BRP Inc

TSX:DOO

Earnings Call Transcript 2019-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to the BRP Inc.'s FY '19 Fourth Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Philippe Deschênes. Please go ahead, Mr. Deschênes.

[Philippe Deschênes, Manager of Treasury & Investor Relations]

Thank you, Maute. Good morning, and welcome to BRP's conference call for the fourth quarter of fiscal year 2019. Joining me this morning are José 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 under the Investor Relations section.So with that, I'll turn the call over to José.

[José Boisjoli, President, CEO & Director]

Thank you, Philippe. Good morning, everyone, and thank you for joining us. It's a real pleasure for me to present our fourth quarter and full year results this morning. Fiscal year '19 was an incredible year for us, and I'm extremely proud of the team and how well our people executed and delivered on our plan, achieving record result; and to them, I say thank you. Now let's start with the financial highlights for the fiscal year on Slide 4.Our revenue were up 18% to reach $5.2 billion, primarily driven by strong growth in Year-Round and Seasonal Product. Our normalized EBITDA was up 22% to $656 million, resulting in a normalized earning per share came in above our guidance range at $3.10, representing impressive growth of 37% over last year. Our retail growth was also remarkable. For the third straight year, we've been able to significantly outpace the industry. Our North American powersport retail sales for the year were up 11%, compared to an industry that was up low single digit. When excluding snowmobile, which experienced very strong growth last year, our North American powersport retail sales were up 16% in an industry that was down low single digit. The strong performance is the result of our ability to push technologies and innovation to create market shaping product as well as our focus on offering the best value proposition for dealers, driving excellent support from our dealer network.Once again this year, the alignment of all our employee around our key strategic priorities allow us to achieve robust results, while positioning us to continue delivering growth in the future. More specifically, we've delivered industry-leading performance outpacing the industry in every product line. We maintain a high pace of innovation, and we have no intention of slowing down. We expanded into new market with the acquisition of 2 boat company, Alumacraft and Manitou, and the opening of an office in Russia. We continued the deployment of the 2020 plan across our manufacturing sites with added capacity in both Juárez 2 and Querétaro, and we actively managed our capital structure and improved shareholders return with $280 million of capital to shareholder through share repurchase and dividend. Fiscal year '19 was an exceptional year.Now a quick look at the quarterly retail performance on Slide 7. Our momentum continued in the fourth quarter as our North American powersport product retail grew 9% in an industry that was flat in the quarter. Excluding snowmobile, we grew 19%, compared to an industry that was down low single digit. As you can see from this slide, all our products are retail growth in the quarter. Can-Am off-road and on-road product lines continued to outpace their respective industry.Notably, Can-Am 3-wheeled vehicle had a very strong start of the season, with retail almost 3x higher versus the same period last year. You will also see that Ski-Doo and Sea-Doo boat grew low single digit in the quarter, performing in line with the industry. Despite some economic weakness in certain region of the world, such as the Middle East and country like Argentina and China, our product portfolio continued to experience strong consumer demand globally, driving retail growth of 8% in Latin America, 6% in EMEA and 3% in Asia Pacific.Now a quick update on some of our key ongoing growth projects, starting on Slide 9. As you know, our side-by-side business has been growing at a very rapid pace over the last 3 years. In fact, our North American retail has more than doubled since we've launched our objective of introducing a new side-by-side platform every 6 months until 2020. As you can see on the right side of the slide, despite the strong growth we experienced, we still have significant opportunity to further capture market shares in that industry, including the introduction of the eighth platform this coming June. We plan on aggressively going after a new market opportunity with the structure and processes that we developed to deliver a new side-by-side every 6 months, that will remain in place. We intend to maintain a solid pipeline of new product innovation over the years to come. The relentless marketing effort to further build awareness for the Can-Am brand, with an emphasis on moving from product alone to the consumer experience and the continued focus on the winning in the dealership by offering the best value proposition in the industry.To support our side-by-side growth, as you know, we have completed the Phase 1 of capacity increase at our Juárez 2 facility during fiscal year '19 increasing our production capacity by 30%, and we have just recently completed the work related to the second phase of capacity. We've closed the line for 2 weeks at the beginning of February and are currently progressively ramping up production with potential additional capacity expected to be available at the end of the second quarter. All the elements are there to enable us to continue our growth trajectory.Another important growth opportunity is to unleash the full potential of our 3-wheeled vehicle business, notably through the introduction of the Can-Am Ryker. The launch of the product has been highly successful. Production and shipment are on plan. We are on schedule with 80% of the design lab already installed in dealership, and we have had very positive feedback from dealers and consumers. The new design lab is an effective retail tool and has raised the consumer experience in the dealership to another level.Our marketing campaign is driving impressive