Good morning, ladies and gentlemen, and welcome to the BRP Inc. Q3 FY 2019 Earnings Conference Call. I would now like to turn the meeting over to Mr. Philippe Deschenes. Please go ahead, Mr.
Deschenes.
Thank you, Mauve. Good morning, and welcome to BRP's 3rd quarter conference call for fiscal 2019. Joining me on the call this morning are Jose Bojalier, President and Chief Executive Officer and Sebastien Martel, Chief Financial Officer. 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.
Uncertainties. I invite you to read BRP's MD and A for listing of these. Also during the call, reference will be made to supporting slides, and you can find the presentation on our website atbrp.com under the Investor Relations section. So with that, I'll turn the call over to Jose.
Thank you, Philippe. Good morning, everyone, and thank you for joining us. 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 2 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 2.96 dollars to $3.06 representing a growth of 30% to 35% versus last year. Now let's turn to the financial highlights on the quarter on Slide 4. Our revenues reached a record level for 3rd quarter at $1,294,000,000 representing a 14% growth over last year's Q3, primarily driven by the continued strong demand for our side by side lineup. Our normalized EBITDA grew 7% and reached $203,000,000 and our normalized earnings per share was up 5% to 1.04 dollars Our retail sales continued to show robust growth. In North America, our powersport product retail grew 6% in an industry that was down low single digit in the quarter.
Excluding snowmobile, we grew 16 percent 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-twenty percent range, whereas the sector is only up mid single digit. ETV sales are up low single digit percentage and the sector elsewhere is declining. For our SEDU 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 Power Sport 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, 3% 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 ambassador 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 Sidu Club at which we introduced our new product, notably the Can Am Ryker. Over the last 2 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 3 wheeled vehicle category. 2 elements emerged that had to be overcome: facilitate the accessibility to the 3 wheel license and address the pricing. At Club, we unveiled our plan in 3 aspects. 1st, the introduction of more affordable product.
The new Ryker vehicle with an MSRP starting at $84.99 is about 50% lower than the existing entry level Spider F3, increasing our addressable market by 2.8 times. 2nd, 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 3 wheeled vehicle models.
You can now ride a Ryker for as low as $149 a month. And 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 3 wheeled vehicle business.
Overall, we were extremely pleased with the reception to the introduction of the Ryker after the dealer event in September. Media tour were conducted in North America and Europe and we attended some key trade show particularly in France and Germany where the reaction was overwhelming positive. So far, we have been very happy with the way the media consumer and dealer have respond and the excellent attention this product has already earned. The media outreach generated over $450,000,000 impression in just 2 months, outpacing the Seadust Spark benchmark launch in a shorter period. Today, approximately 90% of our dealer worldwide have purchased the Ryker Design Lab, which is a requirement in order to carry the Ryker line.
The product is on plan the production is on plan and delivery started this past Monday. Beside the launch of Ryker, the other highlight of the club included the launch of the 7th new side by side platform, the Mavic Sport Max, which was well received. We also continue to introduce specialized side by side like the entry level Mavic Sport XRC and Defender Max XMR.
On the
Sea Doo front, the Fish Pro is the 1st personal watercraft tailored especially for the fishing market, an important growth opportunity with more than 700,000,000 angler involved in recreational fishing worldwide. Also, we're 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 Spark sold worldwide since 2014. Now let's turn to Slide 11 for the year round product highlight. Revenue were up 21% for the quarter, mainly driven by a higher volume of side by side sold.
On the retail side, we are now 4 months into the season 2019 and the industry is up high single digit. For the same period, Can Am side by side retail was up in the high 20%, gaining market share in both the Utility and Sports 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 2nd phase of capacity increase at our U.
