Title

Presentation

BRP Inc. misses on earnings expectations. Reported EPS is $1.31 EPS, expectations were $1.7.

Operator: Good morning, ladies and gentlemen, and welcome to the BRP Inc.’s FY’24 First Quarter Results Conference Call. [Operator Instructions] I would now like to turn the meeting over to Mr. Philippe Deschenes. Please go ahead, Mr. Deschenes.

Philippe Deschenes: Thank you. Good morning and welcome to BRP’s conference call for the first quarter of fiscal year ’24. 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 the actual 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’ll turn the call over to Jose.

Jose Boisjoli: Thank you, Philippe. Good morning, everyone, and thank you for joining us. I am pleased to report that we are off to a good start for fiscal ’24 as our solid production portfolio continued to drive strong demand globally. While the quarter started more slowly at the retail level due to the late arriving spring season, the momentum picked up in April. This allowed us to deliver another solid quarter at retail and gain further market share. From a financial standpoint, we continue our strong execution and delivered solid results that put us on pace to meet our guidance for the year. Let’s turn to slide four for key financial highlights. Revenue reached 2.4 billion, up 34% from the previous year, driven by higher volume and pricing, as well as a more favorable mix.

Normalized EBITDA grew 39% to $377 million and normalized EPS increased 43% to reach $2.38. Turning to slide five for a look at our Q1 retail performance. The strength and the wide range of our Powersports offering continue to drive strong results. In North America, our retail sales were up 3% for the quarter or up 8%, excluding snowmobile. Remember that last year our snowmobile shipments were made later than usual in the season, which led to usually higher retail in the first quarter of fiscal year ’23. This compared to an industry that was down low single-digit. Our performance was also solid in other geographical markets, with retail up 14% in EMEA and 25% in Latin America. In Asia-Pacific, our retail was down roughly in line with the industry.

As shown on slide six, our retail progressively improved as we move through the quarter. Retail declined in February and was relatively flat in March due to poor weather as well as different timing of shipment for certain products which make year-over-year comparison difficult like I point out for snowmobile. However, the momentum picked up significantly in April as weather improved and consumer reacted positively to certain retail incentives. The trend continued in May. Moreover, despite ongoing macro concern, many indicators are pointing to healthy consumer interest for our industry and more particularly for our product, such as continued strong demand for our line-up. For instance, we’ve just closed our snowmobile booking for the upcoming season and pre-sold unit to consumer ended up about 25% above our target.

The financial position of consumer remained healthy with lending application continuing to show FICO score above historical level. The influx of new entrants remained high at 28% and web searches for different product category remain higher than pre-COVID level. Now let’s turn to slide seven for Year-Round product. Revenues were up 43%, reaching $1.3 billion in Q1, driven by strong shipments of side-by-side and three-wheeled vehicles, as well as favorable product mix and pricing. At retail, Can-Am side-by-side had its strongest Q1 ever, with the Commander, Defender and Maverick X3 all gaining share in their respective markets. Our retail was up low single-digit, but the momentum improved significantly through the period. April retail was our third strongest month ever, only trailing the first two months of COVID.

As for ATV, our retail was down low-teen percent limited by the ramp up in production of the new mid-cc outlander platform. This new platform has been very well received by our dealers and the media, which position us well to continue our momentum as the OEM with the highest market share gain in the industry so far this season. Looking at three-wheeled vehicle, Can-Am retail was up low single-digit. Early in the quarter, retail was impacted by the weather and by a product recall. It then picked up nicely in April with high-teen growth and the momentum continued in May. All-in-all, we are pleased with our performance in the three-wheeled category and we believe that we are well positioned heading into the most important retail period. Turning to Seasonal Product on slide eight.

Seasonal product revenue were up 69% from last year, reaching $692 million, driven by higher volume of Sea-Doo Personal Watercraft and Pontoon. Looking at our retail performance. In snowmobile, we closed the ’23 season in North America on March 31st, which we fell down low single-digit, but with a 1% point market share gain, which further increased our historical record level. We also ended the season with the number one position in each segment in which we compete, including the youth category that we’ve just entered last season. In Scandinavia, our market share also improved, gaining four percentage points by the end of the season. Also, as I mentioned, we recently closed our spring customer orders for the Season ’24 model and pre-sold level in North America came in about 25% above target.

