BRP Inc (DOOO) Q1 2022 Earnings Call Transcript

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BRP Inc (DOOO -0.83%)
Q1 2022 Earnings Call
Jun 3, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, welcome to the BRP Inc. Full Year '22 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 -- Investor Relations

Thank you, Simone [Phonetic]. Good morning, and welcome to BRP's conference call for the first quarter of fiscal year '22. Joining me this morning are Jose Boisjoli, President and Chief Executive Officer and Sebastien Martel, Chief Financial Officer.

Before we move to the prepared remarks, please note that certain forward-looking statements will be made during the call, and that future results could differ from those implied in these statements. Also note that forward-looking information is based on certain assumption and is subject to a number of risks and uncertainties. I invite you to consult BRP's MD&A for a listing of these. Also during the call, reference will be made to supporting slides, and you can find the presentation on our website at brp.com under the Investor Relations section.

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

Jose Boisjoli -- President and Chief Executive Officer

Thank you, Philippe. Good morning, everyone, and thank you for joining us. Building on the momentum we had over the last several quarters, we experienced a solid start to the year with record first quarter results, which came in above our expectation. This growth was driven by the fact we are lapping a quarter, in which our manufacturing operations were partially shut down coupled with ongoing and robust demand for our products. Given these strong results and continued positive outlook for the business, we are increasing our normalized EPS guidance for the year by CAD0.50 to a range of CAD7.75 to CAD8.50 per share. We are maintaining a wider than usual guidance range given the ongoing challenges we are facing with the supply chain. I will touch on this in more detail in a few minutes.

Now let's turn to Slide 4 for a more detailed look at key financial highlights for the first quarter. Revenue grew 47% to an all-time first quarter high of CAD1.8 billion, primarily driven by higher volume across all our product lines, especially for our parts and accessories business coupled with lower than expected sales program. In fact, our revenues not only surpassed the same period last year, but also increased 36% compared to the first quarter of fiscal year '20. Our normalized EBITDA was up threefold to CAD375 million, and our normalized earnings per share reached CAD2.53.

Not only were our financial results solid, but consumer demand remained very strong in the quarter, as you can see on Slide 5. Globally, our retail grew in all key regions, while continuing to outpace the industry. In North America, our Powersports retail growth accelerated from the fourth quarter, up 39% or 49% when excluding snowmobile.

We also had a strong performance in international markets with retail up 9% in Latin America, 32% in EMEA and 83% in Asia Pacific. By product line, we grew across all of our line-ups, except snowmobile, as our dealer ran out of units at the end of the season. Our side-by-side, growth was moderate -- more moderate as it has also suffered from limited product availability due to low inventory. I will provide more color by product line in a moment.

Turning to Slide 6. Despite the strong demand in the first quarter, we expect retail growth to be limited in the second and third quarters, mainly due to the ongoing supply chain constraints which are evolving very rapidly. When we last updated you in late March, one of our key challenges was the logistic congestion at different ports. Our team was successful at addressing these issues by finding alternative solutions. Today, logistics are predictable and manageable.

Currently, we are managing the tight availability and delivery delays for certain raw materials. In this case, we are working with our supplier to find substitute or new source of supply, which are creating some delays. For the past month, our main challenge has been dealing with the shortage of semiconductors. This is affecting some of our Tier 1 but also some of our Tier 2 suppliers where we have less visibility. This is presently the main source of disruption in our operations because finding alternative parts would require technical changes. Given these issues, some of our units will need to be retrofitted. This means the unit is missing a few components and it will move to final assembly when the components are received. This situation will delay the timing of certain deliveries and temporarily increase our work in process.

Regardless of these challenges, our objective is to deliver all orders by the end of our fourth quarter. Our plants are running at full capacity and we are in the process of increasing production capacity at Juarez and Queretaro to make this happen. We plan to work through these issues for the balance of the year to deliver our production schedule. Take note that all of this is increasing our costs versus last year, but it has been factored into our guidance.

Turning to Slide 7. Given those challenges and the fact -- the impact on production, dealer inventory will remain low throughout the year. To better illustrate the situation, we have provided statistics from the past few years. In fiscal year '18, '19 and '20, you can observe on the graph that our level of inventory in our dealer network was in sync with retail at about 175 days. During those years, our retail was growing low double-digits.

In fiscal year '21, given the surge in demand, coupled with our two month production shutdown, inventory dropped to 80 days. In the first quarter of fiscal year '22, it dropped as low as 40 days. With the continued strong demand, we expect to remain at this level of inventory for the remainder of the year, which will limit our retail sales growth. Also, it is now clear that inventory replenishment will take place in fiscal year '23.

Turning to Slide 8. We continue to experience strong consumer demand across all our product lines. New entrants continue to enter the industry, representing 37% of buyers in the first quarter compared to about 20% historically. This is good news for the industry and it doesn't seems to be driven only by the impact from the pandemic. According to our survey, only 7% of new entrants said they purchased a powersport vehicle as a COVID distraction. In fact, new entrants are a more diverse group representing younger people and more women and families. In addition, according to our survey, 82% of buyers are not making a trade-off when purchasing a unit. Contrary to our and general belief, only 3% of buyers declared to have purchased a unit instead of traveling.

