Earnings Call Transcript
BRP Inc. (DOO)
Earnings Call Transcript - DOO Q2 2025
Operator, Operator
Good morning, ladies and gentlemen, and welcome to BRP Inc’s FY ‘25 Second Quarter Results Conference Call. For participants who use the telephone line, it is recommended to turn off the sound on your device. And I would like to turn the meeting over to Mr. Philippe Deschenes. Please go ahead, sir.
Philippe Deschenes, Vice President, Investor Relations
Thank you, Sylvie. Good morning and welcome to BRP's conference call for the second quarter of fiscal year ‘25. Joining me this morning are Jose Boisjoli, President and Chief Executive Officer; and Sebastien Martel, Chief Financial Officer. Before we move to the prepared remarks, I would like to remind everyone that certain forward-looking statements will be made during the call and that the actual result could differ from those implied in these statements. The forward-looking information is based on certain assumptions and is subject to risk and uncertainties and I invite you to consult BRP's MD&A for a complete list of these. Also during the call, reference will be made to supporting slides and you can find the presentation on our website at brp.com under the investor relations section. So with that, I'll turn the call over to Jose.
Jose Boisjoli, President and CEO
Thank you, Philippe. Good morning, everyone, and thank you for joining us. Our financial results for the second quarter were essentially as expected and reflect our focus on reducing network inventory to support our dealers. However, the macroeconomic environment and high interest rates continue to put pressure on consumer demand. As a result, the demand has declined more than anticipated, while promotional activity has intensified. In this context, and given our commitment to safeguarding our dealer value proposition, we have decided to further adjust our production schedule for the year, which is reflected in our updated guidance. Let's turn to slide four for key financial highlights. Revenue reached $1.8 billion, normalized EBITDA was $199 million, and normalized EPS was $0.61, generally in line with our expectation. We have made great strides to reduce network inventory, which is down 13% so far this year, progressing towards our objective of a 15% to 20% reduction by the end of fiscal 2025. As for retail, our North American Powersports sales were down 18% from a strong second quarter last year as the industry experienced weaker consumer demand, as you can see on slide five. We are operating in an increasingly challenging economic environment. Market conditions were in line with our plan through April, but deteriorated in the second quarter. Although these conditions are impacting many of the regions where we operate, it has recently become more challenging in North America, our key powersports market. On the plus side, we have been more proactive than most OEMs at reducing network inventory and this was received positively by our dealers. Having said that, OEMs with a high level of inventory have been more aggressive with promotion, which has impacted our market share this quarter. Looking at retail performance for the quarter on slide six, overall retail was down 10%, lagging the industry in North America, EMEA, and Asia Pacific. Meanwhile, it was up 18% in Latin America, driven by a very strong performance in Mexico and Brazil, where consumers are highly engaged with our Ski-Doo and Can-Am brands. Given our focus on bringing network inventory down, we were anticipating some market share loss, namely for side-by-side. A few words on our personal watercraft market share decline. Last year, you may remember that our main competitor had supply issues, which turned out to our advantage. The fact that this situation is back to normal, combined with the current industry weakness, had a larger than expected impact on our retail this season. Turning to slide seven, we are pleased with our results in ORV for the full season, as we've delivered record retail performance up 8% in an industry that was flat. We gained about 2 points of market share in side-by-side vehicles, passing the 30% mark for the first time. We also performed very well in ATV, gaining 1.5 points of market share. With these achievements, we have closed the gap with the number one position in the industry in terms of ORV unit retail per dealers. In the current environment, we expect further short-term market share volatility. However, with our recent product launches and momentum with dealers, we believe we will continue to gain share in ORV for the coming season. Let's turn to slide eight for highlights of our recent dealer event held in California. It was one of the largest ever in terms of product news with over 3,000 participants in person and virtual. We announced the availability of our highly anticipated Can-Am Pulse and Origin all-electric motorcycle lineup, making our reentry into the two-wheel space. These models leverage our own Rotax E-Power unit, which also propels our electric snowmobile and will be used in future BRP electric products. In terms of the next steps, we will be hosting several media events training our dealers and hosting BRP customer events throughout the second half of the year. We intend to become a global leader in this space with true innovation designed to simplify the riding experience for new riders and introduce electric motorcycles to all. But this was not the only key news from our dealer event as you can see on slide nine. We bolstered our Can-Am off-road lineup, introducing the four-seat version of our top-of-the-line Maverick R. This extension was highly anticipated as a multi-passenger model represents close to 60% of sales in that category. We also introduced our all-new Outlander ATV platform in the high CC segment, representing the first major platform upgrade in that segment in about 15 years. This new platform has been very well received, just like the mid-CC last year. As for three-wheel vehicles, we've launched the all-new Can-Am Canyon, our most rugged ever in this segment. Purpose-built to increase accessibility into the growing adventure terrain market, which has doubled in recent years. The Can-Am Canyon will target three-wheel riders of all skill levels. On the Sea-Doo side, we further built on the FishPro success by introducing the FishPro Apex, the most powerful personal watercraft in that segment, and the Switch pontoon fish edition, the first ever in that category. These models cater to a very large potential consumer base with over 220 million recreational anglers worldwide. The product launches at our dealer event demonstrate our commitment to innovation and position us to continue gaining market share in the future. Now let's turn to slide 10 for more detail on our year-round product. Revenues were down 33% to $1 billion, primarily due to reduced shipments. At retail, Can-Am side-by-side was down high-single-digit percentages, slightly more than the industry, as we faced a very strong quarter last year and aggressive promotion from other OEMs this year. However, we continue gaining share in the utility category, driven by the ongoing success of our high-end defender cab. As for ATV, retail was down low-single-digit in the quarter in line with the industry. We are still seeing solid traction with our new Outlander platform, which delivered market share gain in the mid-CC segment. Looking at three-wheel vehicles, our retail was down in the high-20%, slightly lagging the industry. We continue to see stronger performance at the high-end of our lineup, while the Ryker, our entry-level product is affected by the economic pressure on target consumers. Turning to seasonal products on slide 11. Revenues were down 40% from last year to $542 million. Our retail and personal watercraft declined in the mid-20%, due to weak industry trends and reduced market share as explained a few minutes ago. Entry-level products were more impacted, but we performed well in the high-end category. At this stage, we expect to finish the season with more inventory than planned. The Switch was down high-30%, suffering from generally weaker trends in marine and lapping a strong quarter last year supported by early introduction momentum. Moving on to slide 12 with parts for Parts, Accessories & Apparel and OEM engines. Revenues were down 12% to $258 million, due to lower sales volume. PA&A sales continue to benefit from our growing fleet, especially in ORV, offset by weaker demand for snow-related products and lower accessory sales due to softer retail. Turning to marine, revenues were down 54% to $57 million, reflecting lower boat shipment volume. Looking at retail sales, Alumacraft was up about 40%, while Manitou was up high-20%, as we were lapping a low retail volume period. As for Quintrex, retail was down mid-single-digit in line with the industry. With that, I turn the call over to Sebastien.