The solid bookings significantly improved our visibility on expected volume and sell-through for our snowmobile business. For this season, we have increased our seasonal product revenue guidance for the year, as Sebastien will explain in a few minutes. Looking at Sea-Doo product. While still early in the season, our retail for Personal Watercraft is performing very well up in the mid 30% for the quarter and the solid trend continue in May. We are also seeing strong momentum in international markets with retail up over 40% in Latin America and over 50% in EMEA. As for our Sea-Doo Pontoon, our retail was up significantly, even if it was a very small base, as we’re ramping up the initial production during Q1 last year. To give you a better understanding of our momentum with this product, in less than one year, the Sea-Doo Switch has already reached the number two position in the US Pontoon industry for the last three months ended in March.

This is a superb example of how we can disrupt categories by developing market shaping products. As you can see both our Sea-Doo Personal Watercraft and Pontoon are performing well heading into the peak retail season. Moving onto slide nine with Powersports parts, accessories and apparel and OEM engines. Revenue were down 17% to $285 million. The revenue decline is primarily due to lower repeat orders during the season and lower sales volume this year due to timing as late snowmobile unit delivery last season had pushed related P&A sales to Q1 ’23. We still have good momentum with our P&A business as we continue to see positive trend at the retail level, notably for our Sea-Doo Personal Watercraft and Pontoon business, for which we have significantly developed the accessory offering in recent years.

Moving to Marine on slide 15. The revenue lag for Marine continued to be tied to the ramp up of the new Manitou platform. While we were planning to be further along in our production ramp up, we have been dealing with the supplier issue for an aesthetic component that did not meet our standards. These resulted in a slight revenue decline of 3% compared to last year. On the positive note, the situation has improved and shipments have increased throughout May, thereby increasing product availability heading into the peak retail boating season. Looking at retail sales, from an industry perspective, the boat category seems to have suffered the most from the late spring, especially in the Great Lakes region, which is a key market for Alumacraft and Manitou.

In addition, our retail performance was improved by the supply issue at Manitou as well from lapping months during which we were still retailing Alumacraft welded boat. As for Quintrex, retail was down in line with the industry. We are not pleased with the marine result this quarter, but I would like to remind you that we are still on track to deliver a strong year. With that, I turn the call over to Sebastien.

Sebastien Martel: Thank you, Jose, and good morning, everyone. The first quarter essentially played out as expected unfavorable foreign exchange rate variations. While our overall gross profit margin upside was limited by Marine during the quarter, it is worth noting that our Powersports gross profit margin was very strong at 27.3%, up 160 basis points from last year. Continuing down the P&L, we generated normalized EBITDA for the quarter of $377 million, representing a margin of 15.5%, up 50 basis points from last year’s first quarter, despite suffering a 110 basis point headwind from FX. Our normalized net income reached $192 million, resulting in a normalized earnings per share of $2.38 for the quarter, up 43% versus last year.

We generated $141 million of free cash flow, providing us with the financial flexibility to take advantage of the current weakness in the share price to do buybacks. In fact, we have deployed about $110 million toward share repurchases so far this year, and we expect to continue being active in repurchasing shares as we still have about 2.4 million shares available under our NCIB. Moving to slide 13 for an update of the network inventory situation. As expected, the improved supply chain environment allowed us to better leverage our production capacity and increase our throughput in Q1 further supporting network inventory replenishment. Our network inventory now stands only 4% up from the first quarter of fiscal ’21. A very comfortable level when you consider the significant growth of our business since then driven by market share gains and the introduction of new product lines.

Moreover, our mix of inventory is very healthy. We ended the end of the season inventory for snowmobile, while higher than last year, is still below historical levels. Putting us in a good position for Season ’24. Unit availability is much better than last year for Sea-Doo PWC and Pontoon and for three-wheeled vehicles as we head into key summer retail season, which should help support strong retail into Q2. And for off-road while there are some areas of the line-up where we still need to improve unit availability, such as the new ATV platform and some higher end SSV models, we believe that we are near optimal level in terms of overall network inventory. So all-in-all, with the improvement made in recent months, we are now better positioned to serve our dealers and customers and seize retail opportunities across the product portfolio.

Now looking at slide 14 for an update on the guidance for the year. As I already mentioned, the first quarter essentially played out as expected. The demand for our product remains healthy with retail momentum improving in April and May after a spring season that was late to come. The supply chain environment is more favourable allowing us to better utilize our production capacity and reduce turbulence costs. The pricing actions we took over the last year are now more than offsetting the inflationary pressures on costs, providing a margin tailwind and the competitive landscape and promotional environment is trending in line with our expectations. As a result, we are reaffirming our guidance for the year with only slight adjustments to account for the better than anticipated snowmobile booking and longer than planned production ramp up for the new Manitou boats.

