Q3 2019 Earnings Call
Good day, everyone and welcome to the Polaris earnings call.
All participants will be in listen only mode should you need assistance. Please see no conference specialist by pressing the star key followed by zero.
[noise] after today's presentation, there will be an opportunity to ask questions.
Please also note today's event is being recorded.
At this time I'd like to turn the conference call over to Mr., Richard Edwards head of Investor Relations. Sir. Please go ahead.
Thank you Jamie and good morning, everyone. Thank you for join US for 2019 third quarter earnings call. A slide presentation is accessible at our website at <unk> IR Dot Polaris Dot com, which adds additional information for this morning's call.
Scott wine, our chairman and Chief Executive Officer, and Mike Speetzen, Our Chief Financial Officer have remark summarizing the quarter in for your expectations and then we'll take some questions.
During the call we will be discussing embrace topics, which should be considered forward looking for the purposes of the private Securities Litigation Reform Act 1995 actual results could differ materially from those projections and forward looking statements you can refer to our 2018 10-K for additional details regarding these risks and uncertainties.
References to third quarter 2019, actual results and 2019 updated guidance are reported on an adjusted non-GAAP basis, unless otherwise noted.
Please refer to our Reg G. reconciliations schedules at the end of this presentation for the GAAP to non-GAAP adjustments now ill turn it over to our CEO Scott what Scott. Thank you Richard Good morning, and thank you for joining us.
Over the past few months, we want to an impressive ray of products executed a record factory authorized clearance program improved dealer sentiment and made notable progress with tariffs I could argue are most impactful move was introducing the evolved flares brand and thank outside tagline, which features prominently in our new media campaign, highlighting our American heritage.
This campaign is just beginning of a concerted effort to not only resume gaining market share but to bring new more diverse community into power sports.
Our portfolio, which now includes Jim go appeal tap Slingshot boats appeals to a broad audience and with Polaris Adventures ride command in factory choice, we're bringing exciting technology tools and business models to the market.
With more inclusive brand positioning and marketing muscle, we are well positioned to fully realize our expansive potential.
I'm proud of our team's performance in the quarter as they further leverage the lean tools and productivity enhancements, we are implementing across our operations to expand to expand gross margins and a very tough environment, while continuing to aggressively mitigate tariffs.
We introduced great news in Ranger razor in general from out of your 20, but with shipments planned for late in the quarter, we did not get any real retail benefit.
We still delivered our second straight quarter of low single digit side by side retail growth.
In addition, these developments it off road vehicles, we also revealed exciting new products in both end motorcycles, making this the largest product news we have delivered in years.
Our first wave a strategic sourcing savings hit in the quarter on plan, both in timing and value and I'm increasingly confident this will be the largest most impactful productivity project claris has ever executed.
[noise] for over a year, we have devoted substantial time and energy toward gaining fair and just relief for our tariff issues.
Outcomes from these endeavors have finally began to catch up with our successful mitigation efforts and we entered the fourth quarter with confidence that the exclusion process, we yield results.
We saw strong performance from both international and PJ in the quarter with solid PJ attachment rates across all categories, particularly on the RV factory choice models, both continue to represent significant growth opportunities.
[noise] overall third quarter, North American sales were flat year over year up slightly from the prior quarter, but still lagging the overall powersports industry, which was up modestly.
We increased promotions to be more competitive again, focusing on generating a positive side by side mix to drive profitability.
Despite a plethora of competitive entrants in the category. We believe our multiyear 20 news and improved go to market plans will enable improving share performance going forward.
We were not as aggressive with promotions in motorcycle so Indian retail was down mid teens, although in a sluggish north American market share we were almost flat and we grew in Europe . So overall global market share for Indian was up for the quarter.
We are seeing solid demand for our new snowmobiles and despite a weakening boat market Bennington delivered strong retail growth end market share gains in the quarter.
Tap performance also improved with our four wheel parts retail stores and e-commerce sales up 9% year over year.
Third quarter, North American dealer inventory was up nine there are up 4% as we began delivering to meet demand for our motto. Your 20 vehicles and preparing for the height of the factory authorized clearance sale late in September .
With increasing concerns about a slowing economy, we were pleased with the performance of retail flow management system, which reacts to sales cycles and optimize inventory for our dealers.
RFM is one of many tools, we are deploying to continue improving dealer profitability and our most recent dealer sentiment surveys such support these efforts are succeeding.
About inventory is slightly elevated and we will manage fourth quarter shipments to bring it in line for 2020.
Our approach to tariffs as always involved equal aggressive pursuit of two approaches mitigation and relief.
For the former we use our talented sourcing and logistics teams to prudently move parts out of China negotiate with suppliers to limit impact manage the country of origin to our Favre and implement about 60 other mitigation initiatives.
These efforts have been quite successful and despite escalated tariff rates, allowing us to regain two again reduce the expected full year impact by $5 million.
Our relief approach is focused on educating informing the administration about the significant in disparate impact that Polaris and our employees suffer from three a one tariffs because of our heavy investment in U.S. manufacturing.
This message has always been well received and we clearly see that the administration is committed to writing the trade imbalance with China and protecting American workers.
Their support for Polaris is investment in America has culminated in assurance that our Threeo want exclusion request are being processed is strongly considered this takes time, but we expect to see our relief request adjudicated in the near future.
