geographic diversification, we try to allocate and prioritize component depending of the retail season like right now, if we have a cluster, we will put it on the snowmobile instead of a watercraft, because nobody needs a watercraft.

I mean, not the peak season is next spring then this is how we prioritize component between product lines. And also, we took the decision with the dealer, we consult a few key dealers to retrofit, to produce with missing part, then we will retrofit the unit in our factory and at the dealer level. And the goal is to honor all orders.

And our team is very agile, but the discipline to implement those principles and that’s our recipe. And so far, it’s not obviously perfect, but it’s working quite well..

Okay. And one more just could you quantify perhaps the order of magnitude, the contribution expected from Switch, we hear sell-outs, the model year sell-outs. But I really don’t have any idea how to model Switch right now.

So, what should we anticipate in terms of top line contribution?.

But here, the boating industry is a $20 billion plus business and it’s the big opportunity for us. And just to give you a sense, we estimated that this calendar year 2021, the pontoon industry in North America will be about 80,000 units. But there is a fleet of used products, it’s about 600,000 units that have been produced in the last 15 years.

And we know that which like Spark will attract to the used market the trade-in. Then we believe quickly the switch could grow the industry from 80,000 to 100,000 units a year, let’s say in the next 3 years. And we are targeting 15% market share. Then we believe that switch could become a $500 million business in about 3 years, mid-term time life..

Okay. I can work with that. Thank you..

Thank you..

Your next question is from the line of Mark Petrie with CIBC..

Yes. Good morning.

Just with regards to the labor situation, just wondering if there is any effect in your Mexico operation?.

Good morning Mark. To be honest, no, the labor situation in Mexico is good. It’s, we don’t have any labor shortage in Mexico. And this is obviously with now for factory in the country. This is giving us some flexibility. In Europe, Finland contribution, it’s the same thing not much labor difficulty.

Obviously, Canada and United States are more difficult affecting all our manufacturing side, but also our supplier. But in Mexico it’s very well, very good..

Okay, excellent. Thanks.

And then could you, I mean that last answer was very helpful with regards to switch? Can you give us a sense of how the capacity for that will be ramping and then also anything you can comment to revert to the same idea for Ghost and then also how that factors into your CapEx plans for fiscal ‘23?.

Then in term of capacity, and in any of our new product line will always been our capacity or capacity into phase then right now Phase 1 is ready. As you remember, the hull, the motorized hull will be assembled in Querétaro shipped to [indiscernible]. And the production will start at the end of Q4.

But capacity with what we see right now the demand obviously is very good, a lot of units are already pre-sold to consumer. And we are ready to increase the second phase of capacity if we see that the demand is there. It’s a bit too early to call that shut.

But like I said, I mean, we and then we would believe that the pontoon industry in North America could be in the range of 100,000 units quite fast. And we are targeting 15% market share, then we are ready to grow if we need to invest in more capacity if the need is there..

On your question for CapEx for next year, obviously, this year is a big year for CapEx investments almost $600 million at the high-end of the range. We are investing this year in assembly line capacity. We will have investments next year on the manufacturing side, powertrain, PWC.

So, I am expecting to have sustained investments next year, probably in the range of where we are this year. Obviously, we are investing in new products as well. And that’s requiring CapEx. So and Jose mentioned that we are – our pace of introduction is going to be high in the next 3 years. And so obviously, that comes with CapEx..

Okay. Thanks very much. I will pass the line..

Thank you..

Your next question is from the line of [indiscernible] with Exane BNP Paribas..

Hi, guys. Thanks for the question. I want to dig into Slide 19 a bit more. So, you show how much you have expected production. I am just curious, how does that compare to production? And if there were no supply chain disruption or full capacity, what – how does that 20% higher, 30% higher? Can we….

Yes. When I am looking at Q3 versus a year ago, capacity is expected to go up, double-digits. That’s we will call it the total output. This is units that are going to be available for sale and also units that would be retrofitted. And if you are looking at Q4, you are going to see that line actually up versus Q3. So, further increase happening in Q4.

So, we are running at almost full capacity. We could produce more if the supply chain disruptions were not as bad. But we are taking advantage of all of our – all of the shifts available to produced units..

Okay, got it. And then can you may be put into context versus Q2. So as Q4, you are showing – you are talking about improving the supply chain.

Is it even better than Q2, or is it kind of getting back to Q2 after maybe Q3?.

Well, I think the first half of Q4 is still going to be tight, probably in the bottom end of Q4, that’s when things will be more normalized. In terms of output, obviously Q4 is going to be higher than Q2, because now we have the new peak personal watercraft capacity that’s coming online.

And we also have Juarez 3, that’s going to be online in the third quarter and fourth quarter so higher than Q2 in terms of output, yes..

Right. Okay. Got it. Thank you..

Thank you..

Your next question is from the line of Jaime Katz with Morningstar..

Hi, good morning. I actually sort of want to piggyback on that question, because I think it looks like there is a little bit of flack in the capacity utilization or manufacturing chain. But I think you articulated that, it would be something like 12 months to 18 months until the dealer channel was replenished.

