Good morning, ladies and gentlemen, and welcome to the BRP Inc.'s Q3 FY 2019 earnings conference call. I would now like to turn the meeting over to Mr. Philippe Deschênes. Please go ahead, Mr. Deschênes.
Thank you, Maude. Good morning, and welcome to BRP's Q3 conference call for fiscal 2019. Joining me on the call this morning are José Boisjoli, President and Chief Executive Officer, and Sébastien 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 that are subject to a number of risks and uncertainties. I invite you to read BRP's MD&A for a listing of these. Also, during the call, reference will be made to supporting slides, and you can find the presentation on our website at brp.com under the Investor Relations section. With that, I'll turn the call over to José.
Thank you, Philippe. Good morning, everyone, and thank you for joining us. I am pleased to report that we carried our excellent momentum into this quarter as we continue generating strong retail growth around the world and deliver another quarter of solid financial performance. The last few months were also marked by good progress on key initiatives to sustain our growth trajectory in the future such as the successful launch of key product, notably the Can-Am Ryker and the new Side-by-Side models at our annual dealer event, the positive progress on our different manufacturing capacity increase initiative in order to meet the growing demand for our products, the integration of Alumacraft and Manitou, the two boat companies we acquired earlier this year, and the listing in the United States on Nasdaq.
We are very pleased with our overall Q3 performance, especially considering it is lapping a very strong fiscal year 2018 Q3 , fueled largely by the momentum in the Side-by-Side market that is continuing. On the back of the solid result we achieved so far this year and the good visibility we have on the remaining months of the year, we are comfortable increasing the lower end of our guidance for the end of the year, bringing our normalized EPS guidance to a range of CAD 2.96 - CAD 3.06, representing a growth of 30%-35% versus last year. Now, let's turn to the financial highlights on the quarter on slide four. Our revenues reached a record level for Q3 at CAD 1.394 billion, representing a 14% growth over last year's third quarter, primarily driven by the continued strong demand for our Side-by-Side lineup.
Our normalized EBITDA grew seven percent and reached CAD 203 million, and our normalized earnings per share was up five percent to CAD 1.04. Our retail sales continue to show robust growth. In North America, our Powersports product retail grew six percent in an industry that was down low single-digit in the quarter. Excluding snowmobile, we grew 16% compared to an industry that was up low single-digit. As you can see from this slide, our strong growth continued to be driven by the popularity of our Can-Am Off-Road product lines, where Side-by-Side is up in the mid-20% range, whereas the sector is only up mid-single-digit. ATV sales are up low single-digit percentage, and the sector elsewhere is declining. For our Sea-Doo lineup, we have also performed extremely well. We are up in the high-20% range in an industry that is showing low-teen percentage growth.
We are very happy with our Powersports retail performance. Despite some economic weakness in certain regions of the world, such as the Middle East and part of Latin America, our product portfolio continued to experience strong consumer demand around the world, driving retail growth of 11% in Latin America, three percent in EMEA, and 14% in Asia Pacific. In EMEA, the stronger industry growth was due to the motorcycle segment in which we don't participate. We have strong retail demand for our product in all key regions. As you can see on this slide, our retail performance has been exceptional since fiscal year 2017. Our strategy is paying off as we continue to push technology and innovation to create market-shaping products. We have deployed the best value proposition for our dealers, improving their profitability, and they are now more than ever great ambassadors of the BRP brands.
With the focus and the solid execution of our team on all fronts, we have been able to outperform our competition and significantly grow our business. In September, we held our annual Can-Am and Sea-Doo Club, at which we introduced our new product, notably the Can-Am Ryker. Over the last two years, we have put in place teams on the ground in key U.S. states to better understand how we could unlock the full potential of the three-wheel vehicle category. Two elements emerged that had to be overcome. Facilitate the accessibility to the three-wheel license and address the pricing. At Club, we unveiled our plan in three aspects. First, the introduction of more affordable product. The new Ryker vehicle, with an MSRP starting at $8,499 U.S., is about 50% lower than the existing entry-level Spyder F3, increasing our addressable market by 2.8x . Second, to address the price point issue.