As such, our objective remains to deliver 9% to 12% growth in revenues and 9% to 13% growth in normalized EBITDA. Going down the P&L we have adjusted upward our depreciation expense guidance to reflect the impact of FX variations and review downward share account for the buybacks done so far this year. Both elements offsetting each other. As such, we are still in line to deliver a strong normalized EPS between $12.25 and $12.75, which would be a record year for BRP and another strong step towards our M25 objective of reaching $13.50 and $14.50 of normalized EPS by fiscal year ’25. Looking at the rest of the year, we expect to deliver three solid quarters driven by continued market share gains, a more favorable operational environment and upcoming product introductions.

Moreover, we still expect to generate north of $400 million of cash from working capital this year, which should lead to very strong cash flow generation. Finally, zooming in on the second quarter, our plan calls for a normalized EPS that is expected to be flat versus a record Q2 last year as we expect continued growth in the business to be offset by higher depreciation and financing costs. On that, I’ll turn the call over to Jose.

Jose Boisjoli: Thank you, Sebastien. I am pleased with how we began fiscal ’24. We acknowledged that there are still uncertainties surrounding macro concern, but our results demonstrate the strength of our diversified portfolio and ability to reinvent product categories. For the remainder of the year, we anticipate demand for our product to remain healthy, and we will continue to focus on executing and optimizing efficiencies to deliver on our guidance. As we have proven many times since becoming a public company ten years ago almost to the day, our team’s strength, agility and resilience have allowed BRP to grow significantly and outperform the industry. As shown on slide 16, our revenue more than tripled over that period. Normalized diluted EPS grew eightfold and our Powersports market share almost doubled.

And the achievement that make me particularly proud is that our business with dealers quadrupole and we became the number one industry player worldwide. In addition, we have created significant value for shareholders with a 368% share price appreciation as of the anniversary date. We also distributed $2.7 billion in capital to dividend and share repurchase. In conclusion, our strong fundamentals are positioning us well to deliver another solid year in fiscal year ’24 and to gain further market share in the Marine and Powersport industries. Moreover, we believe we can sustain our momentum over the mid to long-term, given many new products in their early stage of growth, a solid pipeline of product introduction and constant progress on our journey towards electrifying our product lines.

As usual, we are hosting our dealer event in August and you are invited to join us in Atlanta. I thank all our employees for another strong performance this quarter. I also acknowledge the support of our dealers who made us the leading OEM in the industry. On that note, I turn the call over to the operator for questions.

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from James Hardiman with Citi. Please go ahead.

James Hardiman: Hey, good morning. Thanks for taking my call. So coming out of the fourth quarter, you had given us some pretty good context. Maybe I missed it, but how were you thinking about industry growth? I think previously you were talking about a flattish industry. And then I guess within that context, I’m assuming based on everything that you’ve said, you still think that you will see significant share gains this year, but maybe walk us through any updated thoughts on either of those assumptions?

Sebastien Martel: Yeah, obviously, we’re happy with how Q1 went, especially the tail end of Q1 and the beginning of the Q2 from a retail perspective. Our assumptions are still the same as when we initially established guidance. The expectation is for a flat industry this year and obviously the growth coming from new product introductions, some of which we’ve done already with the new ATVs, some will come in August and also sustained market share gains, especially on the side-by-side segment and the ATV segment. But overall the industry and the retail is trending in line with our expectations.

James Hardiman: Got it. That’s helpful. And then on the inventory front, pretty flat retail with a few years ago, despite some significant increases in your own retail. So how should we think about is there any remaining replenishment opportunity here or should wholesale generally track with retail? I guess, another way to ask it, as we think about inventory turns, you know, those seem to have come in pretty meaningfully. Is there any way to think about this from an inventory turns perspective and what the right number is there? Thanks.

Sebastien Martel: Yeah. Generally we’re happy with the overall level of inventory, especially going into retail peak retail season for Personal Watercraft, Pontoons and Three-Wheels. So we’re super happy with what we have there. We believe that’s going to drive good retail in the second quarter. There are few pockets of opportunities on the ORV side where inventory is needed. Obviously, the new ATV platform that we just launched and also a few high-end models on side-by-side where dealers are raising their hand to have more inventory. But generally, as the business grows, we will see the absolute number of dollar value of inventory grow in units grow as well, because coming with higher market share and obviously if you look at if you compare our wholesale to retail, well, obviously ASPs are higher as well the — and benefiting from pricing. And so you’ll see a higher wholesale growth and you’ll see a retail growth in the next nine months.

James Hardiman: Make sense. But just to clarify, if I were to think about this in terms of units from here, the expectation is, is that wholesale units would be pretty similar to retail units or is that not a good assumption?

