Good morning, ladies and gentlemen. Welcome to the BRP's Q2 Fiscal Year 2021 Earnings Call. I would now like to turn the meeting over to Mr. Philippe Deschenes. Please go ahead, Mr. Deschenes.

Philippe Deschenes - Manager Treasury and Investor Relations

Thank you, Judy.

Good morning and welcome to BRP's conference call for the second quarter of fiscal year '21. 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 statement will be made during the call that are subject to a number of risk and uncertainty. I invite you to read BRP's MD&A for a listing 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'll turn the call over to Jose.

Jose Boisjoli - President and Chief Executive Officer

Thank you, Philippe.

Good morning, everyone, and thank you for joining us. Before I talk about our result this quarter, allow me to say that in this unusual year, I'm extremely proud of the effort of our people and our dealers in reacting with agility in order to respond to the crisis and preserve our business momentum. Our results this quarter are significantly better than our original projection that we made when the pandemic was first declared and confinement measure were put in place. We were - we were in an excellent position heading into this situation, and we will emerge stronger from this crisis. Based on our revised projection and better visibility, we are expecting revenue down 5% to 9% for the year and a normalized EPS range of CAD3.65 to CAD3.95 for the year. The range is quite large because of the uncertainties we are still facing.

Let's start with the highlights of the quarter, beginning with the financial result on slide 4. Although most of our sites were shut down in April and May, our revenue came in much better than expected at CAD1.2 billion, only down 15% from last year second quarter. Our normalized EBITDA ended the quarter up 28% to CAD214 million, resulting in a normalized earnings per share of CAD1.14, up 61% over last year.

This performance was driven by stronger-than-expected demand for our products and parts, accessories and apparel that drove retail worldwide. This has led us to deplete our yard inventory and reduce our promotional activity more than we had anticipated. Our operational expenses were reduced, as planned.

The highlight of the quarter was the strength of the demand for our products. As you know, we have steadily been increasing market share for the last several quarters. We started Q1 with a strong retail momentum, and our inventory was positioned to sustain that trend. However, given the exceptionally high demand for our product and the production shutdown, we ended up depleting our inventory quickly in the quarter and therefore lost some market share. Our analysis shows that as travel option were limited and people began to rethink how they will spend their free time, many have turned to powersport as a way to spend quality time with friends and family while respecting social distancing guideline. This trend led to exceptional retail performance in all our key markets and all across our product lines. Our retail sales were up 40% in North America, 41% in EMEA, 34% in Asia Pacific and 27% in Latin America. As you can see on this slide, all product lines had significant growth.

Let's talk about the impact of the forced closure of our plant on inventory. As you can see on this slide, our North American dealer inventory was down 51% at the end of July, and our finished good inventory in our warehouse and in transit around the world was down 38%. To illustrate how fast the depletion happened, take a look at the graph to the right. Side-by-side inventory declined in May and June as retail ramped up and we felt the impact of the suspension of our production line from the previous months. For personal watercraft, the effect is even more drastic. Inventory was very low in June and July, ending the season with almost no Sea-Doo available due to the popularity of our brand.

Given the strong retail trend, we expect it could take several quarters before we get back to optimal inventory level. Our team have done an incredible job of quickly ramping up production in this new environment. Our focus is on managing the growth throughout our operation while ensuring that we preserve the health and safety of our employee and our business partner.

The strong retail demand in all our product line was in part driven by a significantly higher number of new entrant to the industry. Early in August, we conducted a global study with customers in seven countries who have purchased units during the quarter and the results are phenomenal. As you can see on this slide, when looking at our retail sales, 77% of our powersport customer purchased from BRP for the first time, representing an increase of 51% over the same quarter last year. By product line, it represents 74% for ORV, 65% for three-wheeled vehicle and 32% for personal watercraft. Of these new customer, 41% were completely new to powersport industry. This represent almost 3 times the number of new entrants we had over the same period last year. These result are very impressive and present a very good opportunity to grow our business. Our focus is to ensure that the surge of new entrant is converted into lifelong customers.

Now let's turn to slide 8 for the year-round product highlight. Revenue were down 15% due to the temporary shutdown of our production site, partially offset by favorable product mix for three-wheeled vehicle, driven by the introduction of the new Spyder RT and by lower sales program. On the retail side, the North American side-by-side industry ended its season '20 on June 30 with retail up low 20%. Can-Am side-by-side had another very strong season with retail up low 40%, solidifying our number two market share position in the industry. We also performed well in international market, with retail for the quarter up almost 50% in EMEA and up about 30% in Asia-Pacific.

Now, not even five year after the opening of Juarez 2 facility, we have tripled the size of our - the size of our side-by-side business and our momentum remains very strong. To ensure we can maintain that momentum, we have announced the construction of a second plant dedicated to side-by-side in Juarez. This new plant will grow our capacity by about 50% and is expected to be operational by fall of 2020.

Turning to ATV. The North American ATV industry also ended its season '20 on June 30 with retail up high teens percentage. For the same period, our retail was up low 20% and ended the season with the number three market share position in North America. Our ATV business also performed well in international market with retail up over 30% in Asia-Pacific and over 50% in EMEA.

Now looking at three-wheeled vehicles. After a slow start to the season due to the closure of riding school and license bureaus and consequently the major readjustment of our marketing plans, when the situation turned around, our three-wheeled vehicle retail picked up significantly starting in June and has continued through the summer. Looking at the industry nine months into season '20, the North American three-wheeled vehicle industry retail is now up high-single digit while Can-Am retail is up low-teen percent, with June and July performing significantly better than expected and retail up over 90% over - as riding school reopened. We are planning a virtual launch of new Can-Am products on October 1. Overall, we are very happy with our Can-Am business.

Turning to seasonal product on slide 9. Seasonal product revenue were down 25%, impacted by temporary production suspension and a negative product mix for personal watercraft, which were partially offset by lower sales program.