R. S. 2 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. Now turning to ATV.
The North American ATV industry is also 4 months into the season 2019 and retail is down low single digit. For the same period, Can Ami TV is up low single digit, notably gaining share in the more profitable high CC segment. For the last 3 years, we have been outpacing the industry, and we are very happy with this momentum. Finally, a look at the most recent season for the 3 wheeled vehicle business. The North American three wheel industry ended its season 2018 on October 31 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 3 wheeled vehicle business. We focused our effort on deploying the rider education infrastructure, managing our network inventory and successfully launching Ryker. We met our objective 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 were up 2%, primarily driven by a higher volume of personal watercraft sold. In term of retail, it's still early in the season, although the North American snowmobile industry was down in the high teen percentage. Ski Doo retail was also down in the high teen percentage, primarily due to the later shipment of spring break presold unit 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 certificate unit, 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 servo power pack that resulted in later delivery. The good news is that there is snow in North 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 18 on September 30 with Retail Hub 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 Seadoo platform introduced last year. 2018 was not only strong in North America, but in all our key market as you can see on Slide 13. When looking at the 12 month period ended on September 30, Sea Doo retail was up mid-twenty percent in Latin America, up mid-twenty percent in up mid teen percentage in EMEA and up in the mid-fifty percent in the Asia Pacific region. The next season is looking promising with good early momentum in counter seasonal market as Sidu quarterly retail is already up on average over 35% in Latin America and Asia Pacific region.
We are more than happy with our Sidu business. Continuing with a quick look at powersports pack and OEM engines. Revenue were up 13% in the quarter, driven by the continued growth of our accessory sales, notably 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 LINK system. So far this year, we added 4 50 new accessories, many of which are LINK compatible and capable of being installed across our product lineup and this is creating great momentum.
Now 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 4 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 moment 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 powersports business, we want to bring meaningful innovation to the marine industry. We are in the early stage, but progressing well. 1 of our first step is to properly integrate Alumacraft and Manitou, including their people and dealers. We attended dealer meeting for both company this fall. For Alumacraft, the boat booking for the upcoming years is in line with last year despite having 2 large engine OEMs stopping product supply.
For Manitou, the pontoon industry is growing at a fast pace and our order for the upcoming season are up by about 20%. We are happy with our acquisition of Alumacraft and Mini 2 and the way they are integrating within BRP. And with that, I will turn the call over to Sebastien and will return for closing remarks.
Thank you, Jose, and good morning, everyone. As Jose mentioned, we posted strong results this quarter and 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 the 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 $1,394,000,000 The growth was primarily driven by higher volume of side by side sold. Revenues grew across all regions with U.
S. Being up 19%, Canada up 9% and international up 8%. We generated $357,000,000 of gross profit representing a gross profit margin of 25.6 percent, down 50 basis points from last year's Q3, primarily due to unfavorable product mix, which was partly offset by a higher volume of side by side and packs sold. Our normalized EBITDA was up 7% to reach $203,000,000 and our normalized earnings per share was up 5% to reach $1.04 We generated $98,000,000 of free cash flow and invested $79,000,000 of CapEx. We also completed the Manitou acquisition in the quarter for a total consideration of $75,000,000 Turning to Slide 18, our normalized net income was almost flat compared to last year's Q3 due to the following: a net favorable impact from volume, mix, pricing and sales programs for $41,000,000 and a favorable foreign exchange rate impact of $4,000,000 were offset by higher production, operating and depreciation expense for $38,000,000 and higher financing costs and normalized income tax expense for $8,000,000 Now moving to network inventory on Slide 19.
Our network inventory is up 9% 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 II 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 up. Partly offsetting these elements was a reduction in snowmobile network inventory as we are starting the season with a clean network inventory position. Finally, turning to Slide 20 for an update on our fiscal year 2019 guidance. As I mentioned earlier, given our strong financial results so far this year and with the continued robust consumer demand for 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 therefore planning revenue growth of 13% to 17% and normalized EBITDA growth of 20% to 22%. We have tightened the normalized tax rate to a range of 26.5% to 27% for the year, which is bringing our expected normalized EPS range at $2.96 to $3.06 resulting in a growth of 30% to 35%. Looking at next year, as we mentioned last quarter, given our strong momentum, our objective is to deliver at least $3.50 of normalized EPS 1 year earlier than initially planned in our 2020 objective. While we have seen the recent implementation of new tariffs over the last few months, our objective remains unchanged given the continued strong demand for our products around the world, the very positive reaction to our newly introduced products, the Phase 2 of capacity increase at Juarez 2 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. And with this, I will turn the call back to Jose. Thank you, Sebastien. 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 results. All our product line in the power sport 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 2 boat company 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% to 35%. And we are confident we'll be able to deliver at least $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 questions.
