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BRP Inc (DOOO 1.94%)
Q1Â 2021 Earnings Call
May 28, 2020, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, ladies and gentlemen, and welcome to BRP Inc. FY '21 First Quarter Conference Call. I would now like to turn the meeting over to Mr. Philippe Deschenes. Go ahead, Mr. Deschenes.
Philippe Deschenes -- Manager of Treasury & Investor Relations
Thank you, Judi. Good morning, and welcome to BRP's conference call for the first quarter of fiscal year '21. Joining me this morning are Jose Boisjoli, President and Chief Executive Officer; and Sebastien Martel, Chief Financial Officer.
Before we move to the prepared remarks, I would like to remind everyone that certain forward-looking statements will be made during the call that are subject to a number of risks and uncertainties. I invite you to read BRP's MD&A for a listing of these.
Also during the call, reference will be made to supporting slides, and you can find the presentation on our website at brp.com.
So with that, I'll turn the call over to Jose.
Jose Boisjoli -- President and Chief Executive Officer
Thank you, Philippe. Good morning, everyone, and thank you for joining us. About two months ago, when we presented our year-end results, we were of -- we were on a roll. We had incredible momentum with every product line worldwide, and we were anticipating another great year ahead.
Like the rest of the world, we were faced with the sudden impact of the COVID-19 crisis, which brought rapid changes that significantly disrupted our business and operation and forced us to quickly adapt our plan. It began when our dealer had to close their business as the situation worsened in China in January. Closure followed in Western Europe in February, where local government enforced severe containment measures.
As you can see on this slide, retail in North America had been strong until mid-March, was negative for one month and once dealers started to reopen, retail has been strong since mid-April. Our manufacturing has reopened or is in the process of reopening, and we are adapting to the present reality.
With retail tracking better than expected, we are now focused on getting production back to capacity globally. I am proud of the team's swift action taken to limit the potential impact of the crisis on our business and protect our financial flexibility. Amongst other, we deployed global protocol to ensure that our employees can work in a safe environment and reduce risk. We adjusted our production plan in line with government health regulation and expected market demand. We implemented cost mitigation measures, notably temporary layoffs, salary reduction and an exhaustive review of discretionary spending, resulting in overhead savings of up to CAD450 million for the rest of the year. We focused on liquidity preservation, notably focusing our capex investment on key projects, with high-impacted return, resulting in a total capex target of CAD220 million to CAD250 million for the year, representing a reduction of about CAD130 million to CAD160 million from last year level. And we were successful in extending our term loan B by $600 million and maintain our covenant-light condition. As a result of this effort with our cash on hand and CAD700 million of revolver availability, following the completion of the term loan transaction, we have about CAD1.3 billion of financial flexibility.
While we remain cautious about the future, we expect that these different initiatives will allow us to navigate through the uncertain times while allowing us to continue investing for the long-term growth of the company. However, these measures do not come without sacrifice and one of the toughest decisions we had to make, as we announced yesterday evening, is the discontinuation of outboard engine production.
As you have witnessed over the last few years, despite its innovative technology, our outboard engine line-up has been losing share in a market that was already difficult. Our strength was in the early power segment while the industry growth was driven by the package sector, which led to continued share erosion. Given this trend, our outboard engine had fallen behind in terms of profitability and cash generation potential.
As the current situation forces us to reduce our investment plan and reviews downward our growth expectations for the business, the path to profitability improvement for outboard engine was too long. It became apparent that we had to discontinue production. For Evinrude employees, let me say that I am very proud of the part they have played over the past years, and in particular their efforts over the past 18 months. Although we have made progress, the impact of the COVID-19 has left us no choice. I wish to thank them for their dedication and commitment in helping us create the Marine Group.
This decision will allow us to refocus our Marine investment on higher expected returns and sustainable projects, such as innovative technology and enhancing our boat offer. We remain committed to our Marine strategy with an evolution to our approach. Along with the announcement last night, we also announced a global supply agreement with Mercury, which is securing access to engines and is expected to support our dealer network development efforts.
Our strategy has always been about building a strong Marine business by offering customers a superior boating experience through product innovation. The discontinuation of outboard engine production does not change that objective. The development of Project Ghost and Project M are progressing as planned and we are confident that they will be game-changers in the industry.
Before we get into the quarterly results, I wanted to provide you with an update on our manufacturing operations. As you know, we suspended or slowed down most of our operations starting in late March until mid-May, responding to local government containment measures. This obviously limited our ability to ship products in the first quarter and impacted our financial results. The good news is that we have been able to take extensive measures to protect our people while resuming capacity. Production has restarted or is ramping up in most of our facilities and we are set to be operational everywhere starting next week.
As mentioned, our results were significantly impacted by mandatory closures of plants and dealerships; however, our retail performance was solid given the current context with North American powersport retail being up 4%, or 10% when excluding snowmobile. Contributing to that strong retail performance was our focus on supporting our dealers as we strive to continue delivering the best-in-class dealer value proposition in the industry.
Ensuring the health of our dealer network is a key priority and we made sure to find solution to ease the financial burden on our dealers, notably as we extended floorplan support until the end of June, adjusted PerforMAX target until the end of July to account for potential reduced demand, we proactively adjusted dealer orders and we extended warranties for all our powersport products. We also implemented measures to simplify business processes for dealers and to drive consumer demand. The response from our dealer network on these initiatives was very positive and should help us to continue to gain momentum.
Now, taking a closer look at the North American quarterly retail performance on Slide 10, our product portfolio performed above our expectations during the first quarter. We continued to outperform the off-road industry with side-by-side retail growing above [Phonetic] 40% and ATV retail being up high-single digit, driven by a strong first half of the quarter and very strong second half of April. The three-wheeled vehicle category is suffering the most in the current context since the confinement measures taken have had the most impact on this category with the closure of riding school and cancellation of demo tours, two key projects that support the growth of this sector. I will explain more on this in a moment. Finally, while outboard down for the quarter, personal watercraft and snowmobile outpaced their respective industries.