Now looking at retail. The personal watercraft industry also benefited from the strong consumer demand for other activity that are compatible with social distancing. Ten months into season '20, North American industry retail is up mid-teen percentage. Sea-Doo personal watercraft retail was slow in April and May and then took off in June. As a result, retail is also up mid-teen percentage over the same period, notably gaining share in the industry largest segment with the new Sea-Doo DTI platform in the recreational segment. Given production constraint and the very strong retail demand, Sea-Doo currently has its lowest level of network inventory in its history.

The same positive trend was also seen in international market, with retail up for the quarter in the high 30% in Latin America and mid-40% in EMEA and Asia Pacific. On September 10, we are hosting a virtual product lunch for all our dealer worldwide with some exciting personal watercraft product news. We believe that the demand for next season will continue to be strong.

With respect to snowmobile, we are still very early in the season but retail is already up 70%. We believe it is due to the same trend that have benefited our other product lines. We are now in full production and we'll be able to meet dealer orders and have more units if the condition warrant this.

Continuing with a look at powersport parts, accessories and apparel and OEM engines. Revenue were up 20% driven by a higher volume of PA&A coming from strong unit retail sales and higher replacement parts revenue, driven by an increased usage of product by consumers. Parts are up over 20%, accessories are up over 30% and apparel is up over 40% compared to last year. The same trend affecting vehicle sales apply to these category.

Finally looking at our marine business. Compared year-over-year, revenue were down 35% due to the wind-down of Evinrude outboard engine, and inventory is depleting faster than planned as retail is also performing well. These results were partially offset by the impact of the additional revenues from the acquisition of Telwater last year. At the retail level, Alumacraft is up high-teens percentage, Manitou is up high 30% and Telwater is up high 20 percentage. The current phenomenon of getting outdoor is also helping our boat brands.

We are progressing well with our discontinuation plan for outboard engine and remain committed to our marine buy, build, transform strategy, which we are pleased to see is on track. We remain convinced that our best strategy is to focus our marine business on the growth of our boat brands with accelerated investment on new technology and innovative product, including the Ghost engine family.

With that, I will turn the call to Sebastien.

Sebastien Martel - Chief Financial Officer

Thank you, Jose, and good morning, everyone.

As Jose mentioned, our second quarter results came in much stronger than we were anticipating just three months ago, driven by the exceptionally strong worldwide demand for products throughout the quarter. Our revenues ended the quarter at CAD1.2 billion, a decline of only 16% from last year despite the significant impact from the production shutdown.

Our normalized EBITDA was up 28% to CAD214 million, driven by improved adjusted gross profit margin and lower operating expense as a result of the cost saving measures we have implemented to preserve liquidity, given the uncertain environment we were operating in just a few months ago. This resulted in normalized EPS of CAD1.14, up 61% from last year's quarter [Phonetic].

These better than anticipated results, coupled with the significant efforts deployed by our teams to preserve liquidity, led to the generation of CAD248 million of free cash flow so far this year. And with over CAD900 million of additional financing we secured this quarter, we stand in a very solid financial position, with about CAD1.1 billion of cash on the balance sheet.

While we remain cautious about the current environment, our solid financial flexibility is providing us with the ability to be opportunistic and accelerate investments in the business to drive long-term growth for the Company as highlighted by the recently announced construction of a new side-by-side plant.

Coming back to our revenue performance. Our ability to generate growth in certain markets was driven by the inventory availability in our yard. At international, we started the quarter with a good inventory position given that the region was more impacted by COVID during the first quarters, with revenues down 29%. As the region rebounded with strong retail demand, we were able to ship units from inventory and generate revenue growth of 15% for the quarter despite the production shutdown. The story was quite different in North America. We started the quarter with lean inventory position in the yard and we continued running lean all quarter despite resuming production as retail demand continued to be very strong. I will come back later with the outlook on how we expect to fulfill demand for our products going forward. Our inventory of parts, accessories and apparel was in a better position, allowing us to seize the market strength and deliver revenue growth of 20%, driven by strong retail momentum and increased consumer usage of their products.

Now looking in more detail at the gross profit margin on slide 15. We gained 230 basis points of gross profit margin coming from volume, mix, pricing and sales programs in the quarter. Foreign exchange rate variations were also positive for 40 basis points, leading to a gross profit margin before the impact of Evinrude outboard engines wind-down and COVID of 25.2%. The Evinrude wind-down had a negative impact of 330 basis points and COVID, primarily due to the temporary production shutdown and under-absorption of fixed costs, had a net negative impact of 180 basis points.

Turning to slide 16. Our quarterly normalized net income was up CAD32 million from last year, driven by a CAD75 million favorable impact coming from lower operating expenses, resulting from the cost saving initiatives we have implemented and a favorable CAD8 million impact from foreign exchange. These elements were partly offset by the negative impacts of CAD41 million coming from volume, mix, pricing and sales programs; CAD3 million coming from production costs and depreciation; and CAD7 million coming from higher financing costs.

Turning to slide 17 for a look at our network inventory position. As Jose mentioned, our North American network inventory is down 51% from last year's second quarter as we experienced exceptionally strong demand for our products since late April, while our unit output was limited by temporary production suspension in April and May. The products that were the most impacted by the situation were SSV, ATV and PWC, given the timing of the production shutdown and the retail growth. Inventory for these products is historically low, and to ensure that we meet demand, we have added production shifts and increased line speed.

Looking further, the second dedicated facility to SSV we recently announced should provide us with greater flexibility for that product line when it comes online in the fall of 2021. As for PWC, we also plan on extending our production schedule, which will increase shipments in H1 of fiscal year '22. For three-wheeled, we were able to produce additional units in June, and given that retail only accelerated later in the summer, the inventory is adequate and we are maintaining our initial production plans for next season. Finally, for snowmobile, given the current trend for powersport products, we are anticipating that demand may come in higher than our initial plan and we have extended our production schedule, providing us with the flexibility of increasing output to meet demand if required. We are pleased by the strength of demand for our products, we gained market share when inventory for our product was available and we are convinced that as we build back inventory and sustain or fast pace our product introductions that we will continue outpacing our industry.