During our recent dealer show, we allowed our dealers to tour, our primary engineering and R&D Center. So they could see the fruits of our major investments in product creation capability.
With 60% increase in research and development spending over the past three years, the breadth and depth of our most of your 20 innovation is an example of what the future holds our new razor pro XP hurricane deck boats and powerful Indian motorcycles, all testify to how we are leveraging our innovation tools and experience to extend our lead and power sports Mike.
Donahoo and his team of over 1000 engineers work hand in hand, with our global business units to bring the best technology and riding experience to our customers. While also playing an important role in the execution of our strategic sourcing work their contribution certainly enhance our innovation efforts as across our portfolio, we drive a consistent focus on safety and quality performance.
And customer experience, which are the key attributes of our motto your 20 offerings.
We're also excited about the evolution of the Polaris brand and the opportunity. It provides for us to invite new customers into our sport. So for the first time in decades, we're running our new Polaris brand message on National TV.
This AD serves as an inspiring to my reminder of the Great American Heritage that is an essential element of our company and our culture and complements our more traditional FSC and value both focused advertising.
Creating a more enlightened inclusive brand is part of our broader organization wide effort to elevate customer centricity.
Pam Kearney wishes customer engagement growth initiative is reaching new demographics, and gaining meaningful traction and sales with important new customer segments. The explosive growth. The Polaris Adventures is one example, as it now offered in more than 125 locations and is already served more than 100000 customer rides. This year 90 per.
The Senate, who are new our new riders to Polaris.
I'll now turn it over to our Chief Financial Officer, Mike Speetzen, well update you on our financial results implants.
Thanks, Scott and good morning, everyone third quarter sales were up 7% on a GAAP and adjusted basis versus the prior year.
Average selling prices were up 7% driven primarily by price increases as well as favorable mix driven primarily by side by sides and preordered snowmobiles.
Third quarter earnings per share on a GAAP basis was $1.42 adjusted earnings per share was $1.68, which was down 10% for the quarter, but exceeded our previously issued guidance driven by a combination of ongoing tariff mitigation favorable product mix and timing of operating expenses offset somewhat by higher promotional costs.
Importantly, the underlying execution of the business continues to improve as evidenced by an increase in our gross margin versus Q3 2018, despite the tariff and FX headwinds our adjusted gross margins, excluding the impact of tariffs and FX was over 26% excluding the impact of tariffs.
Effects and interest our EPS growth for the quarter was up almost 10%.
Foreign exchange continued to have a negative impact on our quarterly results driven by the strong dollar primarily against the euro and the Canadian dollar. However, the negative impact was inline with our expectations.
For the 2019 full year foreign exchange is expected to have a negative impact to pre tax profit for the year of approximately $30 million or 40 cents per share unchanged from our previous guidance.
Our average foreign exchange rate assumptions remain at $1.12 for the Euro to you estee.
And 74 cents for the CAD delisting.
From a segment reporting perspective, Orbi Slash snowmobile segment sales were up 11% on a third quarter, primarily due to positive product mix driven by increased side by side sales the timing of sales associated with our preordered Snowcheck snowmobiles higher average selling prices and 10% PGN a growth.
Orbi whole good sales increased 8% given stronger side by side sales mix and international growth.
Additionally, average selling prices were up 9% driven by the price increases as well as positive product mix.
Importantly, sales unit volume was slightly lower than retail sales as we continue to protect dealer inventory in North America.
We continue to strategically target the more profitable segments and models in our portfolio given the ongoing tariff and competitive pressures.
This focus on more profitable models is driving positive mix in the sales line as well as in gross profit margins.
Gross profit margins were flat year over year, including the negative impact of tariffs and foreign exchange.
Motorcycle sales decreased 3% on a GAAP basis, and 4% on an adjusted basis in the third quarter driven by lower shipments of slingshots in Indian motorcycles, excluding the new FDR 1200.
Average selling price was down 2% for the quarter driven by mix.
International sales were up 28% from increased shipments Fcr 1200, and PGN Ace sales were up 8% during the quarter.
Gross profit margins declined 8% due to lower volumes tariffs and mix.
The North American motorcycle market continued to be highly promotional resulting in Indian losing a modest amount of shared during the quarter.
Although we are moving out of the peak selling season for motorcycles and the overall motorcycle market is expected to remain challenged we are encouraged about our market share opportunity going forward with the pending launch of our new heavyweight motorcycle the challenger, which we gave us sneak preview at our summer dealer meeting as well as the ever increasing awareness of our new FDR 1200 worldwide.
Global adjacent market sales were up 18% during the quarter driven by all product categories average selling prices were up 7% driven primarily by increases in our commercial government and defense businesses.
Gross profit margins improved 220 basis points driven by product mix.
Aftermarket sales were up 3% compared to last year with tap sales up 2% driven by strong retail performance offset by lower wholesale sales.
Our other aftermarket brands increased 5% during the third quarter. We are encouraged to see our tap business gross sales for the first time since Q4 2017, while still early in the team is making the tough decisions to get the business back to growing consistently gross profit margins declined due to tariffs and mix.
Both segment sales decreased 11% third quarter.
As the overall market growth slowed and we adjusted shipments to protect dealer inventory.
Our motto your 20 product launches were well received we are monitoring the market closely and we'll adjust where needed gross profit margins improved despite lower volume due to improved operations.