Sebastien Martel, CFO
Thank you, Jose, and good morning, everyone. Our Q2 financial results came in essentially in line with our expectations and demonstrated our commitment to support our dealers as we proactively slowed our shipments in the quarter to accelerate the reduction of our network inventory levels. Looking at the numbers, revenues were down 34% to $1.8 billion, primarily due to lower shipments. We generated $377 million in gross profit representing a margin of 20.4%, down from last year due to the less efficient use of our assets given the lower production volumes and higher sales programs. These were partly offset by a richer product mix especially in side-by-side and personal watercraft and favorable pricing. In this context, we continued to diligently manage our expenses and also benefited from the recognition of R&D subsidies in the quarter. Combined, OpEx was down 10% compared to Q2 last year, alleviating some of the pressure from reduced shipments. Including all of the above, our normalized EBITDA ended at $199 million and our normalized earnings per share at $0.61. Turning to slide 15 for an update on our network inventory. As discussed since the beginning of the year, a key driver of our plan for fiscal ‘25 is the reduction of our network inventory to support our dealers, whose margins are pressured by the uncertain economic environment, high interest rates, and increased competitive dynamics. Being the first OEM to commit to supporting our dealers through this challenging environment by proactively reducing our shipments earlier in the year allowed us to make solid progress on our network inventory reduction target. In fact, as of the end of Q2, our network inventory is down 13% from Q4 levels, while on our way towards our objective for a reduction of 15% to 20% by year-end. Furthermore, we continue to improve the quality of our inventory, with most of the reduction in the quarter coming from non-current units. While the actions we took to reduce our network inventory during the second quarter impacted our financial performance, we strongly believe that supporting our dealers in this difficult environment is essential to ensure our long-term mutual success. With this in mind let's turn to slide 16 for an update on our guidance for the year. As Jose mentioned, due to weaker industry trends, especially for side-by-side and personal watercraft, and increased promotional activity from competitors in the form of consumer rebates, dealer incentives, and even MSRP reductions. Moreover, the difficult macro environment which had started affecting many of our key international markets in fiscal ‘24 now seems to also be impacting the very important U.S. powersport market. As such we are approaching the second half of the year with caution assuming that the softness we saw in Q2 will persist through H2 and will likely continue through at least the first half of next year. Consequently, we have adjusted our shipment plan for the rest of the year as we continue to aim to right-size our network inventory levels in a weaker industry environment. Additionally, our revised guidance also incorporates planned incremental sales program expenses as we will continue to support our brands and our dealers in this increasingly promotional environment. Following these adjustments, depth of the benefit of additional cost-saving initiatives as we right-size our expenses for the current environment, we now expect our revenues to end between $7.8 billion and $8 billion, normalized EBITDA to end between $890 million and $940 million, and normalized EPS to end between $275 million and $325 million. With these revised assumptions, coupled with the working capital headwind resulting from the change in production schedule, we now expect a lower level of free cash flow generation for the year, somewhere north of $200 million. As for how we anticipate the rest of the year to unfold, we expect a sequential improvement in Q3 in terms of revenue, normalized EBITDA, and normalized EPS, with the former expected to be up in the range of high-single-digits to low-teen percentage from the $0.61 we just delivered in Q2. While fiscal ‘25 is not unfolding as we had initially planned, we strongly believe that we are taking the right actions to protect our business and our dealers in this challenging environment, all the while positioning our business to lead the industry when markets return to growth.