Sebastien Martel: Wholesale will be slightly higher than retail as we obviously grow the business. So a number of days should remain similar. You’ll see a minor impact on the top line.

James Hardiman: Got it. Makes sense. Thank you. Thank you very much.

Operator: Your next question comes from Xian Siew with BNP Paribas. Please go ahead.

Xian Siew: Hey, guys. Thanks for the question. Maybe on the P&A. So it was down 17% in the quarter. You mentioned some timing effects, but the guide of 3% to 7% growth was maintained. Any other kind of shifts we should think about over the rest of the year? And are there any kind of inflection points like maybe in the third quarter? Or any kind of thoughts on the P&A?

Sebastien Martel: Yeah, Q1 P&A down. Some of it is driven by timing of shipments of snowmobiles last year that were shipped much later in the season so that drove higher P&A sale probably accounts for half of the P&A variation that we saw this quarter, just timing of snowmobile year-over-year. And also, when we look at what the dealers have on hand last year and during the COVID period, everyone had a fear of missing out. And so people order more inventory. They wanted to make sure they were not they were running out. And so what we are seeing is that the dealers now that there’s a more stable supply, there are rebalancing their DSOs and managing the business with lower inventory. So I think Q1 was also impacted by, we’ll call it, inventory adjustment on the dealer side.

But overall, when we look at the overall attachment rates on the P&A, it’s good. And obviously, we have exciting product introductions coming later this year, that is also going to be tied to P&A and accessory introductions, which is going to drive growth for the rest of the year.

Xian Siew: Okay. Thanks. And then I wanted to ask maybe just a little more housekeeping, but there was in the other expense line, there was an FX contract cost of about $17.3 million. I guess like what is that expense? And why not exclude that or I guess adjusted out similar to the other kind of FX impact on the P&L?

Sebastien Martel: Well, the euro was more volatile in Q1. And so that obviously drove some, unfortunately, it went the wrong way, and so that drove some loss on foreign exchange. The majority of it is revaluation of balance sheet items, monetary balance sheet items. And in first few weeks, there was a mismatch, which kind of amplified that volatility. And so we’ve obviously made a few adjustments. I’m not expecting that to impact our business as much going forward. But certainly, the euro, the strength of the euro in Q1 did have an unfavorable impact on the remeasurement of some balance sheet exposures.

Xian Siew: Right. But I guess it’s fair to say that’s more of a onetime kind of impact?

Sebastien Martel: Well, it doesn’t mean that it cannot happen going forward. But as I said, we’ve made a few adjustments to how we look at these exposures. And so I’m not expecting as much volatility going forward, even though the rates would — could vary as well.

Xian Siew: Okay. Thank you.

Operator: Your next question comes from Jaime Katz with Morningstar. Please go ahead.

Jaime Katz: Hey, I hope you can talk a little bit about what you guys are seeing with the holdup in Marine parts and how you guys have gotten more clarity on what the rest of the year is going to look like given the disruptions that have already been seen.

Jose Boisjoli: Yeah, good morning. First, the marine industry is probably the industry like I said in my remarks that is the most affected by the late spring. And just to give you some numbers, and obviously, as you know, there is not much — the data on Marine is not as tight on Powersports, but I give you some numbers. And for the first three months of the year, the Pontoon industry was down 18%. But in the Midwest, where is the — very, very strong area for Manitou, the Marine industry was down 35% in Michigan and Minnesota. Then and April was also down 18% then the Marine industry is still affected. And aluminum fishing boat, the industry was down for the first three months of the year by 17%, improved in April to 7% — down 7%.

But again, Minnesota, Wisconsin, Michigan worse than the industry. Then this is the environment that we are in. And our retail, we believe with Alumacraft that we are — it’s a question of timing and seasonality, but we are in good shape. Manitou, obviously, we still have the problem with the supplier for anesthetic parts. But I have to say now the supplier is able to follow production, and we have BOs with that missing part in the yard in the Lansing and we will pick up retrofitting the BO ourselves in May and June then this would stabilize and it’s played into the season, but not too late because the spring affected the retail.

Jaime Katz: Okay. And then maybe this is a little nit-picky, but I think in the prepared remarks, you guys had noted that you were on track to achieve the M25 EPS goals. But I don’t think you guys articulated that you would specifically reach the revenue goals that had been laid out there in the past and I assume that was just an omission and not just caution on what we’re seeing in the environment. Can you clarify that? Thanks.