And I guess I was expecting it to be a bit longer given that retail demand would theoretically be significantly higher if there was actually inventory in the channel.

So, is there a way to reconcile those dates to feel more confident that that’s the right timeline to get back to the appropriate inventory levels?.

Good morning, then just to come back on your capacity usage, typically and you – if you look historically, our second half is always – has been stronger than our first half.

Because we introduced new products, let’s say in August for the new season and typically, our factory for watercraft, snowmobile, all the seasonal product and year round products are running at full capacity. Obviously, right now, Querétaro, our new line for watercraft and Juarez 3 that is ramping up.

Capacity will be more in fiscal year beginning of 2022. But we always have been using our factories almost at max on H2..

Yes. And maybe on your inventory question, we finished Q2 with the lowest level of inventory there since the beginning of the pandemic. Inventory in Q2 was actually down 25% compared to Q1. So, our expectation is that there is going to be no replenishment this year.

Replenishment is going to start next year, at the end of next year and into fiscal year ‘24. That’s our expectation for rev management..

Okay. And then for – with inventory, does that – can you sort of walk us through your expectations of what that looks like over the next few quarters as the supply chain becomes less strangled? Thanks..

It’s still going to be – still going to be tight per se, obviously, there is a tailwind of demand there. Consumers are waiting for their products. So, everything that we shipped to dealers in the next few quarters is most likely going to be retailed very quickly.

As Jose mentioned that a lot of dealers are resold on switch and switch is going to be wholesale up until June next year. So, our expectation is that as there is a backlog of demand, we will see inventory replenishment happening in the next few quarters. And it’s only in the back half of next year that we should see inventory starting to build up..

Okay..

Thank you..

Your next question is from the line of Benoit Poirier with Desjardins Capital Markets..

Yes. Good morning, everyone and congratulations again for the good quarter.

With respect to fiscal year ‘23, could you maybe talk a little bit about the margin expectation? And also could you quantify the size of the inventory replenishment whether it’s still $1.3 billion of potential revenue over 12 months to 18 months period?.

Well, obviously for next year, we are expanding – expecting some headwinds. Obviously, commodity are going to continue to be a headwind. But we should be able to offset that through pricing. If I look at this year expected EBITDA margin is about 17% to 18%. I would expect that next year as well. Programs are going to be probably a headwind for us.

But obviously we will be benefiting from the increased volume, better asset utilization, better operational leverage, and also mission 2020 you all know that we have some cost saving targets. We will also be getting those as we introduce new products with better margins.

So, our expectation is that margins should be similar to what we have had this year..

Okay, that’s great.

And would you be able to quantify the size of the inventory replenishment Sebastien?.

Well, as I have said, the inventory is extremely low. This at the end of Q2 was – is the record low. When you look at the historical levels where we were, obviously the industries have grown a lot. If I can simplify it for you, the inventory replenishment opportunity is almost equivalent to a quarter wholesale, that’s what it could be..

Okay, perfect. And last one for me, you already provided some color about the switch in terms of market size down, down the road.

But could you maybe provide some color about the mix and level of accessories ordered so far versus the initial expectation?.

Yes. Good morning, Benoit. Difficult, I mean, if you remember just to give you a sense for all the analysts and the investor, the Switch if you go the low and the compact 113 foot, it’s starting at $18,000. The 21-foot crews go up to 36.5, but you can add some package. As you know, we have three packages.

We have the three packages and if I give you the example of the water sport and fun package, then it’s the packet of $7,000. Then, if you take Cruise 21, which retails for $36,000 and you had the water and fun package you are ending up at $43,000. Then it’s anywhere between $18,000 and I would say $45,000. And right now it’s a bit early.

We have a lot of pre-order in the system. But I would say we are tracking slightly above $30,000..

Okay, that’s great color. Thank you very much again, and congratulations..

Okay, Benoit..

Your next question is from the line of Fred Wightman with Wolfe Research..

Hey, guys, good morning. I just wanted to follow-up on some of the expected tailwinds from the Juarez facility. I think you made the comment that you are still expecting that 50% capacity boost by January.

Just given how tight the supply chain is today, can you maybe give us a sense for when you started to make some orders with suppliers just how good the line of sight is to ramp, it just seems like a big ask for four months from now?.

Yes. Good morning. Then obviously, the – again, I am coming back to the supply chain. Right now, the main difficulty is semiconductor. At the beginning of 2021, we had a lot of different components. That was difficult. But going from one plastic to the others, it’s thing that now we manage well. Sometime it’s more expensive, but we are doing well.

Then right now, the roadblock that we see for growth next year is the semiconductor. And like we said, there was that fire in the Japan factory, some difficulty with some microchips supplier in the South Asia. But now situation is getting better.

Then what – from where we start today, we believe and our component suppliers say the same that this will improve with some ups and downs. And we are right now planning with them to – for growth in fiscal year ‘23. And right now, this is our plan. We are planning for the growth, and we will manage to reach there..