Jose Boisjoli, President and CEO
Thank you, Sebastien. The first half of the year was challenging, but we believe we made the right decision at the right time. Our plan has been well executed and I thank our teams for their dedication through this difficult period. Over the years, our decisions have always been guided by our commitment to balance the interests of all our stakeholders. In this spirit, we were the first OEM to proactively reduce shipments. We want to protect our dealer business, the value of our brands, and our long-term profitable growth. Dealers have recognized that our actions are those of true business partners. We had the opportunity to connect with them at our dealer event. They are enthusiastic about our recent product launches and pleased to see that we remain committed to actively investing in R&D. Despite the current context, they know we are doing what's needed to remain their OEM of choice. Over the short term, proactively managing production and network inventory is a priority. As we look to the long term, we remain confident in our strategy driven by our focus on innovation, extensive portfolio, and strong dealer network, we are well positioned for continued success. On that, I turn the call over to the operator for questions.
Operator, Operator
Thank you, sir. Thank you. Your first question will be from Craig Kennison at Baird. Please go ahead.
Craig Kennison, Analyst
Hey, good morning. Thanks for taking my question. I guess, I appreciate what you're doing with respect to dealers and making sure they're as healthy as can be. How do you know you've done enough cutting? Those of us on the outside are all trying to figure that out, and I'm curious what you'd use internally to know that this cut is sufficient.
Jose Boisjoli, President and CEO
Yes, good morning, Craig. When we consider the macroeconomic environment, the pressures on consumers, and the overall situation, we are adopting a cautious approach as we move toward the end of the year. We've noticed a decline in retail trends for Q2 that is continuing into August. For the second half of the year, we anticipate that ORV sales will drop by mid to high single digits, snowmobiles will decrease by low to mid-teens, and while watercraft and three-wheel vehicles will have limited retail months, we expect their sales to fall by just over 20%. Based on the trends we've observed in Q2, we believe our projections for H2 are sound. We are in a stronger position compared to some OEMs regarding our inventory levels. Others with excess inventory are resorting to aggressive promotions for both consumers and dealers, with one off-road manufacturer even reducing MSRP. We choose not to follow those strategies because our priority is to safeguard our profitable business, support our dealers, and ensure our long-term growth. This is essentially how we are planning for the second half of the year, and we feel confident that our current approach is appropriate as we continue through H2.
Craig Kennison, Analyst
Thank you. And as a follow-up, to what extent do your efforts to cut broad inventory help you convince dealers to stock e-bikes and some of the newer products that you have in order to win showroom space with your dealer?
Jose Boisjoli, President and CEO
Yes. I spent three days with our dealers at the dealer show, and they are pleased that we are the first original equipment manufacturer committed to reducing inventory. They recognize that we are genuine partners and that we aim to protect our profitability as well as theirs. We are collaborating closely with them, and they left the event feeling excited about the new product, which is what they always look for. Furthermore, we believe that our current approach is the right strategy for long-term success, and this was the attitude observed at the event. Regarding our two-wheeler initiatives, I don't see a link between those efforts and what we're doing for two wheels. We plan to have 300 dealers in the first year for selling two-wheelers, and while we request some showroom space for display, our commitment regarding units is quite minimal. We aim to maintain low inventory levels, displaying only the minimum necessary for demo rides, and we will replenish based on retail demand. The commitment required from the dealers is very low, and so far, this approach has been well received.
Craig Kennison, Analyst
Thanks, Jose.
Operator, Operator
Next question will be from Martin Landry at Stifel. Please go ahead.
Martin Landry, Analyst
Hi, good morning. I was wondering if you could share your revised expectations for industry sales in North America for this year?
Jose Boisjoli, President and CEO
Like I just said, Martin, on the previous call, and I will repeat. Right now for ORV, we expect the industry to be down mid to high-single-digits. For our snowmobile, down to low to mid-teens. Obviously, the snow will play a factor there. At watercraft and three-wheel, and there are only a few months to go and it's low retail month, they will close the year probably down 20%, and this is for the industry in North America. Under our retail side, because of the high promotion activity that we will not necessarily be a leader, but a follower. And we're planning to lose some market share during that correction supply/demand period, we could lose some market share in some product line, but we are confident it's the right thing to do for the long term.
Martin Landry, Analyst
Okay, and just to be clear, are those units or dollars?
Sebastien Martel, CFO
Units.
Jose Boisjoli, President and CEO
Units, sorry.
Martin Landry, Analyst
Yes. So can you give us your assumptions for dollars?
Sebastien Martel, CFO
Right now, no, in terms of industry dollars, no. But obviously, when you look at our guidance, we made a sizable adjustment to the year-round business. The majority of it comes from side-by-side given the softer trends we're seeing.
Martin Landry, Analyst
Okay. And just to better clarify what would be a good assumption to use in terms of average unit price sale fiscal ‘25 versus ‘24 in terms of decline?
Jose Boisjoli, President and CEO
In terms of MSRP, we have seen significant increases during COVID. With inflation decreasing, we expect to return to normal pricing increases next year, similar to what we did before COVID. Typically, we factor in new features and some salary inflation into our pricing. However, we are aware that price points can be a challenge for some consumers. Usually, our price increases are around 1%. It would be reasonable to assume we could be in that range next year.
Martin Landry, Analyst
Okay, that's obviously MSRP and sometimes actual with discounts are going to be lower, right?
Sebastien Martel, CFO
Yes. Well, the promotional environment is still quite high. We expect the promotional environment to be sustained at these levels, at least for the first part of next year.
James Hardiman, Analyst
Got it. That's helpful. Thank you.
Operator, Operator
Next question will be from Robin Farley at UBS. Please go ahead.
