BRP Inc. (DOOO) Q3 2019 Earnings Conference Call Transcript

BRP Inc. (NASDAQ: DOOO)
Q3 2018 Earnings Conference Call
Nov. 30, 2018, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

All participants, please stand by. Your conference is ready to begin. 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 Deschênes. Please go ahead, Mr. Deschênes.

Philippe Deschênes -- Manager, Treasury and Investor Relations

Thank you, Maude. Good morning, and welcome to BRP's Third Quarter Conference Call for Fiscal 2019. Joining me on the call this morning are José Boisjoli, President and Chief Executive Officer, and Sebastien Martel, Chief Financial Officer. Before we move to 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 MDNA 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 in the Investor Relations section. So, with that, I'll turn the call over to José.

José Boisjoli -- President and Chief Executive Officer

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 delivered 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 products, 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 '18 third quarter, fueled largely by the momentum in the side-by-side market that is continuing. On the back of the solid results 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 $2.96-3.06, representing a growth of 30-35% versus last year.

Now, let's turn to the financial highlights on the quarter on Slide 4. Our revenues reached a record level for the third quarter at $1.294 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 7% and reached $203 million and our normalized earnings per share were up 5% to $1.04.

Our retail sales continue to show robust growth. In North America, our Powersport product retail grew 6% in an industry that was down low single digits in the quarter. Excluding snowmobile, we grew 16% compared to an industry that was up low single digits. 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 digits. 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 Powersport 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 products in all key regions.

As you can see on this slide, our retail performance has been exceptional since fiscal year '17. 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 products, 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-wheeled vehicle category. Two elements emerged that had to be overcome: Facilitate the accessibility to the three-wheeled license and address the pricing.

At Club, we unveiled our plan in three aspects. First, the introduction of more affordable products. The new Ryker vehicle, with an MSRP starting at $8,499.00 USD, 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-wheeled vehicle models. You can now ride a Ryker for as low as $149.00 a month. And third, to provide access to our 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 for our 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-wheeled 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. So far, we have been vey happy with the way the media, consumer, and dealer have responded, and the excellent attention this product has already earned. The media outreached generated over 450 million impressions in just two months, outpacing the Sea-Doo Spark benchmark launch in a shorter period.

Today, 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 deliveries started this past Monday. Beside the launch of Ryker, the other highlights of the Club 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 XRC and Defender Max XMR.

On the Sea-Doo front, the Fish Pro is the first personal watercraft tailored especially for the fishing market, an important growth opportunity with more than 700 million anglers 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 this can be retrofitted to more than 120,000 Sparks sold worldwide since 2014.

Now, let's turn to Slide 11 for the year-round product highlights. Revenues were 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 '19 season, and the industry is up high single digits. For the same period, Can-Am's side-by-side retail was up in the high 20%, gaining market share in both the Utility and Sports segments. We continue to experience robust demand for our Can-Am side-by-side lineup, and despite the incremental 30% of capacity we had earlier this year, our production is still lagging demand. Work for the second phase of capacity increase at our Juarez 2 facility is well under way, and our 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 four months into the '19 season, 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.

Finally, a look at the most recent season for the three-wheeled vehicle business. The North American three-wheeled industry ended its 2018 season on October 31st, with retail down high-single-digit percentage. Can-Am Spyder retail was down mid-single digits over the same period. The '18 season was a transition year for our three-wheeled vehicle business. We focused our effort 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 seasons.

Turning to seasonal products on Slide 12, seasonal product revenue was up 2%, 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-teens percentage. Ski-Doo retail was also down in the high-teens percentage, primarily due to the later shipment of spring break pre-sold units and lower levels 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 units are special models where customers put a deposit during the spring season. We had more demand than anticipated for all models with our new 900 Turbo power pack that resulted in later delivery. The good news is that there is snow in North America already, and 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 '18 season on September 30th with retail up high-single digits. Sea-Doo had another very strong season in North America, with retail up mid-teens 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-teens 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 the counter-seasonal market, and Sea-Doo quarterly retail is already up on average over 35% in Latin America and Asia/Pacific regions. We are more than happy with our Sea-Doo business.

