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Good morning, ladies and gentlemen. Welcome to the BRP Inc.'s FY '23 Second Quarter Results Conference Call. [Operator Instructions] I would now like to turn the meeting over to Mr. Philippe Deschenes. Please go ahead, Mr. Deschenes.
Thank you, Julie. Good morning, and welcome to BRP's conference call for the second quarter fiscal year '23. Joining me this morning are Jose Boisjoli, President and Chief Executive Officer; and Sebastien Martel, Chief Financial officer.
Before we move to the prepared remarks, I would like to remind everyone that certain forward-looking statements will be made during the call and that future results could differ from those implied in this statement. 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.
Thank you, Philippe. Good morning, everyone, and thank you for joining us. BRP once again demonstrated its ability to succeed in the unique operating environment. We concluded the first half of the year on a very strong note by delivering our strongest quarterly revenues and normalized EBITDA ever.
Our team resiliency was further tested following the end of the quarter as we were the target of a cyber attack, forcing us to temporarily suspend operation. Our quick reaction and relentless effort allow us to contain the situation and limit its impact. A very special thanks to our team of ISIT expert who did a remarkable job from the very beginning, and who have worked diligently to restore operation and system.
As this situation is causing delay in delivering product to customers, I sincerely thank them for their comprehension. We expect to make up for the loss of [ sales ] throughout the second half of the year, limiting the impact on our results. Consequently, with better-than-expected results so far this year and supply chain improvement, we are increasing our normalized EPS guidance for the year to a range of $11.30 to $11.65 per share, representing a year-over-year increase of 14% to 17%.
Let's turn to Slide 4 for key financial highlights. Revenues reached $2.4 billion, up 28% compared to last year, driven by solid growth for side-by-side and 3-wheel vehicle and the introduction of the Sea-Doo Switch. Normalized EBITDA was up 1% to $418 million and normalized earnings per share increased 2%, reaching $2.94.
Turning to Slide 5 for a look at our Q2 retail performance. Retail sales continue to be limited by product availability, resulting in a decline of 16% for Powersport product in North America for the quarter. However, excluding personal watercraft for which shipments were delayed compared to last year, we outpaced the North American industry. While our retail sales were down 2%, industry sales were down high single digit. The retail decline does not indicate the lack of consumer demand.
It reflects limited product availability in our dealer network. We are confident that retail will improve as we continue to ship more product, and it is, in fact, what we are experiencing so far in Q3, as shown on Slide 6. As you know, over the last few quarters, we have shipped units that were missing a few components and retrofitted them at the dealer when component are available. This strategy is paying off as you can see on this slide.
At the end of Q2, our network inventory was up 134%, including a significant number of unfinished units for which missing component were shipped to dealer in the last 2 weeks of July. This improved unit availability led to retail growth over 20% so far in Q3. This shows that consumer demand is still strong and everything we shipped to dealer continued to convert rapidly in retail.
Moreover, despite higher interest rate, consumer credit expectation remains stable, and we are seeing many positive signs of continued trend in demand. We still see a strong influx of new entrant of 41%. Website traffic and Google search for our different brands remain significantly higher than pre-pandemic level. Retail velocity is solid, and dealer bookings following our BRP Club is ongoing and orders are trending up over 20% versus last year.
Turning to Slide 7 for a quick supply chain update. The supply chain environment evolved positively as expected in the second quarter, and we are seeing improvement in all key areas. Delivery schedule of component, requiring semiconductors is better. We are dealing with less supplier disruption, which helped the planning of our production schedule and logistics, cost, availability and [ delay ] level are all improving. We are also seeing price coming down across many commodities, which could be favorable long term.
However, the benefit will be limited this year as input costs are mostly hedged throughout the back half of the year. As planned, the supply chain improvement put us in a good position to increase production throughput and deliver solid growth in H2.
Turning to Slide 8 for an overview of the key products introduced at our BRP Club held in August. It was our first in-person dealer event since the start of the pandemic and the first that combined both our Powersports and Marine dealers network leading to the highest attendance ever with over 5,300 participants from 55 countries. In terms of product launches, we strengthened our Sea-Doo lineup by creating a new industry segment with the introduction of the Sea-Doo Explorer Pro, especially designed for longer trips on the water.
On the Can-Am off-road vehicle side, we improved our offering in the mid-horsepower sport side-by-side segment, a large and very popular category and we reinforced our Kid ATV lineup, an industry segment that has seen significant growth in recent years. We also unveiled upcoming product on the EV side, including the 2 initial model of our electric motor cycle lineup, the Can-Am Origin, a dual-purpose motorcycle, equally capable and on and off-road and the Can-Am Pulse, the perfect motorcycle for rides in and out of the city.
We also introduced the Sea-Doo Rise, electric hydrofoil board that combined the pace of A Board with the exciting sensation of [ foiling ]. This product opened a totally new market for us, and our research revealed that the vast majority of consumers who own or have owned a Sea-Doo showed interest for the Rise. In addition, this is an ideal electric product since very little energy is consumed when foiling. This is a great example of innovation you can expect from us and you can look forward to more exciting products like this in the future.