Our international sales were up 8% on a reported basis and up 13% when you remove the unfavorable impact from currency.
International growth from motorcycles was 23% largely driven by the launch of the MTR 1200.
Global adjacent markets increased 21% driven by both strength that exome and our defense business.
Parts garments and accessories sales increased 11% during the quarter. We continue to see a strong response to factory choice. This coupled with our industry, leading accessories apparel and service parts offering drove the performance in Q3.
Moving on the guidance, we refined our total company sales growth guidance and now expect sales to increase approximately 12% for the year I'll cover the specifics by segment a few minutes.
We're narrowing our full year adjusted earnings per share guidance from for 2019 by holding the upper end of our previously issued guidance range at $6.30 and raising the lower end of our previously issued guidance range by 10 cents to $6.20 per diluted share given our year to date operating results and ongoing success and mitigating tariff costs.
Although we've updated our revenue guidance to the lowering of our previously issued guidance range favorable mix, coupled with tariff mitigation efforts helps offset slightly lower volume and added tariff costs from thrill one list for a implementation.
As Scott noted, we believe our strong policy arguments are making headway in Washington, but I would also like to note that the thrill one list three terra moving from 25% to 30% will have an immaterial impact on our guidance given the deferment of the implementation date and the fact that most of our inventories on hand to support Q4 production.
Our underlying business remains strong excluding the tariff costs negative currency impact and higher interest costs. Our operating earnings performance for the full year 2019 is anticipated to improve 16% to 17% on a year over year basis.
Moving down the piano, our previously issued guidance ranges remain unchanged as shown on the current slide with the exception of falling.
Onest adjusted gross profit margins, while expected to be down on an absolute basis, driven by tariffs and negative currency have improved versus our previous guidance due to a slightly lower tariff impact mix and productivity, partially offset by higher promotional costs and are now expected to be down 40 to 60 basis points year over year.
Excluding tariffs and foreign exchange, our adjusted gross profit margins improved versus previously issued guidance and are now expected to be up 105 to 125 basis points driven by mix price and productivity.
Secondly, adjusted operating expenses are expected to increase in the mid teens percentage range in 2019, which is unchanged from our previous guidance, but when calculated as a percent of sales are now expected to be up about 40 basis points entirely driven by the narrowing of our sales expectations to the lower end of our previous guidance range.
Our operating expenses are up year over year due to the addition of the boat business the new multi brand distribution center and firmly Nevada, which opened in July the cost associated with the 60 Fiveth anniversary celebration and dealer meeting held this summer and the ongoing investments in strategic and research and development projects.
Moving now to sales expectations by segment, rather than walk through each segment sales guidance, Let me summarize orbi slash snowmobile sales are now expected to be up in the high single digits range as the mix of side by side products as improved as well as ongoing strength in international MPG and at.
The improvement in Orbi saw snowmobiles is more than offset by lower motorcycle and both sales given their respective weak markets. The remaining segment sales expectations remain unchanged.
Operating cash flow finished at 436 million through the nine months of 2019, that's up 23% over the same time last year, driven by lower working capital requirements, our cash flow expectations remain unchanged at up approximately 20% to 30% for the full year compared to last year.
Our bank leverage ratio defined as total debt to EBITDA improved sequentially to approximately 2.4 times and while this is well below our bank covenant requirements debt reduction remains the primary use of excess cash flow for the remainder of 2019.
Oh I see on a trailing 12 month basis was 15.8% well above industry norms with that I'll turn it back over to Scott for some final thoughts.
Thanks, Mike.
From product and brand positioning to managing tariffs and driving quality and productivity, we are well positioned heading into the final months of the year.
It is particularly important for us to create momentum to exit this year as we're keenly aware of the slowing global economy, and the debilitating uncertainty around trade and politics.
Alternatively, the strength in the U.S consumer bolstered by accommodative interest rates provides reasons for optimism heading into 2020.
Propped up by a proliferation of product news the Powersports industry has the potential to remain positive led by side by sides, we should offset ongoing motorcycle weakness balancing the risks. However, we will likely plan for a flat market relying on market share gains for growth.
2020 will be at our first full year of meaningful strategic sourcing savings and the related prospects for significant productivity and quality gains are very encouraging.
Winning in a competitive industry requires product innovation, which we will always strive to deliver but equally importantly, our commitment to customer centricity will ensure that we exceed our market ever more demanding expectations.
New features and ride command will enhance customer experiences on the road and trail, but that is only a fraction of our plans for leveraging our digital innovations to create a competitive advantage factory choice will increasingly give dealers and customers. The exact vehicle they want and RFM will provide the best inventory replenishment system in the industry.
While the political and economic headwinds are likely to increase as we transition into 2020, I am confident that our team will take full advantage of our reduced tariff burden and our broadening product offerings to resume market share gains.
No matter, what happens with the economy or the competitive landscape I'll bet on this Polaris team to win by simply delivering on our commitment to thank outside and being a customer centric highly efficient growth company with that I'll turn it over to Jamie to open the lines for questions.
Ladies and gentlemen will now begin the question and answer session.
You asked a question you May press Star then one using a touchstone telephone if you are using a speaker phone. We do ask you. Please pick up your handset before pressing the keys to ensure the best sound quality.
