Good morning, ladies and gentlemen. Welcome to BRP Inc. Fiscal Year 2017 Third Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Philippe Deschenes.
Please go ahead, Mr. Deschenes.
Thank you. Good morning, and welcome to BRP's Q3 conference call for fiscal 2017. Joining me on the call this morning are Jose Boisjali, President and Chief Executive Officer and Sebastien Martel, Chief Financial Officer. 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 that are subject to a number of risks and 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 at brp.com under the Investor Relations section. So with that, I'll turn the call over to Jose.
Thank you, Philippe. Good morning, everyone, and thank you for joining us. Once again, this year, we had set high objective for the back half of the year, and the Q3 was an important first step to get us there. And we deliver in a big way. We managed to deliver financial results above our plan.
We've launched the production and quickly delivered to our dealers 2 new product platform, the Can Am Maverick X3 and the new 4th generation of Ski Doo snowmobile. We made good progress in our dealer network optimization effort, and we gained market share in a competitive and difficult environment. All of this, while we continued to work relentlessly on projects that will allow us to deliver our long term objective. We also continued managing our CapEx carefully, reducing our expected depreciation expense for the year, and we have completed our NCIB program, which lowered our share count. Both of these elements allow us to increase our normalized EPS guidance by 0 point 0 $4 $4 All in all, the 3rd quarter was key in the achievement of our plan for the year.
And results, we feel we are in a good position heading into the Q4. Now let's look at the financial highlight on the Q4 on Slide 4. Our revenue grew 7% to reach $1,080,100,000 The increase was primarily driven by our growing side by side business, notably the contribution of our new product, the Can Am Defender and Maverick X3. The quarterly normalized EBITDA came in above expectation at $197,000,000 as the timing of a few elements was favorable into the quarter. Sebastien will come back on this in a few minutes.
Our normalized diluted earnings per share is up 50% over last year Q3, reaching $0.93 per share. At the retail level, we had another solid quarter as our powersport lineup, excluding snowmobile, was up 10% compared to an industry that we estimate was down low single digits. This strong performance was driven by a solid end of season for Personal Watercraft, continued market share gain for ETV and very good momentum for our side by side business. For snowmobile, as we mentioned before, this year's shipment were delayed compared to last year due to a later start of production, which resulted in a lower retail into the quarter. I will give you more detail on this in a few minutes.
A key highlight of the quarter was our ability to quickly start the production of our newly introduced platform, the Can Am Mavic X3 and the new 4th generation of Ski Doos. Remember that we launched the Mavic X3 at our Can Am and Sea Doo Club in August. We started the production a few weeks later and the few and the first unit reached our customers in the second half of September. As for Ski Doo, production for the new platform started at the end of September without any issue and people are already riding on them up north and into the mountains. Both of these products received exceptional reviews from the media and the customers.
The future look promising, and we are really excited to see the coming seasons unfold. Now going into the review by product category with the year round product highlight on slide 6. Revenues were up 48% for quarter, mainly driven by higher volume and favorable product mix of side by side due to the introduction of the Can Am Defender and Mavic X3. Growing our off road business is at the forefront of our strategy and we are seeing our effort paying off. For ATV, the industry remained difficult and for the 1st 4 months of the season, the North American industry retail was down high single digits.
Despite that difficult industry trend, Can Am ATV continued to perform well with retail up low single digits. We have a very good momentum with our ATV business as we have now been outpacing the industry for the last 5 quarters and we currently hold the 3rd market share position in the industry season to date. Can Ami TV is seeing the same solid trend in international markets. Turning to side by side. The North American Industry Retail is up low single digit season to date.
Driven by the continued solid momentum of the Can Am Defender and the very good reception of the Can Am Mavic X3, our side by side retail was up over 20% for the 1st 4 months of the season. We are pleased with our progress with the Defender as retail continued to grow every month, demonstrating that the Can Am brand is gaining within the utility side by side market. On the Mavic X3 front, while it had only been on the market for second half of the quarter, the sell through has been excellent. We also introduced a new key side by side model in the quarter, the Can Am Defender HD5. The HD5 offered the same tough, capable and clever feature of the Defender platform with a midsize engine.