Initial shipment of these 3 electric products are expected for summer 2024. Another main highlight of the club on Slide 9 was the official introduction of our new first BRP design boat lineup with the Rotax Stealth Engine technology. When we launched our buy, build, transform strategy with the acquisition of boat companies in 2018, our objective was to create a critical mass that we could leverage to transform the marine industry, with our design, innovation and technical know-how. And this is exactly what we are doing with the introduction of our new Manitou Alumacraft and Quintrex boat lineups that redefine the boating experience and all include our new Rotax Stealth engine.
This groundbreaking outboard engine disappear under the boat, which creates a truly integrated design and free up valuable space. This brings significant benefit to the consumer in addition to being priced competitively with equivalent model on the market. The boat attracted large crowd during the Club. Our new boat are very well received by marine dealers and many Powersport dealers also expressed interest in carrying these product lines.
With these new lineups, we expect to gain additional market share in the large and attractive $36 billion marine industry. It also represents an important step towards our objective of growing our marine business to $1 billion by fiscal year '25. Moreover, these are the first boat designed with the modular approach, which will improve margin in our marine business as we expand this design to additional models. We are very excited about this new step in our marine strategy.
Now let's turn to Slide 10 for our year-round products. Revenue were up 42% to $1.4 billion in Q2, representing by far our strongest quarter ever for year-round products. The growth was primarily driven by strong shipments and a favorable mix of side-by-side and 3-wheel vehicle. In terms of retail, the 2022 North American ORV season ended on June 30 and both our Can-Am side-by-side and ATV outperformed their respective industries. Side-by-side vehicle gained ground in all 3 segments and had a 3 percentage point of market share for the season.
Both product lines have also outpaced their industry in the quarter. Side by side, notably achieved its highest market share ever in the month of July. And the strong retail momentum continued in August, driven by improved product availability leading to our side-by-side retail being up about 60% so far in Q3.
As for 3-wheel vehicle, despite retail being down in the quarter due to limited product availability, we still outperform the industry. We continue to gain traction with consumers through several initiatives such as women off on-road and rider education programs for which course completion are up significantly year-to-date. We are well positioned to sustain our momentum in 3-wheel vehicle with increased shipment for the upcoming months.
Turning to Seasonal Product on Slide 11. Seasonal Product revenues were $691 million, up 20% from last year, driven by the introduction of the Sea-Doo Switch as well as by favorable pricing and mix for personal watercraft.
Looking at the retail. Our retail for personal watercraft in the second quarter was impacted by limited product availability due to the delay unit shipment, which will take place later than usual in the season. This resulted in retail down low 30% in the second quarter, but up high 20% so far in the third quarter.
While the delay of deliveries was not ideal, the momentum in our Sea-Doo business is very strong and demonstrated by solid booking trends. For example, in its second year, dealer order for the model year '23 Sea-Doo Switch are trending about 3x higher than the actual production of model year '22. As for snowmobile, we are currently in the slow period of the year, but we are very well positioned for the upcoming season with a record level of units presold to consumers.
Continuing on Slide 12 with a look at Powersports parts and accessories and apparel and OEM engines. Revenue were up 4% to $257 million for the quarter. Our revenue continued to benefit from our growing product portfolio, which led to higher replacement parts and the popularity of our accessories driven by the LinQ ecosystem. However, growth was limited in the quarter due to lower volume of accessories for personal watercraft in light of daily unit shipment.
Looking ahead, PA&A remains a key growth area for us. Our focus on innovation will allow further drive consumer interest for accessories. This includes bringing the LinQ system to our expanded boat lineup and introducing product with a high potential for add-on accessory cells such as the Explorer Pro, the Sea-Doo Explorer Pro.
Moving to Marine on Slide 11. Revenue reached $132 million, up 5% from last year, driven by a more favorable product mix, partially offset by lower boat shipments. Looking at retail sales. In North America, Manitou performed well with retail up low-teen percent in the quarter, while Alumacraft was down low 20%, reflecting our exit from fully welded boat.
In the Australian market, the second quarter represents the off-season and Telwater retail was down on low volume. Looking ahead, as mentioned earlier, we are shifting our focus to the next boat generation with the Rotax Stealth engines. Production of these boats will begin to ramp up in the fall and this should be available to customers in time for the next boating season.
With that, I turn the call over to Sebastien.
Thank you, Jose, and good morning, everyone. Thanks to the sustained robust demand for product and the improving supply chain environment, we delivered our strongest quarter ever in terms of financial results. Looking at the numbers, revenues for the quarter were up 28% versus last year, reaching $2.4 billion. Our gross profit margin was roughly in line with our expectations, ending at 24.7%. But was down in comparison to last year's level as the benefit from volume, mix and pricing was more than offset by supply chain and inflation, which both impacted logistics, commodities and labor costs.