results, with over 484 million impression worldwide, 1.5 million individual website visit and an increase of 178% in the build-your-own section on our website. The next wave of the marketing campaign and TV ads are starting now, in line with the beginning of the retail season. We have excellent momentum and are very enthusiastic about the upcoming 3-wheeled vehicle business.Now let's turn to Slide 12 for the Year-Round Product highlight. Revenue were up 17% for the quarter, driven by higher volume of side-by-side sold and the initial shipment of the Can-Am Ryker. On the retail side, 7 months into the season '19, the side-by-side industry is up mid-single digit. Despite a weak December for the industry and us, our Can-Am retail picked up in January, ending the quarter in the low 20%. Our momentum continue and dealer order for our lineups remained strong.On the racing side, the Maverick X3 won the Dakar Rally for the second season in a row. First place to 17 were all Maverick X3. That mean our closest competitor finished 18. The Can-Am brand benefit from this remarkable success, which continue to strengthen its image.Now turning to ATV. The North American ATV industry is also 7-month into the season and retail overall is down low single digit. For the same period, Can-Am ATV is up high single digit, notably gaining share in the more profitable high cc segment. Can-Am ATV is also performing very well in Europe with 10% retail growth in the quarter.Now looking at the 3-wheeled vehicle business. Early in the 2019 season, the North American 3-wheeled motorcycle industry is up in the high 30% range, primarily driven by the solid performance of our Can-Am 3-wheeled vehicle, for which, as mentioned, retail was 3x what it was for the same period last year. This growth came from both the introduction of the entry-level Can-Am Ryker and consumer interest for the RT and F3 that have been repriced. We have also achieved our objective of having over 155 active school, offering the program by the end of fiscal year '19, and we now count 175 school across North America, and over 11,000 participants have completed the program so far. The rider education program is progressing well, and preliminary results show that we are on track to meet our target of about 15% conversion rate. It's early in the season, but we are pleased with our momentum, and we are well-positioned for the upcoming main retail period.Turning to Seasonal Product on Slide 13. Seasonal Product revenue were up 32%, primarily driven by a higher volume and favorable product mix of snowmobiles sold. In term of retail, 10-month into the season, the North American snowmobile industry was down low single-digit percentage. Ski-Doo retail was also down low single-digit percentage over the same period. Despite the strong demand for lineup, our snowmobiles season was disappointing due to the unsteady and very uneven snow condition throughout the winter months. Moreover, we did not have enough noncurrent unit in the network to compete in that market. In fact, we started the season with only about 25% of the industry noncurrent unit, which is significantly shorter than our global market share of about 50%. In Europe, Ski-Doo and Lynx had the good quarter with retail up high single-digit percentage, notably driven by strong consumer demand in Russia, where we are selling direct for the first time. We introduced in February, our model year '20 lineup for Ski-Doo and last week for Lynx. The highlights of these new lineups are the introduction of the Ski-Doo expedition family, the Ski-Doo Summit Expert package and the introduction of the Rotax 900 ACE Turbo to the Lynx lineup. Our annual spring tour are taking place right now across the Snowbelt and the feedback from consumer and dealer is very positive.Turning to personal watercraft. We are currently at the end of the season in counter-season market, and Sea-Doo continue to experience solid growth with quarterly retail up high single-digit percentage in Australia and New Zealand and up about 30% in Brazil. Looking at the upcoming North American season for personal watercraft, all signs are positive. Traction at the boat show was excellent with high single-digit growth in consumer certificate.Continuing with a look at Powersport PAC and OEM engines. Revenue were up 8% in the quarter driven by a higher volume of snowmobile parts and clothing and a higher volume of 3-wheeled vehicle accessories, which resulted from the introduction of the Can-Am Ryker. The model year '20 expedition lineup offer more options than ever for utility buyers with more than 200 storage and accessories option available, and all new multi-link mounting system on the rear of this tunnel. The trend is excellent with our accessory business. The increased growth of side-by-side and watercraft is creating great momentum. For model year '19 alone, we introduced over 450 new accessories to complement our different product lines and improve the riding experience of our consumers.Now looking at the Marine category. Revenue were up 39% in the quarter, driven by the acquisition of Alumacraft and Manitou, which were partially offset by a lower volume of outboard engines sold. Regarding retail sales, 7-month into season '19, the North American outboard engine industry is up low single digit with Evinrude retail down about 10%. This decline is due to the same trend that we've seen in the past few years with the industry growth driven by the package business, where boats and motor are sold together. This one of the principal reason we made our entry into the boat business. Although, it is early into the season, the retail for Manitou is up about 50% and Alumacraft down in the 20% range. We are pleased with those results, as both company are currently in a transition phase with their dealers. There is still a lot of growth planned for this business. And remember, that our Marine plan is a mid- to long-term strategy. Internationally, Evinrude continued to see good result this quarter with retail up double digit in Asia Pacific and Latin America.And with that, I will turn the call to Sebastien and will return for closing remark.