Sebastien Martel: Well, obviously, and as we’ve said in the past, we’ve always been very focused on growing this business, growing a profitable business, and that’s the number one priority. And top line is obviously the driver of that growth. So our plans are still very much in line with the M25. Could there be adjustments in terms of which product line delivers the revenue target? Absolutely. But overall we’re very much in line with the target.

Jaime Katz: Excellent. Thank you.

Operator: Your next question comes from Jonathan Goldman with Scotiabank. Please go ahead.

Jonathan Goldman: Hi. Good morning. On one of the slides, you showed your unit growth from February to May. So, on the May numbers, obviously, some significant growth there. Can you provide some color on how much of that is a catch-up from earlier in the year? And also how much maybe attributable to industry growth versus share gain for May?

Jose Boisjoli: Yeah. This is a difficult question, but I will try to give you some color. If we look at the Powersports industry overall and if you — our retail for Powersports in April, if you compare to last year, we were up 37%. But if you compare to pre-COVID, 26%, then you could say here, some may be catch-up. But what is interesting, this was April. What is interesting in May. In May, the retail was up 47% versus last year, but 42% versus pre-COVID then there might be some catch-up in there, but I don’t think it’s significant with what we see so far.

Jonathan Goldman: No, that’s very helpful. Thank you for that. And the second one I had is on expenses. It looks like SG&A was up 35% year-on-year, which is the same as revenue growth. Can you discuss if there’s anything unusual in the quarter? Or can you break out how much of that SG&A increase is attributable to growth investments or growth or just the business is getting bigger? Or what other sort of drivers behind that SG&A pick up?

Sebastien Martel: Yeah, your latter point in terms of business being better, certainly is an element. Obviously, we are investing in technology and that is an investment and comes with obviously higher dollars. But when I look overall for the year on an EBITDA margin, the target is to deliver about 17% EBITDA margin and we’ll see an improvement of probably 50 basis points coming from gross margin and a headwind coming from operating expenses of about 50 basis points. Some of that is a greater R&D expense. Some of it is a greater marketing expense and some of it is SG&A as well.

Jonathan Goldman: And just to clarify, you said 50 basis points tailwind from gross margins and minus 50 basis points from OpEx netting out to even?

Sebastien Martel: Yeah.

Jonathan Goldman: Okay. Thanks for taking the questions.

Jose Boisjoli: Thank you.

Operator: Your next question comes from Robin Farley with UBS. Please go ahead.

Robin Farley: Great. Thanks. I had two questions. One is just a follow-up there on your margin commentary. Just thinking about your top line is growing at a double-digit rate. And just thinking about whether the supply chain has kind of gotten back to what you would say is normal at this point when we think about margin comps? And just with that double-digit revenue growth, should we be thinking about other things like as Pontoons grow, if that’s a lower-margin business than ORV? And like are there sort of segment mix issues that we should be thinking about with your margin that would be offsetting the benefit to margin that we think from the double-digit revenue growth. Thanks.

Sebastien Martel: Hi. Good morning, Robin. Obviously, we’re happy with the margin improvement, especially on the Powersports side. When I look at the drivers of the gross margin in Q1, last year, we did get a benefit coming from an insurance claim with [wise] (ph) to fire that was last year — or this year, a headwind of 100 basis points. But when I look at volume mix and fixed cost absorption, that’s a positive 100, mix was a bit negative, but not that significant to your question. But the big tailwind we got this quarter is, finally, we’re getting ahead of inflation. So all the pricing actions we took over the last several years are now more than offsetting the inflation and also turbulence costs. So that’s a 400 basis point tailwind.

As planned, we have more retail incentives out there that’s a 130 basis point headwind. Higher interest rates on the floor plan financing, a slightly higher number of days as well. That’s another 100 basis point headwind. Marine was a 70 basis point headwind and then the other elements impacting margin for about 40 basis points as a headwind is depreciation effects and warranty. So overall bringing us to the 25.7 gross margin of this quarter.

Robin Farley: Okay. Great. Thanks so much. And then my other question was just on the demand side of things. If you can just help us think a little bit about what’s going on. Obviously, it sounds like it’s certainly improved through the quarter. Any color on sort of higher end versus lower end demand from the consumer or utility versus rec demand? Just kind of any color like that? Thank you.

Jose Boisjoli: Yeah. Then first if we look at — and obviously, as you know, we are stronger in premium product than entry-level product, but I give you some color on the Spark and the Ryker. On the Spark, to be honest, no change. The Spark need is typically 30% of our Watercraft retail and in Q1, and we compare that to the last five years. And basically, this year, it’s in line with the previous year. Ryker is about 50% of our retail versus the traditional Spyder. And it’s, again, comparable to what we had in ’22, ’21, ’20. Last year, we were missing some traditional Three-Wheeled vehicle then I think it’s — you cannot compare to last year. But for Ryker and for Spark, the mix versus the other product line is stable. If you look now at the industry and in the ATV industry, we’re not very strong in the mid-CC and other segment with stronger and higher.