We repriced the F3 and RT models, and we are offering in the U.S. a leasing option for all our three-wheel vehicle models. You can now ride a Ryker for as low as $149 a month. Third, to provide access to a rider education program. By the end of this year, we will have opened up over 150 schools and have over 9,000 people who have registered to a course, of which 6,500 have already completed it. The rider education program is working and is ramping up. With this plan in place, we are well-positioned to unlock the full potential of the three-wheel vehicle business. Overall, we were extremely pleased with the reception to the introduction of the Ryker after the dealer event in September.
Media tours were conducted in North America and Europe, and we attended some key trade shows, particularly in France and Germany, where the reaction was overwhelmingly positive. We have been very happy with the way the media, consumers, and dealers have responded and the excellent attention this product has already earned. The media outreach generated over 450 million impressions in just two months, outpacing the Sea-Doo Spark benchmark launch in a shorter period. To date, approximately 90% of our dealers worldwide have purchased the Ryker Design Lab, which is a requirement in order to carry the Ryker line. The production is on plan, and delivery started this past Monday. Besides the launch of Ryker, the other highlight of the call included the launch of the seventh new side-by-side platform, the Maverick Sport MAX, which was well-received.
We also continue to introduce specialized side-by-sides, like the entry-level Maverick Sport X rc and Defender MAX XMR. On the Sea-Doo front, the Fish Pro is the first personal watercraft tailored specially for the fishing market, an important growth opportunity with more than 700 million anglers involved in recreational fishing worldwide. Also, we were pleased by the reaction to the waterproof radio we launched in Denver. I would like to remind you that it can be retrofitted to more than 120,000 Sparks sold worldwide since 2014. Let's turn to slide 11 for the year-round product highlight. Revenue was up 21% for the quarter, mainly driven by a higher volume of side-by-sides sold. On the retail side, we are now four months into the season 2019, and the industry is up high single digits.
For the same period, Can-Am side-by-side retail was up in the high 20%, gaining market share in both the utility and sport segment. We continue to experience robust demand for our Can-Am side-by-side lineup, and despite the incremental 30% of capacity we added earlier this year, our production is still lagging demand. Work for the second phase of capacity increase at our Juarez two facility is well underway, and hourly capacity increase will start ramping up in H1 next year to be full speed beginning H2. The project is on schedule and budget. Turning to ATV. The North American ATV industry is also four months into the season 2019, and retail is down low single digits. For the same period, Can-Am ATV is up low single digits, notably gaining share in the more profitable high CC segment.
For the last three years, we have been outpacing the industry, and we are very happy with this momentum. A look at the most recent season for the three-wheel vehicle business. The North American three-wheel industry ended its season 2018 on October 31st with retail down high single-digit percentage. Can-Am Spyder retail was down mid-single digit over the same period. Season 2018 was a transition year for our three-wheel vehicle business. We focused our efforts on deploying the rider education infrastructure, managing our network inventory, and successfully launching Ryker. We met our objectives on all these initiatives, and we believe the progress we have made has positioned us well for a successful upcoming season. Turning to seasonal product on slide 12. Seasonal product revenue was up three percent , primarily driven by a higher volume of personal watercraft sold.
In terms of retail, it's still early in the season, although the North American snowmobile industry was down in the high-teen percentage. Sea-Doo retail was also down in the high-teen percentage, primarily due to the later shipment of Spring Order pre-sold units and lower level of non-current inventory in our network versus the previous year. Our starting non-current inventory was 50% lower this year than last year. Remember that Spring Order units are a special model on which customers put a deposit during the spring season. We had more demand than anticipated for all models with our new 900 ACE Turbo that resulted in later delivery.
The good news is that there is snow in North America already. Dealers are extremely busy preparing sleds to be delivered to eager consumers. In Europe, Ski-Doo and Lynx are off to a good start with quarterly retail up high single-digit percentage in Scandinavia, where we started the year with almost no non-current inventory. Retail is up low 20% in Russia, a market that continued to recover at a slower pace. Turning to personal watercraft, the North American industry ended its season 2018 on September 30th, with retail up high single-digit. Sea-Doo had another very strong season in North America, with retail up mid-teen percentage, allowing the brand to reach its highest market share number in history in the region. The strong performance was driven by a record high sell-through on the new Sea-Doo platform introduced last year.