There are multiple positive signs of sustained consumer interest. This is the fourth consecutive quarter of double-digit growth for the powersports industry. Website visits are up over 60% compared to last year for all our brands. And we have a strong demand for our products, including record snowmobile Spring units booking, the strongest start of the personal watercraft season in over a decade and our three-wheeled vehicle rider education program registrations are trending above our target. These are all positive trends for the mid to long-term growth of our industry.

Now let's turn to Slide 9 for year-round products. Revenues were up 44% to CAD923 million, mainly driven by a higher volume, lower sales program and a richer mix of side-by-side vehicles. Looking at side-by-side vehicles season to-date retail, 10 months into season '21, the North American side-by-side industry is up high-20%, while our Can-Am side-by-side vehicles is up low-20%, as we were impacted by limited product availability. This is also impacting our retail performance in international markets as we've delivered more units to North America. As a result, our retail performance was up high-single-digits in EMEA and mid-teen percent in Asia Pacific. Still, we are very happy with the strong consumer demand for our line-up and we look forward to ramping up production as we expect the Juarez 3 facility to come online at the end of the third quarter.

Turning to ATV. The North American industry is also seven months into the season '21 and retail is up in the low-30%. Can-Am is performing in line with the industry with retail up in the low-30% over the same period. For both ATV and side-by-side, our worldwide network inventory is at historic low. Now looking at three-wheeled vehicles. Now six months into season '21, the North American three-wheeled industry retail is up about 90%. Can-Am three-wheeled vehicle is off to a very strong start. It is the fastest growing brand in the motorcycle industry so far this season, with retail up over 140%.

We are very happy with the momentum we have with three-wheeled vehicles. The retail trend is very positive. The rider education program registration continued to trend above expectations with registration up over 50% versus our internal target, which bodes well for the sustainability of consumer demand. And we continue to attract a younger and more diverse consumer base, notably with retail to women up 166%, diverse community up 190% and new entrants up 180%. These are exceptional results and we are very excited at the outlook for the three-wheeled vehicle business appear promising.

Turning to seasonal products on Slide 10. Seasonal products revenues were up also 44% to CAD463 million, driven primarily from higher shipment and richer mix of personal watercraft and lower sales program. Now looking at personal watercraft retail. Only six months into the North American season '21, the industry retail is up in the low-70%. Sea-Doo retail is up mid-90%, outpacing the industry and gaining market share in all the industry segments in which we compete.

The trend is also very good in international markets with retail up over 110% in EMEA, 130% in Australia and New Zealand and up over 30% in Brazil. This year is the strongest start of the retail season that we have experienced in over 20 years. Given the strong start, unit availability is already getting tighter heading into the summer. We expect to end the season with a very low level of inventory, again this year, which should lead to strong shipment in the next fiscal year.

Turning to snowmobile. The North American snowmobile industry ended the season '21 with retail up in the high-teen percent. Ski-Doo retail was also up high-teen percent over the same period and ended the season with the number one market position in every industry segment in which it competes and with its highest market share in history. Our momentum was also very good in Scandinavia and Russia with retail up low-20% for the quarter.

Turning to Slide 11. Looking ahead, our snowmobile business is very well positioned for season '22 as we have a very strong line-up, notably with the introduction of the Lynx brand in North America and the return of an all-time favorite the Ski-Doo Mach Z. We ended season '21 with record low network inventory, and units pre-sold to consumers are up 157% over last year. As a reminder, Spring units, our special model, only available at pre-order and allow us to better forecast volume for the upcoming season. This year, exceptional strong Spring unit orders represent roughly 70% of the upcoming season volume compared to about 35% historically. This reflects the continued very strong consumer interest for powersports product and snowmobile in particular.

Continuing on Slide 12 with a look of powersports parts, accessories and apparel and OEM engines, which experienced a similar trend as vehicles. Revenues were up 91% to CAD300 million, driven by higher volume of replacement parts due to increased product usage combined with strong unit retail, which generated increased accessories sales across all our product lines. It is clear that our LinQ ecosystem accessories strategy is driving demand and paying off. Despite supply chain challenges that also affected PA&A, we've delivered exceptional results.

Now looking at marine on Slide 13. Revenues were up 11% to CAD122 million as strong boat shipments more than offset the impact of the wind-down of the Evinrude outboard engines. Looking at our different brands in term of retail performance for the quarter, Manitou was up over 80%, Alumacraft over 60% and Telwater was about up 40%. All in all, we are pleased with the performance of our boat brands and are on track for the introduction of new products with the Ghost engine.

With that, I will turn the call over to Sebastien.

Sebastien Martel -- Chief Financial Officer

Thank you, Jose, and good morning, everyone. Our revenues reached a record level for our first quarter at CAD1.8 billion, up 47% from the same period last year. Gross profit margin also reached a record level at 30%. Compared to last year, our gross profit margin mainly benefited from lower sales programs and better fixed cost absorption as last year's first quarter margins suffered from the temporary production shutdown. The margins also benefited from the exit of the outboard engine business and our continued focus on introducing products with better margins.