But the high-cc is stable at 20% than the mid and other are stable at 80%. And side by side, there is a change, side-by-side in terms of premium. The industry grew from about 35% premium in fiscal year ’20 to 60% so far this year. And it’s a big change for side-by-side going from higher-end products. What is helpful. We are basically our side-by-side business, 70% of what we sell is premium. Then this is the big picture. Look, we don’t see big change in Watercraft, Three-Wheel and ATV, definitely a shift on side-by-side where the market is growing more high-end. Lucky for us, we stronger on that product category.

Robin Farley: Fantastic. Thank you.

Operator: Your next question comes from Fred Wightman with Wolf Research. Please go ahead.

Fred Wightman: Hey, guys. Jose, I just wanted to go back to last quarter and sort of entering the fiscal year. You called out a few different things to monitor for the industry. One of them was momentum and use. And I’m wondering if you could sort of give an update on that. You had talked about dealers might be carrying some higher cost inventory and what that might do for retail. So I’m wondering if that showed up at all in the spring sort of x the weather benefit or timing?

Jose Boisjoli: Yeah. Obviously, we don’t have much data. It’s anecdote that we have from the dealers on this, but price are starting to go down on the use, which I think is helping the whole retail situation. Typically, a customer come in if there is a good trade between used machine and the new one then the wheel is moving. And I think the dealer we’re holding to high price for use for a long period of time. And now it’s starting to be more, I would say, normal.

Fred Wightman: Okay. And if we think about strong early snow indications, but if you look at sort of dealers with higher inventory levels, higher floor plan rates, are you seeing an impact on dealer orders? Are people sort of adjusting the size, adjusting the cadence of when they would be ordering sort of products versus what you were seeing a year or two ago because of sort of where floor plan rates are?

Jose Boisjoli: I mean — the — if you — obviously dealers this — and we monitor it by days of inventory — and the dealer also are looking at the dollars. But on the dollar side, like Sebastien explained, we’re selling more premium high-end product, the dollar is going up per unit. The other thing is we gained significant market share since the COVID situation. And it’s normal that we need more inventory to support the continuous retail then dealers are obviously watching their line of credit. On the other hand, the snowmobile order was better than what we had anticipated. And what is very interesting, close to half of our production is already pre-sold to consumers. That is — we feel we’re going into the snowmobile season with a very good visibility of what’s going on.

We take ATV order every month for delivery in the next three months. And so far, dealer, most of the time, are ordering above the recommended order because Can-Am is having a good traction at retail. Then we all heard about those macroeconomic concern, but the dealer who are on the front line are quite positive about the business.

Fred Wightman: Okay. Thank you.

Operator: Your next question comes from Joe Altobello with Raymond James. Please go ahead.

Joseph Altobello: Thanks. Hey, guys. Good morning. Jose, I just want to go back to the comment you just made to Fred about the softness you’re seeing in used pricing. I certainly understand why that would drive used retail. But could it diminish demand for new products as that price gap between new and used widens here?

Jose Boisjoli: I mean I don’t believe it will affect the new product. I think there is enough novelty in the new product that the customer will go for the technology and all the novelty that we bring. This is something that we’re very good at. We are good to come out with a novelty that excite the consumer. And the good example is the snowmobile. We came out with the second year of the REV Gen5 and we had very, very good traction with the new model we introduced. Then I think we are in a very good position. My comment to Fred on the use. I think to get the wheel in motion at retail level, you need the trade-in and dealer need to accept that they buy the use maybe a bit higher than what pre-COVID but lower than a few months ago and this gets the wheel in motion.

Sebastien Martel: And maybe if I just add a bit of color that obviously the big hedge that lies with the used market is that there’s been material price increases over the last two or three years. And so MSRPs are much higher than they were two or three years ago. So someone who brought a product two or three years ago, that price is protected from the inflation that the new products have had. So, yes, the gap is widening more than it was during COVID, that gap almost went to zero. But it’s still a very, very healthy gap because of the MSRP increases we’ve seen over the last two or three years.

Joseph Altobello: Okay. That’s helpful. Thank you. And just to clarify on the acceleration of retail that you guys saw in April and May, were your share gains in those two months, similar to what we saw in Q1? And was it concentrated in any particular categories?