As summer is approaching, there appears to also be a clear trend that people will be staying at home for their vacation, or as they say a staycation, which would work in our favor. We added this slide to give you some color on our retail analysis that we did, showing that our retail performance was very strong in a region where access to powersport dealers and playgrounds remains more available during the containment period. You can see a clear difference between the US and Canada where the provinces of Quebec and Ontario were completely closed for six weeks. The middle graph shows the data taken April 15, and as you can see, the gaps in the retail between the dealers that were open versus closed, and on the right between rural and urban dealers. Retail was up 20% when dealers were open for most of the month of April and up 24% in rural areas. When dealers are open, sales remain strong. This bodes well for our industry as gradually enter the confinement stages in many regions around the world.
Now let's turn to Slide 12 for the year-round product highlights. Revenue was up 2% driven by a strong start of the quarter, partially offset by the impact of the crisis. On the retail side, 10 months into season '20, the side-by-side industry was up high-single digit. The demand for our Can-Am side-by-side was very strong and our retail was up low 40% season to date. Can-Am side-by-side was also performing well in international markets despite the situation, with retail for the quarter up over 40% in Latin America and up over 20% in EMEA and 20% in Asia Pacific. Under the current context, these are incredible results.
Turning to ATV, the North American ATV industry was also 10 months into the season and retail was up low-single digit. For the same period, Can-Am ATV retail was up low teen percent, notably gaining share in the mid-cc segment. We are pleased with the performance of our off-road business, which had a very strong end of April, and the positive trend continued in May.
Now looking at three-wheeled vehicles. Early in season '20, the North American three-wheeled vehicle industry was down low 30%, while we were down low 40%. There are a few factors to note. First, we are lapping an excellent quarter due to the launch of the Ryker last year. As I mentioned, the on-road industry suffered the most from containment measures due to the closure of riding schools and license issuers and the cancellation of demo tours. We also had to cancel our marketing efforts since we have no projects to support new entrants into the market, a key driver for this category. We have now launched a new marketing campaign that is adapted to the improving situation. As schools are reopening, demand for classes is growing and we are confident we will regain traction.
Turning to Seasonal Products on Slide 13. Seasonal Products revenues were down 14%, primarily driven by lower shipments as many dealers were closed.
Now looking at retail. The North American snowmobile industry ended its season '20 on March 30, with retail down mid-single digit percentage. Our Ski-Doo line-up continued to drive strong consumer demand, resulting in retail that was up mid-single digit percentage and ended the season with the highest market share in its history. In Scandinavia, 10 months into season '20, the snowmobile industry is down mid-teen percent driven by unfavorable snow conditions last winter. Ski-Doo and Lynx outperformed all other brands with retail only down high-single digit percentage.
Our complete line-up and new product introductions, notably the new Summit snow [Phonetic] model, have put us in a very favorable position in the industry with continued market share gain potential. Although we had to cancel our demo tour, we are encouraged by the level of spring certificate units sold to customers. Our performance is very similar to last year, which is testament to the strength of our Ski-Doo and Lynx brands.
Now turning to personal watercraft. It is still early in the season and the North American personal watercraft is flat, with Sea-Doo retail is up low-single digit percentage. Given the current situation which halted manufacturing, plus a cold spring, our retail was affected and we reduced our model year '20 production plan by 18% compared to last year. However, we decided to advance the cut-off of model year change and we will be ready to ship model year '21 units starting this summer. May retail so far for watercraft has been very encouraging and with our production adjustment, we will be ready to supply the demand as needed.
Continuing with a look at Powersports Parts, Accessories & Apparel and OEM Engines, revenue was down 15% as a result of dealer closures due to the pandemic. Parts orders, which represent an important portion of our PA&A business, are directly correlated to the ability of dealers to service units, and as a result, suffered the most from dealers being closed. As dealerships started to reopen, we saw an improvement in parts sales.
Finally, looking at our Marine business. Revenues were down 26% due to a lower volume of outboard engines and boats sold, partially offset by the impact of the acquisition of Telwater during last year. At the retail level, Alumacraft was down over 20% resulting from weak industry trends in key markets, while Manitou performed well with retail up low-teen percentage. With the confinement measures lifting and spring weather getting better, we see retail improving for both Manitou and Alumacraft.
With that, I will turn the call over to Sebastien.
Sebastien Martel -- Chief Financial Officer
Thank you Jose, and good morning everyone. As mentioned, we had a very strong start to the quarter, continuing our growth trajectory from recent years until the COVID-19 pandemic led to global containment measures resulting in dealer closures and suspension of production in most of our sites starting in late March. This impacted our ability to ship products, resulting in revenues that were down 8% from last year and normalized EBITDA down 16%. Our normalized EPS ended the quarter at CAD0.26.
As part of our initiatives to preserve our financial flexibility, we reprioritized our capex plan for the year, resulting in investments of CAD43 million in Q1, down CAD9 million from last year. We managed working capital leading to CAD100 million of positive working capital contribution and CAD169 million of free cash flow for the quarter. And as Jose mentioned, following the end of the quarter, we secured a $600 million term loan with a covenant-light structure that matures in 2027. With the added Term B, we have significantly strengthened our liquidity position, allowing us to focus on managing the business through these uncertain times and continuing investing for the long-term growth of the company.
As I mentioned, our revenues were impacted by our ability to ship in certain markets. Our retail remained strong in the United States as many dealers were able to stay open, allowing us to continue shipping products, which resulted in Q1 revenues that were up 5% for the region. However, the situation was different in other key markets where a higher proportion of our dealer network had to close, leading to retail decline and lower shipments. This was particularly true in Europe, where we had a very strong start of the year, but the trend worsened early in March as contain measures were more comprehensive and were put in place much earlier than in North America.
Our gross profit margin was also impacted by the situation, notably due to the closure of our manufacturing sites in late March and all of April. On a comparable basis, our gross profit margin was up 10 basis points from last year as the negative impacts from volume, mix, pricing and sales programs, and production costs and depreciation were more than offset by favorable foreign exchange rate variation. However, COVID-19 had a 350 basis point impact on our margin, primarily driven by less-efficient fixed cost absorption due to production shutdown and higher yard inventory depletion.
Turning to Slide 19, our quarterly normalized net income was down CAD30 million compared to last year, driven by negative impacts of CAD62 million coming from volume, mix, pricing, sales programs, and CAD16 million from production and distribution costs, which were partly offset by lower overhead resulting from our cost mitigation efforts, offset in part by higher depreciation for a net positive impact of CAD38 million, lower net financing costs and normalized income tax expense for CAD3 million, and a favorable foreign exchange rate impact for CAD7 million.