So it's all your questions you May press star into.
And the interest of time. We also please ask that you limit yourselves to a question and I'll follow up. Please note that if you do have additional questions you may rejoin the question Q.
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Our first question today comes from Greg and just Canyon from Citi. Please go ahead with your question.
Great. Thank you.
Can you talk about promotion by year.
Dependent or within the segment versus the broader award segment.
Let's say third quarter as well as.
The current mud versus what you saw this second quarter.
And kind of the change that you saw in also how did your strategy to counter could you get to value segment change.
You know Greg we.
As we said in his prepared remarks, we continue to be focused on using promo to manage mix towards our more profitable side by side segments.
So we were again not as promotional with our value offerings in the quarter, which again really puts pressure on now on eightd market share and volume more than anything else.
That is that's consistent with how we manage the business throughout.
The competitive landscape promotions were remained high I don't know that they were any.
Increasingly focused on that value segment than we've seen previously though.
Okay. I know this is a hard hard question, but how would you expect maybe the industry play out over the next few quarters in terms of.
Promotion, both at the higher higher end as well as at the value you expect that to moderate a bit.
As we get into next year or not.
You know I have.
I always like to say that hope is my least favorite strategy, but.
Certainly we have been hopeful that there would be.
More responsible use of promotions, but quite honestly, we've been more promotional and I think the overall industry is going to continue to be promotional in this competitive environment I think Greg.
Clearly the economic backdrop is going to play a heavy handed that I mean, if the consumer confidence levels remain where they are things should be okay. The thing we're keeping an eye on is the industrial segment with both manufacturing and industrial production being down here pretty consistently.
That allows us obviously watching and if that starts to put pressure on the category, we could see promo moving around to support what the dealers have I think the good news for US as we've managed our dealer inventory level using RFM in my prepared remarks I talked about.
Our unit shipments were actually slightly lower than retail.
As we continue to make sure that the dealers have the right level in the event that.
We're seeing circumstances happen.
Great. Thanks for the color.
Next question. Our next question comes from Robin Farley from US. Please go with your question.
Great. Thanks, and you talked about the potential for any exemption from carriers Tonight I feel like you fin.
Trying that for 15 16 months now is it is it right to interpret your comments as like that there has been moving on that front and then maybe something now happens by by year end and does that change.
The potential for you to think about moving production to Mexico, just trying to think about what timeframe might be for for that decision of yours and then my follow up on an unrelated topic is.
You talked about Indian market share being down.
Others in the motorcycle business had talked about their market share being down today as well.
Can you describe a little bit about what may be going on in the U.S. market. It seems like maybe there's some share gains vice manufacturers that really gained share in a long time, but that it could just be different industry definitions that are leading to that thanks.
Okay, what will answer the questions in order.
As usual Robin you're quite receptive on my comments, we have been working this this tariff issue very hard for quite some time, we did see a.
A change in engagement on and as a willingness to listen and ultimately act and we're in the late stages of the process now and we're certainly more confident as I said as we head into the fourth quarter that our request for exemptions will be processed and ultimately theres a lot of ways that that can.
Go, but ultimately it's more positive than.
Based on the information that we received its more positive than we felt since this thing began.
And.
So no timeframe for Mexico that in terms is not something that others.
Part part of our argument is Ben if we don't get really we would have to think about production moves and I think that is something that the administration doesnt want to see happening we don't want to see it happen we're really.
Pleased and proud of our American workforce, and then we want to continue to be able to support that so we are certainly evaluating all options but.
The relief that we're now expecting should be able to limit.
Production moves the requirement for that and that's that's how we're planning at this point.
On the motorcycle industry I suspect it is just.
Difference in the markets that.
That we plan I will tell you that some of the European.
Like manufacturers have been more aggressive in the us and.
They've had a couple of new product interest so that could also contribute but but mostly I would say it's a difference in how we look at market segments, where we just don't play in that lower level cc.
Space and Robin, we said words like modest and slight.
It's literally 10 to 20 basis points of market share for Indian So it's.
You know very small.
Great. That's very helpful. Thank you.
Our next question comes from Jamie Katz from Morningstar. Please go ahead with your question.
Hi, good morning, guys.
I'd like to hear about the boat business I think it was a bit weaker than we had anticipated and.
You could talk about how that's tracking versus your expectations and maybe what your prognosis is for the Vasconia into next year that would be really helpful. Thanks.
Sure Jamie as I said, we've got.
Several good brands in our boat business Bennington being the largest and most important in Bennington had a very good third quarter.
Retail performance I mean, really we had the beginning of the year was impacted by weather and we were playing catch up a little bit.
And we felt better about the third quarter and compare to the year to date performance. So we.
But because of the weather, we had higher inventories, we exited the quarter and we're going to try to work through that in lower shipments to manage that down as we head into 2020 overall, we're pleased with.
The dealer reactions to the new products that we introduced this this summer and we feel like we're reasonably position to keep that business on track, yes. The overall market has been weaker than we thought.
This year and now were managed the business accordingly, but ultimately pleased with our share gains and the outlook that we have for the business Jamie one of the things we talked about was how well that businesses run and I think.
The reaction to the dealer inventory levels and being able to pullback on shipments but.
What Jay can the team are doing in terms of managing the cost base in the in the company as well.
It shows up in the fact that we still anticipate gross profit margins to hang right around 20%.