And now the guidance on slide 18. With both network and our yard inventory being at historically low levels and the solid trend the powersport products continue to experience, we have good visibility on the demand for our products for the rest of the year and are comfortable issuing guidance. Looking at revenues, we expect year-round products to be flat to down 4% for the year, implying revenues for the second half of the year to be flat to up 7%, driven by growth in SSV and ATV, partly offset by a decrease in three-wheeled to a change in timing - and timing of production, leading to shipments being more concentrated into H1 of next year and more wholesale and international, driven by product availability.

For seasonal products, revenues for the year are expected to be down 12% to 15%. When looking at the second half, PWC is expected to be down. The increased production for the upcoming season will mostly benefit next year and we expect snowmobile to be down, driven by lower shipments in international markets. Powersports parts, accessories and apparel revenues are expected to be flat to up 5% for the year. And marine revenues are expected to be down 25% to 30%, with the decline resulting from the outboard engine business wind-down. This is resulting in total Company revenues are expected to be down 5% to 9%.

The normalized EBITDA is planned to be flat to up 5%, and the normalized EPS to end between CAD3.65 to CAD3.95, down 5% to up 3% versus last year. Our guidance range is wider than usual for this time of the year as we still face uncertainties related to the COVID. While we have put in place strong measures to protect our employees, we are not immune to the potential risk that the virus could represent on the economy, our dealers and our suppliers, which could lead to reduced demand, lower production or increased costs, hence the wider range.

In terms of capital allocation, our priorities remain on investing for future growth and preserving liquidity for what may lie ahead. For fiscal '21, we are expecting capex to be between CAD275 million and CAD300 million, with over CAD200 million to be spent in the back half of the year, notably as we are ramping up the new SSV facility and continue invest in product development. As for other capital allocation priorities, given the current context, we believe that preserving the strength of our balance sheet should be our priority and we plan on revisiting capital deployment alternatives such as reinstating buybacks or the dividend after the third quarter.

Finally, turning to slide 19 for an overview of our expectations for H2. Revenues for the second half of the year are expected to be flat to down 7% as the stronger demand for products is expected to be offset by production timing, notably as we shift a higher proportion of PWC and three-wheeled production into fiscal '22 for the future retail season; lower wholesale and international markets as yard and in-transit inventory is very low going into Q3 and we expect it will take a few quarters to get back to more normalized levels; and lower outboard engine revenue resulting from the wind-down of OE.

For the normalized EBITDA, it is expected to be down 5% to up 4%, with Q4 coming in slightly stronger than Q3. The key drivers in the back half of the year are expected to be a contribution from the stronger demand for our products and the wind-down of Evinrude outboard engines, which will somewhat be offset by other elements highlighted previously and an increase in operating expenses as we resume certain investments in the business given the positive momentum we are experiencing.

All in all, in light of the current environment, we expect a solid second half of the year and expect the momentum to continue well into next year when factoring the shift of personal watercraft and three-wheeled production to next year, the need to replenish dealer inventory around the world and the new SSV plant which will come online in the fall of next year.

With this, I'll turn the call back to Jose.

Jose Boisjoli - President and Chief Executive Officer

Thank you, Sebastien.

We have been fortunate in the current context that despite the real hardship for many people, the demand for our product is high. We anticipate that for a certain period of time, we will need to continue to manage risk such as ensuring health and safety in our facilities and potential disruption to our supply chain. I would like to again express my gratitude and admiration to our dealers for their resilience and for our employees, who have gone the extra mile in respecting all the additional health and safety measure we have put in place. This has been and will continue to be critical to our business continuity.

We are pleased with the performance of all our product lines and the progress we have made on our different initiatives. Based on the overall momentum we are experiencing, the new trends that have emerged and our expanded consumer base, we are expecting the second half of the year to be similar to last year, and it bodes well for the year ahead. We are committed to ensuring that these new entrant and first-time owners are converted into lifelong customers once they have experienced our vehicle and boats. Although we expect there will be a lot of volatility in the next few months, in the mid to long term, we believe that we are better positioned than ever for success.

And on that note, I will turn the call over to the operator for questions.

Question & Answers

Operator

[Operator Instructions] The first question is from Steve Arthur from RBC Capital Markets. Your line is open. Please go ahead.

Steven Arthur - RBC Capital Markets - Analyst

Great. Thank you and good morning. Just wondering if you can elaborate a little bit more on the current status of the operations at your plants. Just some sense of what level of utilization you're running at now and how much of an impact the local health measures are having, in particular, in Mexico, and I guess, finally, just how the utilization should trend through the balance of the year.

Jose Boisjoli - President and Chief Executive Officer

Good morning, Steve. All our operations right now are running at full capacity. And we are able to operate without any efficiency loss everywhere in the world. Then, we're quite happy and very, very impressed with our people who accept to put a lot of safety measure and the healthcare measure and operate efficiently in this whole context.

Steven Arthur - RBC Capital Markets - Analyst

That's remarkable [Phonetic]. So in terms of adding new shifts and new lines and such, is that on top of what you're doing now? Or is that 100% reflective of those additions?

Jose Boisjoli - President and Chief Executive Officer

No. I mean, we're running right now at full capacity everywhere. Then obviously if - I mean, we expect to have some here and there difficulty with supplier, tight delivery or stuff like that, but this is a thing that we can manage. Obviously, like Sebastien explained in the guidance, we can - we can overcome some small difficulty. Obviously, if there would be a whole reconfinement in the country around the world, that would be more difficult. But very, very happy with the way our people are operating our operations.

Steven Arthur - RBC Capital Markets - Analyst

And just a final one, just very interesting your survey of customers and new customers, in particular, 40% new to powersports. I guess on - has there been an active marketing effort so far trying to attract these people? Or is that just a natural flow of people looking for new things this summer? And I guess, looking ahead - I'm sorry, go ahead.

Jose Boisjoli - President and Chief Executive Officer

Yeah, definitely. When all of this started, and we saw the surge of new demand, we've done a detailed survey in March, and we've done another one beginning of August - and basically, to better understand who is buying and try to talk to them directly and encourage them to try our product. And obviously, for competitive reason, I cannot give you all the detail of our plan but, obviously, we are in contact more and more with new customers, knowing who they are, trying to promote the experience they could have with our product. And just an example, in July, we've launched an initiative called the Unchartered Society. If you go on our website at brpuncharteredsociety.com, you will see we partner with a lot of operator in North America. We believe we partner with the best into the industry offering safe ride and high quality.