This package offer exceptional value and improve our offering and at the lower end of the price spectrum in the utility side by side segment. The Defender HD5 will start shipping in January. Now looking at Spyder. The North American Motorcycle 2016 season just closed at the end of October, down low single digits. For the season, retail and motorcycle with a price higher than $18,000 declined high single digits.
As we mentioned previously, it was a difficult season for Spider. The industry trends were not favorable. We also decided to hold back on sales program to better maintain long term the value of the units and last year introduction of the Spider F3T did not generate the expected result. With all of this, Spider closed the season with retail down high teens percentage. We are disappointed with the season and we are taking steps to turn the situation around.
For the Spider business, to reach its full potential, we'll need to increase our focus on the business and use a different approach with our dealer and our customers. This is why we have hired Jose Pero, who will fill our newly created position of Senior Vice President Spider Business. Jose with her strong experience into the international Wholesale and Retail Business within the consumer goods industry is a great addition to our management team. To conclude, on our year end product, I want to say that overall, I'm very pleased with our result. With that, let's turn to seasonal product on Slide 7.
Seasonal product revenue were down 12% for the quarter, ending at $417,000,000 primarily due to lower volume of snowmobile partially offset by higher volume and favorable product mix of personal watercraft. Looking at retail, the North American personal watercraft ended the season on September 30 with retail up high single digits. Sidu had another strong season with retail also up high single digit, growing its market share for the 6th consecutive season and achieving a record market share position. The growth was driven by both the Seadust Spark and the traditional personal watercraft. The worldwide demand also continued to be strong with double digit retail growth for Western Europe and Asia Pacific into the quarter.
Now turning to snowmobile. Here's some explanation on retail. At the end of October, the North American Industry retail was down over 30% season to date. Ski Doo Retail was down about 50% over the same period. The decline is driven by the limited availability of our new Ski Doo Rev Gen 4 due to later start of production this year compared to last year.
As you may know, every year we presale to customers snowmobile during the spring season, and those presold sleds are usually the first to be shipped to the dealer and then the first to be retailed to the customer in October November. This year, a good portion of those presold snowmobile were the newly introduced snowmobile platform, for which mass production only started in October. As we continued shipping those units through November, our retail has improved and is now down in the mid-30s percent season to date, right in line with our internal forecast. Therefore, it is just a question of shipment timing. Everything is going according to plan, as we expect to have everything shipped and at the dealer before Christmas.
All in all, our seasonal product business continued to perform very well. Now looking at Propulsion Systems on Slide 8. Revenues for Propulsion Systems were down 4%, primarily driven by lower volume of aircraft engines sold to OEM. Now 4 months into the new season, the North American outboard engine industry is up mid single digit. For the same period, even road retail was up low single digit.
The Itek G2 lineup continued to perform well and we started deliveries of the new 150 to 200 horsepower range Etech G2 engine during the quarter. Turning to parts, accessories and clothing. Our revenues were up 5% into the quarter, driven by higher volume of side by side accessories sold following the introduction of the Defender and the Mavic X3. Despite a 5% increase over last year, our pack sales were lower than planned, mainly due to the fact that dealers still have stock of maintenance item in inventory like oil, belt and skid runners due to a shorter riding season for snowmobile last year. And with that, I will turn the call over to Sebastien and will return for closing remarks.
Thank you, Jose, and good morning, everyone. This morning, we reported revenues of $1,080,100,000 for the Q3 of fiscal year 2017, an increase of 7% from last year's Q3. The growth was primarily driven by higher wholesales of year round products, partly offset by lower wholesale in seasonal products. We generated $307,000,000 of gross profit resulting in a gross profit margin of 28.4%, a 400 basis point increase from last year due to favorable product mix for both SSV and PWC, general price increases and favorable foreign exchange rate variation. Operating income came in at $163,000,000 or 15.1 percent of revenues, primarily driven by higher gross profit.