2018 was not only strong in North America, but in all our key markets, as you can see on slide 13. When looking at the 12-month period ended on September 30th, Sea-Doo retail was up mid-20% in Latin America, up mid-teen percentage in EMEA, and up in the mid-50% in the Asia-Pacific region. The next season is looking promising with good early momentum in counter seasonal market. Sea-Doo quarterly retail is already up on average over 35% in Latin America and Asia-Pacific region. We are more than happy with our Sea-Doo business. Continuing with the quick look at Powersports PAC and OEM engines. Revenue were up 13% in the quarter, driven by the continued growth of our accessory sales, notably on side-by-side and personal watercraft.
The increased growth of side-by-side and personal watercraft sales is having a secondary effect of improving sales on related accessories, especially with our LinQ system. So far this year, we added 450 new accessories, many of which are LinQ compatible and capable of being installed across our product lineup, and this is creating great momentum. Looking at the Marine category, our revenue were up 30% in the quarter, driven by the acquisition of Alumacraft and Manitou, which were partially offset by a lower volume of outboard engines sold. Looking at retail sales four months into the season 2019, the North American outboard engine industry is up low single-digit, with Evinrude retail down mid-single-digit. Internationally, the outboard results were better this quarter, retailing double-digit percentage, driven mainly by Europe and Australia, New Zealand.
I wanted to take a few moments to also update you on our Marine strategy we previously presented when we announced the creation of the Marine Group. As you remember, our buy, build, and transform plan is a mid to long-term strategy. Similar to what we have done in Powersport business, we want to bring meaningful innovation to the Marine industry. We are in the early stage, but progressing well. One of our first steps is to properly integrate Alumacraft and Manitou, including their people and dealers. We attended dealer meeting for both companies this fall. For Alumacraft, the boat booking for the upcoming years is in line with last year, despite having two large engine OEMs stopping product supply. For Manitou, the pontoon industry is growing at a fast pace, and our orders for the upcoming season are up by about 20%.
We are happy with our acquisition of Alumacraft and Manitou, and the way they are integrating within BRP. With that, I will turn the call over to Sébastien, and will return for closing remarks.
Thank you, José, and good morning, everyone. As José mentioned, we posted strong results this quarter. Since the beginning of the year, our results are also solid, which is a reflection of our excellent business fundamentals. With year-to-date revenue growth of 16%, normalized EBITDA growth of 27%, normalized EPS growth of 44%, and with a continued robust consumer demand for our products, we are in good position to deliver our guidance for the year. Looking at the quarterly results, revenues were up 14% to reach CAD 1 billion 394 million. The growth was primarily driven by higher volume of side-by-sides sold. Revenues grew across all regions, with U.S. being up 19%, Canada up nine percent , and international up eight percent .
We generated CAD 357 million of gross profit, representing a gross profit margin of 25.6%, down 50 basis points from last year's third quarter, primarily due to unfavorable product mix, which was partly offset by a higher volume of side-by-side and PAC sold. Our normalized EBITDA was up seven percent to reach CAD 203 million, and our normalized earnings per share was up five percent to reach CAD 1.04. We generated CAD 98 million of free cash flow and invested CAD 79 million of CapEx. We also completed the Manitou acquisition in the quarter for a total consideration of CAD 75 million.
Turning to Slide 18, our normalized net income was almost flat compared to last year's third quarter due to the following: a net favorable impact from volume, mix, pricing, and sales programs for CAD 41 million. A favorable foreign exchange rate impact of CAD 4 million was offset by higher production, operating and depreciation expense for CAD 38 million and higher financing costs and normalized income tax expense for CAD 8 million. Moving to network inventory on Slide 19. Our network inventory is up nine percent over last year's Q3 level, primarily driven by higher side-by-side inventory, as we are now benefiting from the first phase of capacity increase at our Juarez two facility, allowing us to increase shipment cadence and work on catching up with consumer demand for our products. The growth was also driven by higher PWC inventory in line with the growing demand for our lineup.
Partly offsetting these elements was a reduction in snowmobile network inventory, as we are starting the season with a clean network inventory position. Turning to Slide 20 for an update on our fiscal year 2019 guidance. I mentioned earlier, given our strong financial results so far this year, with the continued robust consumer demand for our products, we are confident in our ability to deliver our guidance for the year. We have adjusted our revenue guidance upward, coming from favorable exchange rates. We are planning revenue growth of 13%-17% and normalized EBITDA growth of 20%-22%. We have tightened the normalized tax rate to a range of 26.5%-27% for the year, which is bringing our expected normalized EPS range at CAD 2.96-CAD 3.06, resulting in a growth of 30%-35%.