Still, we continue to tightly manage our expenses, leading to strong normalized EBITDA of $418 million, representing a normalized EBITDA margin of 17.2%. Our normalized net income came in at $238 million, resulting in a normalized earnings per share of $2.94, up 2% from last year's Q2. From a cash flow perspective, we generated $332 million of operating cash flow, and we continued investing in growth with $112 million of CapEx, resulting in $220 million of free cash flow generation for the quarter.
We also seized the opportunity to further strengthen our balance sheet by increasing our revolver capacity by $400 million and raising a USD 100 million term loan. These actions provided us with the flexibility to continue investing in our long-term growth. Notably, as we recently announced 3 acquisitions, all the while maintaining the capacity to make the necessary investments in working capital and ensure that we maximize our production output and sustain our solid retail performance in the current environment.
Moving to our network inventory on Slide 16. Year-over-year, our network inventory is up over 130% with most of the increase being driven by strong shipments of missing components to dealers late in the quarter. This was particularly true for our side-by-side business as our network inventory at the end of July was 3x higher compared to what it was last year, leading to retail growth of about 60% so far in Q3 and positioning us well to meet customer demand throughout the back half of the year. Still inventory levels remain very low from a historical perspective being down 44% in comparison to the second quarter of fiscal year '20.
As Jose highlighted earlier, our strategy of retrofitting units at the dealership is paying off as these shipments of components towards the tail end of the quarter, that's a very strong retail growth of over 20% so far in Q3. Now looking at Slide 17 for an update on the guidance for the year.
Before getting into the numbers, I would like to come back on the impact of the cyber incidents, which we were victim of earlier in August. As we communicated when the attacked occurred, our monitoring systems rapidly detected the breach and allowed us to take necessary precautions to limit the impact. Soon after, we put into action our plan to progressively restart operations and most of our sites were operational within a couple of weeks. All in all, we lost somewhere between 1 to 2 weeks of production depending on the facility.
However, as previously disclosed, we expect no impact from this event on our guidance this year as first we expect to recoup part of the production loss by working weekends and over time. And second, while the incident resulted in downtime from a manufacturing standpoint, we continued receiving components throughout that period. And ultimately, these components will be used to reduce the level of unfinished inventory planned for the rest of the year and therefore, allow us to deliver more wholesale from these units.
So from a revenue standpoint, we expect to be able to offset the volume loss and then some. With this, now let's go over the updated guidance. Our updated guidance reflects our stronger-than-anticipated second quarter results. Our expectation is that we will offset the impact of the cyber incidents through over time and additional conversion of retrofit units and an improving supply chain environment, favorable to higher production and the higher throughput of fully completed units in the second half of the year.
Given this, we now expect to be able to deliver more side-by-side and seasonal products versus our previous guidance. As a result, we therefore expect our total revenues to grow between 26% and 31% for the year and normalized EBITDA to grow between 14% and 17%. These adjustments result in a $0.30 EPS improvement and our normalized EPS is now expected to end between $11.30 and $11.65, representing a growth of 14% to 17% over last year.
As you have already realized, this implies a very strong second half of the year, as you can see on Slide 18. In fact, we expect to deliver record results in the second half of the year with revenues up 27% to 36% and normalized EBITDA of 41% to 48% compared to the first half. We are well positioned to deliver these strong results given the improvement in the supply chain, which we expect will allow us to increase production and drive higher volumes of fully completed units, resulting in stronger wholesale and margins; and second, the continued robust demand for products with robust retail so far in Q3; high level of snowmobile preorders; very positive reception of our new product introductions, leading to strong momentum with booking following the recent Club; and a very solid inventory replenishment opportunity.
In terms of how we see H2 unfold, we expect normalized EPS to be up over 50% in Q3 and the rest of the growth to come in Q4, resulting in a record second half. On that note, I will turn the call back to Jose.
Thank you, Sebastien. Before concluding, I would like to briefly discuss the acquisition announced in July and August. At our Investor Day in June, I pointed to significant opportunities in Powersport & Marine, which support our M25 objective of reaching $12 billion to $12.5 billion of revenue and $13.50 to $14.50 of normalized EPS. We are also looking at expanding our addressable market to support our growth beyond fiscal year '25. One of these opportunities is our entry in the $15 billion European and North American 2-wheel motorcycle industry with the introduction of our electric Can-Am motorcycle family. These new products were very well received at the BRP Club. We are also exploring other markets in mobility and urban services as well as in low voltage EV product.
As an example, the Sea-Doo Rise electric hydrofoil is the first product being introduced that come from exploring such market. This is just the beginning. You can expect more innovation from us in the next few years. In total, we estimate this new markets to be worth about $70 billion, and there is room for us to capture significant market share. And to support our ambition in this field, we recently announced 3 key acquisitions as shown on Slide 21.
These acquisitions are Great Wall Motor Austria and welcome a team of 53 experienced engineers, technicians and professional specialized in the development of e-drive system and transmissions, an 80% stake in Pinion from Germany, a pioneer in the development, design, assembly and sales of compact gearbox technology for traditional and electric bicycle. And the Canadian Powersport operation of Kongsberg, a long-time suppliers of ours, specialized in electronic and mechatronic production, development and manufacturing.