As Jose mentioned, normalized EBITDA came in above our expectations at $197,000,000 or 18.2 percent of revenues. The higher than anticipated results were driven by a few elements that were favorable in the quarter. Expenses came in lower than planned as we continue exercise management of costs and we're able to defer some expenses into the Q4. With the good retail experience in the last few quarters, we replenished some dealer inventory, mostly for ATV and PWC in Q3 with units that were initially planned for early Q4. As you see, most of the incremental lift we realized this quarter versus our plan is a question of timing between the last two quarters of the year.
This resulted in normalized diluted earnings per share of $0.93 a 50% increase over last year. We generated $129,000,000 of free cash flow in the quarter and completed our NCIB program by repurchasing 900,000 shares in the quarter for a total of 3,400,000 shares repurchased for the year. Now Slide 11 for revenues by product categories and geographies. 35% of our sales came from year round products with a year over year growth of 48% driven by side by side business, 39% of our sales came from seasonal products, 9% from propulsion systems, 17% from parts, accessories and clothing. International revenues were about flat compared to last year as higher wholesale of off road vehicles was offset by lower deliveries of snowmobiles.
For Canada, revenues were down 10% as higher wholesale of SSVs and Spiders was more than offset by lower volume of snowmobiles sold and lower wholesale of ATV. Finally, revenues from the U. S. Were up 21%, driven by higher year round product shipments and higher volume and favorable mix of CWC, which were partly offset by lower shipments of snowmobile. As a reminder, remember that due to the introduction of the new snowmobile platform, snowmobile shipments are expected to be heavier in the Q4 and this drove a decline in snowmobile volume in the Q3 for all regions.
Turning to Slide 12 for a look at the normalized net income bridge. Our normalized net income increased by 31 $1,000,000 compared to last year's Q3. Benefiting the normalized net income were volume and mix for 28,000,000 dollars pricing and sales program for $12,000,000 production costs for $4,000,000 and foreign exchange variation for $19,000,000 These elements were partly offset by higher operating expenses for $12,000,000 driven by higher investments in R and D and admin and higher income tax expense and financing costs for a net negative impact of $21,000,000 On to Slide 13 for the North America powersport dealer inventory. Our network inventory level was up 7% from last year's Q3. The increase was primarily driven by the introduction of the Can Am Defender and Maverick X3 with strong demand from dealers and the continuing ramp up of shipments to new dealers we added over the last few years.
The increase was partly offset by lower inventory for Can Am Commander and Can Am Maverick side by side. Given the new product introductions and our expanding dealer network, we are very comfortable with our network inventory level. And finally, Slide 14 for an update on the guidance for fiscal 2017. As Jose mentioned earlier, now with 3 quarters behind us and after achieving a solid 3rd quarter results, we are in a good position heading into the 4th quarter. So with only a few weeks to go until year end, we are making a few changes to the guidance.
The excellent reception of our new side by side models and the strong end of season for PWC are allowing us to review upward our revenue guidance for year round and seasonal products. Our PAC is still suffering from the short snowmobile riding season last winter. Dealer replenishment orders continue to come in lower than expected and coupled with the impact of the disappointing spider season, we are adjusting our revenue guidance downward for that product category. Accounting for these changes, total revenues are now expected to be up 5% to 9%. On the profitability side, while we are increasing our total revenue guidance, we are also reducing our forecast for the PAC business, which is our most profitable product category.
So the net impact on normalized EBITDA is neutral and our guidance remains up 7% to 10%. Finally, as we are approaching year end, we have better visibility on different elements of the business, allowing me to adjust our tax rate and depreciation expense guidance. As a result, normalized net income is now expected to grow between 5% 11% and normalized EPS guidance has been increased by $0.04 and is now $1.86 to $1.96 With this, I'll turn the call back to Jose.
Thank you, Sebastien. The Q3 was a very successful one. Our sales in the U. S. Grew by 20% over same quarter last year.
Our margin grew by a strong 400 basis point. We continued expanding our distribution network worldwide as planned. We've launched several new products for which the market reacted very positively and helped us gaining market share. And we brought 2 new senior executives to our management team, whom I'm sure will contribute to make BRP even more successful. In closing, as the U.