Robin Farley, Analyst
Great, thanks. I just wanted to clarify, you mentioned the retail declines you're expecting for the industry. And I think you were sort of mentioning that you might lose some share because others are being more promotional. But in your introductory remarks, it sounded like you were saying you expect to gain share in ORV for the coming season. So I just want to make sure I understand whether that would be sort of next year's calendar year. In other words, lose share between now and calendar end '24, but then gain share in '25 or just to kind of square that? And then I did have a follow-up, let me just ask that first.
Jose Boisjoli, President and CEO
In my prepared remarks, we gained market share in the 2024 season, which concluded at the end of July. Now that we are entering a new season, we may experience a slight loss in share during the second half of the year. However, with our current product lineup and some inventory adjustments, we believe we will regain market share throughout the entire season from August 1 to July next year.
Robin Farley, Analyst
Okay. Great. Thank you for that clarification. And then my follow-up question is actually just on the electric, like that you're making a big push in here. I guess others' expectations for electric motorcycle have come down significantly over time? And just kind of wondering if you see that space differently than others or what leads you to be more optimistic about the electric two-wheel market? Thanks.
Jose Boisjoli, President and CEO
Yes. We decided to enter the electric two-wheel market four years ago and have made significant progress since then. While we acknowledge there's currently a slowdown in electric car sales, we believe that adjusting to this trend will take a few years and that the trend itself will continue. Our confidence stems from having the right product. Since June, we've received positive feedback from media and dealers who have tested our offering. Our product features an easy riding experience, innovative technology, and exceptional connectivity. Priced at $13,999 for the entry-level model, it offers a range of 160 kilometers or 100 miles and features fast charging that allows you to recharge from 20 to 80 percent in 50 minutes. The Can-Am brand is recognized globally, and we are establishing a strong dealer network with plans for 300 dealers in Canada, the U.S., and 11 European countries in the first year, expanding to 450 next year. We believe we are well positioned with a solid marketing strategy, including demo drives and VIP events, to raise awareness. Additionally, I've observed that many cities in Europe are restricting access to combustion engine vehicles, leading more consumers to consider electric motorcycles. It’s hard to predict an immediate impact, but I feel we are better positioned than our competitors in this segment, although it will be more of a mid- to long-term endeavor.
Robin Farley, Analyst
Okay, great. Thank you.
Operator, Operator
Thank you. Next question will be from Benoit Poirier at Desjardins Capital Markets. Please go ahead.
Benoit Poirier, Analyst
Good morning, everyone. So my first question, could you maybe provide some color about the level of promotional activities we see these days versus the 200 bps impact in a normal environment? And also the puts and takes with respect to fiscal year ‘26, how we should be looking at fiscal year ‘26 given your revised outlook for fiscal year ‘25? Thank you.
Sebastien Martel, CFO
Good morning, Benoit. Yes, on the sales program front, some manufacturers are more promotional lately than we observed before COVID. From a retail perspective, our consumer promotions have returned to pre-COVID levels in terms of percentage of sales, but in absolute dollar amounts, they are higher due to MSRP increases. We also see many incentives to dealers, such as floor plan subsidies, as some manufacturers have delayed deliveries, resulting in higher inventory levels that need to be cleared out. We expect this trend to continue through the rest of this year and into the first half of next year. When interest rates decline, as the outlook suggests they may, that will certainly help, particularly regarding buy downs and floor plans for us and the dealers. As I mentioned, we anticipate that elevated levels will persist in the latter half of this year and at the start of next year. Regarding your second question about next year, it’s a valid one. The current environment is quite fluid, making it difficult to set a target for next year, especially given the soft trends across different industries and the uncertainty surrounding the macroeconomic landscape and interest rate fluctuations. We expect the softness seen in various industries to continue at least through the first half of next year, leading to ongoing pressure on shipments and a sustained high level of promotional activity. We are likely to conclude the personal watercraft season with higher inventory levels due to the industry slowdown, similar to what we experienced in Marine, which means shipments for that product line will likely decrease next year. We will address some of this pressure by adjusting our cost structure accordingly. However, looking beyond next year, we remain optimistic about our business. We are well positioned to grow our market share, particularly in ORV, and we are exploring new markets while still aiming for further efficiencies across our portfolio. Our financial performance is closely tied to the industry's health, and we believe that in a normalized environment, the earnings potential of the business is significantly higher than what we expect this year and potentially next year as well.
Benoit Poirier, Analyst
Okay. That's great. And just in terms of quick follow-up, you ended the leverage at 2.1 times and you mentioned some color about free cash flow. So I would be just curious to see what is your comfort level in terms of leverage and your ability to pursue buyback activity in light of the revised outlook?
Sebastien Martel, CFO
Yes. Overall, very comfortable with the balance sheet. I've often said that coming out of the great financial crisis, we had two key learnings. One is to make sure we have a covenant-light debt structure, making sure we have long-term maturities on our debt instruments, and ensuring we have ample flexibility and availability on the revolver. And these are things that we've done. Our debt is covenant light that is not restricted from any increases in leverage that we might be experiencing in the short to mid-term. We've recently renegotiated the maturity of $1 billion Term B, pushing it through 2031. We've recently extended the maturity this past May of the revolver to 2030. So we're very comfortable from a balance sheet point of view. And from a capital deployment perspective, we've just recently completed the NCIB, we repurchased 3.2 million shares completed in July. The next window is going to open up in December, and obviously, we'll continue having discussions with the Board, but we'll want to make sure that we protect our flexibility in a context that is probably more uncertain these days than certain. And so we prefer to be prudent. But there are a few months to go before we need to make that decision.