Thank Our first question is from Gerrick 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 Triton. But can you talk about the annual sales that the annual sales run rate for Triton 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, Gerrick. I will take the dealer and Sebastien will take it from there. Just to give you a sense, it's just starting. Obviously, there was some other OEM brand, 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 raise their hand to take over the brand, then we feel comfortable. And I would like to remind you some number. Alumacraft has about 275 dealers, mainly east of North America, Manitou 150 in the Midwest. And even though we have 1,000 dealer, I mean, coast to coast. Then we there is maybe some short term disruption in the dealer network because some other engine brand need to decide if they will continue to carry Alumacraft and Manitoupe.
But midterm, we don't see any problem going forward. Sebastien?
Yes. On the revenue numbers for the quarter, the Boda acquisitions had less than 3% of the quarterly revenue. And when I look out for next year, it should be about that 3%. So we're looking at about probably $200,000,000 of revenue from the both businesses, Gary. Great.
Thank you very much. I'll get back in queue.
Thank you. Our following question is from Robin Farney 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.
Yes. When I look at ASPs for the quarter, I'll give it more broadly. ASP was flat for the quarter and I alluded to mix being unfavorable this quarter. And so that brought the ASP down for side by side. If you recall last year, we introduced the Maverick Sport, the Trail and now we have a 60 inches Maverick Sport.
And so obviously, year into product announcement, we're shipping more of those products to dealers. And so that's what impacted ASP in this quarter. And on the ORV side, mix was rich and the ASP was up. But overall, Robin, flat ASP, all product lines on the powersports side blend together.
Great. And 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?
Yes. Well, we've been seeing favorable exchange rates in the last few months. And so in Q3 as well, the rates were favorable. The rates are trending above $1.30 for the U. S.
And as you know, we are kind of naturally hedged throughout the year, our bill of material costs versus our expenses and our revenue. And so 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. And so the drive in 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. But 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 Spider? And 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 Spider to Ryker or sort of how is that kind of playing out at this point?
Yes. Good morning, Mark. First, we are in North America, we are exactly on plan in term of the number of Ryker we book. At International, the demand is about 25% higher than what we had originally planned. But those shipments will happen next year.
Now it's a very good question because we believe that the Design Lab is critical for the experience for the consumer. As you know, have only 3 SKU and the customer can customize on-site the Ryker. And that's why the dealer need to buy the DesignLab to carry Ryker. And 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 spider business because it was too expensive. Then we've lost probably 40, 50 dealers in North America. But on the other hand, many dealer who are not carrying Spider have raised their hand. But so far, we're very, very happy with the booking, with the take rate on the DesignLab and also the first feeling we have from the media and the press is very, very positive. And as I mentioned in my intro, we started to deliver the Ryker this Monday.
The target is every dealer should get 2 in their store for demo before Christmas.
Okay, thanks. That's helpful. And 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, and you remain confident.
But on 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 to 18 months?
Well, let's say that, obviously, we're not economists, but the interest rate has increased and many are a bit concerned that it will impact the consumer demand. But to be honest, in Q3, the traffic at the store were good, as you can see in our retail. And so far, I mean, in Q3, watercraft and side by side were up about 25%. And in Europe was the same thing. Then we don't see any impact at the retail level.
And like I said, the traffic was still very good. And I would like to say, most of our industry are still growing. I think everyone everything is growing except ETV, which is flattish and the snowmobile, which is too early to conclude anything. Then we understand that there is some concern on the global economy, but we don't see that at our level. And 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.
Yes. 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?
Yes. 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 exclude snowmobile, it was up 16%, inventory up 9%. So I'm very comfortable with the inventory that we have. When I look at aging well, units above 18 months is less than 5% of the inventory that's outstanding.
My outlook for the Q4 is that inventory is going to continue to increase coming by 2 elements. 1, with side by side, I mean demand is there. We have we're still not meeting consumer So obviously, we'll be shipping side by sides to the dealers ahead of the spring season that's coming. And also as Jose mentioned a few minutes ago, we started shipments of Rykers and so we'll be busy shipping in December January. And so I'm expecting not side by side, but spider inventory will also be up.
For snowmobile, there's snow on the ground. So hopefully, we'll have a good season. So and we finished off with clean inventory last year. So I would expect a snowmobile to be relatively flat versus a year ago.
Okay. That's very good color. And when we look at your recent stock performance, any thoughts about the your interest for renewing your NCIB that you was completed earlier this year, Sebastien?