Continuing with a quick look at Powersports PAC and OEM engines, revenues were up 13% in the quarter, driven by the continued growth of our accessory sales, notably the 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.

Now, looking at the Marine category, our revenues were up 30% in the quarter, driven by the acquisition of Alumacraft and Manitou, partially offset by a lower volume of outboard engines sold. Looking at retail sales four months into the '19 season, the North American outboard engine industry is up low-single digits, with Evinrude retail down mid-single digits. 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, Bill, and Transform plan is a mid-to-long-term strategy. Similar to what we have done in the Powersport business, we want to bring meaningful innovation to the Marine industry. We are in the early stages, but progressing well.

One of our first steps is to properly integrate Alumacraft and Manitou, including their people and dealers. We attended dealer meetings for both companies this fall. For Alumacraft, bookings for the upcoming years are 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 Sebastien, and will return for closing remarks.

Sebastien Martel -- Chief Financial Officer

Thank you, José, and good morning, everyone. As José 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 a good position to deliver our guidance for the year.

Looking at the quarterly results, revenues were up 14% to reach $1.394 billion. 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 9%, and international up 8%. We generated $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 higher volume of side-by-side and PACs sold.

Our normalized EBITDA was up 7% to reach $203 million, and our normalized earnings per share was up 5% to reach $1.04. We generated $98 million free cash flow and invested $79 million of CapEx. We also completed the Manitou acquisition in the quarter for a total consideration of $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 $41 million and a favorable foreign exchange rate impact of $4 million were offset by higher production, operating, and depreciating expense for $38 million and higher financing costs and normalized income tax expense for $8 million.

Now moving to network inventory on Slide 19, our network inventory is up 9% over last year's third-quarter level, primarily driven by higher side-by-side inventory, as we are now benefiting from the first phase of capacity increase at our Juarez 2 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.

Finally, turning to Slide 20 for an update on our fiscal year '19 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 13-17% 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 $2.96-3.06, resulting in a growth of 30-35%.

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, one 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 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 José.

José Boisjoli -- President and Chief Executive Officer

Thank you, Sebastien. Overall, we are very happy with our Q3 results, given that we're lapping a strong performance year over year for our fiscal year '18 Q3 results. All our product line in the Powersport category are outpacing the competition. Our dealer network and the media welcomed our new product with keen interest, and we expect our consumers 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 to new opportunities. The team around the world is executing very well, and I'm proud of their contributions.

Despite some headwinds in the 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%, and we are confident we'll be able to deliver at least $3.50 EPS for fiscal year '20 in the current economic context. Our product lineup has never been as strong, with our diversified product portfolio, and the engagement from all our dealers is high. The fundamentals 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.

Questions and Answers:

Operator

Thank you. Please press *1 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 Gerrick Johnson from BMO Capital Markets. Please go ahead.

Gerrick Johnson -- BMO Capital Markets -- Director

Hi, good morning. My first round will be focused on boats here. Thanks for the purchase price on Trident, but can you talk about the annual sales run rate for Trident, Manitou, and 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.

José Boisjoli -- President and Chief Executive Officer

Good morning, Gerrick. I will take the dealer question, and Sebastien will take it from there. Just to give you a sense, it's just starting. Obviously, there were some other OEM brands and general OEM brands that decided not to continue with Alumacraft, but I think it's 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 of some numbers. Alumacraft has about 275 dealers, mainly in eastern North America, Manitou, 150 in the Midwest, and Evinrude, 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, but mid-term, we don't see any problems going forward. Sebastien?

Sebastien Martel -- Chief Financial Officer

On the revenue numbers for the quarter, the boat 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 million of revenue from the boat business, Gerrick.

Gerrick Johnson -- BMO Capital Markets -- Director

Great. Thank you very much. I'll get back in the queue.