[Sebastien Martel, Chief Financial Officer]

Thank you, José, and good morning, everyone. We completed fiscal year '19 with solid results for our fourth quarter, driven by the continued strength of our side-by-side business, the introduction of the Can-Am Ryker and the strong snowmobile shipments. Our quarterly revenues were up 23% to reach $1.5 billion, and we generated $335 million of gross profit. Our gross profit margin ended at 22.2%, a decline of 80 basis points from last year's fourth quarter due to higher production, warranty and distribution cost, that were partly offset by higher volume of 3-wheeled vehicles, snowmobile and PAC sold. Our normalized EBITDA came in at $182 million, up 12% from last year, and our normalized diluted EPS came in at $0.88, up 19% from last year.We completed the year investing $299 million in CapEx and generated $263 million of free cash flow. We also successfully completed just last week an amendment of our revolving credit facility, increasing the availability by $125 million and extending the maturity by one year to May 2024. This is providing us with additional flexibility to continue investing in our growth plan.Turning to Slide 17. You will see that our quarterly normalized net income increased $10 million over last year and ended the quarter at $86 million. The increase was driven by a favorable impact coming from volume, mix, pricing and sales programs for $120 million, which was partly offset by higher cost and depreciation expense for a total negative impact of $65 million and increased investments in operating expenses for the development and launch of various new products and the modernization of our information systems for $46 million.Now looking at our network inventory position on Slide 18. Our network inventory is up 15% over last year's fourth quarter level, primarily driven by the continued robust consumer demand for our side-by-side lineup and the initial shipments of the Can-Am Ryker for the upcoming season. Also contributing to the growth were a slightly higher level of personal watercraft inventory ahead of the season to support the expected growth and a slight increase in snowmobile inventory, resulting from the weaker-than-expected season due to unfavorable riding conditions. Our network inventory is very clean, both in terms of level and age, and we are in a comfortable position heading into fiscal year '20.Before heading into the details of our guidance for the upcoming year, I want to update you on some mandatory changes to our accounting standards that we will adopt for fiscal year '20. Effective as of February 1, 2019, our financial will reflect the adoption of IFRS 16 Leases, which will impact the way we record operating leases going forward. Previously, under IFRS rules, operating leases were off balance sheet. Under IFRS 16, we will now recognize these leases on the balance sheet with the recognition of a lease liability and its corresponding asset. As for the P&L impact, previously, operating leases-related expenses were recorded as an operating expenses. Going forward, a depreciation expense will be recorded for the asset over the contract life and an interest expense related to the liability will be recorded in financing cost. These changes all -- these changes have an almost neutral impact on our normalized net income. It will, however, effectively lead to an increase of our normalized EBITDA, which will be offset by an increase of our depreciation expense and our financing costs. There is no impact on cash. We will not be restating prior periods, and as such, our guidance will be presented based on the expected fiscal year '20 numbers that reflect the adoption of IFRS 16 compared to fiscal year '19 numbers that do not.Now let's have a look at the guidance for fiscal year '20. We are expecting total revenues for the year to be up between 7% and 11%. The Year-Round Products revenues are expected to grow between 12% and 17%, primarily driven by side-by-side with the continued robust demand for lineup, a strong pipeline of product introductions this year and supported by the completion of the second phase of additional production capacity at Juárez 2. An important contributor to the Year-Round Products revenue growth are the 3-wheeled vehicle, driven by the introduction of the Can-Am Ryker. ATV is expected to grow modestly, as we continue to gain market share in a most stable industry.For Seasonal Products, revenues are expected to be flat to up 3% as the continued strength with PWC is expected to be partly offset by lower shipment volumes for snowmobile, following a weaker season in North America due to unfavorable snow conditions. For Powersports PAC and OEM engines, revenues are expected to grow between 2% and 7%, driven by the continued growth for side-by-side and personal watercraft accessories as well as the introduction of the Can-Am Ryker.On the Marine side, revenues are expected to be up 15% to 20%, primarily driven by the full year impact of the acquisition of Alumacraft and Manitou. The normalized EBITDA is expected to grow between 19% and 23%. Excluding the impact of IFRS 16, our normalized EBITDA would have been up 14% to 18%. The effective tax rate is expected to be between 26% and 27%. The depreciation expense is forecasted at $227 million, and the adjusted financing cost at $85 million. Accounting for all these elements, we expect industry-leading growth of our normalized earnings per share to be between 13% and 19%. We expect our fiscal year '20 CapEx to be between $360 million and $370 million. This is driven by the continued fast pace of innovation, the Juárez 2 capacity increase and the investments in digital and information systems.Finally, this morning, we announced the increase of our quarterly dividend to $0.10 and the renewal of the NCIB for the upcoming year. We strive to provide strong returns to our shareholders, and we believe that this capital allocation plan will help us achieve that objective, all the while preserving our financial flexibility to deliver on our growth plan.Now looking at Slide 20 for the breakdown of normalized net income between the first and second half of the year. We expect the normalized net income generation between first and second half of the year to be similar to fiscal year '18, with all the growth compared to last year coming in the third and fourth quarter. In the first half of the year, we expect revenues and gross profit growth driven by the continued SSV momentum, the introduction of the Can-Am Ryker and the impact of the boat companies we acquired that only benefited the back half of last year. However, this growth is expected to be offset by higher investments in operating expenses, notably related to marketing efforts in various IT projects. It should be noted that we do not expect any meaningful benefit from our capacity expansion projects at Juárez 2 in the first half of the year, as it will be mostly offset by the impact of a 2-week production shut down in February that was required to complete the work related to Phase 2.Looking at the second half of the year, we expect most of the growth to come in the fourth quarter, driven by the continued momentum of our side-by-side business, the impact of new product introductions and the additional production capacity, following the completion of Phase 2 at Juárez 2.And with this, I'll turn the call back to José.