Also, given the impact of COVID-19 on the outlook for our industries, we took a CAD171 million non-cash impairment in the quarter for our Marine business, which is facing more challenging industry dynamics compared to when we acquired them. This amount accounts for the revaluation of the boat companies we have acquired over the past couple of years and the impact of the decision to discontinue the production of outboard engines. This amount has been excluded from our normalized metrics.
Now looking at network inventory on Slide 21. Our network inventory was up 7% over the same period last year, well positioned despite the current situation as we experienced better-than-expected retail trends across most of our product lines. The increase is primarily driven by three-wheeled vehicles as it was the most impacted product line within our portfolio due to the closure of riding schools, demo tours, and more dealers being closed in urban areas. Accessory industry was also up as we had positioned the network inventory early in the year for the expected continued solid retail growth. This allowed us to support the strong consumer demand we experienced with retail being up over 40% for the quarter despite that we had to suspend our production due to the pandemic.
Our number of days of inventory are lower than usual for both SSV and ATV, which may lead to certain models being difficult to access in certain regions. But with our operations restarting, we expect to be able to sustain the continued strong consumer demand for our line-up.
Our network inventory growth was partly offset by a lower level of inventory of PWC due to the production shutdown. Still, we believe the level of inventory is appropriate for the expected demand. And as Jose mentioned, we will be able to produce and ship model year '21 earlier than usual if there is other additional demand.
And lastly for snowmobile, we ended the season with a healthy inventory position, allowing us to start the next one in a good place.
Finally, turning to Slide 22. The coming weeks and months will be determinant in how our fiscal year '21 will play out. As many regions of North America and Europe are de-confining and restarting their economies, we will get greater visibility on the potential impacts of the pandemic on consumer demand, which will be impacted by the severity and length of the economic uncertainty; the agility of the global supply chain and its ability to adapt and resume operations in a safe and sustainable manner; and people's confidence, which will undoubtedly be linked to the evolution of the virus and will impact both demand and workforce availability across multiple industries.
Given the uncertainty related to these elements, we are not in a position to provide a guidance for fiscal year '21 at the moment; however, we are sharing with you our high-level view on how we expect the year to progress. This outlook assumes the restart of our manufacturing operations as scheduled, no further closure of operations in our factories or suppliers and our dealer network, and continued positive consumer demand in North America but lower year-over-year overall demand in other regions of the world.
Based on this, we anticipate a challenging second quarter as revenues are expected to be down about 40% due to the production suspension across most of our sites during April and May and then a progressive ramp-up to resume full capacity and replenish yard and dealer inventories, and the impact of the discontinuation of outboard engine production. We expect the trend to progressively improve for Q3 and Q4 as we complete our production ramp-up. However, revenues are still expected to be down year-over-year 10% to 20% in the second half of the year due to the anticipated lower demand for our products in international markets and the impact of the discontinuation of outboard engine production.
We expect capex for the year to be CAD220 million and CAD250 million, depreciation of about CAD265 million, net financing costs of about CAD135 million, and the effective tax rate to be between 26% and 27%, and finally end the year with a diluted share count of about 89 million shares.
While our results for the year will suffer from the pandemic, the fundamentals of our business remain solid as we continue to outpace our industries and gain market share. Furthermore, our ability to secure our financial flexibility is allowing us to continue investing in our growth initiatives to put the company in a solid position for the rebound in years to come.
With this, I'll turn the call back to Jose.
Jose Boisjoli -- President and Chief Executive Officer
Thank you Sebastien. These are not easy times, but what makes me happy and proud is the agility and resilience of our employees, suppliers and dealers. I would like to thank them for their efforts and continued dedication. Going forward, our priority, our focus is on two things; how we manage and respond to the current environment and making sure we are prepared for what the future holds. As always, we are committed to ensuring a safe working environment for our employees globally and now more than ever.
We are also focused on staying agile. Our agility allows us to react quickly to the crisis and now to successfully ramp up again, while making sure our dealer network is healthy and ready to be back in action.
We will maintain our market leadership through our best-in-class marketing, go-to-market and retail strategy. There has never been a better time to promote the customer experience riding our products.
Now, to prepare for the future, we need to continue our growth objectives adapted to this new reality. Although we reduced our capex, we are protecting our key growth projects and initiatives to maintain our momentum in the industry. And to do this, we will need to rethink now how we do business and add that to the new normal in our operations, our strategy and our mindset. We believe this new reality will give us opportunities to demonstrate our leadership as things will continue to evolve. For example, we believe the way people purchase has definitely changed with more interest than ever in e-commerce. With global travel remaining restricted in the short term, more staycations, prolonged social distancing and fewer large gatherings and events, consumers will look for activities that can be practiced closer to home. With our products, our know-how and our solid financial flexibility, we are well positioned to navigate through the crisis, respond to new trends, and emerge stronger than ever. Lastly, I would like to remind you we make the ideal product for social distancing.
On that note, I will now turn the call to the operator for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Your first question comes from the line of Steve Arthur with RBC Capital Markets. Please go ahead.
Steve Arthur -- RBC Capital Markets -- Analyst
Yes, thank you very much. I'm wondering first if we could just get a little bit more color on what you're seeing with some of the retail trends into May. In the US, it sounds like a strong recovery started in late April and continuing, but just any comments on what you're seeing now with dealer traffic levels, the restrictions that they're working through and such in the US, and also the patterns that you're seeing emerging now in Canada and Europe?
Jose Boisjoli -- President and Chief Executive Officer
Good morning Steve. Obviously for competitive reason, I will not give you all the data that we see, but I will give you some. First, our dealers right now, about 90% of our dealers are reopened in the United States. There are still some states in the east and in California that are closed, but 90%-plus are open. And in Europe, where everything was closed for a period of time, in Germany, France, Italy and Spain, about 80% of our dealers are operational. And I won't give you the detail by product line or by country, but since the beginning of May, we are up about 35% worldwide between all product lines and all countries. Then, we don't know how long this will continue, but definitely a trend that is positive for our type of product.
Steve Arthur -- RBC Capital Markets -- Analyst
So I guess just squaring that, if retail into May, is that strong versus an outlook for down 40% in Q2, is the difference there I guess just the lag in terms of production versus retail, production's been down for six weeks?
Jose Boisjoli -- President and Chief Executive Officer
Yes, that's for sure. That's for sure.