Sebastien Martel: All I can say is we’re obviously happy with the retail growth that we saw in April, May. We’re happy with the performance. Things are trending in line with our assumptions for the guidance.

Joseph Altobello: Okay. Thanks, guys.

Operator: Your next question comes from Benoit Poirier with Desjardins Capital Markets. Please go ahead.

Benoit Poirier: Yeah, good morning, everyone. Just when we look at your dealer inventory, you’re almost toward the end of the ORV season. Could you talk about the ORV inventory and maybe your overall inventory, how much would be considered obsolete and therefore requiring some sales programs?

Jose Boisjoli: Good morning, Benoit. We’re comfortable with our ORV inventory. On side-by-side, we have good momentum in the retail level. And, at the end of the season, it’s July, August. And after that you have a transition that lasts a few months, and we believe we are in good shape with our side-by-side inventory, good product news that will come in August. And on the ATV side, if there is something, we’ve lost some retail because the inventory tool is too low. We are in a transition with the new platform. And it’s a bit always tricky though. You have like three, four months where you try to ramp down the whole one and you ramp up the new one. We are on plan, but the dealer will see high volume coming their way in June with the new platform.

Then if I have something comfortable with side-by-side, everything is on plan. And on ATV, the inventory is probably too low, and that’s why our retail was a bit soft. I believe that when the network will be fulfilled with the new platform, you will see our retail gaining momentum.

Benoit Poirier: Okay. And Jose you mentioned that the sales program were a little bit higher than it has been in the past. Where are you versus normal level? And maybe on the supply chain I think it impacted your margin close to 400 bps. And given the improvement in supply chain situation, have you been able to capture the full 100, 400 bps? Or are you maybe just halfway through the margin recovery coming from supply chain?

Jose Boisjoli: Yeah, I will take the question on the sales program. Just to give you a sense, on Watercraft and Pontoon, the Sea-Doo Pontoon and Watercraft. First, today, we have nothing on model year ’23. We have some program on model year ’22, but it’s slight program. What we have out there is a two-year warranty plus either 2.99% interest rate for 36 months or 4.99% for 60 months. If a customer would like to finance the machine, it would pay probably 7% for five years. And we are in line with the competition for model year ’22. On ORV, we are weaker than our main competitor. But again, ATV, we have some program on model year ’22, mainly because of the old platform that on the mid-cc category. And on side-by-side, it’s the same thing.

We have some program in model year ’22 and a few on model year ’23 that are entry-level units. But at the end of the day, we are not, I mean it’s significantly less aggressive than what we had at this time of the year pre-COVID. And that’s how I would qualify our — my comments on the remarks about the slide programs. Maybe, you want to comment on the?

Sebastien Martel: On the turbulence and inflation, as you reminded us, yes, it was a 400 basis point tailwind. It’s probably 50-50 between turbulence and the positive effect of inflation. There’s still some inefficiencies that we could further reduce and that’s the plan for the rest of the year. And from a retail incentive, we’re still below pre-COVID, significantly below pre-COVID. And again, we did — yes we did put more programs, especially on the interest side, where we subsidized the rates. But we think it’s the right thing to do with — and it has an impact on the retail momentum.

Benoit Poirier: Okay. Thank you very much for the time.

Jose Boisjoli: Thank you.

Operator: Your next question comes from Craig Kennison with Baird. Please go ahead.

Craig Kennison: Hey, good morning, and thanks for taking my questions. You’ve addressed a lot already, but wanted to ask about your dealer body. And just I’m curious, how do you evaluate the financial health of your dealer partners just given the potential for an economic downturn?

Sebastien Martel: Well, as you know, we partner with Huntington Bank on the floor plan financing. And so we work hand-in-hand with them in constantly evaluating the health of their dealer how much credit can they take the terms of inventory. So it is a daily operation with our internal credit team and their credit teams in order to make sure that we monitor the health of the network. It is something we pay very close attention to. And in the end, it’s a balance. And dealers need inventory in order to be successful in order to drive top line. But obviously we don’t want to have them too much inventory, so that becomes an issue from a floor plan cost. And so we are quite active on that front and we have constant discussions with our different floor plan partners around the world to make sure that we find that right balance.

Craig Kennison: That’s very helpful. And I guess the second question on just the affordability dynamic for consumers. I’m wondering if you ever look at it from a monthly payment standpoint on like-for-like unit. I’m curious, you’ve got rates moving higher, but inflation has waned a bit and dealers probably are offering much sharper prices than when there was no inventory. Just what is the consumer looking at from an affordability standpoint. And we had some inflection where their monthly payment may not be going up anymore.