When compared to our expectations for the quarter, our gross profit margin was better than expected driven by a favorable product mix resulting from stronger than anticipated PA&A sales and lower than planned sales programs due to the strength of the retail demand and faster than anticipated inventory turns. With this strong gross profit generation and lower than expected operating expenses, we delivered our strongest quarter ever in terms of normalized EBITDA of CAD379 million and this resulted in normalized diluted earnings per share of CAD2.53.

We generated CAD379 million of cash from operations in the quarter and invested CAD153 million in working capital, notably for inventory, where due to supply chain issues, our work in process inventory was higher. This higher work in process inventory allows us to more efficiently manage our operations in this supply chain constraint environment and allows us to ship units to dealers quicker when the missing components come in. We also invested CAD97 million in capex and returned CAD288 million to our shareholders through share buybacks, completing our previously announced normal course issuer bid.

Turning to Slide 16 for a look at the key drivers of our normalized net income growth for the quarter. As you can see from the chart, our normalized net income grew CAD199 million from last year's first quarter, driven by a positive impact of volume, mix, pricing and sales programs for CAD388 million, which was partly offset by negative impacts from production costs and depreciation expense for CAD30 million, higher operating expenses for CAD70 million as we continue investing for our long-term growth and higher normalized tax expense for CAD89 million. This resulted in CAD222 million of normalized net income for the quarter, a performance that was stronger than we had anticipated, driven by the continued strong demand, lower sales programs and very strong PA&A sales.

Turning to Slide 17 for a look at network inventory. As Jose mentioned, given the exceptionally strong retail growth we have experienced over the last year, our North American powersports dealer inventory ended the first quarter at a historic low level being down 73% versus a year ago. This, combined with our finished good inventory, represents a decline of over CAD1.6 billion in inventory value compared to last year. Despite increasing shipments in recent quarters, all our product lines are seeing significant inventory decline.

For ORV, the network inventory is down about 80% as the demand for Can-Am brand is higher than ever, and everything we shipped is being retailed very fast. For snowmobile, Ski-Doo had a very strong season, resulting in a record low level of inventory at the end of Q1, down 83% versus last year. And for our summer products, both PWC and three-wheeled are off to a very strong start of the season with consumers purchased Spring [Phonetic] units earlier than typical. Their network inventories are down 64% and 54% respectively. These low levels of inventory are limiting our ability to grow retail in the short-term, but the demand for our line-ups remains very strong and we expect to resume market share gains more specifically for ORV as product availability improves in the network starting later this year.

Now turning to Slide 18 for an update on the guidance for the year. As Jose mentioned, we are reviewing upward our year-end guidance driven by the stronger than expected first quarter results, notably for our PA&A business, the very strong Spring units booking for snowmobile and lower than expected sales programs throughout the year given our very low network inventory position.

We also expect that we will continue dealing with supply chain constraints that are likely going to lead to delays and the reception of components, which in turn would lead to delays in the shipment of products. Based on the visibility we have today, we believe that these supply chain challenges will impact the timing of product deliveries in Q2 and Q3, but our full year volume target remains intact.

We have included additional costs and maintained a wider than usual guidance range to account for the potential impact of these supply chain constraints and for commodity price increases. Following these adjustments, we now expect our total company revenue to grow between 28% and 33%, our normalized EBITDA to grow between 27% and 35%, and our normalized EPS to end between CAD7.75 and CAD8.50, representing a growth of 44% to 58% over last year.

Now looking at Slide 19 for some additional color on the quarterly outlook for the year. In terms of normalized EPS, as mentioned, we expect the supply chain constraints to weigh more on the second and third quarter, therefore, pushing more volume in the fourth quarter. Given this dynamic, we expect to generate a modest normalized EPS growth in Q2, a slight decline in Q3 and strong growth in Q4.

In terms of our expected North American powersports retail, as previously mentioned, our low level of network inventory, coupled with the impact of supply chain constraints and the fact that we will be lapping very strong quarters last year, should lead to retail sales decline in Q2 and Q3 and a return to growth in Q4 as we benefit from improved unit deliveries and additional production capacity, notably for side-by-side with the Juarez 3 facility. For the year, we expect our North American powersports retail to end somewhere between flat-to-up high-single-digits with SSV generating the strongest growth.

On that, I will turn the call over to Jose.

Jose Boisjoli -- President and Chief Executive Officer

Thank you, Sebastien. To conclude, fiscal '21 was an exceptional year and the momentum continued into fiscal '22. Our team is doing an excellent job managing the ongoing strong demand for our products with all our facilities running at full capacity. Despite the supply chain issue, given the continued strong consumer demand and related lower sales program, we are well positioned to finish the year with solid results and expect to deliver our increased guidance for the year.

In addition, we are continuing to position BRP for the future by driving different projects, to generate long-term growth including turning new entrants into lifelong customers, pursuing new market-shaping product introduction, taking advantage of additional production capacity with the ramp up of Juarez 3, Queretaro and Sturtevant as well as executing on our bold investment in electric vehicles.