Steve Arthur -- RBC Capital Markets -- Analyst
Yes. Okay. Okay. Good point. So secondly, just in terms of the production ramp, I guess at your primary facilities in Mexico, it sounds like they're ramping up now. Just any comments on the level of utilization you're at now and how you see that ramping? What the limiting factors [Phonetic] are, whether it's local restrictions or supply chain, or just matching demand?
Jose Boisjoli -- President and Chief Executive Officer
But in Mexico, the government gave us the OK to restart on June 1, which is next week, and we've been working on the ramping up the production for the last two weeks. Then, we're allowed to let our people in and prepare for ramping up. That's what we're doing right now, because you don't just flip the switch on us, but we will be fully operational in our three factories starting next week.
Obviously, we expect to have some difficulty here and there with suppliers because we're managing about 550 key suppliers around the world, and I think we will go through some difficulty overall for the rest of the year. But as we speak right now, everything looks good that everything will be operational next week.
Steve Arthur -- RBC Capital Markets -- Analyst
Okay, and just a final one -- thank you, final one on operating costs and overhead savings. It sounds like you've been pretty aggressive with that, looking at a CAD450 million reduction. Presumably as things start to ramp back up, some of those costs come back online, but any sense of how much of those savings might be permanent or structural in the business now and therefore support longer-term margins?
Sebastien Martel -- Chief Financial Officer
Yes, good morning Steve. What we've communicated is we have plans in place to reduce our expenses up to CAD450 million versus what we were planning initially for fiscal year '21. Obviously, we'll remain agile and adapt our plans. We'll see how things are trending. One thing I can tell you is with the discontinuation of the outboard engine business, that's a reduction of about CAD80 million of overhead, and so that's going to be recurring year-over-year. And as things evolve, we'll be nimble as we've been in the past, and in the last few months, and we'll balance the short-term financial priorities with our long-term aspirations, and so the good news is we have flexibility to adjust accordingly.
Steve Arthur -- RBC Capital Markets -- Analyst
Okay, thank you very much.
Operator
Your next question comes from the line of Craig Kennison with Baird. Please go ahead.
Craig Kennison -- Robert W. Baird & Co. -- Analyst
Hey, good morning. Thank you for taking my questions. Seb, I think you just mentioned some metrics regarding the engine business that you're exiting. Could you share with us the annualized revenue and margin profile of that business, so we can try to exclude it from future results?
Sebastien Martel -- Chief Financial Officer
Yes. Well actually on the OE business, there's actually two components; there's the unit business and there's the parts business. And the parts business is a business that we're going to be continuing. Obviously, we're going to be servicing our dealers for warranty but also for our consumers that are no longer under warranty but need service, so that business is going to keep going on.
As Jose mentioned, the unit business, so the actual engine, was a business that we were sub-scale. We've been losing market share over the last few years. And from a margin perspective, it's a business that was almost breakeven. And from a profitability, it was a business that was actually at a loss position, and that's why we took the decision to discontinue it.
When you look at OE in terms of the whole portfolio of our Marine segment, the engine business is about 45% of total revenues. So if you carve that part out, it should give you a good appreciation of what the remaining business is.
Craig Kennison -- Robert W. Baird & Co. -- Analyst
What would you estimate your market share to have been in that?
Sebastien Martel -- Chief Financial Officer
All [Phonetic] in the mid-single digits.
Craig Kennison -- Robert W. Baird & Co. -- Analyst
Thanks. And then going back to the comment on May retail trends, which appear to be really strong, is there any way to look at that data and deconstruct it for whether you're seeing an influx of first-time buyers or there may be some kind of catch-up demand from earlier periods where dealers were closed? Just trying to get a real feel for the extent to which this outdoor theme is really capturing new eyeballs?
Jose Boisjoli -- President and Chief Executive Officer
Yeah. I mean, we've done some surveys about the customer repurchase our units in the last month, and we see more new entrants than typical. Typically, we have about 20% of our sales is to new entrants. Smart survey, again, it's a small sample, but we are more around 30% right now. Then there is definitely a trend there where some people who was not considering our type of product, we see them entering into our type of industry. Then this is very positive. There is, obviously, a lot of money in the system, a lot of government invested in economy and with, again, the staycation and the social distancing, canceling vacation and travel restriction, there is definitely a hype there. Then this phenomenon is there, we can see it. We can feel it.
On the other hand, we cannot ignore that the unemployment rate is going up, consumer confidence is low and the housing start has reduced, then all of this at one point, will catch up. Then we feel pretty confident for the next few months. But how this will play on the second half of the year, that's a bit difficult to predict.
Craig Kennison -- Robert W. Baird & Co. -- Analyst
Great. Thank you.
Operator
And your next question comes from the line of Gerrick Johnson with BMO Capital Markets. Please go ahead.
Gerrick Johnson -- BMO Capital Markets -- Analyst
Hey. Good morning, guys. A couple of questions. First, you're talking about lower demand in rest of the world. Just why aren't folks elsewhere looking for outdoor recreational products, just like we're doing here in the US and North America? Is this just a North America phenomenon?
Jose Boisjoli -- President and Chief Executive Officer
I think, Gerrick, there is some timing like LATAM right now is down, but the COVID hit Brazil and Mexico later than in Europe and in North -- in Canada and US, and I think it's just a question of timing. Those countries were upbeat [Phonetic] later than North America -- than Canada, US, sorry, and now they are in the middle of it. Then it's -- I think it's only a question of timing. I think the phenomenon is exactly the same.
Gerrick Johnson -- BMO Capital Markets -- Analyst
Yes. But aren't your markets bigger in Europe and Asia compared to Latin America? What about those markets that...
Sebastien Martel -- Chief Financial Officer
Yes. Obviously, the -- what we're seeing is that, the confinement measures were more, I don't want to say drastic or severe. And so, is there a bigger aftershock event there for the consumers, we're not seeing the pickup that we're seeing in the US in terms of retail.
Gerrick Johnson -- BMO Capital Markets -- Analyst
Okay. Okay. Going back, say, two years ago, would you have acquired these boat brands if you did not have the Evinrude business?