Operator

Thank you. Our following question is from Robin Farley from UBS. Please go ahead.

Robin Farley -- UBS Investment Bank -- Managing Director

Great. I wonder if you could give some color around average selling price of the off-road and the side-by-side business, and just a little more color with what's happening with margins there with your revenue guidance raise, but not your EBITDA guidance raise. Thank you.

Sebastien Martel -- Chief Financial Officer

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-inch Maverick Sport, so, obviously, a year into product announcement, we're shipping more of those products to dealers, so that's what impacted ASPs this quarter. On the ORV side, mix was rich and the ASP was up, but overall, Robin, flat ASP product lines on the Powersport side.

Robin Farley -- UBS Investment Bank -- Managing Director

Great. And, just thinking about margins with the increase in revenue guidance but not EBITDA, can you talk us through a little bit about that dynamic?

Sebastien Martel -- Chief Financial Officer

Yeah. 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 were trending above $1.30 for the U.S., and as you know, we are naturally hedged throughout the year -- our building 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 and 100% of the adjustment in revenue comes from [inaudible].

Robin Farley -- UBS Investment Bank -- Managing Director

Okay, great. Thank you.

Operator

Thank you. Our following question is from Mark Petrie from CIBC. Please go ahead.

Mark Petrie -- CIBC Capital Markets -- Analyst

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 of Ryker and the Design Lab compare to how dealers have been positioned with Spyder? Related to that, what's your sense of how dealers are allocating space within their dealership? Are they giving up floor space from Spyder to Ryker? How is that playing out at this point?

José Boisjoli -- President and Chief Executive Officer

Good morning, Mark. First, in North America, we are exactly on plan in terms of the numbers 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 three SKUs, and the customer can customize on-site the Ryker, and that's why the dealer needs to buy the Design Lab to carry Ryker.

And, so far, we're happy. In Europe, almost every dealer has 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, but on the other hand, many dealers who were not carrying Spyder have raised their hands. So far, we're very happy with the bookings, 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.

Mark Petrie -- CIBC Capital Markets -- Analyst

Okay, thanks. That's helpful. And then, I guess just 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 at a high level, can you share your assumptions or generally how you're thinking about the macro environment and the health of the consumer and industry demand over the next 12-18 months?

José Boisjoli -- President and Chief Executive Officer

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 stores was good, as you can see in our retail, and so far, in Q3, watercraft and side-by-side were up about 25%, and in Europe, it was the same thing. We don't see any impact at the retail level, and like I said, the traffic was still very good. Most of our industry is 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, 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 OK, we are in good shape.

Mark Petrie -- CIBC Capital Markets -- Analyst

Okay. Thanks a lot.

Operator

Thank you. Our following question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead.

Benoit Poirier -- Desjardins Capital Markets -- Analyst

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 expectation -- what should we expect in terms of inventory going into the fourth quarter and fiscal '20?

Sebastien Martel -- Chief Financial Officer

Good morning, Benoit. When I look at the overall inventory position, yes, the inventory is up this quarter, but for the right reasons. Retail excluding snowmobile is up 16%, inventory up 9%, so I'm very comfortable with the inventory that we have. When I look at aging as well, units above 18 months are less than 5% of the inventory that's outstanding.

My outlook for the fourth quarter is that inventory is going to continue to increase by two elements. 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 Rykers, so we'll be busy shipping in December and January, so I'm expecting Spyder inventory will also be up. For snowmobile, there's snow on the ground, so hopefully, we'll have a good season, and we finished off with clean inventory last year, so I would expect snowmobile to be relatively flat versus a year ago.

Benoit Poirier -- Desjardins Capital Markets -- Analyst

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, Sebastien?

Sebastien Martel -- Chief Financial Officer

As you said, we completed the NCIB in July. The next window is going to open in Q1 of next year, but we've done everything that we could do under the NCIB. But obviously, when we look at where the share price is trading and evaluations, it's part of the discussion we're having with the board in terms of using our capital. Our balance sheet is strong. Our No. 1 priority is to continue investing in growth, but obviously, we'll be opportunistic if we need to be.