I would like to thank our employees for continuing to diligently follow our COVID safety protocol and for working longer hours both in production and administrative functions. I would also like to thank our suppliers for doing extra work to meet our orders and our dealers for their patience and for managing consumer on the frontline. Lastly, I would like to thank them all for their agility, dedication and resilience in these unusual times.

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

Questions and Answers:

Operator

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

Robin Farley -- UBS -- Analyst

Great, thanks. I wanted to ask about the two things related to dealer restocking. One is, I wonder if you can help quantify the restocking opportunity, which I realize is kind of a fiscal '23 event? And just thinking that maybe inventory wouldn't get back all the way to 175 days, but -- so if you can help us quantify that? And then also, we had heard from dealers that potentially some production was limited by the availability of engines that -- where there is some shared engine capacity between snow and off-road. And so just wonder if you could kind of address whether that is limiting -- whether that will limit your snow production or your side-by-side off-road production later this year if there are kind of a trade-off that you have to make there because of the Rotax engine capacity? Thanks.

Sebastien Martel -- Chief Financial Officer

Good morning, Robin. I will take the first part and I think Jose is going to take the second part. In terms of replenishment opportunity, obviously, as you've said, we were -- historically, we're running with 170 days of inventory. Our guess is that the industry will be running lower, but obviously, as the industry grows, as we gain market share, in absolute dollars, you're probably looking at an opportunity of restocking in the range of well above $1 billion. So obviously, it is quite sizable. And as Jose alluded to in the prepared remarks, we believe that that restocking is going to happen next year because of continued demand for the products and the low levels of inventory we have now.

Jose Boisjoli -- President and Chief Executive Officer

And Robin to your second question about parts availability at Rotax, dealers are right in the sense that we have limited capacity of engine components and we are trying to manage with them between product lines to better optimize the situation. This is an ongoing discussion we're having with our dealers, with our suppliers, trying to maximize what we can do to respond to the demand, and that depends a lot on the sustainability of the product. I mean, dealer don't need now snowmobile. They will start to deliver it to consumer in October. This is what we're trying to manage the best we can, but definitely, there is some challenges on the engine component.

Robin Farley -- UBS -- Analyst

Okay, great. Thank you.

Operator

Your next question comes from the line of Cameron Doerksen with National Bank Financial. Your line is open.

Cameron Doerksen -- National Bank Financial -- Analyst

Thanks. Good morning. Just wanted to, I guess, question is on the retail. I think Seb you said that your expectation for the full year retail was flat-to-up high-single-digits, just wanted to confirm that number. And in addition to that, is there any way you can sort of give us an idea of what your expectation is for retail this year versus two years ago? Obviously, last year was a bit of an anomaly.

Sebastien Martel -- Chief Financial Officer

Yeah. Good morning, Cameron. Yes, that's correct. You correctly quoted me. So flat-to-up high-single-digit. Obviously, the retail will vary quarter-by-quarter. This quarter we had very strong retail. There was some pull forward from Q2 for personal watercraft and three-wheeled. What I could tell you is, if I look at the second quarter, when I compare it to two years ago, I believe the second quarter should be flat in retail compared to two years ago. So obviously, two years ago was a strong quarter, continued strong demand, but obviously, we will be lapping a very strong quarter compared to last year and that's why we'll be down compared to last year.

Cameron Doerksen -- National Bank Financial -- Analyst

Okay. And do you have any, I guess, a number for kind of the full year? I mean, I think that the expectation would maybe in the high-teens or even 20% versus two years ago for the full year?

Sebastien Martel -- Chief Financial Officer

Yeah. For the full year, you'll be in the high-teens to low-20s.

Cameron Doerksen -- National Bank Financial -- Analyst

Okay. That's excellent. And just want to follow-up with the question on the three-wheeled market because you're doing obviously very, very well there ahead of plan. Is there any way to maybe talk about the difference in I guess in retail demand between Spyder and Ryker or is it really broad-based across the entire product portfolio?

Jose Boisjoli -- President and Chief Executive Officer

Yeah. For sure, the Ryker is attracting a younger customer base because of the price point. But I would say that all the program we put together, the program where the people do the rider education program, we have many Ryker customers, but also many RTF3 customers. The woman on -- the woman on the road community is affecting all the models. Then Ryker, because of price point, definitely attract a younger customer base, but I would say the momentum on three-wheeled is the three models that we're very, very happy.

Cameron Doerksen -- National Bank Financial -- Analyst

Okay, very well. Thanks very much.

Operator

Your next question comes from the line of Craig Kennison with Baird. Your line is open.

Craig Kennison -- Baird -- Analyst

Hey, good morning, and thanks for taking my question. It's really on allocation. What are you doing to, I guess, fairly allocate inventory across your dealer network given the shortages?

Jose Boisjoli -- President and Chief Executive Officer

Yeah. Good morning, Craig. We don't -- I mean, we don't favor one dealer versus the other. We try to be as equitable to everyone because short-term you could do favoritism, but we don't do that because it's not helping the second dealer, and mid to long-term we'll be impacted by this. Then we're trying as much as we can to allocate obviously by countries and after that by region and after that by dealers, but we're trying to be very fair between all the dealer network to make sure we protect the mid to long-term.