Jose Boisjoli -- President and Chief Executive Officer
Absolutely. I mean, when -- and you saw the few presentations we've done about the boat strategy. But BRP is a diversified company, and we are -- I think this is one of our strength, and we needed to diversify outside powersports. Marine is a good complement to what we do, and you see how many customers who buy ATV, Ski-Doo or snowmobile are buying boat. And we see a big opportunity in the boat industry. Obviously, our thinking is about creating new experience by pushing innovation and technology, and that's what we're doing right now by redesigning the complete lineup of Alumacraft, Manitou and Telwater boat. Then for us, it's a bit sad that we discontinued the production of the Evinrude -- the outboard engine, but we will continue to invest in new technology in the new boat because we believe that our long-term strategy makes a ton of sense.
Gerrick Johnson -- BMO Capital Markets -- Analyst
Okay. So Project Ghost was not reliant on you having the outboard engine technology?
Jose Boisjoli -- President and Chief Executive Officer
Project Ghost, and I won't tell you the detail about it, but Project Ghost and Project M are ongoing right now.
Gerrick Johnson -- BMO Capital Markets -- Analyst
Okay. Okay. I'll leave it at that. Thank you very much.
Jose Boisjoli -- President and Chief Executive Officer
Thank you.
Sebastien Martel -- Chief Financial Officer
Thank you.
Operator
Your next question comes from the line of Robin Farley with UBS. Please go ahead.
Robin Farley -- UBS -- Analyst
Great. Thank you. I have two questions. First, on the off-road business. You mentioned -- well, I guess, you didn't give a specific product line, but you mentioned sales up very strongly so far in May, and we're assuming a lot of that in off-road. But with the restart just taking place next week, I guess, how long -- or do you think that retail from here going forward is going to be lower than it would have been. In other words, is there not enough product that it's going to impact your retail negatively in the next month? And then, is it by six weeks from now that you feel like you would have enough inventory in the system to be able to meet the level of retail demand? Or sort of how long will that period last? Thanks.
Sebastien Martel -- Chief Financial Officer
Well, as you saw, Robin, at the end of Q1, our inventory was up in the network, about 7%. And part of that was driven by side-by-side. So year-over-year, side-by-side at the end of Q1 was up mid-teens. And so, we had a good level of inventory. Obviously, the retail is very strong, but we had anticipated strong retail when we started the quarter, and we had, I guess, filled the network with some inventory. It might be tight for a few models in some regions, but the retail in May continues to be strong. And as Jose mentioned, next week, we're going to be in full production, and we're going to be starting shipping units to dealers again. Obviously, we'll be shipping the units that are in high demand. And so, we believe that we'll be able to meet consumer demand and continue driving strong retail in the second quarter as well.
Robin Farley -- UBS -- Analyst
Okay. I guess, just looking at side-by-side inventory is up mid-teens, but in theory, retail is pacing -- seems to be pacing up 40% still in the month of May. Is that -- and I know these are on different basis, right? The retail base and the inventory base are different numbers. So, do you have enough inventory -- is the mid-teens increase at the end of Q1 enough to support that kind of retail through Q2?
Sebastien Martel -- Chief Financial Officer
It's enough to support strong retail. We're going to finish Q2 probably with inventory down year-over-year. As I said in my prepared remarks, we might run out of certain models in certain regions. And so, unfortunately, some consumers may not necessarily have the choice of color they wanted, but we believe that there's going to be enough inventory in the network to meet the overall demand. And as we rebuild our -- as we restart production and refill the pipeline, we believe that we'll be able to sustain that momentum. So, are we losing retail maybe in the second quarter? Yes. But we believe that with our production ramp up, we'll be able to catch up pretty quickly.
Robin Farley -- UBS -- Analyst
Okay. Great. That's very helpful. Thank you. And then just another question. We had thought that the outboard engine business was operating at a loss, and you kind of confirmed that. Can you quantify what addition to EPS you get just from maybe taking that loss out? In other words, how much does that add to the bottom line?
Sebastien Martel -- Chief Financial Officer
Yeah, good question. When I look back to fiscal year '20, and I carve out the OE business, I'm looking at a CAD0.60 to CAD0.70 negative EPS impact.
Robin Farley -- UBS -- Analyst
Great. Very helpful. Thank you.
Operator
Your next question comes from the line of Mark Petrie with CIBC. Please go ahead.
Mark Petrie -- CIBC Capital Markets -- Analyst
Hey. Good morning. I just wanted to follow-up on two things. First, with operational constraints and social distancing on manufacturing, does that ultimately impact your sort of capacity or throughput? Or do you expect to be able to ramp to previous levels?
Jose Boisjoli -- President and Chief Executive Officer
Good morning, Mark. No. I mean, obviously, we were lucky enough to restart engineering in Canada about five weeks ago because we needed to plan the transition from model year '20 to '21, and we could not lose the momentum we had. Then we developed a lot of good measure to make sure that our employees are safe. And right now, we are implementing this protocol everywhere where we have factory. And we believe that in terms of assembly and all the manufacturing operation will be as efficient as before.
That being said, as Sebastien explained, we need to rebuild the inventory -- our own inventory to be efficient in shipping. You need a certain level of product, and we are lucky we have many product lines. And right now, when we ship, we have a mix of Watercraft, ATV side-by-side, we're optimizing the load for few dealers in certain area. This will take time to rebuild. Then in the factory, our efficiency will go back quickly. I think it will take a few months before we are overall as efficient as before.
Mark Petrie -- CIBC Capital Markets -- Analyst
Okay. Thanks. And then wondering if you could just give any other comments around sort of the type of demand that you're sort of seeing at the dealer level in terms of price points and the type of product. And then maybe by -- at least within side-by-side like rec-sport utility, how the demand profiles or the sales performance varies by those subcategories?
Jose Boisjoli -- President and Chief Executive Officer
I would say it's all over. The demand is strong for every product line. It was a bit difficult for three-wheel, because we had to stop all our different activity to continue our momentum. Even today, you cannot have a license or you cannot place your vehicle because license office are still closed. But except for three-wheel and now it's ramping up, I think we will recover the year, but the demand for all the product lines are strong.
Mark Petrie -- CIBC Capital Markets -- Analyst
Okay. And then just the last one. Seb, you had mentioned sort of the positive working capital flow through for Q1. Just wondering about expectations for the balance of the year as production ramps up and inventories get moved around?
Sebastien Martel -- Chief Financial Officer
Yeah. I'm expecting Q2 to be a consumer of cash on the working capital side as we pay off suppliers, we rebuild inventory. So that's going to be a negative, probably in the range of CAD100 million. And then for the back half of the year, I'm expecting things to stabilize as they were in prior years and prior quarters.