But right now, I mean, you can book a snowmobile ride in Rocky Mountain in Utah. You could - we have the ride for women on-road ride in San Gabriel Mountain in California with the Ryker. One of my favorite is DADS & KIDDOS Adventure in the Grand Canyon, Arizona. Then we're trying, obviously, to do cross-sell between consumer. If someone purchase a side-by-side, we're trying to promote those to our - that at least they can try a watercraft or a snowmobile in the winter. But I can tell you, our marketing people are extremely active to try to talk to those customer and try to make them lifetime customers.

Steven Arthur - RBC Capital Markets - Analyst

Good. So Thank you and congrats again.

Jose Boisjoli - President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question comes from Mark Petrie from CIBC. Your line is open. Please go ahead.

Mark Petrie - CIBC Capital Markets - Analyst

Good morning and congrats on the excellent - the excellent result. I just wanted to ask a bit more, just a follow-up on the outlook for snowmobile. I was wondering if you could just - you went through a lot of statistics there. I'm just wondering if you could sort of summarize the production capacity right now. I know inventories are lower at the dealer level. But do you expect that to be sort of normalized in the coming months? And just sort of an overview of the outlook for snowmobile for this season, please.

Jose Boisjoli - President and Chief Executive Officer

Good morning, Mark. But first, the snowmobile season ended very quickly mid-March last year. If you remember, most of the trail system were closed mid-March because of government regulation. Then we ended the season - all the OEM ended the season with more inventory than previous year. And we took orders from our dealers in April in the middle of the crisis. And we restarted, in our case, in Valcourt and in Finland - we restarted production a bit later than originally planned because we needed to produce some three-wheeled vehicle in May and June.

Then right now, we are scheduled in both of our factory in Finland and in Valcourt to run at full capacity till Christmas time. We have capacity to meet the order that we took from the dealers. And like Seb said on his - on his intro, we have some capacity to add on if there will be a demand from a dealer. We'll follow the trend closely in October- November, and we plan some material to be able to react quickly if there is a need.

Mark Petrie - CIBC Capital Markets - Analyst

Okay. Thanks for that. And just from a competitive standpoint, in terms of marketing and promotion, I understand sort of early on, you guys were fairly aggressive in terms of marketing and some of your promotions and financing deals. When did those get ratcheted back? And then how are you - or what's your expectation for how the industry is going to approach the snowmobile season?

Sebastien Martel - Chief Financial Officer

Yeah. For - good morning, Mark. Overall, we ended the first quarter a bit more cautious in our planning for retail and so we had provided for some programs. But these programs were not needed, especially that the retail was very strong. And when you look at next season, there's less noncurrent inventory. And so, well, the way we look at the second half of the year, we believe that promotions will be a tailwind to our results. There will be a lesser of a need for retail incentives, less non-current as well. So it should be a positive element, and that's factored into our guidance number.

Mark Petrie - CIBC Capital Markets - Analyst

Okay. Appreciate the comments. All the best.

Sebastien Martel - Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from Benoit Poirier from Desjardins Capital Markets. Your line is open. Please go ahead.

Benoit Poirier - Desjardins Securities - Analyst

Yeah. Thank you very much and congratulations for the very impressive quarter. So Jose, could you mention some color on how the - does the pandemic impact your five year plan? I was wondering whether it postponed some product introduction or it put in advance on product introduction translating into a bigger market, especially with the new entrants coming to the powersports industry.

Jose Boisjoli - President and Chief Executive Officer

Good morning, Benoit. For sure, when everything shut down in March, and it was shut down for two months, we had to tweak a bit our R&D effort and our product planning. But the essence of what we believe will make a big difference in the industry have not changed. Then overall, all the program going from model year '20 to '21 this year are ongoing as planned. There is a few tweaking here and there, but some shift, maybe a month or two, but nothing - nothing that we believe will affect our five year plan.

To be honest, I'm very impressed. The working from home, how we were able to be efficient in this whole context because, obviously, there is things that are easier to do by phone, but there is - when you talk about product development, you need to touch and feel, try. It's a bit more complicated, and the team have done an incredible job to pull it off. There is no change on the five year plan.

Benoit Poirier - Desjardins Securities - Analyst

Okay. And with respect to capital deployment opportunities, you're going to be revisiting the NCIB and dividend with the third quarter results. But given the new plant built in Mexico, could you talk a little bit about the working capital movement expected in the second half and maybe some color about capex expected for fiscal '22?

Sebastien Martel - Chief Financial Officer

Yeah. Good morning, Ben. Like, first half of the year, we generated solid free cash flow coming from, obviously, the good results. Working capital was a positive as well with the inventory reduction and AR that we collected. Back half of the year, I'm expecting inventory to rebuild, AR to rebuild. We'll offset some of that from the accounts payable. So probably cash gen - free cash flow gen of probably, let's say, CAD100 million for the back half of the year. Capex, as you see, back half of the year is going to be very loaded with about CAD200 million of investment.

Obviously, when the crisis started, we adjusted some of our plans for this year, and so capex is lower than what we were expecting when we were looking at our budgets, let's say, back in January when there was very little talk of COVID. Obviously, some of that is going to be pushed to next year. So I'm expecting next year to be pretty important year in terms of investments. Obviously, we have side-by-side plans that we're investing in and more investments. So it will be a record year in terms of capex investments for '22.

Benoit Poirier - Desjardins Securities - Analyst

Okay. And last question for me. When we look at slide 15 with respect to the gross margin, you quantified the impact of the Evinrude outboard engine wind-down and also the COVID-19. I would just be curious what we should expect if there is any more costs with respect to Evinrude wind-down and COVID-19 impact for the second half.