Sebastien Martel -- Chief Financial Officer

And we talked about our dealer value proposition, and one of the key elements is our OMS system, the order management system. And that is the I would say an objective model where dealer places an order, but the orders are also correlated to what their market share targets are. So that obviously makes sure that everyone is treated fairly.

Craig Kennison -- Baird -- Analyst

Thanks. And then what systems are in place to help dealers either trade new inventory or even used inventory among themselves? Is there anything BRP can do to help facilitate, I guess, better liquidity to help your dealers help themselves?

Jose Boisjoli -- President and Chief Executive Officer

I mean, in each region, the dealer has -- each dealer has a network of other dealer where they typically trade between themselves. But that being said, in the last 12 months, there was definitely less trade than typical because every dealer want to hold to every unit they can.

Craig Kennison -- Baird -- Analyst

Great. Thank you.

Operator

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

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Yeah. Good morning, everyone, and congratulations for the good quarter. Could you talk a little bit about the capital deployment strategy in light of your favorable market environment, strong balance sheet and whether a substantial issuer bid is something that you could consider?

Jose Boisjoli -- President and Chief Executive Officer

Good morning, Benoit. Obviously, a sound capital allocation strategy has been part of our success. And as you said, we do have a strong balance sheet that provides us with flexibility. As we've always said, our priority is to invest in the growth of the company and when you look at our capex guidance for the year up to CAD600 million investment, we maintain that disciplined approach. As you also saw in our Q1, we completed the NCIB. We invested almost CAD300 million in share buybacks. That completes the NCIB that we started last December. We purchased about 4.3 million shares. So the next opportunity to do NCIB would start in December and until then well, as you said, the good news is we have a strong balance sheet, we have that flexibility and if we decide to be opportunistic in buying shares, we do have that possibility. So no decision taken now, but obviously as I said, there is a time between now and the next NCIB window.

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Okay, that's great. And you talked Jose about the supply chain constraint, I was wondering if you -- that is also impacting the ramp-up at Juarez 3, Queretaro and also Sturtevant with respect to the new Project M and given the strong consumer demand, any new capacity increase required either at Valcourt or in Austria to deal with Rotax?

Jose Boisjoli -- President and Chief Executive Officer

Good morning, Benoit. First, Juarez 3 is on plan, then this is doing good, then we are planning to ramp up production on the back end of Q3 and Project M in Sturtevant is also on plan. Manufacturing the motorized haul will be made in Queretaro, this is on plan and the Sturtevant facility revamp is also on plans then in end of Q4. We'll start production then.

And in terms of engine and maybe to complement on what I answered to Robin in the first question, overall, the engine -- we have a very good dealer network -- supplier network. We manufacture our key component ourselves and we were already in an investment mode to satisfy to the growth we had. And obviously, there is some timing of equipment, but the engine capacity is a very short period as far as ratio, period of time. Then overall, we are happy with -- you need to realize that in fiscal year '23, Juarez 3 will be fully running, Queretaro with watercraft 30%. There will be Project M and we are tweaking to optimize production in other sites. Then we feel we have the right capacity for fiscal year '23.

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Okay, that's great. That's it from me. Thank you. That's it.

Operator

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

Fred Wightman -- Wolfe Research -- Analyst

Hey guys, good morning. Thanks for taking the question. I just wanted to look back at sort of the commentary you've provided last quarter for your retail expectations. I think you talked about high single digit retail and if we look at what you posted, you came in quite a bit above that for the full quarter. So, what does that mean for these retail parameters that you sort of outlined here for 2Q and 3Q? What drove the outperformance, was it better than expected consumer demand, better availability in terms of supply, and how did that shake-out for sort of the guidance that you've given us?

Sebastien Martel -- Chief Financial Officer

Yeah. Good morning, Fred. You're right that we did call out that retail would be a bit soft, more softer than what we actually delivered in terms of numbers. I think the surprise was in the accelerated retail for personal watercraft and three-wheeled and obviously production is set at a certain level. So, whatever we retail in Q1 is retail that we lose in the second quarter and so that acceleration provided for stronger growth in the first quarter versus what we were expecting. Obviously, it's going to impact our retail expectation for the second quarter.

Fred Wightman -- Wolfe Research -- Analyst

It makes sense. And just circling back to the allocation question from earlier. Can you talk about how pre-sold units sort of factor in to the internal allocation system? And if you've seen any change in sort of dealer order patterns tied to pre-sold units specifically?

Jose Boisjoli -- President and Chief Executive Officer

Yeah. First, our goal is to honor every pre-sold unit to the consumer. Like, give you the example for snowmobile, our record of pre-sold -- our next production season, the pre-sold unit is at the record high and we're trying to honor every single unit that is pre-sold for every product line. We have less visibility on off-road, but we still have the team, is doing their best to make sure we protect that everything is pre-sold to the consumers.

Fred Wightman -- Wolfe Research -- Analyst

Got it. Thank you.

Operator

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

Martin Landry -- Stifel -- Analyst

Hi, good morning everyone. My first question is on your parts, apparel and accessories. It increased twice as fast as your revenues during the quarter. So I was wondering if you can give us some color on what explains that strong performance?