Mark Petrie -- CIBC Capital Markets -- Analyst
Okay. Thanks a lot, guys. All the best.
Sebastien Martel -- Chief Financial Officer
Thanks.
Jose Boisjoli -- President and Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Tim Conder with Wells Fargo Securities. Please go ahead.
Timothy Conder -- Wells Fargo Securities -- Analyst
Thank you. Good morning, gentlemen. A couple of items. Just wanted to -- just to clarify and confirm a prior question here. So, Seb, you said that for fiscal '20, the impact of the engine business that you're discontinuing was about CAD0.60 to CAD0.70 in earnings?
Sebastien Martel -- Chief Financial Officer
Yes.
Timothy Conder -- Wells Fargo Securities -- Analyst
Okay. Okay. And then gentlemen, can you kind of talk about the potential incremental investments you may be making in e-commerce, either at the Company level or with the dealer network that have -- maybe that you said is you've reexamined things coming through the trough of COVID and now on, hopefully, the continued positive slope of recovery? So, we maybe need some more additional investments on e-com here, both again at the Company level or at the dealer level?
Sebastien Martel -- Chief Financial Officer
Yeah. And Tim, it's more rebalancing our portfolio of IT investments. Obviously, we believe that there might be a continued phenomenon of people working from home or people preferring to -- obviously, everyone sees that -- have seen the trend of people shopping online. And so, how do we make sure that we have the best tools for consumers or dealers. So it's shifting of money, but it's not a huge capital investment that we're talking about. It's more prioritized.
Timothy Conder -- Wells Fargo Securities -- Analyst
Okay. Okay. And then, Jose or Seb, whoever wants to take this, the pricing and promotions. Can -- any way to bucket what you're seeing -- what you saw in Q1 and are expecting here over the balance of the fiscal year into what may be, let's call it, normal promotions, ex-COVID and then COVID-related, what you're having to do because of COVID? Any way to -- I mean, it's maybe a difficult question, but any way to sort of parse that?
Jose Boisjoli -- President and Chief Executive Officer
Yeah. It's a difficult question. Let's say that promotion was quite aggressive on non-current, like it's always do. Off-road, obviously, everyone want to benefit of the situation. On current, I would say, it's about similar to what we see from some of our competitors over the last few years. Then, I would say, no big change before and after the COVID. Non-current, we're aggressive and some model, on the current we were aggressive on retail promotion for consumers with a very good financing offer, zero interest for five years. And that definitely helped the retail because two, three weeks ago, we didn't know how this would play. Then overall off-road watercraft, I would qualify it as normal and three-wheel as normal.
Going forward, it's very difficult to predict. I think right now, every OEM are chasing capacity and want to make sure to ramp up, then most likely, people will be maybe a bit less aggressive on program, but very difficult to predict what will happen in the coming months.
Timothy Conder -- Wells Fargo Securities -- Analyst
Okay. Okay. Helpful. And then two last questions. One, do you see any furtherance of working relationship with Brunswick outside of the supply agreement on the Marine side? And then lastly, your thoughts on the potential of when you could potentially return to fiscal '20 levels in terms of revenue or I would think profitability may have a quicker ramp given the -- at least the CAD80 million of structural savings on the engine side that you've eliminated?
Jose Boisjoli -- President and Chief Executive Officer
On your question about Brunswick, and Brunswick, obviously, is the perfect partner for us because they don't compete in powersports, then it's a very good complement. We, obviously, are happy with the Evinrude -- the outboard supply agreement that we have with them, and we could, in the future, exchange technology, but we'll see how this will play in the future.
Sebastien Martel -- Chief Financial Officer
And on the -- your question, obviously, I'd love to give you an answer this morning to you and to the rest of the organization of BRP. There's -- obviously, as you can appreciate, there's still a lot of uncertainty. How things will pan out? How the economy will react to massive job losses? And so, today, I'd say, it's much too early to call when we believe things will come back to normal. The good news is, again, at BRP, I believe we are in a much better position than we were back in '08 and '09 with The Great Recession. You guys understand well the leadership positions we have in all our brands. And we believe that that momentum is going to continue as we are seeing it continuing when things come back to normal. So, do we believe we'll come back to fiscal year '20 levels someday? Absolutely. But today, it's too early to give any outlook.
Timothy Conder -- Wells Fargo Securities -- Analyst
Thank you, gentlemen.
Operator
Your next question comes from the line of Benoit Poirier with Desjardins. Please go ahead.
Benoit Poirier -- Desjardins Securities Inc. -- Analyst
Yes. Thank you very much, and good morning, gentlemen. With respect to the engine contribution in fiscal '20, was this CAD0.60, CAD0.70 on EPS was positive or negative contribution?
Sebastien Martel -- Chief Financial Officer
It was negative, Benoit.
Benoit Poirier -- Desjardins Securities Inc. -- Analyst
Okay. Perfect. And now with respect to the Ghost Project and the Project M, I understand the timing is unchanged, everything. But could you talk more specifically about who will be responsible of providing the engine and whether there's exclusivity or is Mercury -- does Mercury need to build a new engine for these particular projects?
Jose Boisjoli -- President and Chief Executive Officer
Good morning, Benoit. Obviously, Benoit, for competitive reason, I cannot go into detail of your question. The only thing I can say is, Project Ghost and Project M are ongoing. And we are confident about our -- we oriented our strategy.
Sebastien Martel -- Chief Financial Officer
But it will be an internally sourced technology, Benoit.
Benoit Poirier -- Desjardins Securities Inc. -- Analyst
That will be manufactured by Mercury or manufactured...
Sebastien Martel -- Chief Financial Officer
We won't go into the detail, but it's -- again, our partnership with Brunswick is for the supply of traditional outboard engine. And our plans for Ghost do not change, and our plan for Project M do not change as well.
Benoit Poirier -- Desjardins Securities Inc. -- Analyst
Okay. Perfect. Okay. That's great color. And Jose, you mentioned that capex will come back and will be reduced, obviously, and the spending will be may don't keep projects. So would you maybe share some color on what you would consider as key projects right now? And maybe if you could share some discussion you had with the dealers following the announcement around the electric bikes last fall? Thanks.