Looking at next year, we mentioned last quarter, given our strong momentum, our objective is to deliver at least CAD 3.50 of normalized EPS one year earlier than initially planned in our 2020 objective. We have seen the recent implementation of new tariffs over the last few months, our objective remains unchanged given the continued strong demand for products around the world, the very positive reaction to our newly introduced products, the phase II of capacity increase at Juarez two that is on plan and is expected to deliver an additional 50% of side-by-side production capacity, and our unparalleled innovation capabilities that are providing us with a solid pipeline of product introductions for next year. We are well-positioned to continue delivering strong growth. With this, I will turn the call back to José.
Thank you, Sébastien. Overall, we are very happy with our Q3 result, given that we're lapping a strong performance year-over-year for our fiscal year 2018 Q3 result. All our product line in the Powersports category are outpacing the competition. Our dealer network and the media welcome our new product with keen interest, and we expect our consumer to feel the same way. Our marine strategy has progressed with the acquisition of two boat companies and over the mid- to long-term will lead us into new opportunities. The team around the world is executing very well and I'm proud of their contribution. Despite some headwind in a still volatile environment, we are executing on our plan and we continue to outpace the industry.
I strongly believe that the strength of our diversified product portfolio, our global distribution capabilities, and our world-class manufacturing footprint is what has made us successful and what differentiates us from the competition. As mentioned, we are well-positioned to deliver a record year with normalized EPS growth of 30%-35%. We are confident we'll be able to deliver at least CAD 3.50 EPS for fiscal year 2020 in the current economics context. Our product lineup have never been as strong with our diversified product portfolio and the engagement from all our dealer is high. The fundamental of our business are very strong and we are excited with our momentum. On that, I will turn the call over to the operator for question.
Thank you. Please press star one at this time if you have a question. There will be a brief pause while participants register for questions. We thank you for your patience. Our first question is from Derek Johnson from BMO Capital Markets. Please go ahead.
Hi. Good morning. My first round will be focused on boats here. Thanks for the purchase price on Alumacraft, but can you talk about the annual sales run rate for Alumacraft, Manitou, and then also what the boat contribution was in the quarter, and perhaps how the integration is going at the dealer level? I guess that's good for now, and I'll follow up later. Thank you.
Good morning, Derek. I will take the dealer question and Sébastien will take it from there. Just to give you a sense, it's just starting. Obviously, there was some other engine OEM brand that decided not to continue with Alumacraft, but I think it's too early to give feedback, but we feel comfortable. On the Alumacraft side, we've lost maybe 20 dealers so far, but we have 50 Evinrude dealers that raised their hand to take over the brand. We feel comfortable. I would like to remind you some number. Alumacraft has about 275 dealers, mainly east of North America. Manitou, 150 in the Midwest. Even though we have 1,000 dealers coast to coast, there is maybe some short-term disruption in the dealer network because some other engine brands need to decide if they will continue to carry Alumacraft and Manitou.
mid-term, we don't see any problem going forward. Sébastien?
On the revenue numbers for the quarter, the Boat acquisitions had less than three percent of the quarterly revenue. When I look out for next year, it should be about that three percent . We're looking at about probably CAD 200 million of revenue from the Boat businesses. Gerrick?
Great. Thank you very much. I'll get back in queue.
Thank you. Our following question is from Robin Farley from UBS. Please go ahead.
Great. I wonder if you could give some color around average selling price on the off-road and the side-by-side business, and just kind of a little more color on what's happening with margins there, just with your revenue guidance raised, but not your EBITDA guidance raised. Thank you.
Yeah. When I look at ASPs for the quarter, and I'll give it more broadly, ASP was flat for the quarter, and I alluded to mix being unfavorable this quarter. That brought the ASP down for side-by-sides. If you recall, last year we introduced the Maverick Sport Trail, and now we have a 60-inch Maverick Sport. Obviously, a year into product announcement, we're shipping more of those products to dealers. That's what impacted ASP this quarter. On the ORV side, mix was rich and the ASP was up. But overall, Robin, flat ASP, all product lines on the Powersports side blended together.