All these acquisitions are expected to support our long-term growth by adding key capabilities and know-how to support our EV strategy and entry in new market. I am very excited with these acquisitions that bring us great talent and innovation opportunities. In conclusion, I am pleased with our performance throughout the first half of the year, as we've delivered better-than-expected results in a challenging environment.
Looking ahead to the rest of the year, we are well positioned to deliver record results in H2 on the back of our solid product portfolio, healthy consumer demand and signs of improvement in the supply chain environment. Beyond this year, the strong inventory replenishment cycle, new product introduction, additional production capacity and recent acquisition put us in a good position to sustain our growth trajectory.
Lastly, I thank all our employees for their hard work, resilience and dedication, our suppliers for doing all they can to meet our orders and our dealers for their support. On that note, I turn the call over to the operator for questions.
[Operator Instructions] And your first question comes from Robin Farley from UBS.
Obviously, very strong results. I'm just curious why your gross margin guidance is unchanged when the revenue is higher. Just given your comments about improvements in the logistics and commodity pieces with that higher revenue kind of not translating into, I don't know if you're perhaps you're just being conservative, but I wanted to hear your thoughts on that.
Good morning Robin. Obviously, there are pluses and minuses in building the guidance. And obviously, yes, a better top line, which is good. We are improving the overall EBITDA as well coming with higher revenues. And so it's a variation between operating expenses and gross margin. We will be investing probably slightly more in operating expenses, and that's why you're not seeing the gross margin move. It's staying flat.
Okay. Great. And then just one quick follow-up. Are you seeing anything in the environment that's promotional from others? It sounds like, obviously, continuing strong retail demand and lack of availability across the board, but just any thoughts there?
No. So far, I mean, I would say the environment is quite stable, like we saw in the last, I would say, 18 months.
Next question comes from Xian Siew from BNP.
Quarter-to-date retail sales up 20% [indiscernible] is very impressive. I guess where do you think they shake out for the rest of the year? And how do you think the industry is comparing relative to that 20%?
Well, if you look at our year-to-date or for 6 months, our retail is down 12% after 6 months. And with the planned increase in wholesale and the better inventory position versus a year ago at the end of Q2, our expectation is that total retail for the year for us should probably be high single digit is where we're targeting to end. From an industry perspective, obviously, still limited by inventory. And so I'm expecting the industry to probably be in the mid- to low single-digit overall industry growth for the full year.
Okay. Got it. But I guess to clarify, the 20% quarter-to-date for you, that's outperforming the industry, right?
Well, we don't have the industry data as of the mid of September, but the number is based on over Monday's data, so year to quarter -- quarter-to-date, Monday. So obviously, we don't have the industry data as of mid-month.
Okay. Got it. Yes. And then it sounds like you're making progress on the retrofit and that's helping the availability and some of the increases in the quarter-to-date retail. But just curious how many like new orders are you coming? Are you still making -- increasing the number of preorders. I think preorders were up 80% in Q1. Where are we today? And is there any way to kind of think about the pace of new orders coming in.
First, on the retrofit side, like I said in my remarks, we received a lot of components on the month of July and a lot in the last week of July that have been delivered to the dealer, and that's the reason why we saw the retail going up in Q3. And the supply chain are definitely getting better than we're expecting the number of back order to go down significantly by the end of the year.
And this is overall quite healthy. In terms of the -- your second question on the preorders, this time of the year, it's a bit difficult to read. The snowmobile, obviously preorder are extremely high. This didn't change. And we just came out of the Club beginning of August with -- the introduction of the Sea-Doo Watercraft, Sea-Doo Pontoon, the side-by-side and ATV that we allocated till December, the 3-wheel vehicle and all the boat. And so far, the reception of the dealer is excellent.
And like we said, the booking because we introduced the product, we have discussion on volume and bookings are coming in right now, and we're trending about 20% up versus last year, very, very happy with that. Product will receive. And I would like to remind you that the dealer are the front line. They are dealing with the consumer. And so far, I mean, the momentum is great.
Your next question comes from Benoit Poirier from Desjardins Capital.
Congratulations for the results. Just to come back on the strong retail performance so far in Q3, obviously, up over 20%. I was just wondering, how much is driven by order place during the quarter versus those who have been made prior to Q3? And if you could provide some color about the inventory replenishment, whether this is still around 1.4 billion and mostly skewed towards fiscal '24? Or is it trending a bit earlier than expected? That would be great.
Yes, sure. I'll pick up on the inventory question, and I could cover also the order. But obviously, when you look at the inventory and if you compare it to where we were in Q1, it's up $400 million at the dealer network. We talked about the inventory opportunity replenishment, 1.4. You can appreciate that a significant portion of that inventory is related to seasonal products such as personal watercraft. And so a lot of the retail that is happening in August was for personal watercraft.
And even with the cyber incident, wholesale deliveries were lower than expected in August. So as of today, my inventory in the network is actually lower than where it was in July. So given the short-term nature of the product that we shipped in July, i.e., in terms of when it were supposed to be retail, I'd say that the 1.4 opportunity is still there today. In terms of the retail, which happened when the orders from the consumers were placed.