Jose Boisjoli -- President and Chief Executive Officer
Benoit, I mean, we have -- we had before COVID, an incredible momentum with all our product lines around the world. And in those reductions that we made, we didn't make sure that we protect as much as we can our five-year lineups for our product line. There is some adjustment here and there. But globally, we are very confident with what we're planning for the years to come. A lot of capex was related to plant maintenance, equipment turnover that we will slow down for a period of time, but we protected our five-year lineup.
Electrification is ongoing. And again, we didn't disclose when those products will be offered. But we'll see how all of this will play and how fast we can come back to the level that we had before the COVID-19.
Benoit Poirier -- Desjardins Securities Inc. -- Analyst
Okay. Perfect. And now when we look at your kids lineup, could you let us know how this product line is doing these days? And how would you compare your kids product lineup against your peers right now in terms of product offering?
Jose Boisjoli -- President and Chief Executive Officer
You're talking which product line, Benoit?
Benoit Poirier -- Desjardins Securities Inc. -- Analyst
Oh, I'm talking about the kids lineup. So the DS-90, the DS-70, 225, I believe. So, you have -- on the ATV side, you don't have your snowmobile for kids anymore, but just wondering whether you've seen more momentum around the kids' products and whether you have the good offering as opposed to peers?
Jose Boisjoli -- President and Chief Executive Officer
I mean, we have -- I think we have a competitive lineup in every segment that we are competing, and we decide to compete. And overall, I mean, we didn't see any drastic change with what happened in the last month and a half for those product line. Like I said before, right now, the surge in demand is touching every single product line, every price point, low- and high-end. Then we didn't see a surge on the youth product -- product for youth people.
Benoit Poirier -- Desjardins Securities Inc. -- Analyst
Okay. Perfect. And last one for me.
Sebastien Martel -- Chief Financial Officer
Hi, Ben. We need to move to the next caller on the line. We're running...
Benoit Poirier -- Desjardins Securities Inc. -- Analyst
Yeah. Okay. Perfect. Thanks.
Sebastien Martel -- Chief Financial Officer
Sorry, thanks.
Operator
Your next question comes from the line of Greg Badishkanian with Wolfe Research. Please go ahead.
Frederick Wightman -- Wolfe Research -- Analyst
Hey, guys. Good morning. It's Fred Wightman on for Greg. Just one quick one from us. If we look at the share gains in side-by-sides in the quarter, that was a big acceleration versus what we've seen over the past few quarters. So, how should we think about that gap going forward? And what is driving that? Is it really just product availability in the channel or is it something else?
Jose Boisjoli -- President and Chief Executive Officer
I mean, again, we have -- I believe we have very good competitive product. And the Can-Am brand is more and more known. The awareness is improving. People like the quality of our product and how they ride. And I think it's all those things that are happening. Then, again, good product, dealer making good money, better margin with our product line. Then it's a combination of all this that created the momentum.
Frederick Wightman -- Wolfe Research -- Analyst
Great. Thanks.
Sebastien Martel -- Chief Financial Officer
Thank you.
Operator
And your next question comes from the line of Derek Dley with Canaccord. Please go ahead.
Derek Dley -- Canaccord Genuity -- Analyst
Yeah. Hi, guys. Just a quick one for me. Just in terms of your dealer network, have any of them decided not to reopen due to the financial distress that was caused to some of them over the past month or two?
Sebastien Martel -- Chief Financial Officer
We've been very lucky. None of our dealers have defaulted on their obligations with either their financial institution or the floorplan partners. Obviously, the dealer came in to this in a very good financial position because, obviously, our business with them has been growing. And they've made a lot of money with us. We've been proactive as well early in the COVID-19 by supporting our dealers with extended floor plan, working with TCF also to provide extended payment terms on interest that maybe due. So they deferred payments by over 90 days. And now with the retail that we're seeing, obviously, that's providing good cash flows for the dealers. So, as of now, we're not seeing anything concerning on the dealer health's side.
Derek Dley -- Canaccord Genuity -- Analyst
And is that more specific to you guys, the fact that you had zero of them have to close? Or what did you see overall in the industry?
Sebastien Martel -- Chief Financial Officer
Well, obviously, we know what our dealers -- how our dealers are performing and how other dealers. It's not -- I mean, it's not a business that we're looking at closely. But, obviously, we work hand-in-hand with TCF. They're very proactive in assessing dealer health. And overall, I think, as I said, given that the dealers are -- have made money with us and are maybe had a period of two to three weeks, where things were tougher, but things restarted pretty quickly. I'm sure that brought a breath of fresh air to lot of our dealers.
Derek Dley -- Canaccord Genuity -- Analyst
Okay. Thank you very much.
Operator
Your next question comes from the line of Jaime Katz with Morningstar. Please go ahead.
Jaime Katz -- Morningstar Inc. -- Analyst
Hi, good morning. Thanks for taking my question. I'm curious, piggybacking on Tim's question. Since we don't know when we get back to 2020 levels, are you guys basically tabling the 2025 plan for now and rethinking it? Or do you think that there's enough sort of road ahead of us that we can -- that you guys can get back on track to achieve those goals? Thanks.
Jose Boisjoli -- President and Chief Executive Officer
No. I mean, we don't know. We are -- the pillar of the M25 plan are still there. But before the situation stabilize and the situation, we have a better view on when we'll go back to what we call new normal, we don't want to commit on anything. Then at the right time, we'll definitely -- if there is a need, realign M25, but for the time being it's too early.
Sebastien Martel -- Chief Financial Officer
And Jaime, when we announced M25 last fall, we did get the question what will happen if there's a recession and what we said then, and it's still relevant today as well. If recession happens, maybe it's going to slow us down by a year or year and a half, but the ultimate goal does not change. And today, that's still our position.
Jaime Katz -- Morningstar Inc. -- Analyst
Okay. And then at the end of the MD&A discussion, there was some commentary that internal control for financial reporting were ineffective, and it looks like there were no material restatements surrounding that. But I'm curious what the time line for the mitigation of that is just to sort of get my head around what the time line of maybe anything down the road that might come up with a restatement? Is that something like...
Sebastien Martel -- Chief Financial Officer
Yeah. Obviously, when we listed in the US on NASDAQ, the -- we were obligated to comply with the SOX requirements over the control environment. Related to financial reporting, obviously, we've always had clean audit opinions, as you have seen. And so, the quality of our numbers still remain, and Jose and I sign them every quarter, and we stand behind them.