Great. Just kind of thinking about margins with the increase in revenue guidance, but not EBITDA, just can you talk us through a little bit about that dynamic?
Yeah. We've been seeing favorable exchange rates in the last few months. Q3 as well, the rates were favorable. The rates are trending above CAD 1.30 for the U.S. and as you know, we are kind of naturally hedged throughout the year, our bill of material cost versus our expenses and our revenue. Yes, we're seeing a revenue uplift, but because of the hedging position that we have, we're not seeing that flow down to the bottom line. The drive and 100% of the adjustment in revenue comes from foreign exchange.
Okay, great. Thank you.
Thank you. Our following question is from Mark Petrie from CIBC. Please go ahead.
Good morning. I wanted to ask about Ryker. Obviously, good response from the dealers, just in terms of magnitude, how would the take up on sort of Ryker and the design lab compare to how dealers have been positioned with Spyder? I guess sort of related to that, what's your sense of how dealers are allocating space within their dealership? I mean, are they giving up floor space from Spyder to Ryker or sort of how is that kind of playing out at this point?
Yeah. Good morning, Mark. First, in North America, we are exactly on plan in term of the number of Ryker we book in. At international, the demand is about 25% higher than what we had originally planned. Those shipments will happen next year. It's a very good question because we believe that the design lab is critical for the experience for the consumer. As you know, we have only three SKU and the customer can customize on-site the Ryker and that's why the dealer need to buy the design lab to carry Ryker. So far happy, in Europe almost every dealer have purchased the design lab and in North America about 90% and some decided not to continue with the Spyder business because it was too expensive. We've lost probably 40, 50 dealers in North America.
On the other hand, many dealers who were not carrying Spyder have raised their hand. So far, we're very happy with the booking, with the take rate on the Design Lab and also the first feeling we have from the media and the press is very positive. As I mentioned in my intro, we started to deliver the Ryker this Monday. The target is every dealer should get two in their store for demo before Christmas.
Okay, thanks. That's helpful. Then I guess just sort of a more of a high level question. Obviously, you've got a lot of capacity coming on next year. You reiterated your EPS target for fiscal 2020, you remain confident. At a high level, can you just sort of share your assumptions or generally how you're thinking about the macro environment and sort of the health of the consumer and industry demand over the next kind of 12 - 18 months?
Well, let's say that, obviously, we're not economists, the interest rate has increased, many are a bit concerned that it will impact the consumer demand. To be honest, in Q3, the traffic at the store were good, as you can see in our retail. So far, in Q3, watercraft and side-by-side were up about 25%, in Europe was the same thing. We don't see any impact at the retail level. Like I said, the traffic was still very good. I would like to say, most of our industry are still growing. I think everything is growing except ATV, which is flattish, and the snowmobile, which is too early to conclude anything. We understand that there is some concern on the global economy, we don't see that at our level.
We believe that as long as the unemployment rate is low and the housing market is, I would say, okay, we are in good shape.
Okay. Thanks a lot.
Thank you. Our following question is from Benoit Poirier, from Desjardins Capital Markets. Please go ahead.
Good morning, everyone, and congratulations for the good quarter. Could you provide some comments about your inventory at the retail level, more about the age of the inventory and what type of expectations, what should we expect in terms of inventory going into the Q4 and fiscal 2020?
Good morning, Benoit. When I look at the overall inventory position, yes, the inventory is up this quarter, but for the right reasons. Retail, when I exclude snowmobile, was up 16%, inventory up nine percent . I'm very comfortable with the inventory that we have. When I look at aging as well, units above 18 months is less than five percent of the inventory that's outstanding. My outlook for the fourth quarter is that inventory is going to continue to increase, coming by two elements. One, with side-by-side, demand is there. We're still not meeting consumer demand, so obviously we'll be shipping side-by-sides to the dealers ahead of the spring season that's coming. Also, as José mentioned a few minutes ago, we started shipments of Ryker, and so we'll be busy shipping in December and January, and so I'm expecting Spyder inventory will also be up.
For snowmobile, there's snow on the ground, hopefully we'll have a good season. We finished off with clean inventory last year, I would expect snowmobile to be relatively flat versus a year ago.