[José Boisjoli, President, CEO & Director]

Thank you, Sebastien. Fiscal year '19 was an incredible year for us, with annual sales of $5.2 billion and 37% growth of normalized EPS. I am extremely proud of the team and how well our people executed and delivered our business plan, achieving record result. We have demonstrated quarter after quarter that our capacity to innovate allow us to outpace the industry.In conclusion, I would like to give you a recap of the progress made since the launch of our 2020 Challenge in spring 2015. Delivering on our growth pillar, we've gained market share through innovation and a customer experience-centric marketing approach for snowmobile, watercraft, ATVs and side-by-side. We accelerated side-by-side growth by entering new segment and delivered on our commitment to introduce a new side-by-side every 6 months and have already introduced 7 new platforms. We set solid foundation to unleash the full potential of [ 3-wheeled vehicle ]. We improved our distribution footprint with 289 new dealers signed in North America and went direct in Russia and China. We entered into new market with the creation of the Marine group and completed 2 boat acquisition. We have also been successful in achieving our strategic priorities for agility and lean enterprise pillar, with the high pace of innovation made possible by the modular product design approach.The capacity expansion in both Juárez 2 and Querétaro, the modernization of Valcourt operation from 2 assembly line to 1. We implemented a flexible ordering system for side-by-side, ATVs and 3-wheeled vehicle, and we've delivered margin improvements of 130 basis points net of FX impact. Our execution around our 2020 objective has been solid, and that allow us to deliver impressive financial results over the last 4 years and return $934 million to the shareholders. With this strong performance, we are confident to be able to deliver our guidance of $3.50 to $3.70 of normalized EPS, a growth of 13% to 19% 1 year earlier than initially planned.On that note, I will turn the call over to the operator for questions.

[Operator]

[Operator Instructions] Our first question is from Mark Petrie from CIBC.

[Mark Robert Petrie]

I wanted to just start and ask about the pricing environment heading into the season, specifically around side-by-sides. Could you just give us a sense of sort of how pricing is shaping up for the year and sort of your expectations in terms of promotional investment relative to the last couple of years?

[José Boisjoli, President, CEO & Director]

Yes, good morning, Mark. What is unusual this season is one of our main competitor in the off-road business has increased his pricing for ATVs and side-by-side mid-year into the season. This is quite unusual. And -- but we believe that they funding a lot of back-end money with those price increase, then the competitive environment into, I will say, the network is quite competitive. But this is quite unusual. And obviously, we're preparing to announce our model year '20 in June, but this is what happened into the market so far.

[Mark Robert Petrie]

And do you have a sense of sort of what uncertainty that introduces into the market and how that might affect the season?

[José Boisjoli, President, CEO & Director]

Yes, what is difficult, Mark, is they have adjusted the price and the MSRP is lower, but there is a lot of back-end money given to the dealers, and it's very difficult for us to put our fingers on how much money it was talking about. And it seems to vary between region. Then, this is what we see. We don't change our plan. So far, we have our program, we have the PerforMAX. And time-to-time, we have launched more aggressive program in March. We announced our -- like we do every year on the back- end of the season, we have launched our program for model year '19, but it's something we watch very closely, and we will adjust if we need to.

[Mark Robert Petrie]

Okay. And one other question, I guess, just sort of maybe bigger picture. Relative to maybe the financial crisis, which I know is a long time ago now, but could you just talk about the benefits in your system of the flexible manufacturing that your modular manufacturing that you guys have implemented as well as the more flexible ordering system for dealers? And how do you think that positions you relative to sort of the last kind of slowdown in terms of being able to respond to a weakening of demand if and when that were to come?

[José Boisjoli, President, CEO & Director]

Yes, first, the modular approach is something we implemented in the design of our product in 2012. And every new product we've launched since the Defender in 2015 is following that mindset. And basically if you design your product right, you have a lot of flexibility in the manufacturing and the way you assemble, and we could move. It's not the intention, but we could move easily product between our factory around the world, because all our new assembly line are set up the same way and the design -- the product, the new product is designed the same way. Then that gave us a lot of flexibility that we didn't had in 2008. The other thing is, today, we're taking -- for off-road vehicle, we're taking orders every month for deliveries in the next -- for like right now in March, we're taking order for product to be delivered in May. Then obviously, we see the dealer adjusting their orders to the retail quite quickly. And this is something we're monitoring very closely, because we don't want to have too much inventory and want to have the right inventory. But we believe that compared to what we had in '08, where we had probably 2 order period per year at that time, we have a lot flexible; and the quality of our inventory, it's a lot better. For 3-wheeled vehicle, we're not as flexible. We take orders, when we introduce product, but we give a chance to the dealers to adjust their orders during the season. But it's very different environment to what we had in '08, '09.

[Sebastien Martel, Chief Financial Officer]

And obviously, when you compare to '08, '09 versus today, '08, '09 were very Seasonal Product business focused with watercraft and snowmobile. Today, obviously, Year-Round Product business plays a much bigger part. ATV also was bigger than what we had in '08, '09. And again the size of side-by-side business, which was not there in '08, '09, provides more advantages. And so we're more diversified in terms of product portfolio, region as well, and so we're very different as a company versus that period.