Benoit Poirier, Analyst
Thank you very much for the time.
Operator, Operator
Thank you. Next question will be from Joe Altobello of Raymond James. Please go ahead.
Unidentified Analyst, Analyst
Hi, good morning. This is Martin on for Joe. Just sort of assuming that the retail environment holds up at the city basis right now or the base it is right now, would you expect wholesale and retail to be in alignment next year? Or do you anticipate further destocking?
Jose Boisjoli, President and CEO
Right now, again, for H2, we will continue to deplete inventory. We are at 13% at the end of Q2, and our goal is to be 15% to 20%. Obviously, snowmobile will be critical because we had more non-current than desired since last winter. In terms of balancing retail and wholesale next year, I think it's too early to call at this point. There is so much volatility out there that it's very difficult to predict. And I would not, at this moment, comment on anything on that one.
Unidentified Analyst, Analyst
Okay. Understood. And just looking at this quarter, one of your competitors launched several model year '25 earlier than normal. How did that impact your shipments and retail sort of in this quarter and generally?
Jose Boisjoli, President and CEO
Listen, it didn't impact our shipment. The shipments are planned a few months in advance, and we have dealer orders on hand. We ship according to plan for everything scheduled for the next two to three months. However, with the introduction of the '25 models, they had discounts on their '24 models that likely affected some retail. We were surprised by the MSRP reduction, which we believe is not beneficial for the brand, so we chose not to follow that trend as we are in this business for the long term. It would not be prudent for our brand, our dealer business, or our long-term profitability to follow suit. We see this as a short-term issue, and we believe our approach is the right choice for the mid to long term.
Unidentified Analyst, Analyst
Thank you very much.
Jose Boisjoli, President and CEO
Thank you.
Operator, Operator
Next question will be from Xian Siew at BNP Paribas. Please go ahead.
Xian Siew, Analyst
Hi, thank you for the question. You mentioned that some competitors have been slower to reduce shipments. How do you see the industry shaping up as we close out the year? Do you think the competition is taking the necessary steps? Is it possible that overall industry inventories could drop to around 15 percent? What are your thoughts on where the entire industry will end up with inventories? Thank you.
Sebastien Martel, CFO
Yes, you're right. Obviously, part of what's happening right now is that many OEMs started the year with probably better industry and volume assumptions and some are late to adapt to the softer trends that we've been experiencing, and that resulted in more inventory out there, and more aggressive promotions. Hopefully, that inventory gets liquidated in the near term. Even with softer trends, if they were to persist next year, we believe that OEMs and dealers will be better aligned in terms of wholesale coming in and retail coming out, and that should help. As for ourselves, we expect to be in a better position and on the offense. This year, we're making a big correction to ORV inventory in the network. And we're well on track. You saw inventories are down 13% since Q4. So we're making very good progress.
Xian Siew, Analyst
Okay, got it. Thanks. I'll pass it on.
Operator, Operator
Thank you. Next question will be from Mark Petrie at CIBC. Please go ahead.
Mark Petrie, Analyst
Hey, good morning. I guess just following up on that inventory question. I think you called out it's up 3% year-over-year. But just looking back at the last quarter, it looked like you guys had planned for it to be down, call it, mid-single-digits or maybe high-single-digits by the end of Q2. So obviously, you have different levers in terms of addressing that. The lower shipments clearly is what is in guidance, but you also have the lever of higher incentives. So I'm just wondering what it would take for you to sort of move into or make a step function higher in terms of promotional investment to clear inventory?
Sebastien Martel, CFO
Yes. The main element in the second quarter, Mark, is the personal watercraft industry, which was softer than what we have expected. So the miss versus where we were expecting to end in Q2 is related to personal watercraft. And as I said in one of the questions that I answered, we expect personal watercraft shipments to be softer next year as we work through that inventory. Some of it is happening in the back half of this year and some of it is going to happen as well next year. But from a promotional side, we believe we're competitive. And we have enough tools out there to make sure that we support our brand, support our dealers and allow them to match other OEMs and what they offer.
Mark Petrie, Analyst
Thank you for the information. Could you help us understand how you determined the target of a 15% to 20% inventory reduction by the end of the year? Also, compared to past periods of slower demand, what would that mean in terms of units per dealer or units in relation to market share or however you measure inventory levels?
Jose Boisjoli, President and CEO
Yes. First, it's important to distinguish between seasonal and year-round products. For seasonal items like watercraft and snowmobiles, we aim for about 10% of the following year's retail. For instance, if a dealer sells 100 snowmobiles, it's typical to finish the season with around 10 units for the next season. That's the general estimate we rely on when discussing with dealers. Seasonal products like watercraft and snowmobiles vary significantly, and this also includes the boat and marine industries. For year-round products, such as three-wheel side-by-sides and ATVs, we assess inventory on a forward days basis. The retail pace for dealers changes monthly, influenced by peak seasons in spring and fall. We aim for roughly 90 days of forward inventory relative to retail. Although there can be regional differences, all dealers strive to maintain around 90 to 100 days of forward retail inventory according to their specific market dynamics. We have a strategy in place for dealers based on their focus on sport or utility products. This approach leads us to the inventory reduction target of 15% to 20% for both seasonal and year-round products.
Mark Petrie, Analyst
Okay. That's excellent color, Jose. I appreciate that. I guess maybe just my question would be then, would that 15% to 20%, would that not have changed just given the deterioration in demand that you saw through Q2 and into the first part of Q3, like I would have thought that, that number might have come down just based on the parameters that you just provided?