Sebastien Martel - Chief Financial Officer

Very little cost related to the wind-down. We took all of that in the first - some in the first and most of it in the second in terms of, well, kind of like cash costs. When I look at the back half of the year or the full year, you see my normalized EBITDA margin there, it should improve by 130 to 140 basis point just based on the guidance. What's going to be driving that improvement? About 50 basis points from operating expense and the rest will be coming from margin, Benoit.

Benoit Poirier - Desjardins Securities - Analyst

Okay. Perfect. And for the full year, right, the 130 to 150?

Sebastien Martel - Chief Financial Officer

Yes, yes, yes.

Benoit Poirier - Desjardins Securities - Analyst

Okay. Thank you very much for the time, gentlemen. Thanks.

Sebastien Martel - Chief Financial Officer

Yeah.

Operator

Thank you. The next question is from Robin Farley from UBS. Your line is open. Please go ahead.

Robin Farley - UBS Investment Bank - Analyst

Great. Thank you. Just trying to think about the dealer inventory declining, while retail rising in those charts you had. I wonder if you can give us a little bit of color on kind of the rate of change in that retail through June, July and kind of what you've seen now with most of August gone? And then, if you can help us think about, is there a cap just sort of mathematically on where retail for you could go in Q3 based on what we see as fairly depleted dealer inventory? Is there a sort of a natural cap that even though you're at full capacity everywhere, based on what you're able to ship and where dealer inventory is, that - we shouldn't expect despite what may be strong demand, is there just kind of a natural cap in the near term? Thank you.

Sebastien Martel - Chief Financial Officer

Yeah. Good morning, Robin. Obviously, yes, the retail decline - the retail was very strong in the beginning of the quarter and that retail growth slowed down as we saw our inventory go down. August is still very good. I'll remind you that Q3 of last year was a very, very strong quarter in terms of retail, especially in the month of August. Despite that, despite the low inventory, we're still up on retail for our ORV business. Obviously, as Jose mentioned, the inventory for PWC is super, super lean. And so retail in August is down.

When I look at Q3 and the expectation for retail, there's a certain ceiling, yes, to what the retail could be. With low inventory in personal watercraft, snowmobile shipments that are a bit later than last year, we expect good retail, but not to the level where it was last year in terms of retail growth because of the whole inventory situation. And as we go into Q4, as the inventory gets replenished, we should see retail pick up. But for us, and as I mentioned in my prepared remarks, a lot of the units that we'll be producing, especially for personal watercraft and three-wheeled will be shipped next year. And that's when we'll come back to more normalized inventory levels. So it will take a few quarters before we stabilize the inventory in the network.

Robin Farley - UBS Investment Bank - Analyst

Okay. And just to - Thank you for that. And just make sure I understood, you were saying snow shipping later and personal watercraft inventory is super lean and you said so retail would be lower there. You're saying retail down there just for the seasonal, but not for year-round?

Sebastien Martel - Chief Financial Officer

Not for year-round.

Jose Boisjoli - President and Chief Executive Officer

Yes.

Robin Farley - UBS Investment Bank - Analyst

Okay. Okay. And I guess, are you at the point where you're starting to see retail be a - I guess I'm thinking specifically of off-road or year-round here where you're actually able to see retail levels start to accelerate a little bit as you ship more or not at that point yet?

Sebastien Martel - Chief Financial Officer

Well, it's still early. I mean, we've - the inventory - the retail is still up and so we're still at very lean inventory levels in the network. As I said, it will take a few quarters before we come back to more normalized levels. And when I say a few quarters, that's next year, fiscal year '22, when we have the new plant running. And so our expectation, when I look at the inventory outlook in the network for Q3 and Q4, I'm still expecting it down to - it to be down significantly year-over-year at the end of Q3 and Q4.

Jose Boisjoli - President and Chief Executive Officer

But maybe to give some colors. Last year, like Sebastien mentioned, last year in August, just to give you some numbers, if I exclude watercraft to look at the comparison because we don't have any watercraft this year, but last year in August, our retails between all product line, except watercraft, was up about 40%. And right now, so far in August, we are up excluding watercraft, again, a bit higher than 20%. And that's despite we're not optimum in inventory in some product line. Then we believe demand will be there. We believe every OEM is struggling with the refilling [Phonetic] the inventory. But the demand is there. No doubt about that.

Robin Farley - UBS Investment Bank - Analyst

Okay. That's great. Very helpful. Thank you.

Operator

Thank you. The next question is from Craig Kennison from Baird. Your line is open. Please go ahead.

Craig Kennison - Robert W. Baird & Co. - Analyst

Yeah. Hi. Thank you for taking my questions, and congratulations on the quarter as well. Wanted to follow-up on Robin's question just so I understand the retail comment regarding Q3. Seb, I think that you said not to the level of Q3 of last year. Did you mean the level of growth last year or the absolute level of retail?

Sebastien Martel - Chief Financial Officer

The level of growth last year.

Craig Kennison - Robert W. Baird & Co. - Analyst

Thank you. And then wanted to dig into your survey, which is really interesting on first-time riders. And do you have any data on the follow-through of first-time riders? I'm imagining that people who buy maybe an ORV or some powersports equipment tend to buy one for the family, but may buy more as time moves on. So one question is just what's the follow-through typically of a first-time buyer, either buying a new unit to replace that unit or adding units to the garage because it's such a great activity?

Jose Boisjoli - President and Chief Executive Officer

Like we said on our - on the slide that we had in the package, 23% of our customer purchase in Q3 - in Q2 are existing customers. And this is lower because we had a surge of new entrants in the quarter. But there is no doubt, Craig, that we are all surprised by this surge of new entrant, and we're doing everything we can to give them idea how to ride our product, to do cross-product selling and to encourage them to ride in different environment. Then this is our marketing effort and we believe that opportunity will be there for - I don't know. I think we always knew that we were competing against leisure. And when I say leisure, I'm not - we're not a specialist, but if we take cruise, airline and amusement park, this is a huge industry, and they are significantly down. Then, I think there is an opportunity there that will remain for probably a few years. And you, the analysts, say that it will take three years to those industry to go back to normal. Then right now, our effort is to make sure that we make those customer lifetime customers.