Yes. As you said, we completed the NCIB in July. The next window is going to open in Q1 of next year. So we've done everything that we could do under the NCIB. But 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 1 is to continue investing in growth, but 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.
Yes. 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?
Yes. Good morning, Derek. Yes, I mean, we have more than 50% of the industry than the market share. Then when I mean we have success in the segment, we pull the segment up. But 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%.
Then we really that's proved the success of the new platform that we introduced last year. Recreational was up mid single digit. Were up high single digit and Rec Light was flattish at mid single digit. Then as you can see, every segment is growing and we are pacing the industry in luxury performance and recreational. And overall, very happy and this are numbers from North America, but the phenomena is the same worldwide.
Okay. That's very helpful. And just on the inventory position, Sebastian, 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. Again, we finished clean on snowmobile last year. So what we're shipping is the current models. Watercraft, we finished a bit higher, but that's in line with overall market performance and market growth. ATV, I mean, we will continue gaining market share, so that's clean inventory.
And 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 and thank you for taking my questions. So just to follow-up on the inventory question, I apologize if I missed it, but do you have inventory growth excluding the snowmobile category?
I do not have it with me, but I could we could rummage around and see before the end of the call if we could pull it out. But else be glad to provide that info to you.
Okay. And then Jose, how should investors view the turnover and leadership in the powersports segment? Obviously, you brought in a lot of good talent there, but there's been change. Yes.
I mean, Bertrand came to the company. It was a new industry for him. He came from the car industry. And after 10 months, we've he and I felt that the fit was not there and he wanted to continue in something else. And we've looked at what were our option and we have, as you know, with Sandy Skallion, who've been with the company for more than 20 years and Thomas Sur, who was in Austria for 5 years, We have a very good talented person who will co lead the Power Sport Group.
Just that you know, Thomas that you met when we were in Austria in 2015 have accepted to move to Canada with his family. Then at the minute that we will get his working permit, he will move here and both of them will be base here. Then those things happen, but very happy that we have very talented people internally.
Thank you. And then finally, just getting back to the macro environment, we have seen reports of more farmer bankruptcies in the upper Midwest of the United States. 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 share, so maybe that masks some of the weakness, but curious what you're seeing.
Yes. We don't see much. I mean, the oil and ag patch that we call, we don't see much. The dose states are still somewhat depressed. And for us, like you just said, it's very difficult to analyze because the defender momentum is masking the slower industry.
That's for United States. Canada is still soft in the West versus the East. But as you can see with the momentum we're gaining with our side by side business, all of this is match is masking. Those slow growth or flattish state in United States.
Great. Thank you.
Thank you. Our following question is from Cameron Dozen 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 the key driver there was of the retail softness. I mean, the way you described it, it sounds more of a timing issue than anything.
And then also, if you could just maybe comment on what you're seeing so far subsequent to quarter end with snowmobile retail. I mean, you mentioned early snow in a lot of parts of North America that should bode well, but just wondering what you're seeing so far?
Yes. Obviously, I would like to remind you that we have 50% of the industry then when we are when the timing of our 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 percent of the non current inventory and our market share is 50% plus then this is affecting our start of the season. On the other hand, the spring unit, we always have a very high level of snowmills that are presold to customers. But the popularity of the model with the 900 servo resulted that we're shipping those models a bit later than what was planned originally because the volume was at twice at what we were planning. And there is another phenomenon.
I was with the dealer from Milwaukee Wednesday evening, and he was telling me that he winterized about 200 watercraft every year and the customer with the warm fall we had, the customer kept the watercraft on the water very long. Then he winterized basically his watercraft about a month later than typically and started to focus on TDI snowmobile at a high speed a month later. Then I think there is all those moving parts that is affecting the retail season. But 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. That's very good. And maybe just a second question for me. I mean, we've talked a bit about the macro environment. I mean, it doesn't sound like you're seeing any real weakness there at this point.
But 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? I mean, just what kind flexible do you have with your manufacturing or your, I guess, overhead costs to reduce your cost base in that kind of eventuality?
Yes, that's a good discussion that we had with the Board yesterday. Our situation is quite different than what happened in 2008. And 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 the 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, then we believe our fraud will be adjusted very quickly down. And 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.
And our debt, lower leverage, covenant light, then we have a lot more flexibility than what we had in 2008. And BRP is a company that have been through many, many cycle and we can react very quickly if things happen. Then we're not looking for those periods, 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.