These orders that have been with dealer in dealers' hands for a long time. As I said, some of them were switched, some of them were personal watercraft. So in-season products. And side by side, the inventory is so low that consumers had placed these orders with delivers several months or several quarters ago.
Okay. That's great. And just a question on the snowmobile. Obviously, you have already presold a very good number of snowmobiles for the upcoming winter. But given the [indiscernible] sale at Polaris, do you see an opportunity to gain market share ahead of the winter season? Or is most of the planned inventory already sold out?
I mean like we said, Benoit, a high level of our Ski-Doo model year '23 are already sold to end consumers. Then there is always some in-season model, but for sure, it's difficult to see how our competitor will react. And if they will slow down production because of all this, but this makes us even more confident that we will sell-through everything we have, we will ship to the dealer before the end of the year.
Okay. Perfect. And last one for me. Do you see -- in terms of booking trend, is there a larger interest for -- or do you see a big change in the mix versus between entry-level and higher-end products?
No, I know many of you have that question. But so far, we didn't see any trend versus the low end. What is interesting, it was our first in-person dealer meeting beginning of August, and we gave the allocation to the dealer. Now we're hearing that many dealers already sold their whole Sea-Doo '23 allocation to end consumers. Same thing for the Sea-Doo Switch. Then I know we have some concern about the demand and the environment of the global economy. But so far, we don't see that in our industries.
Your next question comes from Joe Altobello from Raymond James.
I guess First question on the ransomware attack, and I apologize if I missed this. But did you guys quantify the impact of the ransomware attack on maybe revenue across Q2 and Q3?
Yes. Joe, well, first, obviously, the investigation is still ongoing. And so there's certain information I can share with you. But here's a few points that I can obviously cover. First, cyber security has been a priority of BRP for several years, and we've made considerable investments in cyber. We've obviously updated our plans based on the advice of experts over the years, making sure that we have the latest tools and technology.
And our tools were able to quickly detect the infiltration and limit the impact on our business and soon after, we've put our plan to progressively restart operations, making sure that our systems and data were scrubbed to make sure that it was safe to restart the operations. In terms of overall quantification, as I said earlier, in terms of guidance, no impact on the guidance as we're able to offset it. But when you combine the fact that our sites were closed for between 1 to 2 weeks and the fact that we could recoup with some weekends and over time, net-net, we probably lose 4 to 5 days of production before the compensating effect of having more components and selling more -- building more good units and delivering these units to the network.
Okay. All right. That's helpful. And maybe a second question, you guys sounded pretty optimistic about supply chain getting better this morning. I mean how confident are you that what you're seeing is sustainable and not just some puts and takes like you've seen in the past.
I mean like we said in Q2, I mean, what happened in the summer, I mean, semiconductor have improved, and we are well in good position with our suppliers for H2. On top of it in terms of logistics and transportation, everything is easier. And we have less case by case. For the last 12 months, we had many, many case every day, every week. And now we see some reduction in those case by case.
I'm happy because the procurement team around the world at BRP could take some holiday, then this is a good sign that things are improving. Then that's why we're quite optimistic that we will be able to run all our factories at full capacity in the fall.
Your next question comes from Mark Petrie from CIBC.
I just want to actually ask with regards to the guidance, hoping you can give a bit of color regarding the pacing of growth between Q3 and Q4. Obviously, you heard the comment for potentially over 50% growth in Q3. But that still leaves a significant amount of growth for Q4 in order to hit the sort of guidance. So could you just help us think about sort of the balance between Q3 and Q4 with regards to, I guess, revenues and margins?
Yes, sure. Well, obviously, when you look at the overall guidance, margin-wise, there's going to be an improvement happening in the second half of the year with compared to where we were. The bulk of the improvement in margin is going to happen, though, in the fourth quarter with strong shipments of personal watercraft, snowmobiles and side by side.
Year-to-date revenues were about $4.2 billion. We're looking at the back half of the year between $5.3 billion, $5.7 billion. I'd say that the overall growth in revenue will be much higher in Q4, in line with the EPS growth. And so revenues are probably in the range, probably 60% of the revenue is going to be in Q4 and the remaining in Q3, it would be a fair distribution.
Okay. And as we think about sort of the pacing of growth into fiscal '24, you mentioned that you're still of the belief that the $1.4 billion of inventory replenishment opportunity. I think would remain in place going into next year. Is the expectation effectively that, that can be kind of serviced in fiscal '24? Or what's your current view on the sort of balance of your ability to supply and what you're seeing with regards to demand?
Just an additional comment and to answer your question, I would like to remind you that we added capacity for watercraft and side-by-side, but we were not able in H1 to run the factory at full capacity because of the supply chain. Now in H2, we're running all our factory at a good pace. We have a [ deal ] catch-up because we receive component from supplier that will be retrofit at the dealer level during Q3 and Q4. And next year, obviously, the capacity is there. Then if the demand is there, we feel confident we can run all our operation at a higher level in fiscal year '24 versus '23.