Jose Boisjoli -- President and Chief Executive Officer

Well, it's a mix of two things, the product usage, customer is using the product a lot more than typical. We saw it during the snowmobile season this winter. Then product usage is one element. The second one is the accessories, the LinQ ecosystem that were put together, where many accessories can fit many product lines. The same accessory can fit many product lines. This is doing extremely well. Then it's a combination of those two things that are generating the growth.

Martin Landry -- Stifel -- Analyst

Okay, thank you. And my other question was on your survey, you shared some very interesting data point on the consumers, you're quoting 3% of buyers purchased a unit instead of traveling and you were mentioning 7% of new entrants purchased a vehicle, only 7% as a COVID distraction. So, were you surprised by these results and if staycation and COVID explain just a small portion of the growth? And then what does explain the surge in demand that you've seen for Powersports products this year?

Jose Boisjoli -- President and Chief Executive Officer

Then, first, just as a reminder, at the end of each quarter, we do a survey about 1000 customers who purchased a new unit during the quarter. And yes, we were surprised by a few numbers. New entrants is growing 37% in Q1 fiscal year '22 versus historically 20%, but last quarter fiscal year '21 Q1 quarter was up 30%. This is still increasing. The two numbers that we were also surprised is the 7% that only 7% said that it was COVID distraction, then a big portion. It's true and to the rest to Powersports and the other one is the 3% that trade-off for traveling. Then those are extremely strong, the result, and we are very happy and I think we need to give to our marketing team very good -- they've done a very good job to -- if you looked at our website today versus what it was a year ago, our websites are better craft to make it easy for the people who don't know the industry. We try to educate the customer how and where to ride. We try to educate them to make sure they select the right product and we encourage them to ride, promoting community and woman off on road and the program for writing education. Then, I think it's a combination of all of this that is giving those incredible results.

Martin Landry -- Stifel -- Analyst

Okay. And was that the first time that you were asking these questions about purchase instead of traveling and COVID distraction, just to see if we have some benchmark as that evolved?

Jose Boisjoli -- President and Chief Executive Officer

Yeah, that was the first time we're asking that question and every quarter if you want to do a good survey, you need a certain number of questions, not too many, but not too little and we try to remove the one that are less critical and had the most relevant one and the traveling was the first time.

Martin Landry -- Stifel -- Analyst

Okay, perfect. Thank you.

Jose Boisjoli -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Shawn Collins with Citigroup Research. Your line is open.

Shawn Collins -- Citigroup Research -- Analyst

Great, thanks. Good morning, gentlemen.

Jose Boisjoli -- President and Chief Executive Officer

Good morning.

Shawn Collins -- Citigroup Research -- Analyst

My question is on today's unique inventory environment and its impact on retail results. Today's lack of inventory or scarcity of products is certainly a challenge, maybe a high-class challenge, but still a challenge, I wanted to ask if there are any comparable periods in the past where you experienced a similar environment? And I'm curious how that may have played out, resolved itself, any historical context might be helpful. Thanks.

Jose Boisjoli -- President and Chief Executive Officer

That's an interesting question. I would say that I saw a period like we're going through with the product line. I remember BRP started producing watercraft in 1988 and in the mid-90, we were not able to supply to the demand. For three, four years, there was no use out there and the growth was incredible. Then I saw over the years in our industry, one product line taking up versus the others, but having the whole industry, all product lines like this, I think is the first time in the history of Powersports.

Shawn Collins -- Citigroup Research -- Analyst

Okay, understood. That's helpful. It really is truly unique. Maybe just a brief follow-up. As you experienced supply chain challenges and some rising input costs, just curious, any commentary on how well and successful you are to kind of pass on those costs to the consumer? Thanks.

Jose Boisjoli -- President and Chief Executive Officer

Yeah. On the cost side, just to give you a sense, on the marine where the aluminum costs and wood are very critical, we already announced a special surcharge that was effective June 1st and the price increase will be announced shortly for being effective July 1st with the model year change.

On the Powersports side, obviously, right now, many of our supplier are hedged, then this whole year we are partially hedged and every year we increase our pricing between 1% to 2% that's typical and the model you change for ORV is July 1st and for watercraft is in September and we'll announce price increase at the model you change. Then that's the way we plan it for the H2 for all those product lines.

Shawn Collins -- Citigroup Research -- Analyst

Great. That is helpful insight. Thank you.

Operator

Your next question comes from the line of Brian Morrison with TD Securities. Your line is open. Hi, good morning. Going back to Juarez 3, can you talk about the ramp trajectory of those extra 50,000 units? Is that a methodical ramp or do you hit the ground running? And then also in terms of Queretaro, same question for PWC and when will that commence running? Is that a Q4 or Q1 event?

Jose Boisjoli -- President and Chief Executive Officer

Yeah. Then let's start with Juarez 3. Juarez 3, the construction is ongoing. We already have a team training employees and the ramp-up will be on the back-end of Q3. Then the way you can see it -- let's say, you see the production will run three, four months this year, this fiscal year, then you can probably count maybe at 50% something like that. Next year, obviously, in fiscal year '22, you can count the 50% additional capacity, that's for Juarez 3. Queretaro, the installation will be done for the start of production in the fall. That means when production restart in August, there will be some additional capacity for watercraft, but Project M, which is a new product, this is coming in Q4.