Okay. That's very good color. When we look at your recent stock performance, any thoughts about your interest for renewing your NCIB that was completed earlier this year, Sébastien?
Yeah, as you said, we completed the NCIB in July. The next window is going to open in Q1 of next year, we've done everything that we could do under the NCIB. Obviously, when we look at where the share price is trading and the valuations, it's part of the discussions we're having with the board in terms of using our capital. Our balance sheet is strong. Our priority number one is to continue investing in growth. Obviously, we'll be opportunistic if we need to be.
Okay. Thank you very much for the time.
Thank you. Our following question is from Derek Dley from Canaccord Genuity. Please go ahead.
Yeah. Hi, guys. Just a question on the PWC growth, obviously quite strong during the quarter. Can you comment just on the split of that growth between some of your higher-end models versus the Spark?
Yeah. Good morning, Derek. Yes, we have more than 50% of the industry than the market share. When we have success in a segment, we pull the segment up. Basically, the high-end, what we call internally the luxury performance, the industry was up this season by about 50%, and we were up by more than 30%. That proved the success of the new platform that we introduced last year. Recreational was up mid-single digit. We're up high single digit, and rec lite was flattish at mid-single digit. As you can see, every segment is growing, and we are pacing the industry in luxury performance and recreational. Overall, very happy. These are numbers from North America, but the phenomena is the same worldwide.
Okay. That's very helpful. Just on the inventory position, Sébastien, appreciate your comments on the snowmobile side, but can we just talk about some of the other business lines? Is it mostly relatively current inventory that's in the channel right now?
Yes, very current. We finished clean on snowmobile last year, what we're shipping is the current models. Watercraft, we finished a bit higher, that's in line with overall market performance and market growth. ATV, we continue gaining market share, that's clean inventory. For side-by-side, well, most of it is driven by the new models that we've introduced.
Okay, great. Thank you very much.
Thank you. Our following question is from Craig Kennison from Baird. Please go ahead.
Good morning, thank you for taking my questions. Just to follow up on the inventory question, I apologize if I missed it, do you have inventory growth excluding the snowmobile category?
I do not have it with me, but we could rummage around and see before the end of the call if we could pull it out, but else, we will be glad to provide that info to you.
Okay, thanks. José, how should investors view the turnover in leadership in the Powersports segment? Obviously, you brought in a lot of good talent there, but there has been change.
Yeah. Bertrand came to the company, it was a new industry for him. He came from the car industry. After 10 months, he and I felt that the fit was not there, he wanted to continue in something else. We have looked at what were our options, and we have, as you know, with Sandy Scullion, who has been with the company for more than 20 years, and Thomas, who was in Austria for five years. We have very good talented person who will co-lead the Powersports group. Just that you know, Thomas, that you met when we were in Austria in 2015, has accepted to move to Canada with his family. At the minute that we will get his working permit, he will move here and both of them will be based here.
Those things happen, but very happy that we have very talented people internally.
Thank you. Finally, just getting back to the macro environment. We have seen reports of more farmer bankruptcies, in the upper Midwest of the U.S. How would you characterize your exposure to that farm economy, and are you seeing any weakness in trends there? I know you've got Defender, which is gaining a lot of share, so maybe that masks some of the weakness, but curious what you're seeing.
Yeah. We don't see much. The oil and ag patch that we call, we don't see much. Those states are still somewhat depressed. For us, like you just said, it's very difficult to analyze because the Defender momentum is masking the slower industry. That's for U.S. Canada is still soft in the West versus the East. As you can see, with the momentum we're gaining with our side-by-side business, all of this is masking those slow growth or flattish state in U.S.
Great. Thank you.
Thank you. Our following question is from Cameron Doerksen from National Bank Financial. Please go ahead.
Thanks. Good morning. I guess just to follow up on the snowmobile retail in the quarter. I just wonder if you can just go over again what the sort of key driver there was of the retail softness. I mean, the way you described it sounds more of a timing issue than anything. If you could just maybe comment on what you're seeing so far subsequent to quarter end with snowmobile retail. You mentioned the early snow in a lot of parts of North America that should bode well, but just wondering what you're seeing so far.