Okay. And then maybe just to sort of to clarify then. So is your expectation that the retrofits will effectively be sort of complete at the dealer level by the end of this year? Or is that going to remain in place for next year?
Our expectation is that we will ship very little if it's no [ BODs ], which were our retrofit units at the dealer in the fourth quarter, but we will still have some unit in our inventory that we will need to retrofit in the first half of next year. But based on where the supply chain is trending today, we believe that we could move away from spending in complete units to the dealers by the fourth quarter. In terms of inventory opportunity, obviously, when we look at it, we look at it from a year-round products position, i.e., ORV and a seasonal product business. We know we will have personal watercraft inventory at the end of the year because of the timing and production, so better timing of production this year versus last year. And so -- but that inventory will be, i.e., already sold to the dealer and dealers will have orders. We expect to still be low in side-by-side ATV inventory in Q4.
Okay. That's helpful. And then I guess just one last one. Obviously, you've -- you've made a number of acquisitions, more tuck-in in nature and size, I guess, but obviously important from a strategic perspective. Seb, just given the elevated CapEx and sort of the macro uncertainty, maybe you could just remind us of sort of your immediate capital priorities over the course of the next year and opportunity for NCIB activity.
Yes. Well, if you look at what we've done in terms of share buybacks since the beginning of the year, we've purchased $300 million of shares. And as we obviously communicated to all of you in the past, our priority has been investing in the business. And so we -- this year, we have an ambitious CapEx plan, we also invested in working capital to manage through the supply chain headwinds and allow us to bring units quicker to the dealers by using a retrofit approach. That obviously requires some capital investments and obviously, the acquisitions that we're doing as well is going to require cash probably to the tune of about $200 million.
So -- that has always been our priorities, but we've also been very diligent and being opportunistic in buying back shares. So making sure that we maintain that financial flexibility and being opportunistic is something that we will obviously pay close attention going forward as we've done in the past.
Your next question comes from Gerrick Johnson from BMO Capital Markets.
I'm interested in seasonal, particularly in the personal watercraft. Is there a way to quantify Switch contribution to seasonal in the quarter? And then also is Switch in PWC retail, when you report the retail and also related the delay in Sea-Doo shipments, I think after last quarter, we're expecting an acceleration in 2Q, so that seems to be pushed out.
Yes. Well, first, the Switch is not built into the personal watercraft retail. Obviously, it's a different industry. So it is not included in those numbers. In terms of overall contribution, what I can tell you is that the expectation for seasonal this year is that Switch will be 10% of our revenue. And so obviously, a very good business for us. And just your third question, Gerrick, sorry.
The delay in Sea-Doo shipments.
Yes. What happened on the Sea-Doo shipment, Gerrick, there was a critical component for the Sea-Doo specific to Sea-Doo that we receive a big shipment in July. We had to reship the component and keep the dealer and those were shipped the last 2 weeks of July. And then the dealer received a component, but they could not obviously retail before the end of July. That's why we see the pace increasing in Q3. And I think there will be some more retail going on in the next few months. That's what happened.
Okay. Okay. Got it. Great. And then on Manitou and Alumacraft, how about the orders coming out of your Club event? Are they in line with your expectations?
We sold out. Everything we can produce is sold out to the dealers, and we're hearing very good comment that presell unit to consumer is extremely strong.
Your next question comes from Martin Landry from Stifel GMP.
I just want to go back on the promotional environment. I'm wondering what have you factored into your H2 guidance in terms of promotional activity? And when do you think that we go back to promotional levels that are more aligned with historical levels?
We've done -- given that we shipped some units later than what we would have liked for personal watercraft for 3-wheel that we have provided in the guidance a bit more promotion, but nothing significant. As I said earlier, there's always some pluses and minuses. That's one of the adjustments we did, but nothing too significant. But cautiously, we're planning for it.
And in terms of going back to normal, obviously, our hope is that we don't go back to normal ever. But we know that what we are living today is exceptional and there's probably going to be a revised -- a new normal after COVID. Obviously, dealers tell us they like operating with lower inventory. All the OEMs say it as well, and there are some learnings from the last 2 or 3 years that we know that we can apply going forward and being much more tactful in how we deploy programs. So could we end up, as I shared, saving 100 basis points overall from less promotional. That's certainly something that we're pushing the teams to strive for.
Okay. That's helpful. And then maybe just switching gears to your acquisitions in the electric sector in urban mobility. I was wondering, I'm a bit curious with urban mobility. I was wondering when we could see you launch something in that sector. And I was wondering if you can discuss the competitive landscape in Urban Mobility? Is it a fragmented market? And what does the distribution network looks like?
Yes. This is a very general question, Martin. Let's say, that this is definitely a segment that is growing. [ Human assist ] products are very popular because many customers buy it because, obviously, the [ train ] when they ride their product and some use the product for utility. Then we are basically the 3 acquisitions that we've done was to give us the additional know-how, the Pinion GearBox, it's a very, very sophisticated, small, compact gearbox that can be applied to many of our product line. Then I will not comment this morning on what we're looking at.