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Okay. Thank you very much for the time.

Operator

Thank you. Our following question is from Derek Dley from Canaccord Genuity. Please go ahead.

Derek Dley -- Canaccord Genuity -- Analyst

Hi, guys. Just a question on the PWC growth. Obviously, quite strong during the quarter. Can you comment on the split of that growth between some of your higher-end models versus the Spark?

José Boisjoli -- President and Chief Executive Officer

Good morning, Derek. Yes, we have more than 50% of the industry -- the market share. When we have success in a 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%. That has proved the success of the new platform that we introduced last year. Recreational was up mid-single digits. We're up high single digits, and rec lite was flattish at mid-single digits. Then, as you can see, every segment is growing, and we're outpacing the industry in last year's performance in Recreational. Overall, very happy, and these are numbers from North America, but the phenomenon is the same worldwide.

Derek Dley -- Canaccord Genuity -- Analyst

Okay, that's very helpful. Just on the inventory position, Sebastien, I 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?

Sebastien Martel -- Chief Financial Officer

Yes, very current. Again, we finished clean on snowmobile last year, so what we're shipping is current models. Watercraft finished a bit higher, but that's in line with overall market performance and market growth. ATV -- we continue gaining market share, so that's clean inventory. And, for side-by-side, most of it is driven by the new models that we've introduced.

Derek Dley -- Canaccord Genuity -- Analyst

Okay, great. Thank you very much.

Operator

Thank you. Our following question is from Craig Kennison from Baird. Please go ahead.

Craig Kennison -- Robert W. Baird -- Analyst

Good morning, and thank you for taking my questions. I have just a follow-up on the inventory question. I apologize if I missed it, but do you have inventory growth excluding the snowmobile category?

José Boisjoli -- President and Chief Executive Officer

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'll be glad to provide that info to you.

Craig Kennison -- Robert W. Baird -- Analyst

Okay, thanks. And then, 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's been change.

José Boisjoli -- President and Chief Executive Officer

Yeah. When Bertrand came to the company, it was a new industry for him. He came from the car industry, and after 10 months, he and I felt that the fit was not there, and he wanted to continue in something else. We've looked at what our options were, and as you know, with Sandy Scullion, who has been with the company for more than 20 years, and Thomas Uhr, who was in the industry for five years, we have very good, talented people who will co-lead the Powersports group. Just as you know, Thomas, that you met when we were in Austria in 2015, has accepted to move to Canada with his family. The minute we get his working permit, he will move here, and both of them will be based here. Those things happen, but I'm very happy that we have very talented people internally.

Craig Kennison -- Robert W. Baird -- Analyst

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 of share, so maybe that masks some of the weakness, but I'm curious what you're seeing.

José Boisjoli -- President and Chief Executive Officer

We don't see much -- the oil and ag patch that we call -- we don't see much. Those 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 the 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 masking those slow-growth or flattish states in the United States.

Craig Kennison -- Robert W. Baird -- Analyst

Great. Thank you.

Operator

Thank you. Our following question is from Cameron Doerkson from National Bank Financial. Please go ahead.

Cameron Doerkson -- National Bank Financial -- Analyst

Thanks. Good morning. Just to follow up on the snowmobile retail in the quarter, I just wondered if you can go over again what the key driver was of the retail softness. The way you describe it, it sounds more of a timing issue than anything. And then, also, if you can just comment on what you're seeing so far subsequent to quarter end with snowmobile retail -- 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.

José Boisjoli -- President and Chief Executive Officer

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 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, then this is affecting our start of the season. On the other hand, the spring units -- we always have a really high level of snowmobiles that are pre-sold to customers, but the popularity of all the models with the 900 Turbo resulted that we're shipping those models a bit later than what was planned originally because the volume is twice what we were planning.