It makes sense. If we just take a step back and look at some of the sort of the macro side of the equation, the consumer confidence numbers in the U.S. for August, a pretty big step down versus July.

Are you seeing some of the forward indicators whether it’s sales leads or credit applications start to mirror sort of that broader macro backdrop or is the vehicle space still sort of a good contra indicator to where if people really are spooked about Delta in traveling that they are sort of pivoting towards some of these safer vehicle discretionary purchases?.

And I think our industry might be a bit different than general consumer demand in the sense that the COVID restriction forced many people to stop traveling. I think now, people are restarting to travel. But now they realize it will be more complicated, it will take maybe a few years before its back to what it used to be pre-COVID.

And for us, we are still happy to see that the ratio of new entrants buying our product. And when we look at those new entrants, and we survey them, they are more family oriented, they are more woman, they are younger, and even their household income has increased, versus the traditional buyer that we had.

And I think that’s why, right, we are quite optimistic about our future, because we believe that those new entrants could change the dynamic into our industries..

Okay. Thanks guys..

Your next question is from the line of Derek Dley with Canaccord Genuity..

Hi, good morning. Thanks for taking the question. I am actually [indiscernible] just filling in for him today. Just a couple of questions for you guys.

Could you speak to your capital allocation preferences going forward after that wrap up [indiscernible] that’s complete?.

Yes. Good morning. Obviously, where we prioritize capital deployment, we have invested in CapEx and that’s always been a priority of us investing in organic growth. But we have been inactive in terms of deployment for share buybacks as we have done in the last quarter. Our balance sheet is very strong.

And so we have obviously options to deploy capital going forward. And we are always mindful of what’s the best opportunity for the business that drives the better returns. These are discussions we have regularly with the Board and with management.

And as I have said, next year, our expectation is we will have another big year in terms of CapEx investments as we continue investing in new products, such as electric, but also just new introductions that we have done with the switch..

That’s really helpful. Thank you. And then as a follow-up, I know limited promotional activity was a factor this quarter in terms of the gross margins.

But what do you view as the more normalized gross margin target looking forward?.

Well, this quarter, we benefited from a good mix and also better sales incentive. My expectation for the full year is that we will probably get a 300 basis point positive coming from programs that would be versus fiscal year ‘20, last year, but versus fiscal year ‘20.

And going forward, the expectation is that we probably keep 150 basis points of that..

That’s great. Thanks a lot..

Thank you..

Your next question is from the line of Brian Morrison with TD Securities..

Thank you. Good morning. This is [indiscernible] on for Brian. So, understandably, there are challenges in securing semiconductors and components.

But can you just talk about your ability to secure those components given the plant increase in your capacity? And did that contribute at all to the outperformance relative to the industry in Q2? And any thoughts you have on that dynamic for the second half of the year?.

And on securing, obviously, with the shortage that is happening in the world, all electronic suppliers are asking for a better visibility long-term then we gave to our suppliers, our need for fiscal year ‘23, a few months ago. And there is no surprise there. And we have to commit maybe a bit longer than typically in the past.

Then that’s why our supplier know exactly what we expect to produce next year. We know the area where it will be tight, and we are working to improve either capacity or invested in more tooling. We are – we have been working on this for the last few months.

And that’s why we are – again, we believe that from where we are today thing will improve with some ups and downs. But with what we know, we believe it will be better, but it will last probably till the end of 2022..

But on your question on our performance in the second quarter compared to the overall industry, obviously, our teams have been doing a phenomenal job. It is a – I don’t want to say a nightmare to manage. But it’s a daily battle to make sure we get the parts necessary to build the units.

And we have seen in certain product lines where we have gained significant market share in the second quarter. And we believe it’s because we have been able to produce more units to meet consumer demand and other OEMs. And so obviously, that’s kudos to our team.

But obviously, we need to continue focusing on delivering great results in the next few quarters..

And just secondly, is there anything you can call out in terms of the operating expenses being below expectations in the quarter? Thank you..

It’s a tight management of expenses. Obviously last year, we went through COVID, we reduced costs significantly. So this year, this quarter, we saw an increase in overhead expenses. But obviously, we are mindful of making sure that we spend money if necessary, especially on the marketing front. Obviously, there is scarcity in the network.

There is good awareness for our brands. And so sometimes we modulate what expenses we do based on what’s needed..

Thank you..

Your final question comes from the line of Craig Kennison with Baird..

Thanks for taking my question. This has been a very helpful call.

Just a quick one, will those supply chain issues that you are seeing have any impact on your electric vehicle timeline?.

No, we – obviously we are at the period of where we are building, where we are developing the product. And it’s the engineering work and building for the type, but no delay on our program..

Great, thank you..

Thank you very much..

That is the question-and-answer session.

Are there any closing remarks?.

Yes, thank you. Thank you all for joining us today and we look forward to speaking with you again for our third quarter conference call on December 1st. Thanks again everyone and have a good day..

This concludes the BRP Inc. second quarter results conference call. Thank you for your participation. You may now disconnect..