But again, you can expect from us that we will enter a new category of product will -- and then we intend to invent new category of product. And it's like my best example is the Sea-Doo Rise, the electric hydrofoil. Hydrofoil has been around for many years, but you need to be an athlete to ride an electric hydrofoil, the one that we're launching with the Sea-Doo Rise, and I'm sure you saw the video, you can run it as a board. You can run it with a full-half deployed or full deployed, very, very easy to ride for the whole family. And this is what we intend to do is to democratize certain industry and come with great innovation, and that's why we are confident we can grab a good market share in that $70 billion bubble. But too early to give you more detail this morning.
Your next question comes from Craig Kennison from Baird.
You've addressed several already, but a point of clarification on Slide 6. So when is revenue recognized on unfinished units at the dealer? Is it when the part is shipped to the dealer, when it arrives at the dealer or when the part is installed?
The revenue is recognized when the part is shipped to the dealer.
Got it. And maybe how long does it generally take to get to the dealer? And how long does it take to have that part installed on average?
It could take us a day to a few days or we ship them, usually, we have overnight service that we get the parts to the dealers. We want to get them quickly as possible because we know that consumers are waiting for the product.
And then I guess regarding that unfinished product at dealerships, what are the most common part shortages that when shipped would allow them to be recognized as revenue and sold at retail?
Cluster, the gauge. Like we explained before, we have 3 type of cluster, low, medium and high end. And this is -- there is micro chip in there. And the cluster is one of the most critical component that we ship after assembly. And this typically takes -- cluster is very short -- but let's say, average, it will take between about 45 minutes to retrofit the unit.
Your next question comes from Cameron Doerksen from National Bank Financial.
I guess maybe just want to go back to an earlier question just around, I guess, working capital and your wholesale inventories. I mean, obviously, a significant part of the inventory increase on your balance sheet is related to these retrofits. Maybe you can just discuss a little bit about how -- or maybe discuss what you think at kind of a normal level of inventory on your balance sheet should be given the size of the business now? Because we've seen obviously a significant increase over the last 18 months, but a lot of that is kind of unusual. So what do you think kind of a normal level of inventory should be for BRP with the size of the business now?
Yes. Well, obviously, we have invested in working capital in the last few years for raw material for retrofit and there's lower actually finished goods and the inventories at a record level over $2 billion of -- on our books inventory. My expectation is that in Q3, we'll still be running with high inventory, probably even some investments in working capital that are going to continue as we ramp up our production and the expectation is that it should go down in the fourth quarter and probably be a working capital cash generation element.
So when are we going to come back to normalized inventory? Obviously, we're running today with higher raw material because, obviously, we want to have a bit more buffer in our planning. And we are actually having discussions with the team and say, okay, what's going to be that new level once we get to that more normal. There's one thing I'm going to -- I do know is that finished good inventory is going to go up in the fourth and in the first quarters of next year. But when will the raw material come back down to more regular levels, it's still too early to call, Cameron.
Okay. Okay. Fair enough. And maybe just a second question on, I guess, again, on the M&A, the Kongsberg acquisition, more of a vertical, I guess, integration for BRP. Can you maybe just go into a little more detail as to why you felt the need to bring some of that, I guess, supply in-house? And is there anything else that you think is critical that you think you need to bring in-house that potentially could be an M&A opportunity for you?
At first, we were about 80% of that division sales and there is many unique features that we developed together over the years. We even have common patent in certain areas. But I'll give you an example, power steering. We developed with them the power steering that we use on our ATV side-by-side and our 3-wheel vehicle units. It's unique to BRP, and we believe we can accelerate the pace. And it's a combination of acquiring the know-how and also being self-sufficient in key components has the power steering, and this is only one part that they're doing for us.
Okay. Do you think there's additional new acquisitions you might want to do to -- for other critical components?
I mean at this point, we're looking obviously at opportunities all the time. At this point, there is no specific plan for this. And again, the acquisition of Kronsberg has 2 objectives. One, obviously, is vertical integration, doing it ourselves. But the other one was to acquire a very talented team over there to continue to push innovation and have a better coordination between our team here in Canada and their team to go faster than it was like a 2 objective for Kronsberg.
Your next question comes from Jaime Katz from Morningstar.
I actually have a couple of nuanced questions just on consumer behavior. I think you discussed the availability of credit saying that it seemed pretty good, but I'm curious whether the usage of credit for purchases has changed or if the quality of borrowers has changed over time?
When I looked at the data for Q2, when I look at the overall FICO scores and when I compare to where we were pre-pandemic and where we were last year, the FICO scores are actually higher, which is obviously a good sign on the people who apply for credit. [indiscernible] higher scores if the acceptance rates are lower. But the acceptance rates are also trending higher. Last year Q2, we were at 66% of acceptance rates from our financing partner. This quarter, we're at 71%. And when I look at the data just for August, we're still trending higher at 73% of acceptance rate. So as we say, we -- Yes, we are looking at what's happening in the news, and we are reading and listening to all the articles and looking at inflation, but the retail is remaining strong, booking from dealers is strong, and they're on the front line. Website visits are also strong. So we're not seeing any slowdown from the consumer in the interest in powersports and marine products.