And given the volume reduction that we're anticipating that speaks to the.
Cost management discipline that the team continues to have.
Okay, that's really helpful and then.
Thanks to the outlook for motorcycles implies.
The fourth quarter will be really robust on.
On a shipment fraud and I'd like to here if you can bridge the gap between sort of the outlook.
For for Polaris, and then the industry weakness that seems to be pretty pervasive for you to me at backhaul, because there seems to be sort of a wide margin between those two factors. Thanks.
Yes, good theres two elements feeding into that Jamie one is Steve mento. His team have done a really good job.
What I'll call dialing in the competitive landscape and understanding where we need to be with pricing and promotions.
And overall ground game to to be competitive there. So there's an element of that that's playing into our expectations for better results in the fourth quarter, but primarily it's the as Mike talked about we tease that the dealer show the introduction of challenger that will come out.
Very soon and that will play a fairly significant role.
As much of a major product introduction in motorcycles that we've had in quite some time. So that really is what's driving that the change in trajectory into the fourth quarter.
Okay next question.
Our next question comes from James Hardiman from Wedbush Securities. Please go with your question.
Hi, Good morning, just to clarify that last point Scott. So challenger you actually think we'll we'll have a meaningful impact on four key retail.
More so on sales I mean, it's a it's such an important part.
Of the of the portfolio James that we need to get it ended dealers. So consumers can actually see Ed and take a look at it before the spring selling season. So it really is more of a sell land that is an expected boost to it'll have more impact on sales in retail in the quarter.
Got it and then.
Two two questions for me so.
Hopefully, we'll never get to this point given your confidence on the exemption exclusion process, but Mike maybe give us an idea if everything that's been announced in terms of tariffs.
Goes through without any mitigation, what's the incremental earnings impact.
On 2020.
And then Scott just.
Degree of confidence that you'll outgrow the RV market in 2000.
Well, James I I I wish I can put a number in front of yet.
But I'm not going to but what I would do is I would point back to the comments I made last earnings call, where I talked about.
The impact of our list three going up to 25% and retaliatory going away into 32 going away. We really don't have a better view right now for a couple of reasons. One it's predicated on what we think volumes going to do next year and we're obviously early in the process of rolling up our budget plan for next year and thinking through that.
Second and more importantly is the status of the exemptions because that obviously could play a pretty substantial role.
In impacting what those tariffs would be as we roll forward. So.
We'll we'll give more color on that in January because we should have a much better.
View given that we'll have another couple of months under our belts and we can see worthy exclusion process shakes out.
And as far as the.
How we feel about getting back to share gains in off road vehicles, we took a big risk with our.
Significant price increase coming into this year and now we've had very promotional category, we paid the price for that on market share and we've talked about that and you.
I I will tell you we're pleased with our model year 20 product introductions and.
You know at the end of the day, one of you got really great culture here, but the ridiculously competitiveness, which I often referred to is one that I think is going to kick in here and then the execution that you'll see from our off road vehicle team.
Is likely to improve to the point, where we should be able to get back to share gains in 2020.
Excellent thanks, guys.
Our next question comes from Scott Stember from CL King. Please go ahead with your question.
Good morning, and thanks for taking my questions.
Morning.
Just to embedded within the the sales decline within motorcycles.
Could you better flush out fcr and over the last couple of quarters, you've talked about how you would expect some of the strength in motorcycles that to your guidance to come from that maybe just talk about will more granular how the fcr rollout wins in the quarter and how you expect that the ROE or to play out for the rest of the year.
Good question Scott we are we remain extremely excited about the potential of Fcr I'm not not our best execution in two ways. One we were because of our focus on quality. We were late in delivering that it really missed a good part of the season and then.
You know I, we actually underestimated demand for our highest and our race replica bikes. So we had I kind of a mix problem that wasnt quite as good as we thought so or if there was a greater demand for the race replica than there was for our based models.
And so we've had to adjust some of that mix, we remain very encouraged about.
The bike the reviews have been very very good.
So it it has played out below our expectations. This year, we understand why we feel.
Good about prospects for MTR and challenger as we head into out to 2020, and Scott I made a couple of points and if you look back at slide 14, and our deck.
You can see we had 23% growth internationally and that was largely driven by the introduction of the FDR. So even even given the fact that Scott laid out.
You can see it drove substantial growth and we also saw PGN a growth.
In motorcycles, which a portion of that comes along with.
The fact that we had gotten accessories out earlier for MTR than a typical motorcycle launch.
Got it Thats very helpful and those staying within motorcycles got maybe just talk about slingshot.
We're a couple of years looks with three years and into some slower times or demand for that product.
Some of the newer models for 2020 doing and.
What are your thoughts.
About the offering going forward into 2020 and beyond.
Yes, Scott I will tell you that.
Our execution of Slingshot has not been our best effort.
That's a stating the obvious I think.
That said I think Steve Menneto, and Chris Sargent, who now leads that business for us have really done a.
Very very good deep dive into what that customers segment is like and what it takes to succeed and.
If you got to the dealer show you might have noticed there was a little black can't inside the show where every dealer got one ticket to come and see what the model year.
21 product is going to look like and.
After they saw that not a single dealer actually one dealer decided they didnt want to continue with this but everybody's excited about it.