S. New administration is put in place, we are following closely orientation that the new government will take come January 20. We are confident that our diversification strategy on product, manufacturing sites and global markets will allow us to maintain our industry leadership position and our profitable growth in the U. S. As well as in the rest of the world.
I'm very proud that we were able to continue to grow despite operating in an aggressive industry and an overall difficult environment. This would not be possible without our employees and I want to thank all of them for their commitment and loyalty. And on that, I will turn the call over to the operator for questions.
Thank The first question is from Steve Arthur with RBC Capital Markets. Please go ahead.
Yes, thank you. Just a couple of quick follow-up questions. First on the lower pack sales, I do hear you on the snowmobile and spider implications. Has that been enough to offset the new products that have been launched, which seem to have a full complement of accessories? Or more broadly, maybe if you can comment on the uptick of
addition of X3 is compensated by some reduction on the Spider. The difficulty on PAC is we don't have much visibility on the stock that the dealer have. It's very, very difficult to predict. And the order of maintenance item, like I said, oil belt runners were lower than planned in August September. Those items typically the dealer replenished early in the fall and the order were quite low compared to our planning.
Then because of that situation and that difficult visibility, that's why we decided to reduce our guidance for year end.
Okay, I understand. Secondly, just on the Spider business, it looks like renewed focus in a specific business unit. Is it too early? Or are you able to comment yet on any changes in the go to market strategy there that you might be looking at?
It's too early. We work Jose Perot took over about 6 weeks ago. She's been on the job. She's been touring dealers and making a better assessment of the situation. And we should come out with a plan early in 2017.
Okay. That's fair. And final point, just you mentioned Jose earlier making good progress on dealer optimization. Just wondering if you can elaborate on that a little bit more. Is that a new way of looking at new dealers or more efficiency from the existing dealer base?
As you know, we have a target this year to add 45 to 55 new dealer. We are on track on this plan. But obviously, like we said, I think 18 months ago, the focus is a lot on making the existing dealer more performant. And to be honest, it's going quite well. We obviously, the retail momentum that we have, the profitability that our dealer do with our product is helping the situation, but we're trying to Thank you
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the color. Thank you. Thank Thank you for the color.
Thank you.
Thank you. The next question is from Derek Dley with Canaccord Genuity. Please go ahead.
Yes. Can you guys just give us a bit of an update on how the Performax dealer program is going? It sounds like there's some good momentum there, but any additional color would be great.
Well, as you know, Derek, we shared the overall dealer network plan with investors in September. Bernard presented the strategy and how we are addressing especially the multi brand dealers in the U. S. And Performax was a big part of that equation with the back end incentives that dealers can earn. Obviously, if you look at the retail Proformax played a big factor in making sure that the dealers focusing more and more on the BRP business.
Okay, great. And on your international sales were flat during the quarter. Can you just give us a breakdown of regionally where you saw some strength and weakness?
Yes. The Asia Pacific is strong. You're in a counter season market there. So and the watercraft business is doing very good there. So and a side by side business as well is doing excellent there.
So we saw good momentum there. Where revenues were down versus a year ago is more Scandinavia, Russia and part of it is because of the production of snowmobile timing versus a year ago. So less units of snowmobile were shipped to those markets.
Okay. And then in Canada, is you're still seeing some weakness in Alberta? Or is that starting to come back? We see last year, the West was down by about 30%. Now it's improving.
I would say it's probably around 15%. Then it's getting better, but it's the West is still weaker than the East, but improving. Okay.
Okay. Thank you
very much.
Thank you. The next question is from Jamie Katz with Morningstar. Please go ahead.
Thanks. Good morning. Thanks for taking my questions. My first question is on year round, which the shipments were pretty strong this quarter and it sounded it was mostly like from entering some of the white space areas that you hadn't previously been operating in. So I'm curious how some of the demand for the legacy products were as well in the quarter And it would appear that you guys are taking share.
Do you think that's from other North American competitors or from international competitors?
Yes. Good morning. Dan, as you know, the Mavic X3, the reception is very good. And it's clear that the Mavic X3 will obsolete the older platform Mavic Turbo then and this was planned. The Defender, as we said before, is cannibalizing the Commander.