Sebastien Martel: Yes. When I look year-over-year, obviously, with the rise in interest rates that we’ve seen in the last 12 months — for a like-for-like product there consumer buying a product a year ago and buying a product today. The consumer would pay 8% more on a monthly payment. So that factors in inflation, interest rates, et cetera. So, yes, it’s higher, but on the other side, now, we are offering promotions that’s certainly helping to drive retail. And on a $300 monthly payment, 8% is something that is something the consumer looks at, but probably not significant enough to pull them away from executing on the purchase.

Craig Kennison: Great. Thank you.

Operator: Your next question comes from Brandon Rolle with D. A. Davidson. Please go ahead.

Brandon Rolle: Good morning. Thank you for taking my question. First, just quickly, when would you be able to start your buyback this quarter?

Sebastien Martel: As soon as next week is with something that we could start doing again and we have until the end of November to do the buyback. So there’s quite a long window to execute on the buyback, Brandon.

Brandon Rolle: Okay. Great. And then also on the promotional side, I think, you guys have started increasing support to dealers and April and May and obviously saw strong market share gains. Do you see your competition potentially responding with increased promo to respond or could that cause you to go back to pre-pandemic promotional levels this year?

Jose Boisjoli: So far we don’t see an escalation of programs. On the Watercraft, our main competitor, we are about in line with our main competitor below historical programs level. On off-road, obviously, the leader in the industry is a bit more aggressive than us, but it’s lower than what it was pre-COVID.

Brandon Rolle: Okay. Great. And just finally on market share dynamics. Obviously, the Japanese competition still doesn’t have necessary inventory in the channel. How much of their absence in the channel is contributing to your market share gains?

Jose Boisjoli: That’s a very difficult question. But I would say I believe that our market share gain last year came from our first — our strategy about building unit that was almost completed and retrofit them when we received the part either in our factory and at the dealer level. This gave us a head start versus some of our competitor who reduced production and second, the strength of our lineup. Our lineup , and again, I’m biased, but our lineup are the best in the industry. And we have a complete product portfolio. We have products for all season, which is very helpful for the dealers. Then if all this that I believe explain why we have so much momentum at the retail level.

Brandon Rolle: Okay. Great. Thank you.

Operator: Your next question comes from Brian Morrison with TD Securities. Please go ahead.

Brian Morrison: Yes, good morning. I want to understand the margin cadence throughout the year. So Q2 sounds like it will be sub 17% EBITDA margin again, so below in the first half. So the second half weighting and the forecast improvement in the back half of the year. Is this a mismatch of timing of the offsetting benefits and headwinds? Is it scale or is it the need for Marine to improve? And I understand the weather impact in Marine, but can you just talk about the demand pull for the new Manitou marine product?

Sebastien Martel: I’ll let Jose cover the Manitou and then I’ll cover the cadence. Is that fair?

Brian Morrison: Please.

Jose Boisjoli: On the Manitou, as you know, we are sold out to the dealers and basically the dealer orders everything we can produce. To be honest, we reduced our planning for model year ’23 from now until summer for production. But so far, what we hear from the dealer is retail, the new Pontoon is very popular. I think the new Manitou with the MAX Deck, you know the fact that you have an open space, you’re gaining four feet in the back. You have an open space. You don’t have the engine in your way. It’s a big, big benefit. And I would say very happy that we dealer and consumer react to the product.

Sebastien Martel: From just a margin profile similar to what we saw probably last year in terms of the EBITDA margin. We historically had a higher EBITDA margin in the second half of the year. A lot of it driven by mix, but some of it driven by timing of operating expenses. So probably consistent to what we’ve seen in prior years, Brian.

Brian Morrison: Okay. Thank you for that. Just and then the snow checks up 25% relative to your target. Can you just provide a comparison relative to pre-orders last year? It sounds like it’s probably flat.

Jose Boisjoli: It’s below last year in terms of production units that are sold in percentage of production. Like I said, about close to 50% of our production is presold to a consumer. This is the third best year in our history. Then, obviously, the COVID year were exceptional because the fear of missing. But it’s the highest year in, I would say, a more normal non-COVID year. I’m very, very happy with the snowmobile season.

Brian Morrison: All right. I appreciate that clarification, Jose.

Jose Boisjoli: Thank you.

Operator: [Operator Instructions]

Philippe Deschenes: Well, thank you very much, everyone, for joining us this morning and for your interest in BRP. We look forward to speaking with you again for our second quarter conference call on September 7th. Thanks again, everyone, and have a good day.

Jose Boisjoli: Thank you.

Operator: Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.