That'll that'll launch early next year, and we're really encouraged.
With these refinements that we've got to better.
On the market than we had with the current effort. So we're we're encouraged about it it's not a slam dunk, but we believe that the repositioning of that product and the brand marketing and messaging will make 2020, a better year for slingshot.
And just real quick on ONTAP, it's good to see the retail sales.
Looking back up could just remind us how much of topcell the retail versus wholesale.
Yeah, the tap sales or call it roughly 40% to 50%.
Through the various channels that they've got and.
We suspect that some of the wholesale reduction is actually coming back to our retail channels, we continue to be.
A little bit more discerning about the customers that were doing business with.
And as I said in my prepared remarks.
The fact that we're starting to make traction in some of the key areas as a testament to the upper Craig and his team are executing on we still have waste go but.
It is a positive signs.
Got it Thats all I have thank you. Thanks.
Our next question comes from Michael slots from Suntrust. Please go ahead with your question.
Hey, good morning, guys, Hey, Mike and I apologize if I missed this if you if you've said this on the call, but did you quantify the savings from strategic sourcing that you started seeing in the quarter and just how should we be thinking about that going into 2020 and beyond.
Yes, no we didn't but.
In past calls the comments I've made is that while we are seeing savings in 2019.
The investment, we're making around validation cost is.
Is offsetting that and obviously, we're getting the early stage savings, where we start to actually pick up momentum as I think we talked about at the dealer meeting Investor day.
As we get into next year. Because then that's when we start to get kind of at more of a run rate level of savings at least for the first wave and then obviously, we'll be looking for a little bit of the wave to start kicking in so we talked about 200 million coming from the program, but that obviously happens overtime I think Scott hit the re points, which is the fact that they're coming through there on plan.
The teams are executing is very encouraging and we think it's going to play a big part getting our margins up over the next three four years.
Okay, Great and then second question maybe.
Related with boats and.
And motorcycle I guess coming out of July you would maintain your expectations or even increased around motorcycle I believe at that time and now we're lowering expectations here today I guess, what did you see during the quarter, maybe what we are you hoping for during the quarter planning for during the quarter that maybe didnt come through.
Come to fruition.
You know both in the us and in Europe , we saw weaker market conditions, then than we expected we had.
We just had die based on.
What we saw from the second quarter, we thought going into the third quarter, we would see sequentially improving results and we saw just the opposite so.
With that we had to adjust down our our outlook, we and Mike just going back when we started out the year, we had motorcycles at high teens and we had adjusted that last go around into kind of.
Low double digits to mid teens.
So we have been seeing the weakness and bringing it down and and then to Scott's point, the third quarter kind of pushed us down into that high single digits.
Okay, great. Thank you.
Next question.
Our next question comes from Joe Altobello from Raymond James. Please go with your question first of all Lucas that.
Thank you guys good morning so.
Good.
And I know.
Mike You mentioned earlier.
So 2020 still very clear, but I think if I go through my notes you had said that.
The incremental impact from list three going from 10% to 25% next year with about 30 to 40 million you could probably offset about half of that.
In addition for the 232 tests being lifted.
The most single test.
Going away et cetera.
I guess, one is that still the case.
Two.
Three does go to 30% and again, assuming no exemptions does that imply an incremental 20 million on top of the 30 to 40 million last year.
Well the to the first part of your math is right. That's the comments that I made.
Last quarter.
I think I've made comments before that talks about the list three being about 40% of our tariff exposure. So I think you can probably get yourself.
Most from a mass standpoint, the reason, we're holding back from providing any kind of perspective for next year I mean outlined some of the the perspectives.
Earlier, but it really comes down to the success, we anticipate from an exemption perspective and those are aimed squarely at least three which is one of our biggest exposure lists.
Okay understood and then secondly in terms of new product launches you mentioned that.
The reason for Expedia range of 1000 kind of shift a little too early.
Look you late this quarter have an impact.
On numbers, so given the seasonality of those businesses. When do you think we get more definitive evidence that they are translating into share gains could we see something like that in December with more into the March quarter.
Yeah, I think were our expectations is that we'll see some.
Adoption in the fourth quarter, but primarily thats going to be at 2020 benefit Thats, how weve got to design.
But you know we will be immensely disappointed if we don't see those retail trends start to pick up throughout the fourth quarter.
Got it okay. Thank you guys.
Next question. Our next question comes from Garrick Johnson from BMO. Please go ahead with your question.
Hi, good morning.
Two questions first we're finding that the election cycles are growing concern for for dealers are you seeing any cautiousness in your willingness to stock 2020 to their prior plan.
Number one and number two on Polaris Adventures as anyway, you can quantify how it's affected the rest of your business you view, some nice superbowl to verbiage, but clearly numbers. We can we can put behind that too to quantify thank you, yes. So.
As far as stocking up you know we've got.
Profiles for all of our dealers we've seen the preorders, we have to allocate you know our newer models and we're on allocation out into 2024.
The pro XP and some of the new a new product offerings. So the demand seems very good the sentiment with our dealers really is quite positive I think.
You know they see the election outlook differently than most of American does so I don't think there is concerned right now.
But so that's that's reasonably good we think our dealers in a good place our dealer sentiment surveys are.
Moving into right direction, So thats generally positive and the other question was around pillars, albeit ventures.