We see a customer who used to buy requeue that now are buying the utility side by side. But at the end of the day all that was planned and we are basically on the cannibalization estimation we had done. But the net of all of this is very positive overall.
Okay. And then, I think you had mentioned some expenses being deferred from the Q3 to the Q4. Can you elaborate on that?
Yes. We had planned some marketing expenses in the quarter for the ramp up of side by side. It's a big, a big season in the fall. And some of the expenses were transferred to being invested more in November, December. So that's basically a question of timing.
Okay. And then lastly, I'm curious what you guys are sort of thinking for just the general economic outlook for both North America and Canada together and separate, if you have any economic thoughts on what you're expecting in the year ahead?
Yes. Well, obviously, I think the big dark cloud above our heads is everything related to NAFTA and the new President-elect in the United States has made several comments. We've received a lot of questions from investors on that topic. And it is today, I mean, we not necessarily want to speculate what the outcome of future NAFTA agreements will be because, 1, I don't know and I don't think anyone knows what the outcome will be. However, one thing's for sure is when we look at the whole campaign, well, President or President-elect Trump's message was while focusing on growth, focusing on infrastructure and also focusing on keeping jobs in the U.
S. And the way we look at that is that is very, very positive for the powersport industry. Obviously, like all OEMs, especially the automotive ones with global operations, we're monitoring the situation closely and we'll learn more as times evolve. But for us today, we see it as business as usual until there's more clarity as to what if any changes will be happening to NAFTA agreement. In terms of overall economic outlook for Canada, positive.
I think we've lapped some of the issues that we've had out West. And in Eastern Canada, the outlook as well is good. So we're optimistic for next year.
Thank you.
Thank you. The next question is from Tim Conder with Wells Fargo Securities. Please go ahead.
Thank you. Just a couple here. Wanted to follow-up on the first question that was asked regarding Spider and looking at any potential changes to that business. Wanted to ask it related to Evinrude. Any color there?
And then on your dealer adds, you're seeing that that's progressing. You're very pleased with that. If you could any additional color that you would have given the competitors' challenges in ORV, if that has made it easier or if you're getting into dealerships that you thought you might not being added to multi lane dealers?
Good morning. First, for sure the momentum that we have right now particularly with the mid CC and TV and with the Defender and now the Mavic X3 dealer are quite optimistic about BRP and we gaining share in the dealership. And you know that one of our objective was to gain more space in the south southwest. And so far, the strategy is working quite well. And I would say the Maverick X3 have accelerated the pace in certain area.
Then overall, we're quite happy with that. On the Johnson and Evinrude, the Evinrude situation, since the introduction of the G2, we've been able to sign about 160 dealers more than 14 new boat builders. The G2 is getting traction. The I would like to remind to you that the new G2 Aspara range from 150 to 200 started deliveries in Q3 and is just starting to ramp up. But overall, we're quite optimistic about the G2 momentum into the industry.
And this industry is going well. Then we have things are going according to plan, I would say, for the Evinrude business.
Okay. And so just to clarify on the dealer adds, you're very pleased getting it in the core areas. Has it been easier given some of the challenges that have been faced by some competitors in the industry?
I would say for sure what happened with 1 of our competitor in the sport side by side category is giving us an opportunity. Our booking for the Mavriq X3 was very good and we tried to take advantage of this. But for me this is short term things. What is more important is we have opportunity to get faster into dealers that are multiline. And if they are successful retailing our product, I think we will be there for the long term.
Then for us, we're trying to benefit of the situation as much as we can. But overall, it's very positive.
Okay. And then lastly, gentlemen, just maybe a little more color related to the U. S. Election everything. A little color on the commentary, I guess, on retail trends that you saw right before, say, the month before and then since the election in the U.
S?
Tim, I can't say that we saw a difference in terms of retail trend. Don't forget that we were bringing a lot of new products to the market. So I think that is what influenced more the retail than the outcome of the election. The Maverick X3, last year, we didn't have the Defender for Q3, which we had in November as well. So all of that great products that we've been introducing in the last few years, I think, is the main catalyst for driving retail.