[Operator]

Following question is from Derek Dley from Canaccord Genuity.

[Derek Dley, MD & Consumer Products Analyst]

I just want to clarify one thing. You mentioned in your prepared remarks that you continue to expect to launch a new SSV product every 6 months. Did you give a time frame on that? I mean, the last period was a period of 4 years, is there an updated time frame? Or is it just open-ended?

[José Boisjoli, President, CEO & Director]

It's not exactly what I said. First, we will introduce our 8 platform in June, and we'll complete the commitment of a new side-by-side every 6-year for 4 years. What I said is to be able to deliver 1 new platform every 6 months, we put a group of people in place and processes in place to achieve a high pace of innovation, and we intend to keep the same momentum. Then everything, all the people that were there for the last 4 years with the process we had in the last 4 years will remain to be able to continue to gain market share in the side-by-side business. But we don't commit at this point on new platform, because we completed -- not completed, but we have -- it will be a constant innovation, constant model change, but we don't want to specific, specific numbers at this point.

[Derek Dley, MD & Consumer Products Analyst]

Okay, understood. Can you comment on the macro environment that you're seeing on a global basis? I know you commented again in your press release that certain regions, Europe, Brazil, Asia Pacific, were strong. But how do you view the consumer spending in the discretionary spending environment today?

[José Boisjoli, President, CEO & Director]

Yes, if I start with U.S., unemployment rate in U.S. is still below 4%. The housing is slowing down a bit, but still healthy. And the retail, I think, the retail in January was up 1.8% in United States. Then, we see overall the industry quite healthy. Canada, it's a bit the same thing. There is some region that were affected more than others, but same thing. We saw slowdown in China, but China is still growing. And you need to understand that China was growing above 25% a year for the last 3 years. And now this year, in fiscal year '19, it grew about 10% for us, and it's still growing but at a slower pace. Argentina, it's more political situation, where basically it's very difficult to ship product over there. Middle East is more difficult. But overall, when you step back and you look at the big picture and you look the region where we have high volume, we are in pretty good shape. And we feel quite optimistic for the years to come. To be honest, in North America and everywhere in the world, the spring is a bit difficult to read. The winter is longer, which benefits snowmobile right now. The retail is still good, but start to affect off-road and summer product. But when we talk to dealers, the order for March, for the May delivery on off-road are good. Then, we are quite optimistic about a good spring. We just hope that soon the winter will turn to better weather.

[Operator]

The following question is from Robin Farley from UBS Bank.

[Robin Margaret Farley, Managing Director and Research Analyst]

Great. I wanted to ask a couple of things about the seasonal business. One is just wanted to think about why the lack of noncurrent availability? Wouldn't that just in theory drive more sales of your current models? And then is that the snow season is out, why your overall seasonal guidance is flat to up 3%, is it just because of snowfall this year that you're anticipating not shipping a lot of -- much of an increase in snow for next winter, because of that? And then also just had a question on the Evinrude in the Marine business. I guess, how long until your Marine investments do you think will drive growth in Evinrude?

[José Boisjoli, President, CEO & Director]

First on snowmobile, the industry so far, and this is at the end of January, was up mid-single digit, and we're up mid-single digit. But what happened is last year we had an incredible growth in snowmobile, and we end up with only 25% of noncurrent inventory when our market share is about 50%. That mean our competitor has 75% of the noncurrent inventory. And if you remember, this winter, the snow was quite good early in November than the noncurrent deplete very, very quickly. But December was soft in term of snow, and they started in January. And it was an uneven snow season with region that have almost too much snow and very cold weather and other region a weekend of snow and a weekend of rain. Then so far, we're following the industry. Basically, we are in line with the industry, but we're hoping for better than that. And that's why we expect the shipment in fiscal year '20 a bit lower than last year, and all of this is included in our guidance. On the Marine front, we're quite happy with our acquisition. Alumacraft, when we announced the acquisition of Alumacraft, 2 of our engine supplier decided to stop delivering to us, and it created some confusion with the dealer network. But right now, we're working on this, and we believe we will gain back and we will had -- if a dealer want to drop Alumacraft, we have plenty of Evinrude dealer that raise their hands to take it, but it will take a year to adjust all this. On the Manitou front, we're very happy. They had a very good booking in last August, and so far the retail -- it's early in the season, but so far the retail is 50% up in Q4, and I'm very happy about the acquisition. But all of this will take probably a year to align in term of dealer network. But the big play is better integrate the design of the engine and the boat, and this is more a mid-term play, about 3 years. And more we advance and more we progress, we'll tell you more about this.

[Operator]

Our following question is from Gerrick Johnson from BMO Capital Markets.

[Gerrick Luke Johnson, Senior Toys and Leisure Analyst]

I had a couple of questions. First, I just want to be clear and specific about what you're talking about regarding retail trends in February and March. Are you saying off-road retail is down in February and March?

[José Boisjoli, President, CEO & Director]

Depends. On off-road vehicle, it's soft. And we believe there is a weather pattern. Dealers are not concerned, because they still had a very good booking in March. But what we see so far, it's a bit soft for February, March.