Sebastien Martel, CFO
We still want a good unit representation in the network. Even though we are planning for a softer industry, the 15% to 20% range also accounts for higher interest rates that are putting pressure on dealers, as well as higher MSRPs. In relative terms, we will still be lower compared to where we were pre-COVID, despite gaining market share. As Jose mentioned, while 90 is a target, we are still comfortable with levels around 90 to 100 days. Therefore, maintaining the 15% to 20% target is something we believe is the right approach for the business, despite softer industry forecasts.
Mark Petrie, Analyst
Yes. Okay. Thanks, guys. Appreciate the comments and all the best.
Sebastien Martel, CFO
Thank you.
Operator, Operator
Next question will be from James Hardiman at Citi. Please go ahead.
James Hardiman, Analyst
Good morning. Thank you for taking my question. I wanted to revisit the topic of an early look at fiscal '26, which is challenging given the guidance adjustments over the past few quarters. I understand why the previous approach was scrapped since it became too complicated. However, I would like to know if there's any way to quantify the impact of the inventory reduction. While I realize it's early to say, if wholesale matched retail next year and retail remained stable, how much earnings potential could we expect in that situation?
Jose Boisjoli, President and CEO
When we began the year with our first call in March, we mentioned that 2024 would be a correction year. We faced a tough winter, but we all believe that 2024 will indeed serve as a correction year. Based on the trends we've observed in Q2 and our plans for H2, it seems likely that we will continue to see corrections over the next 12 to 18 months. We aim to reduce our inventory this year to align with the appropriate levels for our seasonal and year-round products. It's too soon to make predictions for next year. The macroeconomic situation is evolving; interest rates are beginning to decline, but we need to monitor what the U.S. Federal Reserve decides in September. This is a positive sign, though it will take some time before we return to a reasonable level. There are too many variables to discuss anything specific regarding the fiscal year 2026.
Sebastien Martel, CFO
Yes. In terms of quantifying the impact, in our Q4 call that when we launched interim guidance for this year, I referred to the inventory correction that we were doing, about an impact of $3 to $4. And so again, in a situation where industries are normalized and no inventory depletion, is that a potential tailwind that we have to our earnings, that would be how I would still frame it.
James Hardiman, Analyst
Okay. Following up on that, are there any other significant factors we should consider regarding that bridge? Additionally, regarding the interest rate situation, it appears that the Fed is prepared to make significant changes. It seems you’re not expecting this to positively affect your business much, especially considering your outlook for the first half of next year does not seem to improve significantly. Are you not incorporating any potential interest rate cuts, or are you making some assumptions about these cuts but believe they won't have a substantial impact in the medium term?
Sebastien Martel, CFO
Interest rate cuts will positively impact our financials, especially by lowering floor plan costs. However, we also have interest rate caps that will expire next year, which could create a headwind of about $10 million to $15 million, even with the expected rate reductions. From a dealer perspective, the decrease in floor plan expenses and interest rate buydowns for retail financing will also be beneficial. Additionally, if we see double rate cuts this year and next, that would help consumers too. However, it's uncertain whether these changes will significantly alleviate the macroeconomic concerns we are currently facing; it may be too early to tell.
James Hardiman, Analyst
Got it. That's helpful. Thank you.
Sebastien Martel, CFO
Thank you.
Operator, Operator
Thank you. Next question will be from Cameron Doerksen of National Bank Financial. Please go ahead.
Cameron Doerksen, Analyst
Hey, thanks. Good morning. I just wondered if you could sort of frame how should we think about some of the operating expense line items for the rest of the year. Obviously, R&D was lower in Q2. You've cited the, I guess, R&D subsidies hitting the quarter there. So just can you just talk a little bit about what you see in the back half of the year on those operating expenses and G&A?
Sebastien Martel, CFO
Yes. There has been some movement. However, if I look down the profit and loss statement, I would expect gross profit to remain flat or potentially decrease in the second half of the year compared to the beginning. In the first half of the year, the gross profit margin was up 22.1%. Regarding operating expenses, there will be some changes, but they should remain relatively flat year-over-year as well.
Cameron Doerksen, Analyst
Okay. And as you sort of look ahead to next year, I mean, one of the things you sort of mentioned earlier in the call was around adjustments to the cost base to try to offset further weakness here. I guess what can you do across the business to reduce cost to try to offset some of the weakness on the demand side of the equation?
Jose Boisjoli, President and CEO
I mean without going into detail, there are always in a company like us, a lot of projects going on in different countries, in different areas. And obviously, we will relook at the whole list and reprioritize the next 18 months going into a more slowdown than what we had anticipated.
Sebastien Martel, CFO
And the other element is from the operations. Again, we're planning more conservatively for next year with softer industry trends. That means our operations people will plan accordingly. This year, it's been challenging for them, but they've actually done a very good job. But when you do a sequential adjustment to production, it's tough for them to run their shops as efficiently as possible. And so that is certainly another lever that we have. And also, as you know, there's been a lot of inflation. A lot of management of COVID needed to happen in the last three, four years. Now we can focus on reducing the bill of materials through cost improvement initiatives. And that's going to be another important driver of efficiency.
Cameron Doerksen, Analyst
Okay. So that process is, obviously, you're ongoing, but maybe we'll see some of the benefits more so in fiscal '26 as opposed to this year?
Jose Boisjoli, President and CEO
Yes, absolutely.