Okay. And then I don't think it was bifurcated, but between North America and international, it seems like there was a little bit of a shift in the composition of sales. Is there anything that you're seeing broad that indicates that the cadence of demand might be slower than domestic? Or any other trends that might be noteworthy?
Yes, in terms of -- obviously, we're watching Europe because in the context of the energy shortage, this is -- there is high inflation in some area. But if we look at the Q2 retail again in EMEA, and it was a low double digit when in North America was mid-double-digit and LatAm was also mid low double digit, then basically in EMEA in Q2 despite all the pressure that we see or we hear about energy the retail was somewhat in line with what we saw in North America and LatAm.
Your next question comes from Brian Morrison from TD Securities.
I just want to follow up on the earlier question on the guidance [indiscernible]. Second half EPS looks like 30% will be Q3 and 70% in Q4. But you're talking about the supply chain improvements, capacity improvement. So is this [indiscernible] Q4? Is this cyber related? Is it supply chain? Is it the mix of retro products in WIP. I guess, in simplistic terms, why can't we push through more retrofit in Q3?
Good question, Brian. Obviously, yes, the cyber incident impacted Q3 production, some of the catch-up is going to be happening mostly in Q4 with overtime and weekends and also the completion rates are going to be higher or expected to be higher in the fourth quarter. Obviously, we are working with the teams. Can we optimize and be better in Q3. That's something we always strive to do. But just the inherent, we'll call it, improvement of the supply chain and cyber incident are obviously weighting heavier on -- in the third quarter.
Okay. And then I guess a higher-level question maybe for Jose. So when you discontinued Evinrude, you signed a deal with Brunswick. Does that agreement phase out with the Stealth technology now in place? Or what is that relationship going forward?
No. We -- when we signed the agreement, they knew about our plan with the Ghost technology. And the agreement is going up.
So I guess what is the competitive response? Or what do you think the competitive -- what -- what's your reaction to have a new competitor or a very strong competitor now in the place?
This I don't know. I mean, again, if you look at the marine industry, it's a huge industry, $36 billion. And today, we have about $0.5 billion of revenue in that industry. Then we have a long way to go. But for us, the vision is to sell a complete product like we do on all our other product line. That being said, it will take a while before we get there. But step by step, we will continue to go there.
When we acquired the Telwater in Australia, Mercury was not there. Now they are a partner in Australia. Then there is some win-win for both companies and the relationship continue.
Your next question comes from Fred Wightman from Wolfe Research.
Seb, you had alluded to some potential tailwinds just on the raw material side. I know you're not really expecting that to hit this year, but is there any way that you could sort of put parameters around what that tailwind could look like as we think about next fiscal year?
Well, we -- earlier in the year, we talked about a headwind coming from inflation, supply chain disruption of about 300 basis points. Obviously, this year, commodities are improving. But we're kind of hedged or committed with our suppliers this year, so not much opportunity. But obviously, that 300 basis point headwind is something that we would obviously -- we will obviously work hard to remove or reduce next year. And it brings a considerable opportunity for us going forward as we address it.
Makes sense. And then on the updated guidance, have you guys assumed or is there any business interruption insurance that is contemplated in that?
We obviously do have insurance coverage for cyber incidents. We're in the -- obviously, in the middle of doing the computations. Yes, we did file a claim with the insurance company. And our guidance assumes that the insurance will not be -- or the insurance or the additional cost would be normalized from those numbers.
Sorry, just to be clear. So the business interruption insurance claim, assuming that goes through, would be incremental to the current guidance or current guidance....
Will be normalized, would be normalized.
[Operator Instructions] And your next question comes from Gerrick Johnson from BMO Capital Markets.
On the acquisitions, how is that impacting your guidance for the year? And also, Sebastien, how is that impacting the P&L from an accounting standpoint given that these are some suppliers?
Well, for this year, no impact on the guidance. They are relatively small acquisitions. Pinion is a relatively small business with a lot of opportunity. It will be presented in the Powersport P&A and OEM engines, but no significant impact this year. In Kronsberg, well, obviously, it's twofold, as Jose said, from a technology standpoint, strategically, there's a good fit there. And from a vertical integration, obviously, it's going to reduce our overall bill of material costs. We expect some minor benefits this year, but they're still operating in a tough supply chain environment and some most of the benefits will come most next year. But nothing is supermaterial, Gerrick.
Okay. I was just wondering about the accounting for it. So this is not adding revenues since they were supply components? Or is there some revenue recognition or is it lower cost...
No revenues. It's going to be a cost advantage more in the next year.
And there are no further questions at this time. I will turn the call back over to Mr. Deschenes for closing remarks.
Super. Thank you, Julie, and thanks, everyone, for joining us this morning and for your interest in BRP. We look forward to speaking with you again for our third quarter conference call on November 30. Have a good day, everyone.
This concludes today's conference call. You may now disconnect.