Craig Kennison - Robert W. Baird & Co. - Analyst

Thank you. And then, again, regarding your survey, I'm wondering to what extent you tapped into the behavior of your core riders. And then specifically, I'm wondering whether some of your existing riders who might have been in the market to replace their unit this year maybe instead just said, I'm going to ride this year, no need to compete with everyone else to buy units that are scarce in the channel. Because I'm really wondering whether that customer deferred demand into next year, perhaps, which would create a more sustainable trend going forward.

Jose Boisjoli - President and Chief Executive Officer

Yeah. I don't have, Craig, top of mind that level of detail. I'm sure our team has it. But for me, I don't have it at the top of our mind. Maybe one interesting data we can give you - and, again, it's not for Q2, it's from March 15 to the end of July. The number of people who purchased who are between 18 and 44 years old, the number of people increased by 49% versus last year. Women, again, from March 15 to the end of July, plus 63%; and family, people who purchased a product to use it with family, plus 53%. Then, it's coming new entrant, and we're attracting a more diverse customer base, which we believe is very healthy for everyone in the industry.

Craig Kennison - Robert W. Baird & Co. - Analyst

Great. Thank you.

Operator

Thank you. The next question is from Brian Morrison from TD Securities. Your line is open. Please go ahead.

Brian Morrison - TD Securities - Analyst

Hi. Good morning. I just have a couple of follow-ups with specifics to prior questions. So, maybe for Seb. In terms of the dealer catch-up with dealer inventory being down 51%, can you maybe just give us the dollar value of that to get back up to the optimal level for powersports overall and maybe specifically for PWC?

Sebastien Martel - Chief Financial Officer

Well, if you look at the outstanding inventory that's there and it's disclosed, that we have on our balance sheet. I mean, we're down almost CAD1 billion in terms of inventory in the network. And so in terms of dollar figure, that's what it represents. So it's quite sizable in terms of the reduction.

Brian Morrison - TD Securities - Analyst

Okay. And then in terms of your capex, it's going to be at all-time levels for next year. I presume that's greater than CAD400 million?

Sebastien Martel - Chief Financial Officer

Yes, that's fair.

Brian Morrison - TD Securities - Analyst

Okay. And in terms of your leverage, your commentary about reviewing the dividend or NCIB, what would your target leverage be, assuming you have visibility going forward?

Sebastien Martel - Chief Financial Officer

Well, we've operated pretty much in the range of a net debt-to-EBITDA about 2 times. And that's an area we're comfortable and going into the crisis that provided us with flexibility of getting additional financing. And so obviously, we'll continue having discussions with the Board on what's the optimal leverage level. But the lesson learned was that at these levels and with the type of debt structure that we had in place with a covenant [Indecipherable] long-term maturity was something that served us well during the last few months. And I think it's something that we will try to preserve going forward.

Brian Morrison - TD Securities - Analyst

Okay. And then last question, just in terms of, obviously, powersports very well, but also marine. The boat sales were incredibly strong as well. Just maybe an update on the boat inventory as well, where you stand on that front.

Jose Boisjoli - President and Chief Executive Officer

Yeah. The boat inventory declined a bit, but not as drastic as what we had in the powersport business, declined by about 25%.

Brian Morrison - TD Securities - Analyst

Thank you very much. Congratulations.

Sebastien Martel - Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from Greg Badishkanian from Wolfe Research. Your line is open. Please go ahead.

Fred Wightman - Wolfe Research - Analyst

Hey, guys. Good morning. It's actually Fred Wightman on for Greg. If we look at the 3Q retail color that you guys gave, that was really helpful. But how should we think about market share against that backdrop? Should we expect more share loss into next quarter?

Sebastien Martel - Chief Financial Officer

It all depends on the inventory position of our competitors, and that's something we do not have visibility on. Obviously, as I said, we believe we started with a leaner inventory position going into this crisis because our retail was super strong in January, February and March, where we outperformed the industry and even outperformed what our expectations were. Our units flew off the shelf, if I can say, early in April and May. We were shut down for a few weeks longer than most of our competitors. And so it's all a question of inventory replenishment.

But when we look at our situation going in, we were a market leader, we had the innovative products, we have a great deal of value proposition. And so there might be some share loss driven by inventory availability in the short term, but we believe that when things come back to more normal and we're able to meet demand with our capacity, that will continue that momentum going forward.

Jose Boisjoli - President and Chief Executive Officer

I would like to put a bit of color on this. At international level, where we had enough inventory because we had shipped prior to shutdown, we gained market share. We've lost some market share in North America because the timing of the production shutdown and the shipment was for North America. But we don't talk massive numbers. We're talking 1 point or 2 point here and there. And it's something that we believe we will catch up when the right level of inventory will be there because the fundamental of our strategy didn't change. And it's about product, it's about value proposition for the dealer, and that has not changed.

Fred Wightman - Wolfe Research - Analyst

Okay. That's fair. Maybe just simplistically, given the inventory destocking and the retail momentum, why aren't you guys expecting more top line growth in the back half of the year? Is the way to think about it that it's really just sales and shipments shifting into next year given some of the disruption? Or what is sort of the way to frame that?

Sebastien Martel - Chief Financial Officer

Well, that's one of the big elements where we're shifting more units for the upcoming season into fiscal year '22, and the other one is international, where we need to replenish inventory. We finished the second quarter very lean, both in yard and in-transit inventory. Obviously, to ship something in Australia, there's a few weeks on the water that you need to factor. And so there is that element as well, just rebuilding that inventory in our yards just to be able to supply to demand.

Fred Wightman - Wolfe Research - Analyst

Great. Thanks, guys.

Sebastien Martel - Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from Martin Landry from Stifel GMP. Your line is open. Please go ahead.

Martin Landry - Stifel GMP - Analyst

Hi, good morning. My first question is on the supply chain. Obviously, with COVID, everybody in the supply chain has been stretched. And I'm wondering if you can give us some color as to how the situation has evolved this summer and how confident you are that supply chain is solid to help you out, for instance, capture the strong snowmobile season coming up.