And as well as we've talked in when we met in September in Mexico, all the efforts that we've put over the last few years on focusing on the dealers, we've opened up a lot of new dealers. We also presented the model where the dealers have the primary market areas and we're focused on making sure that the dealers are profitable. All of that is paying off and is what's driving the retail success that we've seen.
Okay, great. Thank you, gentlemen.
Thank you. The next question is from Martin Landry with GMP Securities. Please go ahead.
Good morning. The first question is with regards to the acceleration of shipments into the quarter versus Q4. Can you talk about what product lines and what products were shipped a little earlier? And then what was the reason behind that?
Yes, if
I look at the impact versus what we have to read, the 2 main items are the lower expenses, probably comes in the range of about $20,000,000 And in terms of early shipments, the 2 product lines we shipped a bit earlier were ATV and PWC and that has an impact of about $5,000,000 for the quarter. And what drove that is, as you've seen in our numbers, we have good retail in ATV, and we've also had a great season in PWC. The industry was up and we were up 10%. And obviously, dealers' inventory levels are low, and therefore, they've asked for a bit more inventory earlier, and that's what we've done.
Okay. Thank you. That's helpful. And then just on the Mavic X3, you're obviously seeing some very good sell through. Just wondering, are you able to satisfy the demand currently?
Do you have any capacity constraint issues on the
X3? Good morning, Martin. Let's say that the ramp up we're trying to accelerate the ramp up as much as we can. But right now, we are we're not able to meet 100% of the demand, but we're ramping up as fast as we can. But the season the peak of the season is ending in a few weeks.
Then we're doing our best, but we were a bit behind the demand in October November. We will catch up December January.
Okay. So how long is the backlog right now for customers to get an X3?
I spoke to many dealers who we're delivering obviously everything we can every day. But if you talk to a few dealer and again that's my information date of November, but every dealer in the south southwest had typically a few units sold. And when the unit arrive delivered to the customer right away then We try to ask the dealer to hold 1 unit on the floor, but you don't have much inventory out there.
Okay. Okay. That's helpful. And then just lastly, we're just about to start the snowmobile season. What do you see in terms of snow coverage?
And what do you see in terms of traffic at dealers and momentum at dealers for the upcoming snowmobile season?
Yes. Snow coverage is definitely better than last year. No doubt about that. And sitting here in Val Cour and it's wide outside and it's better than last year. But overall, customer up north in North America and in the mountain are already riding.
It's not great condition yet, but at least they can try their machine. Then traffic is good. At the minute that snow hit the ground at this time of the year in December, you always have good traffic in the store. Then we believe that North America is positioned for a good season, normal season I would say. In Scandinavia and Russia, same thing.
The snow started normal, I would say, compared to the previous year, better than last year obviously and normal, then everything is positioned to be a good season, but we're too early to conclude on this.
Okay. Thank you very much.
Thank you. Thank you. The next question is from Craig Kennison with Baird. Please go ahead.
Good morning. Thank you for taking my questions. I'm curious about the agricultural market. I think BRP generally has been under indexed there because you didn't have quite the product they needed. But with Defender, clearly you do.
How are dealers reacting to that? And what are your overall comments on the ag market?
Well, if I give you some colors on the ag market for the ORV business, And if I include ATV give you the ATV statistic. Right now in the Q3, ATV in the U. S. Was down high single digit. And into the HAG state, the 6 state that we consider HAG, it was something like 15% down.
Then there is definitely some lag. That being said for us, we it's a white space for us. The Defender is gaining traction every month. And I think the farmer is a new customer for us, but our dealer are getting better to talk to them. And product has a good momentum right now, good reputation in term of performance.
And overall, it feels good. But there is definitely some still decline in those states versus the non ag or all patch state.
Thank you. And then with respect to NAFTA, I appreciate your comments that you've got a highly diversified manufacturing footprint. But could you talk about the NAFTA trade agreement elements that you benefit from today? To the extent that were to change, what would you be most concerned about losing?
Yes. Obviously, there was a lot of talk between trade between the U. S. And Mexico. And as you know, we have 3 plants in Mexico.