There is another phenomenon -- I was with a dealer from Milwaukee Wednesday evening, and he was telling me that he winterizes about 10 of his watercraft every year, and with the warm fall we had, the customer kept the watercraft on the water very long. He basically winterized his watercraft about a month later than typically and started to focus on PDI, snowmobile, and high-speed about a month later. I think there are all those moving parts that are 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.

Cameron Doerkson -- National Bank Financial -- Analyst

That's very good. Second question for me -- we've been talking a bit about the macro environment. It doesn't sound like you're seeing any real weakness there at this point, but can you just discuss what your flexibility is to reduce your cost base in the event that we do a have a slowdown in demand? What kind of flexibility do you have with your manufacturing or overhead costs to reduce your cost base in that kind of eventuality?

José Boisjoli -- President and Chief Executive Officer

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 products than we were before. We entered the side-by-side Utility segment with the Defender, which we believe is a more stable industry. You have big fluctuation with the economic environment. Our network inventory -- with the order management system that we have in North America, the dealers order every month.

We believe off-road will be adjusted very quickly down. We are more diversified today than we were in '08-09. We did continue to increase our global sales worldwide. Our manufacturing footprint is more flexible. We can move products around between product lines. Our debt...lower leverage coming in light -- we have a lot more flexibility than what we had in '08. BRP is a company that has been through many cycles, and we can react quickly if things happen. We're not looking for those periods, but we believe we are in good ship versus where we were in '08-09, and obviously, '08-09 was a very bad recession.

Cameron Doerkson -- National Bank Financial -- Analyst

Absolutely. Thanks very much.

Operator

Thank you. Our following question is from Jamie Katz from Morningstar. Please go ahead.

Jamie Katz -- Morningstar Incorporated-Analyst

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 FX-related or if there's a certain consumer segment that's acting as a lag in that region.

José Boisjoli -- President and Chief Executive Officer

Good morning, Jamie. What happened in Western Europe is two phenomena. First, this fall in Q3, the retail for watercraft was very good because it was a very warm fall and our dealers were 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. When it's 35 degrees Celsius, it's not comfortable to purchase a side-by-side. The watercraft was good and traffic was good in the dealerships, a bit less in off-road, but the big drive came from the motorcycle business. It was a good season for motorcycles in the mid-CC segment, in a category that we don't participate in any of our product lines. Then, this is how we see the situation in Western Europe: In Scandinavia, where we are very strong with a very high level of market share in every product line, the retail was good overall.

Jamie Katz -- Morningstar Incorporated-Analyst

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.

Sebastien Martel -- Chief Financial Officer

Good morning, Jamie. Last quarter, when we talked about inflationary elements for fiscal year '19 -- the current fiscal year -- versus guidance, I alluded to a $25 million impact for this year, and I also talked about impact for next year of about $25 million as well. What came into effect since we last talked was the Section 301 that lists three tariffs, which were confirmed and communicated, and those tariffs impact mostly our PAC business, as we buy goods from China and import them into the U.S., so what I'm estimating in terms of costs for next year coming from those tariffs is about a $10 million for next year --

Jamie Katz -- Morningstar Incorporated-Analyst

It's actually better than you originally anticipated.

Sebastien Martel -- Chief Financial Officer

Well, actually, we still have about $25 million coming from commodities, freight, so that's still there. The $25 million is there, so, add the extra $10 million on the $25 million -- about a $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 is 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 $3.50 for next year.

Jamie Katz -- Morningstar Incorporated-Analyst

Thank you.

Operator

Thank you. Once again, please press *1 at this time for any questions or comments. Our following question is from Seth Woolf from Northcoast Research. Please go ahead.

Seth Woolf -- Northcoast Research -- Vice President

Good morning, gentlemen. Thanks for taking my questions.

José Boisjoli -- President and Chief Executive Officer

Good morning.

Seth Woolf -- Northcoast Research -- Vice President

I wanted to talk about off-road vehicles and the marine industry. First of all, in your year-round products, did you get a chance to figure out what the growth was ex snowmobiles? José, I think you said that as capacity comes online, you're starting to meet consumer demand now, so how should we think about this going into next year? Is the dealer inventory a number that is going to continue to rise and maybe accelerate?