Brian Morrison -- TD Securities -- Analyst

Okay. And then changing gears to the cost side of the equation, Seb, the CAD300 million of cost savings from M25, is that put on hold or deferred at all with the current dynamics or can you update us on where we are with that and what more of that entails?

Sebastien Martel -- Chief Financial Officer

Well, obviously, there were many levers to the CAD300 million cost saving. As I said, the last time, obviously, the team is very focused on making sure we are producing all the units that we can produce. But one of the big pillars of M25, the CAD300 million is also introducing products with better margins and, obviously, as you see our performance this quarter was very strong and some of that is driven by the engineering that we've done in our product and modularity approach. So I'm not worried about our ability to get to that CAD300 million, especially with -- we have again low levels of inventory and what we're learning on sales programs, there are some learnings that will stay with us even when the industry comes back to a more normal way of operating.

Brian Morrison -- TD Securities -- Analyst

Can you just give us a sense of how far you are through it at this point in time?

Sebastien Martel -- Chief Financial Officer

Again, tough to call. Brian, we'll obviously look forward to updating investors and analysts in the near future on our M25 plan and we'll give you more color then.

Brian Morrison -- TD Securities -- Analyst

Thanks very much.

Operator

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

Derek Dley -- Canaccord Genuity -- Analyst

Yeah, hi, all. Just one for me. Just on the gross margins. Obviously, we've seen some strong gross margin performance here with limited promotional spending and sales programs. Has the normalized gross margin in your view changed going forward? It was sort of call it mid 20% prior to the pandemic, has that stepped up in your view?

Sebastien Martel -- Chief Financial Officer

Well, for this year -- we finished last year, very strong gross margin and our expectation for this year is that we should be slightly up compared to fiscal year '21. As part of our M25 plan when -- and our target to deliver CAD300 million cost savings, some of that is going to be margin improvement. Obviously, this quarter we benefited from a higher proportion of back sales and so that is lifting the margins. But going forward, yes, I do believe that as we are doing a better usage of our assets, we continue introducing products with better margins, we've exited the outboard engine business as well, these are all elements that will help bring the gross margin up.

Derek Dley -- Canaccord Genuity -- Analyst

Okay. That's helpful. And then actually just one more. R&D is kind of typically around a like a 4%, 4.5% of revenue percentage. Is that something we should expect to continue going forward as well?

Sebastien Martel -- Chief Financial Officer

Yes.

Derek Dley -- Canaccord Genuity -- Analyst

Great. Thank you very much.

Sebastien Martel -- Chief Financial Officer

Thanks.

Operator

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

Jaime Katz -- Morningstar -- Analyst

Hi, good morning. Thanks for taking my question. I don't think it was clearly delineated whether or not the supply chain issues that you were seeing were as pervasive for the boat or Marine business, Would you be willing to talk a little bit about that or whether the throughput has been slightly more consistent in that segment?

Jose Boisjoli -- President and Chief Executive Officer

Yeah. Good morning, Jaime. Yes. All product lines are affected and depending, obviously, of the seasonality and -- but between all product lines it's about the same challenges that we're facing. After that and that's where I think our team is doing an excellent job. Working with our suppliers, sometimes we try to allocate the parts to one product line versus the others. An example, right now, we don't need snowmobile. We're producing snowmobile with some missing part that will -- the vehicle will need to be retrofitted but we have time because snowmobile retail is starting really in October. Then that's the type of thing. To optimize the situation, we need to work with our suppliers and we need to work internally between product lines to make sure that we optimize the situation to first deliver on consumer orders and try to [Indecipherable] all orders from consumer and dealers that we have on hand.

Jaime Katz -- Morningstar -- Analyst

And then I don't think I heard the number, but have you guys laid out what you expect increased commodity costs to [Indecipherable] account for this year in your estimates?

Sebastien Martel -- Chief Financial Officer

No, I haven't given any color, but I'm more than happy to do so. If I look at Q1 logistics, commodity costs had an impact of about 190 basis point on the margin and I'm expecting that to continue for the rest of the year. Obviously, with the higher volume, sales programs, a good mix, we'll be able to offset a lot of that, but the expectation is what we saw in Q1 is going to continue for the rest of the year.

Jaime Katz -- Morningstar -- Analyst

Okay. And then is there any thoughts about how you think your market share will pan out at the end of the year? Will you be able to sort of outpace your competitors in selling the channel going forward or do you sort of perceive the constraints with equal across the industry at this point? Thanks.

Sebastien Martel -- Chief Financial Officer

Well, obviously, with a significant increase in production capacity in the fourth quarter with side-by-side, we believe that we -- it will provide us with an important competitive advantage in our ability to replenish inventory and supply to demand. So that should be driving market share gains for side-by-side business.

Jaime Katz -- Morningstar -- Analyst

Okay. Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Gerrick Johnson with BMO Capital Markets. Your line is open.

Gerrick Johnson -- BMO Capital Markets -- Analyst

[Technical Issues] do you have in place -- what do you have in place in policing over ordering since product is so difficult to get at the dealer level?