We've been in Mexico for since early 2000 and one, and we were extremely successful with our operations there, and we've got a solid workforce as well. I can appreciate that you guys probably want a bit of color as to the level of trade that we're doing between Mexico and the U. S. So let me try to help you out a bit and give you a few numbers. When we look at BRP's trading volume between Mexico and the U.
S, there's about a little over $1,000,000,000 of goods transacting between the two countries, so from Mexico to the U. S. And that's in the form of personal watercrafts, ATVs and side by sides. Now if let's say and obviously there could be many scenarios with many variables and a lot of moving parts. But when we some trade experts have discussed about the U.
S. Pulling out of NAFTA. Well, what would that mean for us in terms of Mexico U. S? The first thing is a 6 months notice that would have to be given.
So we'd have 6 months to look at various scenarios. But after 6 months, what would happen is Mexico would fall under what we refer to as a most favored nation tariffation status. And the tariffs that would be charged between the two countries would be depending on the product line between 1.4% 2.9% per transaction. So overall, when you look at an annual impact on $1,000,000,000 of transaction, it would be in the range of, let's say, dollars 20,000,000 to $25,000,000 a year in terms of impact. Obviously, if that were to happen, well, the whole value chain wouldn't have to be would have to be addressed.
And the increased cost could either be passed down to some of it could be passed down to the suppliers, some of it passed through pricing increase. And also doing what we do when we have inflation is addressing it through cost structure improvements and improving operations. And so that's the scenarios that we're looking at. Should we expect changes to NAFTA? Well, the Canadian government and Mexican governments have also indicated that they were willing to sit down with the U.
S. Government and renegotiate the agreement. After 25 years, they feel it was normal. And so for us, until there's more clarity, it's business as usual. Obviously, dollars 20,000,000 to $25,000,000 is something which is important, but not too material for us, something we could manage.
We prefer not spending that money obviously on tariffs. But we do not feel and I don't feel that the objective of the U. S. Government is to hurt the industry. As I said, they invest in infrastructure.
And for me, all of that is positive for the powersports industry.
Just a final point of clarification. Is that $1,000,000,000 figure a retail or wholesale metric?
It's a wholesale metric.
Great. Thanks for that explanation.
Okay.
Thank you. The next question is from Benoit Poirier with Desjardins Capital Markets. Please go ahead.
Hi, good morning gentlemen. Just to come back on the previous question, Sebastien, looking at the potential impact of $20,000,000 $25,000,000 dollars would it be a fair statement to say that probably you would consider keeping your operation in Mexico rather than moving those location elsewhere?
Obviously, at that level, yes, Martin, the benefits of being in Mexico with access to skilled labor force, Mexico is very beneficial to us. And when I look at this, it's almost the cost of inflation that $20,000,000 to $25,000,000 a year. And again, it's something that we address regularly and it's part of managing our business. So yes, on that scenario, we obviously remain in Mexico.
Okay, perfect. And now when we look at your dealer inventory level, was up 7% versus last year, so good color there. Just wondering what we should potentially expect in Q4 in comparison to a year ago and on a sequential basis given the impact with the Mavriq X3 and also the Defender?
Yes. When I look at a few weeks down the road, obviously, snow season is a big factor in where we're going to end in inventory. But assuming a normal snow season and achieving the retail objectives that we have, I would expect the network inventory to be up high single digits, mostly coming from the ramp up of the Maverick X3 and also the Defender. Last year, we had started shipments of Defender, but we were in just the preproduction ramp up. Now we've just launched the new Defender HD 5, and so we'll be shipping those units to dealers December, January.
So these are the two factors that are going to be driving increased inventory. And also probably a bit more of ATVs ahead of the spring season retail that is going to be starting.
Okay. Perfect. And just on the snowmobile front, why did it take so long to ramp up? Was there any delay in terms of production schedule on the new platform?
No. Production schedule was right in line with what we had planned. But I would like to remind you that the Ski Doo Rev Gen 4 and was a brand new snowmobile with a brand new engine. Then the production was we had a small production batch in September, but the mass production started in October. That was planned.