José Boisjoli -- President and Chief Executive Officer

Let's clarify a few things. The capacity increase in Juarez 2 for side-by-side -- we will start to ramp up the speed of the line February 1st, but it will take about six months to reach the 50% increase that we're planning. It will start from low numbers February 1st and by the end of H1 will 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 color about what we're planning for next year.

Sebastien Martel -- Chief Financial Officer

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.

Seth Woolf -- Northcoast Research -- Vice President

Okay. I'm assuming your turns are coming down because you're filling the channel with what they've been short on. Is that right?

Sebastien Martel -- Chief Financial Officer

Well, the turns, obviously, are good now because we have trouble meeting consumer demand on side-by-side, 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 120-160 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 make sure they have the right products for the consumers.

Seth Woolf -- Northcoast Research -- Vice President

Okay, that's excellent. And then, just turning to the Marine business, you threw out the number for Manitou -- orders are up 20% year over year coming out of the dealer show. Is there anything different that you guys have done from a model standpoint, or is just that the strength of that market is the underlying driver?

José Boisjoli -- President and Chief Executive Officer

No, but Manitou and Evinrude have been all the way strong. We rigged about 35% of their pontoons already. Many Manitou dealers used to sell Evinrude. Then, like you said, the pontoon industry is up high -- about 15%. It was a good show. Dealers were enthusiastic that Evinrude and Manitou are together. We're working on a strategy where we will rig from the factory more pontoons. It makes their life easier. We believe all this created the momentum. Then, it's a combination of good industry momentum and popularity of the Manitou product.

Seth Woolf -- Northcoast Research -- Vice President

Okay, thank you.

Operator

Thank you. Our following question is from Gerrick Johnson from BMO Capital Markets. Please go ahead.

Gerrick Johnson -- BMO Capital Markets -- Director

Hey, thank you. Just on gross margin, the gross margin down 50 basis points year over year, Sebastien, can you please quantify basis point hit or tailwind or headwind from mix, leverage, inputs, and the other components of gross margin? Thank you.

Sebastien Martel -- Chief Financial Officer

Yeah, 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 50 basis points in the quarter.

Gerrick Johnson -- BMO Capital Markets -- Director

Okay, so, no major swing either way on inputs then.

Sebastien Martel -- Chief Financial Officer

Well, production cost was about 40 basis points negative, but offset by pricing, but again, 40 basis points -- considering the environment in which we are, I'm pretty happy with that level of impact, so the teams were able to react appropriately, and our cost reduction programs are actually paying off.

Gerrick Johnson -- BMO Capital Markets -- Director

Related to that, how about program expense as a percent of gross sales this year versus last year?

Sebastien Martel -- Chief Financial Officer

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 turnover on the new platform was strong, so we didn't have to necessarily put in programs, so, year over year, flat.

Gerrick Johnson -- BMO Capital Markets -- Director

Okay, great. Thank you very much.

José Boisjoli -- President and Chief Executive Officer

Thank you.

Operator

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.

Philippe Deschênes -- Manager, Treasury and Investor Relations

Thank you, Maude, 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.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.

Duration: 55 minutes

Call participants:

Philippe Deschênes -- Manager, Treasury and Investor Relations

José Boisjoli -- President and Chief Executive Officer

Sebastien Martel -- Chief Financial Officer

Gerrick Johnson -- BMO Capital Markets -- Director

Robin Farley -- UBS Investment Bank -- Managing Director

Mark Petrie -- CIBC Capital Markets -- Analyst

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Derek Dley -- Canaccord Genuity -- Analyst

Craig Kennison -- Robert W. Baird -- Analyst

Cameron Doerkson -- National Bank Financial -- Analyst

Jamie Katz -- Morningstar Incorporated-Analyst

Seth Woolf -- Northcoast Research -- Vice President

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