Yeah. Obviously, I would like to remind you that we have 50% of the industry. When the timing of what we're doing is affecting our retail, it's affecting the industry, but somewhat, basically in the non-current. We started the year this year with 25% of the non-current inventory, and our market share is 50% plus. This is affecting our start of the season. On the other hand, the spring unit, we always have a very high level of snowmobile that are pre-sold to customers. The popularity of all the model with the 900 Turbo, resulted that we're shipping those models a bit later than what was planned originally because the volume was at twice as what we were planning. There is another phenomenon. I was with a dealer from Milwaukee Wednesday evening, and he was telling me that he winterize about 200 watercraft every year.
With the warm fall we had, the customer kept the watercraft on the water very long. He winterize basically his watercraft about a month later than typically and started to focus on PDI snowmobile at a high speed a month later. I think there is all those moving part that is affecting the retail season. With the good snow we have here in the East, it's a bit weaker in the west of Canada, but overall, I would say it's a very good start to the season, and we're not worried with the snowmobile season.
Okay. No, that's very good. Maybe just a second question from me. We've talked a bit about the macro environment. It doesn't sound like you're seeing any real weakness there at this point. Can you maybe just discuss what your flexibility is to reduce your cost base in the event that we do have a slowdown in demand? Just what kind of flexibility you have with your either your manufacturing or your, I guess, overhead costs to reduce your cost base in that kind of eventuality?
Yeah, that's a good discussion that we had with the board yesterday. Our situation is quite different than what happened 2008. Just to give you a sense, today we have a lot more diversified product portfolio. We're less dependent on seasonal product than we were before. We entered a side-by-side utility segment with a Defender, which is, we believe, a more stable industry when you have big fluctuation with the economic environment. Our network inventory with the order management system that we have in North America, the dealer order every month. We believe off-road will be adjusted very quickly down. We are more diversified today than we were in 2008, 2009. We did continue to increase our global sales worldwide. Our manufacturing footprint is more flexible. We can move product around between product line.
Our debt, lower leverage, covenant light, we have a lot more flexibility than what we had in 2008. BRP is a company that have been through many, many cycle, and we can react very quickly if thing happen. We're not looking for those period, but we believe we are in good shape versus where we were in 2008 - 2009, and obviously 2008 - 2009 was a very, very bad recession.
No, absolutely. Thanks very much.
Thank you. Our following question is from Jaime Katz from Morningstar. Please go ahead.
Good morning. Thanks for taking my questions. First, I'm interested in hearing about international markets, particularly Western Europe. In the table in your financial statement release, it appears that Western Europe trailed a little bit this quarter, and I'm curious if that is either effects related or if there's a certain consumer segment that's acting as a lag in that region.
Good morning, Jaime. What happened in Western Europe is two phenomena. First, this fall in Q3, the retail for watercraft was very, very good because it was a very warm fall and our dealer are almost sold out of watercraft. It was a bit slower on the off-road business, and we believe it's because the weather was so hot. When it's 35 degrees Celsius, it's not comfortable to purchase an ATV or a side-by-side. The watercraft was good and traffic was good in the dealership, a bit less in off-road, but the big drive came from the motorcycle business. It was a good season for motorcycle in the mid CC segment, in a category that we don't participate in any of our product line. This is how we see the situation in Western Europe.
In Scandinavia, where we are very, very strong with very high level of market share in every product line, the retail was good overall.
Okay. You commented briefly on tariffs in your prepared remarks, but I'm curious if you have any quantifiable insight into how that maybe has affected the business given the amount of sales that are completed in the U.S., positive or negative.
Good morning, Jaime. Last quarter, when we talked about inflationary elements for fiscal year 2019, the current fiscal year versus guidance, I alluded to a CAD 25 million impact for this year and also talked about impact for next year of about CAD 25 million as well. What came into effect since we last talked was the Section 301, the list three tariffs, which were, I guess, confirmed and communicated. And those tariffs impact mostly our PAC business as we buy goods from China and import them into the U.S. And so what I'm estimating in terms of cost for next year coming from those tariffs, the list three, is about a CAD 10 million impact for next year. So if you-
It's actually better.
Pardon?
It's actually better than you originally anticipated.
No, well, actually, we still have that CAD 25 million coming from commodities, freight.
Okay.