She has been a home run for us and I will remind you talked about the Polaris brand and how pleased we are with how that's rolling out.
At the end of the day, the single best sales and marketing till we have is button seat than when people right our products they want to spend more time in it and.
The translation of those hundred thousand riders into sales you know it's in the low very low single digits right now.
But the incremental that's having impact on our brand in our business in bringing more people in is extremely positive and you know our investment there is going to continue because.
It it never fails when people ride the product that's the best indication to get them into the sport for a longer period of time and that means sales so and it's a financially good deal for us so we like that as well.
Okay, great guys. Thank you very much.
Next year.
Our next question comes from Tim Conder from Wells Fargo Securities. Please go ahead with your question.
Thank you.
Gentlemen, thanks for all the color on much appreciated it would like to the maybe just return again to.
The list for and then the list three and Scott.
Very clear that hope is not a strategy, but is also seems to be clear that you're expecting some type of resolution definitive.
Color here before year end on on the list three exemptions just to.
A little more anything else you can add there and then we've got that exactly right Tim.
Okay, Okay, and then list for gentlemen.
Quantification there Mike if you could remind us and then I know theres an exemption process.
Rolling out on that also just update from that perspective, then the second follow up question would be.
How much of the share loss you talked about the price increases how that hurt you in maybe the.
The timing there wasn't good the ceight anticipating new products, how much of the share loss was just due to the timing of the new products do you believe Scott.
Tim on on list for or at least for eight.
That is currently in place the impact for us is relatively small.
That said there is an exclusion process that will open up at the end of October and we absolutely will be filing for exclusion on that as well okay.
As it relates to share loss.
Go back to the comments that we had in her prepared remarks.
It was not in those categories that are new products are aimed at as much as it was in the value categories as we've talked about in our prior call.
Okay. Okay.
Okay.
Okay. Thanks, Tim next question et cetera.
Our next question guys from David Macgregor from Longbow. Please go with your question.
Yes, good morning, everyone.
Wanted to just Eskimo side by side growth and I guess, you've had positive mix within or fees DTV categories.
Only mature category at this point.
Hi, how successful you've been in terms of getting people to mix up only tvs into into side by sides and as people make that step.
Which cut your retention level as opposed to.
Competitive element.
Well I mean firms.
Well I mean, it with the company 11 years and grew 11 consecutive years, we've moved people from eight Tvs into side by side. So I actually think the TV market is about stable now it's not going to continue to go down I think you'll go down with up and down with economic.
Not unlike snow I mean, I would say Tvs are kind of like the snow business right now and it kind of.
A level that is going to state way for awhile and move up and down slightly.
No.
Side by sides is just the better solution for most people and I think we've been able to.
Maintain this position where were three times larger than the nearest competitor and.
That's a kind of a key focus for us is not only to to maintain that but to extend that and we do that with our product offerings and.
Once people get into the brand.
They tend to stay there and that's one of the reasons why but more of the new entrants are entering into side by sides as opposed to the old.
Where they used to entering Ltvs and then move up.
But that said, we're not giving up on the TV market. This year has been tough we had to allocate we had limited promo dollars.
To go around and we chose to put the more on side by sides, but I think in the future Youll look for us to be to continue to be competitive in a TV is we like the market, we like the customer and.
When they are important to us are you able to break out what percentage of the site by site growth has come from ATP immigration.
No. Okay. Second question is just I guess on steel prices are low to what extent you're able to talk at this point about the potential benefit.
Gross margins from lower steel prices.
Maybe one way to think about it is just to what extent did you benefit as steel prices.
What was going to get to get reimbursed by steel prices going up and we would expect the reverse that on way down.
Yes, I think David some of that's built into the when we talked about the favorability next year are coming from 232 going away as well as retaliatory.
To 32, it really the impact was is that it raise steel and aluminum prices and then.
We've seen those prices subsequently coming down.
The benefit for US this year is somewhat paced because our team had done a really good job of getting out ahead of.
The impacts and doing some forward locks and hedging essentially but as those start to to wind down we would fully anticipate that that would come through and and show up in commodity benefit for the company. We're not obviously at a point, where we want to quantify that nicely done outside of all the other things we got going on the business, but we will provide perspective on that.
As well as other key components like logistics and tariffs when we give guidance in January .
Thanks very much.
Next question.
Our next question comes from Joseph Stack from RBC. Please go ahead with your question.
Thanks. Good morning, just wanted to turn back to boats for second I think you explain sort of what's going on from a topline and retail inventory perspective, but.
Like you had gross profit basically flat on a 15 million sales drop.
And even the past youve talked about the variable costs nature of that business, but seems like there was something else going on as well was it mix or were there were there some costs are synergy savings that sort of helped out the gross profit there.
Actually mix was unfavorable for us so I think the efforts that the team drove and Mike talked about it.
We are quite significant part of those are synergy savings in part of them just a very effective way that they manage that business and nine we talked about they're incredibly high returns on invested capital is on the business, we bought and they're continuing to act I mean, basically we just didn't need to screw that up.
But we mix down as we introduced more.
Smaller lower priced.
Boats for from a market share perspective, where we had actually seen some share losses. The previous year. So mix was not helpful. But the the ongoing efforts to drive productivity and efficiency within the factories has been very beneficial.
Add color.