Cameron Doerksen, Analyst
Okay, great. Appreciate it. Thanks very much.
Operator, Operator
Thank you. Next question will be from Jonathan Goldman at Scotiabank. Please go ahead.
Jonathan Goldman, Analyst
Hi, good morning. Thanks for taking my questions. On the consumer side, the weaker demand trends that you're seeing, do you think that's more a function of consumers delaying or deferring a purchase? Or are they lacking the ability to make a purchase in the first place? And in either case, what sort of rate relief would you need to see to spur consumer demand?
Jose Boisjoli, President and CEO
To provide some insight into consumer behavior trends, prior to COVID, 20% of our units were purchased by new customers. During the peak of the COVID period, this figure rose to over 30%, but we have now returned to the pre-COVID ratio of 20%. Interestingly, there is a noticeable difference between high-end technology innovation products and entry-level products. For instance, in the second quarter, our entry-level retail sales experienced a significant drop in the high double digits, while high-end products saw a decline in the high single digits. The Spark and GTI categories of watercraft were particularly impacted at the lower end. Similarly, in the side-by-side segment, premium products saw an increase in the mid-single digits, whereas value products decreased in the mid-double digits. This trend we have observed over the past few quarters appears to be ongoing. Additionally, there is a growing number of new customers looking to finance their purchases but facing credit rejections. We believe this situation will improve when interest rates decrease.
Jonathan Goldman, Analyst
That's great color. And then, Jose, you talked about potentially gaining share in ORV in season '25. Is your expectation you can gain similar levels as you did this year?
Jose Boisjoli, President and CEO
Yes, I would not venture committing on any numbers. But the point is, right now, we are in a period where it's transitioning from model year '24 to '25. We start producing '25 for TV side-by-side this month in end of July, beginning of August. Then we are in that transition where depending on the inventory, depending on the program and the noncurrent, there is a play there. But that's why when this transition is done, it typically takes a quarter or two. After that, we will compete again model year to model year and we believe we have the right product to start with. And we have, obviously, the right program to continue our momentum.
Sebastien Martel, CFO
Yes. And just to highlight, on ATV, if you look at our ATV lineup, we've completely refreshed the whole lineup in the last 18 months, the introduction of a mid-level platform 18 months ago, and now we have the high CC platform that we recently introduced as well. So from a product point of view, we're extremely competitive. With a lot of new features and there's been very little innovation in the last 10 years on the ATV industry. So that obviously bodes well for the next season.
Jonathan Goldman, Analyst
That's good. Thank you for taking my questions. I'll get back to the queue.
Sebastien Martel, CFO
Thank you.
Operator, Operator
Thank you. Next question will be from Jaime Katz at Morningstar. Please go ahead.
Jaime Katz, Analyst
Hi, good morning. So could you guys give us some insight as to how dealer financing rates have changed? I'm wondering if they've moved down similarly to mortgage rates and if the demand is still sort of languished while those rates are moving down? Or is that rate generally a little bit stickier to sort of SOFR?
Sebastien Martel, CFO
Yes, the rates are actually pegged to SOFR. So they haven't yet moved down. Obviously, there should be some positive news in the next few weeks, hopefully, that is going to be announced. That is certainly going to help the U.S. dealers. But as of recently, they've been stable at the level in the last few quarters.
Jaime Katz, Analyst
Okay. And then when we think about assessing secular demand changes, I think it would be interesting to hear how maybe something like unchartered society demand has changed in the recent period. Has that sort of kept up given the limited requirement for ownership in it? And otherwise, have you seen any other patterns coming out of that business?
Jose Boisjoli, President and CEO
I don't have the latest data this morning, but I didn't hear anything new. The goal of Unchartered Society is to partner with the best rental operators globally to ensure we provide a top-notch experience for our consumers. As we say internally, we want to fill seats because every time someone tries our product, we believe it increases our chances of converting to sales. However, I don’t have any new numbers to indicate if their business has slowed down significantly recently.
Jaime Katz, Analyst
Perfect, thanks.
Operator, Operator
Thank you. Next question will be from Luke Hannan of Canaccord. Please go ahead.
Luke Hannan, Analyst
Thanks. Good morning. Just one question on my end here. If we go back to last quarter, if I remember correctly, Jose, I think it was roughly two-thirds of the units that you had retailed during the quarter were current versus non-current. Where did that stand this quarter? And how does that compare to the industry?
Sebastien Martel, CFO
Yes. As I said in my prepared remarks, we are actually successful in retailing non-current units in the quarter. At the end of the quarter, what I can tell you is the overall inventory in the network, about 75% of the inventory was current. It was a bit lower because snowmobiles. As you know, we finished the season last year with higher snowmobile inventory that becomes non-current. As for ORV, the inventory in the network was 90% current at the end of July. So we're in a very good position there.
Luke Hannan, Analyst
Great. Thank you very much.
Operator, Operator
Thank you. Next question will be from Brian Morrison at Cowen. Please go ahead.
Brian Morrison, Analyst
Good morning. Thank you very much. I appreciate the color on Mark's question on the 15% to 20% inventory reduction. Can you just take it one step further if you target 90 days of inventory, where are you now? Because I have you around 135 days. And if I add back the destock to forward revenue, they still have you about 120. Can you just share with us where you are now?
Sebastien Martel, CFO
Yes, we are below 135 days of inventory. I would need to verify your figures, but we are indeed less than 135. When you compare our wholesale to retail, our wholesale numbers are lower, which might explain the higher figures you're seeing. We've made significant progress; our inventory has already decreased by 13% since the start of the year. We are in a strong position to achieve our goal of a 15% to 20% reduction by the end of the year, Brian.