[Gerrick Luke Johnson, Senior Toys and Leisure Analyst]

Okay. And then your comments on snow kind of confused me a little bit, because we've talked to some dealers who just had fantastic seasons and fantastic year-ends. I guess, it's not spread like peanut butter, I guess, it's patchy that you're saying at the February, March snow was good in some areas and not others.

[José Boisjoli, President, CEO & Director]

Yes, exactly. If you go Ontario and Québec, very, very good winter. If you go in the Midwest, soft. If you go in the West, it's very patchy. Some dealer had excellent season, others a bit weaker. Then, it's very, very patchy all over North America. But at the end of the day, the industry is up only mid-single digit.

[Gerrick Luke Johnson, Senior Toys and Leisure Analyst]

Okay. And lastly, Sebastien, can you talk about the components of the gross margin decline. You didn't mention any program impact, but you did mention warranty impact. So maybe if you could give us sort of a basis point breakdown, a rough breakdown of what hit you where and then more specifically what's going on with warranty?

[Sebastien Martel, Chief Financial Officer]

Yes, sure. I'll give you the walk-through of the margin decline. 80 basis point decline in the quarter. Volume was positive, as you saw in the top line growth year-over-year. So that brought about 210 basis points of margin improvement. The topic this year has been commodities and freight. And so obviously, we've been impacted in the fourth quarter. That's a headwind of 90 basis points. We did record additional warranty related to the Marine business in the fourth quarter. That was an impact of 90 basis points. Currency as well was unfavorable for 60. And then there is other elements, overhead related to capacity increase and growth for about 50 basis points, Gerrick.

[Gerrick Luke Johnson, Senior Toys and Leisure Analyst]

Okay. And on your capacity expansions, I understand you're probably adding operating profit dollars at this point. But is the whole Juárez expansion right now a headwind in terms of operating margin percent?

[Sebastien Martel, Chief Financial Officer]

No, it's -- for the fiscal year '20, it's going to be a positive impact. Because in H1, it's going to be softer, where we should produce the same level of production that we hit -- we had in the -- in H2 of last year, because the ramp-up in capacity is being offset by the shutdown that we have. For H2, it's going to be positive. We're going to be seeing more and more volume coming out of Juárez 2, and so net for the year is going to be a positive.

[Operator]

The following question is from Benoit Poirier from Desjardins Capital Markets.

[Benoit Poirier]

Gentlemen, could you come back a little bit and provide more granularity on the capital spending forecast this year? Obviously, it's a significant bump versus last year and the previous year. You've talked about the fast pace of innovation, digital information system and Juárez 2. But could you provide maybe more granularity on the spending expected and what is driving the increase?

[Sebastien Martel, Chief Financial Officer]

Yes, as you covered well -- you listened well my comments this morning. The other element that we're addressing are capacity expansion elements. Watercraft is growing. I think you've visited our plant in Canada, I hope. So we need to invest in Canada for added capacity. The side-by-side business is also growing. So yes, we're increasing the plant, machining, et cetera, but we also need to increase the logistics around the capacity increase. And therefore, delivering of units to dealers is requiring additional investments this year. And so that's covered in our plan as well. And also what's part of our transformation 2020 mission, well, we have some better tools that we want to deploy to our teams internally and to our dealers, and that's calling for important investments as well.

[Benoit Poirier]

Okay. And my second question is with respect to the acquisition of Alta Motors that you've announced recently. I understand that there's no intention to bring back some motorcycles from Alta right now. But could you talk a little bit about the strategy, where do you see Alta contributing in the future and what we should expect out of this small acquisition?

[José Boisjoli, President, CEO & Director]

It's not a secret that we said a few times that one day, our product will be electric. It's -- I'm not saying all of them, but some of our product could be electric. And it's not if it will happen, when it will happen. And you know that we've done -- we sold Commander, electric Commander for a few years. We had prototype of electric Spyder. We have prototype of other of our product in electric version. And Alta, it was an opportunity. Alta had difficulty, and it was an opportunity this fall, where we could acquire it for small money, interesting technology, interesting equipment and also a few key pattern that will help us to develop more performance electric Powerpack. Then nothing more that I can share this morning. But it was an opportunity, and we decided to go for it.

[Benoit Poirier]

Okay. Are there some product lines where the electric is more suitable and maybe some product lines where the electric capabilities is maybe less suitable at this point, José?

[José Boisjoli, President, CEO & Director]

For sure, the difficulty in our industry, first many of our product line are off-road; and second, we don't have much space in our product line to put battery, then the rain is affected. Then the challenge we have is to have high performance parcel [ today ] to maximize the space and to maximize the range. That's the challenge that we're facing. Obviously, for competitive reason, Benoit, I cannot share more than that for the time.

[Benoit Poirier]

Yes, I understand. And maybe the last question on the -- or maybe 2 quick one. On the retail side, you put out some good color about the fact that the retail inventory is up 15%. But given the introduction of new products, what should we be expecting in terms of retail inventory towards fiscal '20? Should we expect kind of a reduction or maybe another continued increase given the strong top line growth?