And the other question I had was about your own inventory with -- you had inventory down 34%, but your materials in WIP up 64%. Have you had missed matches like that before in your past and is there any risk to sort of obsolescence of the WIP that you have on the books right now?

Jose Boisjoli -- President and Chief Executive Officer

Good morning, Gerrick, I will answer the first question, Sebastien the second.

On the allocation question, obviously, seasonal products are very different than off-road or year-around products. Seasonal products, like, we have a pretty good idea of, I mean, we know exactly how each product line perform and how each region and each dealer perform and we can plan for a growth the following year and that's why we have like a target for each dealer and after that depending of how the dealer pre-sold a unit or depending of how much you want units for the following year, it's a discussion with the salespeople. Then it's not like give me your order and your wish list. We try not to disappoint the dealer by letting dream about the big numbers that we cannot deliver and this have worked very well for everything that is seasonal product. On the off-road side, right now, we're working on the location and it's our job to make sure like, I answered to Craig that we don't favor a region versus the others. We're trying also to be fair on product mix, but off-road will be on the location till the end of the year.

Sebastien Martel -- Chief Financial Officer

And on your question on raw material. Yes, raw material in WIP is up over CAD200 million this quarter compared to Jan 31st. No concern on obsolescence, that inventory turns around very quickly. It's just a question of getting the missing parts in and then retrofitting the units. So obviously, the number is high, but well under control.

Gerrick Johnson -- BMO Capital Markets -- Analyst

Okay and then just one more if I could [Indecipherable] on that number of 37% new entrants, you said only 7%, you said the purchases were as a COVID-19 distraction. Kind of curious, I don't know if you asked them, but maybe the second derivative of that, how many of those people had friends who bought as a COVID distraction last year because that was kind of the bull case going forward? You have a bigger installed base, more friends, keeping up with the [Indecipherable] things like that.

Jose Boisjoli -- President and Chief Executive Officer

I don't know, I don't have -- maybe my team has, but I don't have the answer to this question, Gerrick. For sure, we see that there is more -- I have a statistic that I can share with you, but the new entrant are younger and then the repurchaser 42% versus 32% for the repurchaser, more women and more family oriented which is all positive. But I don't have the answer to exactly what you're asking for.

Gerrick Johnson -- BMO Capital Markets -- Analyst

Yeah. No. Okay. That's fine. Thank you very much guys.

Jose Boisjoli -- President and Chief Executive Officer

You're welcome.

Operator

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

Mark Petrie -- CIBC -- Analyst

Hey, good morning and thanks for all of the commentary so far. I just wanted to ask about your expectations with regards to the promo programs over the course of time. What's embedded in your guidance with regards to the back half of the year? Do you expect the current levels to sort of remain in place? And then looking forward into fiscal '23, do you expect that the industry sort of evolves a little bit in terms of how the pricing programs are utilized or do you expect that that normalizes over the course of time?

Sebastien Martel -- Chief Financial Officer

Good morning, Mark. When we talked back in March, I indicated that in fiscal year '21, we had a positive tailwind from programs of about 200 basis points and we were expecting that 200 basis points to remain in fiscal year '22. Obviously, with a strong performance we had in Q1, we've adjusted that assumption. So, now we're looking more at a 250 basis point tailwind coming from programs. Next year, obviously, when we turn on the switch and it's February 1st, the inventory is still going to be lean. We're thinking about inventory replenishment in the fiscal year '22. So it's going to happen more probably in the back half of next year. So, I'm expecting the first half of next year to still to be favorable on the commercial side and obviously as I said, there are some important learnings that we are seeing from COVID and how we tailor our programs that will stay with us going forward. And that will provide benefits to obviously the bottom line. How much, too early to call.

Gerrick Johnson -- BMO Capital Markets -- Analyst

I understood. Thanks a lot.

Sebastien Martel -- Chief Financial Officer

Thanks.

Operator

There are no further questions at this time. I turn the call back over to our presenters.

Jose Boisjoli -- President and Chief Executive Officer

Super. Thank you all for joining us this morning. And just before we let you go, we want to take the opportunity to invite you to join us for our virtual Can-Am, off-road, and three-wheeled vehicle and Sea-Doo product introduction. The event will be held on August 11 and was also featured at the official launch of the Project M. We look forward to sharing with you more information about this over the next few weeks and we hope you will be able to join us. With that, thanks again and have a good day.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Philippe Deschenes -- Investor Relations

Jose Boisjoli -- President and Chief Executive Officer

Sebastien Martel -- Chief Financial Officer

Robin Farley -- UBS -- Analyst

Cameron Doerksen -- National Bank Financial -- Analyst

Craig Kennison -- Baird -- Analyst

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Fred Wightman -- Wolfe Research -- Analyst

Martin Landry -- Stifel -- Analyst

Shawn Collins -- Citigroup Research -- Analyst

Brian Morrison -- TD Securities -- Analyst

Derek Dley -- Canaccord Genuity -- Analyst

Jaime Katz -- Morningstar -- Analyst

Gerrick Johnson -- BMO Capital Markets -- Analyst

Mark Petrie -- CIBC -- Analyst

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