Absolutely. Thanks very much.
Thank you. Our following question is from Jamie Katz from Morningstar. Please go ahead.
1st, 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 FX related or if there's a certain consumer segment that's acting as a lag in that region?
Yes. Good morning, Jamie. What happened in Western Europe is 2 phenomena. The 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. But it was a bit slower on the off road business and we believe it's because the weather was so hot.
Mean, when it's 35 Celsius, it's a bit it's not comfortable to purchase a EVR side by side. And the watercraft was good and traffic was good in the leadership, a bit less in off road, but the big drive came from the motorcycle business. There was it was a good season for motorcycle in the mid cc segment in high 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. And then 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?
Yes. Good morning, Jamie. Last quarter, when we talked about inflationary elements for fiscal year 2019, the current fiscal year versus guidance, I alluded to a $25,000,000 impact for this year. And I also talked about impact for next year of about $25,000,000 as well. What came into effect since we last talked was the Section 301, the List 3 tariffs, which were, I guess, confirmed and communicated.
And those tariffs impact most of impact mostly our pack 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 3 is about a $10,000,000 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 $25,000,000 coming from commodities, freight. So that's still there. So the $25,000,000 is there. So add the extra $10,000,000 on the $25,000,000 So about a $35,000,000 impact for next year.
Again, it's material, but it's 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. But despite all of that, we're still comfortable on delivering the 350,000,000 for next year.
Thank you. Thank you. The following question is from Seth Wolff from Northcoast Research. Please go ahead.
I guess
just talk about the I wanted to talk on Off Road Vehicles and Marine Industry. So first of all, in your year round products, did you get a chance to figure out what the growth was ex snowmobiles? And then I think, Jose, you said that as the capacity comes online, you're starting to meet consumer demand now. So how should we think about this going into next year? Is this a number that dealer inventory, are we going to see that continue to rise and maybe accelerate?
Let's clarify a few things. The capacity increase in Newhall is 2 for side by side. We will start to ramp up the speed of the line Feb 1, but it will take about 6 months to reach the 50% increase that we're planning then. The real it will start from low numbers Feb 1st and by the end of H1 will be at 50%. Then next year our capacity for additional side by side will be about 25% more than what we've done this year.
And that's probably the simpler way to give you more colors about what we're planning for next year.
Yes. In terms of inventory, excluding snowmobile for North America, it would be in line with the retail that we had excluding snowmobile. So 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. And I'm assuming so your turns are probably coming down because you're catching 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. And so as we ramp up capacity next year, the turns should reduce a bit. But our objective is to maintain a level of inventory in the range of 120 days to 160 days in the network. So 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. And then just turning on turning to Marine business, you threw out the number for the 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 what's it's just the strength of that market is the underlying driver, do you believe?
No, but on Manitou, even road have been always strong. We rig more about 30 5% of their pontoon already. Then many, many 2 dealer were used to sell Evinrude. Then and like you said, the Pantone industry is up high about 15%, then we were able to then it was a good show. Dealer were enthusiasts now that Evinrude and Manitou are together.
We working on a strategy where we will rig from factory more pontoon than it's make their life easier. And we believe it's all this that created the momentum. Then 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, Sebastien, quantify basis point hit or tailwind or headwind from mix, leverage inputs and the other components of gross margin? Thank you.
Yes. Good morning again. Mix was the big factor this quarter. I talked about snowmobiles, utility sleds that we shipped versus mountain. I also talked about the Maverick Sport.
That was a hit of 130 basis points and that was offset by volume 80 basis points. So in a nutshell, these two elements drove the margin down by the 50 basis points of the quarter.
Okay. So no major swing either way on inputs then?
No. Yes, well production cost is about 40 basis points negative, but offset by pricing. But again, 40 basis points considering the environment in which we are pretty happy with that level of impact. And so the teams were able to react appropriately and our cost reduction programs are actually paying off.
Okay. And then related to that, how about program expense as a percent 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. Jose alluded to the new platform.
The turnover on the new platform was strong, so we didn't necessarily have to put in programs. So year over year flat.
Okay, great. Thank you very much.
Thank you.
We have no further questions registered at this time. I would now like to turn the meeting back over to you, Mr. Deschenes.
Thank you, Mo, and thanks, everyone, for joining us this morning, and 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.