Jose Boisjoli - President and Chief Executive Officer

Yeah, good morning, Martin. For sure, I mean, it's a rock-and-roll year for the people in operation. I mean, in Canada, you had the railway blockage in the spring, we had the Port of Montreal last month, we had California supplier who are shutting down a long period of time. But at the end of the day, we've been able to overcome all those difficulty. Sometime, we could have back order parts for a day or two - we prefer to assemble back order and put the parts on the vehicle a few days later. But overall, we are able to manage the situation. And like we said, if there is a few hiccup like this in the back half, we believe it's manageable. Obviously, if a country would shut down for a month, that could be more difficult, but we cannot plan for this. We're planning for some hiccup, but not a big shutdown. And so far, the team have done a great job to manage it.

Martin Landry - Stifel GMP - Analyst

Okay. Thank you. And I may have missed this, but you're guiding for marine revenues to be down 25% to 30% this year. If we exclude Evinrude, what would that look like?

Sebastien Martel - Chief Financial Officer

Well, Evinrude full year is about CAD140 million reduction. Last year, it was a CAD200 million impact on our revenues. And so if you - this year, it will be - obviously, we sold some units in the first quarter. And so net, it's about CAD140 million.

Martin Landry - Stifel GMP - Analyst

So the shortfall in revenues this year is CAD140 million?

Sebastien Martel - Chief Financial Officer

Yeah. So all of it is to outboard engine.

Martin Landry - Stifel GMP - Analyst

Okay. And last question on your customer survey. You're saying 40% are new to the industry. What is usually the proportion of new customers in the industry in normal conditions?

Jose Boisjoli - President and Chief Executive Officer

Okay. I'm not sure 100%, but I think it's one-third of that…

Martin Landry - Stifel GMP - Analyst

So 30% to 40%?

Jose Boisjoli - President and Chief Executive Officer

Yeah.

Martin Landry - Stifel GMP - Analyst

Okay. Okay. Perfect. Thank you.

Jose Boisjoli - President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from Cameron Doerksen from National Bank Financial. Your line is open. Please go ahead.

Cameron Doerksen - National Bank Financial - Analyst

Thanks. Good morning. I just wanted to dig maybe a little bit further into the margins in the quarter. Normally, Q2 would be, I guess, a lower margin quarter for you. Obviously, there were a lot of puts and takes this quarter, but I don't know if you can provide any more, I guess, color around if we were to look ahead to next year, in the Q2, I mean, is it 25% gross margin, I guess, adjusted something that's an achievable number in a kind of a normal year, whatever that may be? But any kind of, I guess, color you can sort of put around what is sort of a more normalized margin might be here going forward?

Sebastien Martel - Chief Financial Officer

Yeah. Good morning. Let me - what I'll do is probably give you - obviously, there's noise, as you said, between Q1 and Q2. And so I'll give you the full picture for the six months of the year. So last year, we were at 22.5%, in six months this year, we're at 23%, before any OE wind-down or COVID impact. So about a 50 basis point improvement. Volume was negative. So I must - we hope that's going to go away next year.

The plus that we got was on the sales program. So for a full six months, it's about 120 basis point positive impact. It all depends on how next year is going to go. Are we going to see that benefit, let's say, of about 100 basis points next year on our gross margin because of a - still a good demand for products and a less competitive environment where less noncurrent inventory. So it's still early to call what next year is going to be like in terms of gross margin. But with better capacity utilization and potentially better sales programs, we might see a 100 basis point improvement in margin on a full year basis.

Cameron Doerksen - National Bank Financial - Analyst

Okay. And is there any of the, I guess, sort of the cost savings you've achieved outside of the selling and marketing? Are some of these more permanent as you've learned to do things more efficiently? Maybe there's more remote work, things like that. I'm just wondering if you can talk about sort of more permanent cost reductions.

Sebastien Martel - Chief Financial Officer

Well, the important one is our decision to exit the outboard engine business. As we said, in Q1, it's about a CAD0.60 to CAD0.70 EPS impact. This year, we should probably get about a CAD0.40 benefit off it and that's going to obviously roll over to next year, and we'll get the full year benefit. That comes from - obviously, the saving comes from operating expenses that are going away.

And yes, there are some lessons learned. But obviously, we are focused on growing this business. And so there's no big cost saving from working from home. I mean, there's a structure that's in place that needs to be supported. We'll have some employees who'll be working more remote next year, but a lot of them will still be in our premises hopefully. And obviously, we continue focusing on being efficient in how we run the business, and that's part of what we do every year. So we'll continue driving margin improvement.

Cameron Doerksen - National Bank Financial - Analyst

Okay. Great. And just finally, for me, just shifting gears, I wonder if you can talk a little bit about the used market for off-road vehicles and personal watercraft, maybe snowmobile as well. I mean, our understanding is that there's very low availability of used product out there in the market. So I'm wondering if you have any data on that, what the sales of used products have been. I know it might be difficult to track, but any data on that? And what do you think that means for new product sales as we look ahead to next year?

Jose Boisjoli - President and Chief Executive Officer

Yeah. As you said, we don't have any data of the inventory out there by region. But one thing is sure. I mean, we heard a lot of dealers saying they are empty. Watercraft was totally empty this summer in North America and I believe it's the same thing for our froze - snowmobile, the season is just starting. But I was talking to a dealer Saturday, and there is a surge of customer at the dealership right now and obviously, the salespeople are saying buy now because we'll be out of inventory soon. Then, I think all of this is very healthy for the industry and for the dealers, and we'll all gain from it.

Cameron Doerksen - National Bank Financial - Analyst

Okay. That's great. That's all for me. Thanks very much.

Jose Boisjoli - President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from Derek Dley from Canaccord Genuity. Your line is open. Please go ahead.

Derek Dley - Canaccord Genuity - Analyst

Yeah. Hi. Thanks. Just one for me. In terms of - given the strong demand pull-forward here that we've seen, are you guys seeing any changes, early stages, here in terms of dealer order patterns? Like are dealers looking now to potentially hold more product on their floors, just given that the really strong demand that they're seeing?