Related to the material weakness that was noted is around access controls around our systems, obviously, we have compensating controls. But the nature of the preventative controls need to be strengthened and the time line to do this is over the next two years. Our objective is for fiscal year '22 to be fully compliant.
Jaime Katz -- Morningstar Inc. -- Analyst
Thank you. That's very helpful.
Operator
Your next question comes from the line of Cameron Doerksen with National Bank Financial. Please go ahead.
Cameron Doerksen -- National Bank Financial, Inc. -- Analyst
Yeah. Thanks. Good morning. Just really one question for me, just with regarding gross margins. And you talked about in Q1, kind of a 350 basis point impact from, I guess, COVID-19 related stuff. How should we think about gross margins in Q2 with revenue down 40%? And, I guess, maybe also if you could talk a little bit about what the second half of the year gross margin profile might look like on lower revenue, but on the offset, you've got the outboard engine that's not going to be there? So just some commentary about gross margins in Q2, but also the second half of the year.
Sebastien Martel -- Chief Financial Officer
Yeah. Well, I'm expecting gross margins to be impacted quite significantly in the second quarter. Obviously, our plants are going to be closed for a month out of the full quarter. Inventory ramp-up should help a bit on the margin side. But, obviously, with the significant reduction in volume, margins will be hit.
When I look at the full year, and I'll go to probably the EBITDA margin there, again, if we hit those revenue numbers that I talked about, I'm expecting my EBITDA margin probably to be in the range of what we reported back in fiscal year '18, fiscal year '19 there. Those would be the numbers that I'd expect it to meet for the full year, Cameron.
Cameron Doerksen -- National Bank Financial, Inc. -- Analyst
Okay. That's very helpful. I'll leave it there. Thanks very much.
Sebastien Martel -- Chief Financial Officer
Thanks.
Operator
Your next question comes from the line of Brian Morrison with TD Securities. Please go ahead.
Brian Morrison -- TD Securities -- Analyst
Thanks very much. I'll keep this quick. I appreciate your comments on working capital. Just in terms of free cash flow for the year based on what you've given us, is it fair to say that you're looking at breakeven slightly positive?
Sebastien Martel -- Chief Financial Officer
Well, free cash flow, we'll call it free cash flow from operations, Brian. Yes, breakeven. But, obviously, with the discontinuation of outboard engine, there will be a cash outflow coming with that. The expected cash outflow is about CAD60 million to CAD85 million that we reported in our financials. And so, that's going to be a headwind to cash generation. So I'm expecting to burn cash this year with the closure of outboard engine.
Brian Morrison -- TD Securities -- Analyst
Okay. Thank you. And then just market share with the growth that you've had in side-by-side vehicles, specifically utility. Can you update us where you think you are?
Jose Boisjoli -- President and Chief Executive Officer
Can you repeat the question? The sound is bad.
Brian Morrison -- TD Securities -- Analyst
Sorry. Just in terms of your market share with side-by-side vehicles, what you think your current market share is with the growth that you've had and specifically on the utility side?
Jose Boisjoli -- President and Chief Executive Officer
But obviously, for competitive reasons, we don't disclose the detail, but we are around 20% market share globally.
Brian Morrison -- TD Securities -- Analyst
Thank you very much.
Operator
And your next question comes from the line of Brandon Rolle with Northcoast Research. Please go ahead.
Brandon Rolle -- Northcoast Research Partners -- Analyst
Good morning. Thank you for squeezing me in here. Our conversations with dealers exiting Memorial Day weekend indicated a lack of inventory in four to six units for side-by-side just from a surge of demand of families wanting to get into ORVs. Could you talk about, I guess, the timing for production ramp-up for those units? And any risk you see from maybe families going to alternative, maybe going to boats or RVs are going away from ORVs because of the lack of inventory of those larger seated units? Thank you.
Jose Boisjoli -- President and Chief Executive Officer
Yeah. I mean, like Sebastien explained, for sure, there is some customer who will show up at the dealership and will not have the exact model that he's looking for. He won't have the blue or the red that he is looking for, no doubt about that. If the customer want exactly what he need, he might be unhappy. That being said, we try to encourage transfer of inventory between dealership. And again, like we said, we're ramping up production. We're restarting production this coming week, and we will try to refill the pipeline as fast as we can. But again, we know that in some area, some model will be out of some product.
Brandon Rolle -- Northcoast Research Partners -- Analyst
Okay. Thank you. And there was some fears that one of your competitors was ramping up production, maybe a week or two before you and they have product in the field. Do you see that as a concern at all?
Jose Boisjoli -- President and Chief Executive Officer
For sure. I mean, like Sebastien presented, our inventory level at the end of the quarter was higher than last year. Then we feel that we have sufficient of inventory, and we believe that for restarting the factories, we are all about at the same timing because we're all waiting for government to give us the green light to restart. Then maybe a week apart, but overall, we are in the same situation.
Brandon Rolle -- Northcoast Research Partners -- Analyst
Okay. Thank you for that color.
Operator
And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.
Philippe Deschenes -- Manager of Treasury & Investor Relations
Great. Thank you, and thanks, everyone, for joining us this morning. We look forward to speaking with you again for our Q2 call on August 27. Thanks, again. Have a good day.
Operator
[Operator Closing Remarks]
Duration: 68 minutes
Call participants:
Philippe Deschenes -- Manager of Treasury & Investor Relations
Jose Boisjoli -- President and Chief Executive Officer
Sebastien Martel -- Chief Financial Officer
Steve Arthur -- RBC Capital Markets -- Analyst
Craig Kennison -- Robert W. Baird & Co. -- Analyst
Gerrick Johnson -- BMO Capital Markets -- Analyst
Robin Farley -- UBS -- Analyst
Mark Petrie -- CIBC Capital Markets -- Analyst
Timothy Conder -- Wells Fargo Securities -- Analyst
Benoit Poirier -- Desjardins Securities Inc. -- Analyst
Frederick Wightman -- Wolfe Research -- Analyst
Derek Dley -- Canaccord Genuity -- Analyst
Jaime Katz -- Morningstar Inc. -- Analyst
Cameron Doerksen -- National Bank Financial, Inc. -- Analyst
Brian Morrison -- TD Securities -- Analyst
Brandon Rolle -- Northcoast Research Partners -- Analyst