Brian Morrison, Analyst
Okay. I understand. Can you give us a ballpark of where you are or no?
Sebastien Martel, CFO
Well, the ballpark is around 30% down. So that's pretty precise in terms of number.
Brian Morrison, Analyst
Okay. I'm talking in terms of days. But next question in terms of your liquidity, I understand it's very good, but is there a target leverage that you don't want to exceed, I think you had a target of 1.5 times to 2 times previously?
Sebastien Martel, CFO
Yes. Well, we want to keep a normal circumstance, I want to have time to 2 times because we want to have that flexibility. And we know that in a situation where there is a slowdown and we need to correct delivery that the leverage is going to go up. But when we IPO-ed, we were three times levered, and we operated at that level, and we were very comfortable operating at that level because our debt is coming at light and the maturities have been extended, and so we have no short-term financial commitment that is going to distract the organization from focusing on operations versus managing cash flow. And so could we run at three times, 3.5 times? In the current context where with our treasury team earlier this year, we extended the maturity of the revolver and the Term B. I'm super comfortable operating at those levels.
Brian Morrison, Analyst
Okay. And then last question, maybe, Jose, say, do you have any insight right now into the used market?
Jose Boisjoli, President and CEO
We don't have much data on the used market. However, it's clear that during COVID, many consumers bought products at prices above MSRP. This situation is gradually improving. It takes time for our customers to come to terms with a greater loss on their used units than they anticipated. I would say things are stabilizing now, but I don't have specific data to share with you this morning.
Brian Morrison, Analyst
Okay. Thank you very much. I appreciate the actions you guys are taking.
Jose Boisjoli, President and CEO
Thank you.
Operator, Operator
Next question will be from Fred Wightman at Wolfe Research. Please go ahead.
Fred Wightman, Analyst
Hey guys, good morning. I was just hoping you could unpack the changes to the year-round guidance. I mean, to your point, that's sort of where the biggest chunk of the full year outlook adjustment comes, but there are some different subcategories down within that. So could you sort of give us the magnitude where you're making the biggest changes?
Sebastien Martel, CFO
Yes. We made an adjustment to our product revenue guidance, if I look at the midpoint, by about $165 million. The year-end products is a big business, about 50% of revenues in the second half of the year. And the ORV industry is where we've made the biggest adjustment because that's where we're seeing more softness. And we want to be cautious, obviously, on the shipment plan. About 80% of the adjustment we did is on side-by-side, and the rest equally distributed between ATV and three-wheel. But again, as I mentioned, we want to be cautious. But yes, we're still very bullish on the prospects of ORV. As I mentioned earlier, coming out of the cloud, the new ATV platform, very well received, the Maverick MAX as well, which is 60% of the supersport industry for side-by-side. That was super well received and also the new Defender with the upgrades that we did on the Defender CAB. Plus we have also great product news coming out next year for the ORV business, but we're anxious to announce that. And so we're still very bullish despite making a sizable adjustment on ORV this quarter.
Fred Wightman, Analyst
Great. Thanks a lot.
Operator, Operator
Thank you. Next is Tristan Thomas-Martin at BMO Capital Markets. Please go ahead.
Tristan Thomas-Martin, Analyst
Good morning. Just one question on PWC. You said you're going to kind of end the season with some carryover inventory. The selling season itself is ending. So I'm assuming there's a lot of floorplan support kind of baked into your guidance and potentially early next year. Is that right? And then is there any way to quantify how much that is?
Jose Boisjoli, President and CEO
Watercraft, to explain the dynamics that occurred in season '24, there are two key elements. First, we were taken aback by the extent of the industry decline. By the end of May, we were still on track with our plan, although it was modest, but the trend was in line with expectations. We noted that Memorial weekend at the end of May was softer than usual. However, June and July saw very weak retail sales, marking the lowest Q2 industry retail in eight years. The decline was significant for June and July. This was a situation affecting the entire industry. Additionally, although we anticipated challenges, they turned out to be worse than expected. As you may recall, in 2023, our main competitor released their new product late, allowing us to capture substantial market share in that category. However, this year, while we had a significant amount of non-current inventory, our competitor had even more, leading us to lose more market share in that category than we had planned. Honestly, our projections were likely overly optimistic. These are the two factors that impacted our watercraft retail this season. Nevertheless, we are finishing the season with nearly 60% market share. While we cannot be satisfied with this outcome, we need to adjust our shipments and rebalance inventory for next summer to maintain our strong business performance.
Tristan Thomas-Martin, Analyst
I see your point. What I meant to ask is, with winter approaching and dealers possibly having excess PWC inventory, is there additional floor plan support available, and could you specify how much?
Sebastien Martel, CFO
Yes, we do provide additional floor plan support depending on the dealers depending on how much more inventory they have in the yard. And we do provide support until early next year, but you'll appreciate that for competitive reasons, I'll hold back from disclosing any amount, but it's all provided for in the guidance.
Tristan Thomas-Martin, Analyst
Got it. Thank you.
Operator, Operator
Thank you. At this time, we have no other questions. I will turn the call to Mr. Deschenes to close the meeting.
Philippe Deschenes, Vice President, Investor Relations
Great. Thank you, Sylvie, 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 December 6. Thanks again, everyone, and have a good day.
Operator, Operator
Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.