What happened Benoit is last year with the bad snow, the order came out a bit different than what we had planned. We had a lot more order for the new snowmobile, the rev gen 4 novelty into the industry less on the current product line. And because we were stuck with production date that we could not advance, we're delivering later. We communicate all of this to the consumer and the dealers then we are unplanned, but it's a question of timing. And those situation happen from time to time when you introduce a brand new platform and you don't want to risk any when you want to risk on the production, quality and warranty and all this.
Okay. Perfect. And when we look at your free cash flow, obviously, pretty strong in the quarter. You've been able to deliver the balance sheet. Your share buyback now is done for the year.
So I'm just wondering if you could provide more color about the cash deployment opportunities because on the debt side, you got some pretty attractive interest rates. So I'm just wondering what's your thinking right now in terms of the deployment opportunities?
Yes. Well, we've deployed about $230,000,000 of cash this year on I'll call it on cap structure. As you mentioned, the NCIB for about $75,000,000 and we also reimbursed about $150,000,000 or $130,000,000 CAD of debt at the in Q2. So part of the cash gen that we will be generating this year is going towards that. Obviously, objective is continue to focus on growth, the organic part of it, so the product that you know.
But as we've highlighted, when we met in Mexico in September, we have a team in place looking at various alternatives to grow the business outside of what we traditionally do through M and A. So obviously keeping a bit of dry powder for that will be key.
Okay. And Sebastien, any color on the timing when we could potentially see those alternatives?
No. Obviously, we're not in a rush to do something. We'll do something if it's right. And so we're waiting for the right opportunity before making a move.
Okay, perfect. And last one for me. It's probably a little bit early, but looking at fiscal 2018, any things we should industry growth rate? Any color for fiscal 2018?
Well, we'll obviously as customary, we'll provide be providing full fiscal year 2018 guidance when we talk in March. Obviously, we're optimistic for next year with the strong retail momentum that we have, the good momentum with the dealers in all of the markets, the great products we have. So we're optimistic for next year. And that's as much color I can give you this morning Benoit unfortunately.
Okay. Perfect. Thank you very much for the time.
Bye bye.
Thank you. The next question is from Cameron Doerksen with National Bank Financial. Please go ahead.
Yes, thanks. Good morning. Just a question on sales programs that was a tailwind for you in the Q3. Just wondering if you can talk about what you're seeing so far in the Q4 on sales incentive programs? And from what you're seeing out there in industry generally, has anything kind of changed what we've seen in the last couple of quarters?
Good morning. Watercraft, we had less program over all the season. As you know, we are only 2 OEM in that 2 major OEM in that industry and it was a good season. And was less costly on watercraft overall and that was till the end of the season. Right now on ATV, promotion is higher in the mid cc category where we compete with the offender family Senderheld family and it's driven by some of our competitor who has a lot of inventory.
Then ATV more competitive. In terms of side by side, there is 2 elements. There is a lot of new product hitting the market from all OEM And some, not all, but some of our competition are very, very aggressive with program because they want to clear inventory. And snow I would say too early to say. It's a normal start of the year with some program, but I would consider it normal.
Then overall, good on watercraft and snowmobile and off road more competitive than last year. Okay.
And just a maybe a modeling question just on the depreciation expense you've taken down what your estimate for the full year is. I'm just wondering what's driving that and how the trend might continue into next fiscal year on depreciation?
Yes. 2 things Cameron driving that. First, the timing of the CapEx. We've pushed out a bit of the CapEx later in the year versus initially planned. And the other one is the nature of the CapEx.
Obviously, with the strong demand we've had for a few product lines, we've shifted CapEx priorities from, I'd say, shorter term CapEx to more longer term CapEx, which are depreciated over longer lives and that impacts a bit 2 years in the range of $200,000,000 Our depreciation expense is lower than that. So the depreciation expense will creep up next year naturally.
Okay. I forget that. That's all I had. Thanks very much.
Thanks a lot.
Thank you. There are no further questions registered at this time, gentlemen.
Great. Thank you. And thanks, everyone, for joining us this morning and for your interest in BRP. We look forward to speaking with you again in March for our year end conference call. And thanks again everyone 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.