[Sebastien Martel, Chief Financial Officer]

Yes, the increase this year was high again the 15%. But don't forget, last year, we were chasing capacity for side-by-side, and so we were missing inventory in the network. So when I look at the average increase over 2 years, we're looking at a 9% increase over 2 years of inventory when our retail is up 11%. So I think we're doing a good job managing the overall inventory in the network. Obviously, our business is called to grow for side-by-side. We have strong aspirations to grow this business. We're still an important player, but we want to be even a greater -- have a greater impact on that industry. And so I'm looking for inventory to increase next year as well. There's going to be some pluses and minuses quarterly. But for a full year, the inventory will go up.

[Benoit Poirier]

Okay. And Last one for me. Could you talk a little bit about free cash flow generation? Anything we should be aware in terms of working cap for fiscal '20 and maybe the cash deployment opportunity that you see as you grow the EBITDA and reduce debt?

[Sebastien Martel, Chief Financial Officer]

Yes, in terms of free cash flow, we're probably looking at a free cash generation of, let's say, between $200 million and $250 million next year. Factors impacting free cash flow outside the EBITDA and the CapEx, obviously, income taxes will be increasing. Some of the attributes that we had for Canada and U.S. have been fully utilized, and therefore we're in a more cash tax paying position. And working capital investments as well, we'll require some cash investments.

[Operator]

The following question is from Brian Morrison from TD Securities.

[Brian Morrison, Research Analyst]

I just want to go back on the gross margin performance, specifically within the Marine segment. I'm wondering if you can just go through for me the key factors impacting the decline in gross margin, whether that was in line with your expectations and maybe whether there's some house cleaning to proceed with your future strategy of building the vertical. That would be appreciated. And then just, I know I realize it's early, but maybe just to elaborate on the headwinds and tailwinds you're encountering about optimizing the network.

[Sebastien Martel, Chief Financial Officer]

Yes. Well, Q4 is usually a softer period for the Marine business. One, volumes are usually lower. And also the Marine -- the boat businesses that we have acquired have a lower gross margin profile. On the EBITDA side, it delivered similar EBITDA margin. But because of lower overhead or lower pricing, et cetera, they have lower gross margin, lower OpEx, which delivers similar EBITDA. Where we needed to make an adjustment this quarter, which is nonrecurring, was related to gross margin. That impacted, as I said, our totaled -- related to warranty, that impacted our gross margin by 90 basis points negatively this quarter. Obviously, as José alluded, our plan for the Marine business is a more long-term plan. Yes, we are not happy with the results of Evinrude. It's been more challenging in the packaged side of the business. We're doing a good job on the loose engines. And so our strategy is a long-term strategy, where we want to transform that industry, and it's going to be a 3- to 4-year journey as José alluded.

[Brian Morrison, Research Analyst]

Okay. And then just the headwinds and tailwinds you're encountering of optimizing the network?

[Sebastien Martel, Chief Financial Officer]

The headwinds we have is the transition from Yamaha and Mercury to Evinrude and other engine brands. So that's one of the headwinds we're facing. The tailwinds obviously is while there is excitement with BRP that you know what our innovation capabilities are, they see what we do within the Powersport industry, what we've done in the side-by-side industry in a very, very short period of time. And so they're excited or anxious to see what we're going to be coming out with in terms of an integrated package for the Marine business, and that's something which is obviously bringing dealers to BRP and to the Evinrude brand in anticipation of what's going to be coming.

[José Boisjoli, President, CEO & Director]

But just to give you a sense, Brain, I will not call that a headwind at this point. I mean, Alumacraft, we've lost 11 dealers so far. We added 15. In Manitou, we didn't lost any, and we added 6. But we are right now in a period where some dealer don't know if they want to continue or to stop. And we have a list of dealer that we are in discussion with that they need to make a decision, but we have also a list of dealers that are ready to take over. And just to give you a sense, to remind you the number, we have 1,022 dealer Evinrude in North America, Alumacraft has about 280 dealers and Manitou 150. Then we have plenty of alternatives, but we are right now in the period where the dealer need to make his decision.

[Brian Morrison, Research Analyst]

Understand. Last question, just on the global macro outlook being a little bit more uncertain. The M&A climate, are you seeing more acquisition opportunities, maybe decline in valuation but these are becoming more attractive?

[José Boisjoli, President, CEO & Director]

Like we said, we're still exploring some boat company. We are still discussing with some other boat company, but nothing more than that for the time being.

[Operator]

The following question is from Craig Kennison from Baird.

[Craig R. Kennison]

I wanted to start with retail and follow-up with some prior questions. Have you seen any impact from the U.S. government shutdown, tardy tax refunds or the flooding in some rural markets?

[José Boisjoli, President, CEO & Director]

Yes, we heard about the government shutdown and some delay on farm loan program. We heard about this from -- through some dealers that it was affected. But again, the [ ag ] and oil area are quite, I would say, stable; not good, but quite stable. And -- but we don't see that -- we're still growing in those states, because we started from nothing and now the Defender is gaining in popularity. Then we heard about that through the dealers, but I would not say that it affected our growth in those states.