The only other thing I'd add Joe is we do get rebates coming back from our engine suppliers and sometimes those can move around between quarter. So we've got a little bit of a benefit but Scott said the operational improvements at the teams focused on.
As well as just managing their cost base is a big part of what drove the performance as well.
And then secondly, and Scott you mentioned, our IC and as you know the very strong RSC level at the corporate level used to be a hallmark and obviously.
Some of the recall challenges and on tires that thats been sliding I guess, you know with the asset if the world sort of stays as it is now with the asset OSI efforts is that enough to get at least the incremental are always see back to sort of.
Very strong double digit level or or would you ultimately need some relief entire so sort of cut back there as well.
Yes, so Joe I in my prepared remarks, I talked about as just being shy of 16%, which is two X our cost of capital to ex the S&P 500.
Higher than what our competitors average out at.
We are down from where we've been historically now I would say historically, having ROI see at 30% would put you in a position not to invest in certain things. So it's probably not a great area to be.
And certainly with the fact that we've got two recent acquisitions that have put about a billion and a half dollars' worth of combination a goodwill and intangible intangible assets on the books and we're still earning out of that any early periods.
So we're actually poised to continue forward with a good progress now the tariffs that put a damper on that to some extent so even if those were to remain in place and basically neutral as we go forward, we would certainly expect.
Barring another acquisition that we should be able to get to the high teens, if not the low twentys, which again would put us in an incredibly attractive position relative to the cost to run this business as well as relative to our competitive set.
Very helpful. Thank you.
Next question. Our next question guys are Mark Smith from Lake Street. Please go ahead with your question.
Guys can you talk first off just a little bit about dealer inventory in your comfort with that being up as well as.
How the projects going with a focus on lowering slingshot inventory. So you can get that new product out.
So dealer inventory was up overall, 4% as I said that was up.
The way you execute a factory authorized clearance sales have enough.
Older products in the category to sell so that was more or less plan and we're very comfortable with RV inventories our.
Our mix as we head into the fourth quarter gives us the opportunity to drive I continue side by side growth. The the RFM process continues to work extremely well I mean, our ability to and then our model year introductions, I mean, just that Mike talked about it but.
The way the factories are working we really were efficient and getting those products out there on time and so we're well positioned for dealer inventory aspect. It now we do need to deliver good retail in the fourth quarter.
And we're comfortable that.
That will be able to do that.
The question.
What was the other ground I'm, sorry, Oh, just on slingshot and how that inventory is going yes, no that is been.
Again, I said the team has taken a different approach.
You know understanding a better way to market and execute the ground game, there and we're seeing the traction there obviously with the the planned introduction of new product in.
In mater, you're not not model your but calendar year 20, we've got to get that inventory down and we're comfortable with where we are heading into the heading into the ended the year.
Okay, and if I can get one more Canadian dollar, we've just seen a little bit of strength here, Mike maybe a hypothetical Nicole move in Canadian dollar how incremental would that be.
Well I mean, it would be somewhat isolated obviously to the fact, we just got a couple of months left in the year.
I think we've talked in the past about ascent.
Okay, and that will equate to about 5 million.
For the year, so there could be a little bit of impact in the quarter, we're still tracking a little bit lower from a euro standpoint, as I mentioned in my prepared remarks sort of $1.12 and our guidance and forecasting and I think this morning, when I check we're tracking at about a Buck 11. So.
At this point foreign exchange is largely played out as we anticipated. It has had some volatility in movement back and forth within the months, but.
At this point, we just don't see anything moving dramatically outside of that range that will move the numbers meaningfully, but if they do will obviously provide color on them.
Great. Thank you.
Right.
Last question come here.
Final question comes from Craig Kennison from Robert W. Baird. Please go with your question.
Hey, Thanks for squeezing me in first question just back on slide seven.
For what percentage of your tariff exposure have you had applied for exclusion.
Well.
For the list three of Threeo, one which is the big Kahuna, if you will we're about 95%.
Exclusion request submitted and Thats.
We would just becomes a add that the final 5% theres a diminishing rate of return for that time energy and effort to get those and so when the.
Essentially it's the vast majority of our burden there and I don't think there's any chance that we get all of that relief, but the fact that we get I.
Good number there I think a potentially a really good number there could be helpful.
And Scott what's the notification process you received from the government.
I'm you know, there's one notification process. It is the issuing of up the Federal Register better Register and it it happens.
Indiscriminately, we think Theres a list coming out.
Imminently.
But again, it's a random process and you just you literally you find out when it's on there so you'll know when we know.
Sounds good My final question then on factory choice Scott is there any metric that frames your percentage of sales through factory choice today, and where that bigger could be headed overtime.
I mean, we keep track of it internally and it's been you know exceptionally good it is.
As I, probably articulated before it's an incredibly complex process I mean, I'm so proud of what.
Ken and Christmas, though and the team have done to figure this out and make the capability exists.
So it's been purposefully constrained if you will.
What we're we're working through that and we think the demand continues to be exceptionally good and it really does provide a unique competitive advantage, we expect to fort for many years to come for that to be an increasingly.
An important part of our sales.
Thank you.
Okay I want to thank everyone for participating this morning in the call and we look forward to talking to again next quarter. Thanks again goodbye.
Ladies and gentlemen, the conference has now concluded we thank you for attending today's presentation. You may now disconnect your lines.