That's still there. The CAD 25 is there. Add the extra CAD 10 on the CAD 25. About a CAD 35 million impact for next year. Again, it's material, but obviously it's something that we can manage. As every year we do have inflation, and as a customary, we have our cost efficiency programs that are in place and we'll address those cost increases appropriately as well. Despite all of that, we're still comfortable on delivering the CAD 350 for next year.
Thank you.
Thank you. Once again, please press star one at this time for any questions or comments. Our following question is from Seth Woolf from Northcoast Research. Please go ahead.
Good morning, gentlemen. Thanks for taking my questions.
Morning.
I guess, just talk about the off-road vehicles and marine industry. First of all, in your year-round products, did you get a chance to figure out what the growth was ex snowmobiles? I think, José, you said that as the capacity comes online, you're starting to meet consumer demand now. How should we think about this going into next year? Is this a number, the dealer inventory? Are we going to see that continue to rise and maybe accelerate?
Let's clarify a few things. The capacity increase in Juarez two, for side-by-side, we will start to ramp up the speed of the line Feb 1st. It will take about six months to reach the 50% increase that we're planning. It will start from low numbers Feb 1st, and by the end of H1, we'll be at 50%. Next year, our capacity for additional side-by-side will be about 25% more than what we've done this year. That's probably the simpler way to give you more colors about what we're planning for next year.
Yeah. In terms of inventory, excluding a snowmobile for North America, it would be in line with the retail that we had, excluding snowmobiles. We're looking at a high teen increase in inventory coming obviously from side-by-side with the retail growth that we've experienced in the quarter, and also personal watercraft with the added inventory we finished the season with compared to last year.
Okay. I'm assuming, so your turns are probably coming down because you're filling the channel with what they've been short on. Is that right?
Well, the turns obviously are good now because we have trouble meeting consumer demand on side-by-side. As we ramp up capacity next year, the turns should reduce a bit. Our objective is to maintain a level of inventory in the range of 120-160 days in the network. We're always cautious of maintaining those ratios, and we believe that's a healthy level of inventory that the dealers can support and making sure that they have the right products for the consumers.
Okay. Excellent. Just turning to marine business, you threw out the number for Manitou, 20%. Orders are up 20% year-over-year, I think coming out of the dealer show. Is there anything different that you guys have done from a model standpoint, or it's just the strength of that market is the underlying driver, do you believe?
No. On Manitou, Evinrude have been always strong. We rig about 35% of their pontoon already. Manitou dealer were used to sell Evinrude. And like you said, the pontoon industry is up high, about 15%. It was a good show. Dealer were enthusiast now that Evinrude and Manitou are together. We working on a strategy where we will rig from factory more pontoon, it make their life easier, and we believe it's all this that created the momentum. It's a combination of good industry momentum and the popularity of the Manitou product.
Okay. Thank you.
Thank you. Our following question is from Gerrick Johnson from BMO Capital Markets. Please go ahead.
Hey, thank you. Just on gross margin, the gross margin down 50 basis points year-over-year. Can you just please, Sébastien, quantify basis point hit or tailwind or headwind from mix leverage inputs, any other components to gross margin? Thank you.
Good morning again. Mix was a big factor this quarter. I talked about snowmobile, utility sleds that we shipped versus mountain. I also talked about the Maverick Sport. That was a hit of 130 basis points, that was offset by volume 80 basis points. In a nutshell, these two elements drove the margin down by the 50 basis points of the quarter.
Okay. No major swing either way on inputs then?
No. Well, yes. Well, production cost is about 40 basis points negative, but offset by pricing. Again, 40 basis points considering the environment in which we are, I'm pretty happy with that level of impact. The teams were able to react appropriately and our cost reduction programs are actually paying off.
Okay. Related to that, how about program expense as a % of gross sales this year versus last year?
Relatively flat. No variance in terms of margin. As you saw, the retail was strong. The pull from the watercraft was excellent. As José alluded to the new platform, the turnover on the new platform was strong, so we didn't necessarily have to put in programs. Year-over-year, flat.
Okay, great. Thank you very much.
Thank you.
Thank you. We have no further questions registered at this time. I would now like to turn the meeting back over to you, Mr. Deschênes.
Thank you, Maude, and thanks everyone for joining us this morning. Thanks for your interest in BRP. We look forward to speaking with you again for our year-end conference call in March. Thanks again, and have a good day.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.