[Craig R. Kennison]

And then with respect to the NCIB 7 on Slide 20, you talk about the somewhat back-end loaded nature of normalized net income. Does that imply that your buyback activity might correlate to that and be a little more back-end loaded or could you take advantage of the stock weakness here recently and be more aggressive early in the process?

[Sebastien Martel, Chief Financial Officer]

Yes, obviously, we do not like where the stock is trading today. It's been like this for 6 months. And so the part of what's driven that is, I guess, some dark clouds over economic slowdown, but the dark cloud seem to be dissipating, and we're not seeing any slowdown in the economy. And so obviously, as part of our strategy, we want to maximize the NCIB, and so doing some buybacks this early in the year, when the price is very attractive, would be the right thing to do.

[Craig R. Kennison]

As a follow-up, does EPS guidance include any benefit from buyback activity?

[Sebastien Martel, Chief Financial Officer]

No, the EPS guidance does not include any share count impact coming from buybacks.

[Operator]

The following question is from Cameron Doerksen from National Bank Financial.

[Cameron Doerksen, Analyst]

Just a couple of questions on the IFRS 16 impact. Just wondering what that does for the balance sheet? I mean, it looks like you've got about $250 million-or-so in operating lease commitments. I assume the associated debt that's going to come on balance sheet would be something lower than that. I'm just wondering if you can quantify that.

[Sebastien Martel, Chief Financial Officer]

Yes, on the balance sheet, you'll be seeing about $200 million of assets being reported in the fixed assets on the balance sheet, and it will be a corresponding liability of about $200 million as well going on the balance sheet.

[Cameron Doerksen, Analyst]

Okay. And lease expense now are under the previous accounting, it's running through cost of sales, correct?

[Sebastien Martel, Chief Financial Officer]

Most of it is running through cost of sales. Some of it a bit in admin expense, but the majority is running through cost of sales. And so what you're going to be seeing is a increase in gross margin coming from the removal of that lease expense. Part of it is going to be offset by higher depreciation expense, but then the remaining portion about, let's say, an $8 million impact is on financing cost. So financing costs are increased. When you look at the guidance, it calls for an $8 million impact coming from IFRS 16.

[Cameron Doerksen, Analyst]

Right. Okay, understood. And just final thing, just on the -- you've talked about inflationary cost headwinds in the past. I'm just wondering if you can give us an update on what you're seeing for fiscal 2020 on things like commodity cost and tariffs and your freight cost.

[Sebastien Martel, Chief Financial Officer]

Yes, things have stabilized a bit when we -- versus when we talked last in December. You might remember that for fiscal year '20, I called out a -- about a $35 million impact coming from commodities, freights, tariffs, that was versus fiscal year '19. We're still in that ballpark. Tariffs has been the status quo in terms of 10% on list 3. And so that's factored in our guidance, commodity increases as well as in our guidance. We've seen a bit of improvement, but nothing material yet to, let's say, call a $10 million favorable versus what we had estimated. But at least the trends are in the right direction.

[Operator]

The following question is from Jaime Katz from the Morningstar.

[Jaime M. Katz, Equity Analyst]

So you've talked a lot about production, distribution costs, the factors that have impacted the gross margin. But I'm curious about what levers you guys might have to pull on to mitigate some of those expenses in the year ahead to benefit the gross margin line?

[Sebastien Martel, Chief Financial Officer]

Yes, when I look at our overall gross margin, and you might remember that once we launched the 2020 plan, we had called for about a 200 to 300 basis point improvement in the gross margin. When I look at the progress we've made over the last 3, 4 years, gross margin has improved net of FX about 130 basis points. This year, we're impacted negatively by commodity increases, freight costs for about 80 basis points. So we're pretty much very close to our estimated improvement in margin of about 200 to 300 basis points. Going forward, I mean, we're still focused on modularity, and so not 100% of lineup is modular. ATV business, none of the ATV products that we have today follow that modularity strategy. We're in the process of converting the last part of the personal watercraft business. That's going to drive further margin improvement. And with the added production that we're doing in Mexico for side-by-side, that's also going to bring margin improvements. So there's still some road to go, but there's still opportunities to continue improving and getting to the 300 basis point target that we have.

[Jaime M. Katz, Equity Analyst]

Okay. And then in one of the documents this morning, it noted that the expectations for the year ahead would be that the industry was flat and that you'd be gaining market share in Year-Round and Seasonal, and then constant share in Marine. But I'm curious what your take is for that Marine segment going forward, specifically? Do you have an outlook on industry growth that you have there?

[Sebastien Martel, Chief Financial Officer]

Yes, we do have an outlook on the industry growth for Marine. The Marine business has been very healthy in the last few years. The macroeconomics trends are very positive, and so we're continuing to see some optimism in that industry. And that's one of the reasons why we've invested. And we want to grow into that market. Engine sales are up, boat sales as well is good. The trends in the boat shows are favorable. I mean last year were strong and we're seeing similar trends this year. And so no red flags are on our screen on the Marine side.

[Operator]

We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Deschênes.

[Philippe Deschênes, Manager of Treasury & Investor Relations]

Great, thank you, Maute, and thanks, everyone, for joining us this morning for your interest in BRP. We look forward to speaking with you again on May 30 for Q1 earnings call. Thanks again, everyone, 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.