Jose Boisjoli - President and Chief Executive Officer

Good morning, Derek. I mean, first, we believe that, in general, dealer don't like inventory and some were complaining we had too much inventory - they had too much inventory before the COVID. Then we believe that this all surge of demand could give us an opportunity - when I say us, the dealer and us, to maybe lower a bit the inventory in the network. It will take a while before we get there. But this is an opportunity that all of us together, the other OEM, the dealer and us, will run leaner on inventory and be more efficient, but it will take a while before we get there.

Derek Dley - Canaccord Genuity - Analyst

Okay. No, that's helpful. Thank you very much.

Operator

Thank you. The next question is from Jaime Katz from Morningstar. Your line is open. Please go ahead.

Jaime Katz - Morningstar - Analyst

Hi, good morning. Can you give us a little bit more color on the Canadian market? It looks like the sales there or the shipments decelerated a little bit faster than some of the other geographies, and I'm wondering if maybe it has reaccelerated in products to the other geographies since the end of the quarter. Thanks.

Sebastien Martel - Chief Financial Officer

Hey, good morning, Jaime. Yeah, Canada was down in the quarter, obviously, coming from, one, the leaner inventory and the shipments of personal watercraft that we had to reduce. But the other big factor is timing in snowmobile shipments. We shipped less snowmobiles in the second quarter than - than last year. These are units that we'll be shipping in the third and fourth quarter.

Jaime Katz - Morningstar - Analyst

Okay. And then for the Unchartered Society program that you mentioned earlier, are you guys basically loaning units to these providers? And then, if that's the case, are there some shipments that are sizable, maybe that we should think about as this is initiated relative to what it's going to look like next year shipping into that program?

Jose Boisjoli - President and Chief Executive Officer

First, definitely, I mean, we partner with people that we believe are the best in the industry and, obviously, they use our product, but we don't think it's meaningful in the overall thing. They have a fleet of vehicle that they turn probably once a year, but it's not meaningful in the whole thing.

Jaime Katz - Morningstar - Analyst

Thank you.

Operator

Thank you. The last question is from Gerrick Johnson from BMO Capital Markets. Your line is open. Please go ahead.

Gerrick Johnson - BMO Capital Markets - Analyst

Great. Thank you. The last three questions. So first question, your decision - well, the announcement on the new factories made in early July. So when was that decision made? Was that something you were contemplating pre-COVID back January, February? Or is that something that the demand you've seen since the pandemic, did that trigger that decision?

Jose Boisjoli - President and Chief Executive Officer

Good morning, Gerrick. I mean, as we've said - I mean you were a part of the analyst call last September. We were starting to plan for it. Obviously, when the COVID thing happened in mid-March, we put everything on the hold. But when we saw the surge in demand, we have restarted the program. Then it was planned. That's something that with the growth that we had pre-COVID, that's something that we needed anyhow. But that's why in the middle of all this, we decided to announce and move forward.

Gerrick Johnson - BMO Capital Markets - Analyst

Okay. Great. And then a follow-up on Fred's question, for the second half, sales to be flat to up 7%. Can you talk about other variables that would go into that guidance, specifically thinking about the retail demand you're expecting? And also where you are planning on dealer inventories to end up at the end of - in January, at the end of the year?

Sebastien Martel - Chief Financial Officer

Yeah. As we said, we're very focused on producing as many units as we can in the second quarter. There's going to be an international inventory replenishment, which I mentioned about. One item we didn't talk about is parts and accessory. They performed very, very well in the second quarter, obviously, driven by the strong demand in our products. It was soft in the first quarter; it was actually down in the first quarter impacted by COVID. And so are there opportunities there for the second half of the year? Our guidance calls for, let's say, down 2% to up 7%. Some of it in the second quarter was probably a tailwind i.e., dealers being closed in the first quarter and more cautious planning from them. So we'll see where that ends. But we certainly like to see the performance that we had in Q2 continue. And the team is very focused on making sure we deliver strong growth on the PAC side.

Gerrick Johnson - BMO Capital Markets - Analyst

Okay. Well, Jose mentioned earlier that you're going to run leaner - run leaner on inventory. So does that mean the optimal level of dealer inventory is lower than it had been in the past?

Sebastien Martel - Chief Financial Officer

Well, in absolute - again, it depends on the overall industry and the number of days. Could we reduce the overall number of days by, let's say, 25%? Yes, but does it mean that the inventory is going to go down by 25%? Probably not, because, obviously, the industries are growing, our market share is growing. So that's something we need to factor in when we look at the overall total inventory. But Jose's comment was more in terms of reducing the number of days out there.

Gerrick Johnson - BMO Capital Markets - Analyst

Okay. And then my last one is a little bit more specificity on the cost savings. You outlined on the last call, CAD450 million of total savings. I guess, the ongoing number excluding Evinrude would be about CAD370 million. That was overhead costs that you're taking out through layoffs, hiring freezes, salary reductions. Now, where are we now? Are those costs coming back online? I'd assume that that CAD370 million number would be lower. What's the number of cost savings to expect going forward?

Sebastien Martel - Chief Financial Officer

Yeah. Well, you saw, let's say for - and we look at opex for the first half of the year, when you compare year-over-year, it's an CAD80 million saving that we have. When we talked about the CAD450 million, it was CAD450 million versus our original plan for fiscal year '21, not a year-over-year reduction. I'm expecting Q3 opex to also be down as we continue seeing the benefit of the cost reductions. But obviously, as the business is much better than what we're anticipating and the outlook for next year as well is favorable, we need to continue invest in growth. And so Q4, I'm expecting opex to be flat year-over-year.

Gerrick Johnson - BMO Capital Markets - Analyst

Okay. Thank you, Sebastien.

Operator

Thank you. There are no further questions at this time. So I will return the meeting over to you.

Jose Boisjoli - President and Chief Executive Officer

Great. Thanks, everyone, for joining us this morning, and we look forward to speaking with you again on November 25 for our third quarter results. Thank you. Bye.

Operator

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Q2 2021

Earnings Transcript

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