Q4 2019 Earnings Call
Good morning, and welcome to the Polaris Industries fourth-quarter and full-year 2019 earnings conference call. All participants will be in listen-only mode off. So you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press * then 1 on your touchtone phone to a draw your question, please press * then two, please note this event is being recorded. I would now like to turn the conference over to Richard Edward vice president of investor relations, please go ahead and good morning everyone. Thank you for joining us for our 2019 fourth-quarter and full-year earnings, a slide presentation is accessible at our website at which has additional information for this morning's call Scott wine or chairman and chief executive officer and Mike's Pizza Pub.
It's officer will have remarked some right.
In the corner and pull your expectations, and then we'll take some questions.
During the call we will be discussing various topics, which should be considered for looking for the purposes of the private Securities litigation Reform Act of 1995 actual results could differ materially from those projections in the forward-looking statements. You can or 2018 10K for additional details regarding these risk and uncertainty all references to the fourth quarter and full-year 2019 actual results and our 2025 files are reported on an adjusted non-GAAP basis unless otherwise noted, please refer to our G reconciliation schedules at the end of the presentation for the gaap to non-GAAP adjustments. Now, I will turn it off to our CEO got one. Thanks Richard. Good morning. And thank you for joining us while we were battling in December to close the year strong. I made time to see Navy football beat Army and then when the Liberty Bowl to finish the season and to their recovery from 2018 S three and eight records served as a good reminder of what can happen with a motivated team experienced coaches and a good game plan, of course winning also demands execution.
And coach niumatalolo.
Had that dialed in all year long while I would great are players performance last year a good bit better than 3:00 and 8 we share Navy strong foundation and focus on execution and I like our chances to make a Navy football game improvement in twenty-twenty retail and revenue growth in Q4 helped push full year sales up 12% with half of that from organic growth and the remainder from our first full year with bulb encouragingly. We had positive sales growth in every business segment during the quarter and for the full-year a true Testament to our strategy and the execution of our players team. We made bold price was in 2018, which aided our top-line but at times challenged us competitively providing our best-ever delivery performance and offering customer advantages through Factory Choice are flexible and efficient operations were a key advantage that we will continue to exploit with lean activities continuing to drive network-wide productivity and strategic sourcing savings beginning to hit the bottom line dead.
delivered better than anticipated growth
Charging performance to finish the year our Power Sports PGA and related aftermarket Brands, exceeded 1 billion in annual sales for the first time which is an especially significant Milestone of our most important and profitable parts of our business cabs, four-wheel part business retail aspects also had another strong quarter of growth up 11% off the prior year. I'm proud of the work our team did last year at the limit the impact of tariffs and with exemptions flowing through and mitigation efforts accelerating. We will moderately reduce our monthly burden in 2020 Indian Motorcycles had two major product introductions last year with the FTR 1200 in the first half and Challenger arriving towards the end of October both contributed to Q4 and full-year market share gains, and we expect their sales to remain strong this year.
Overall fourth-quarter North American retail sales were up 2% improving sequentially as ongoing side-by-side growth was complemented by growth and ATVs and snow. We lagta mujhe abhi Market slightly which was up mid-single digits in the quarter, but with the Improvement built into our twenty-twenty plans, we do not expect that to continue Indian retail return to growth and market gains of the fourth quarter outperforming in North American heavyweight Market, which was down to the quarter and year boat retail was up modestly with Bennington leading the way keeping Pace with the industry that was up mid-single digits change seasonally smallest quarter for the year Bennington gain market share and our dealer inventory reductions finished slightly ahead of plan.
our model year 20
By side retail ramp slowly slightly below our expectations, but improved in December and appropriate counter measures are in place to ensure that we satisfied many more customers in a year ahead snow sales have been strong and with the help of a good start to winter so and impressive lineup of sleds and we know this is about to get better with our dealer show next month.
We ended the year with North American dealer inventory up 5% was at the which is at the higher end of our comfort zone, but certainly manageable as we head into the spring selling season. We are lowering your dealer retail flow management profiles for $20 and expect to maintain our inventory turnover advantage in the industry snow inventory contributed a 1% Improvement reflecting the solid snow gets conditions and strong demand for 850 powered sleds.
We made several key leadership moves recently and I'm excited about their positive impact. Steve manetto has expertly ladder motorcycle business for the past decade building the Indian Brandon Business into a half billion dollar Global Enterprise posting industry-leading growth and customer satisfaction having grown up in his family's players dealership and led sales for off-road vehicles Steve's passion and Relentless focus on results are timely additions to our largest business unit. Mike Dougherty is another twenty plus year players leader having ladder a TV business and significantly expanded on a global reach during his International tenure Mike led the growth of Indian in Europe and Asia and was intimately involved in the development and launch of the FTR 1200 now leading both motorcycles and international off Mike's business Acumen bold Banking and Global brand management experience should enable us to accelerate the work that Steve started these moves position us well to win the competitive battle and Powersports.
Strategic growth is also extremely important and with Chris Musso's two years leading ORV and nearly twenty years of world-class Consulting experience. He is the right person.
To consolidate our strategy and accelerate our investments and growth with electric powertrains. We have extensive experience and a few products in our electric portfolio and we are committed to being competitive and profitable in our electric Endeavors. I'm extremely proud of the digital tools and advances. Our team is made to improve how our customers experience our vehicles in our company, but we must accelerate this transformation to enable the continued expansion of our business and customer-centric digital engagement and to facilitate that I am thrilled that has joined us as players his first Chief digital officer Vicks extension of exide Technologies, and it's groundbreaking and very relevant work as Chief digital officer at Michelin group gives him the tools any background to take players to another level of digital engagement and execution. We are excited to have him and look forward to seeing how much he improved both the customer experience and our overall business.
Our commitment to Innovation is a key reason players' exists and our history of high-performing industry-leading Vehicles testifies to its efficacy. We were
Maine dedicated to Innovation but consistent with our think outside brand message. We are extending our reach and exciting ways such as Factory choices unique vehicle offering Camp razors, amazingly fun and large annual appreciation party and Clara's Adventures experience roughly 130,000 visitors last year. Our focus on customers plainly shows in our investments exemplified by a recent ride command enhancements that enables buddy tracking enhanced Factory defect detection in our plans to improve quality and our new 50 million dollar distribution facility in Nevada, which offers expedite wage is to our West Coast customers.
Are Las Vegas reveal of the 2020 slingshot was fun and exciting which mirrors how we expect a much larger audience of customers to feel as they experience. It's new automated manual transmission off auto drive will capture most of the headlines but with 70% new content including a more powerful higher reving ProStar engine significant interior enhancements and eye-catching LED lighting the 2025 or newer extends far beyond those who simply do not want to drive a stick the phenomenal Indian Challenger also goes to brand new liquid cooled engine giving it best-in-class horsepower to go with this classic styling a cutting-edge Electronics. It is aptly named as it invites Riders to see what's around the next Bend and dares our industry Rivals to keep up.
with a diner
Namak Market a Charged political landscape and are positive leadership changes. It consistent stable strategy is Paramount to Our Success our commitment to being a customer-centric jobs and Growth Company is unwavering and despite the unanticipated tariffs. We are working to overcome. We remain focused on creating a path to our 2022 Financial targets. I will now turn it over to our Chief Financial Officer Mike speeds and who update you on our financial results in plans. Thanks guide and good morning. Everyone. Our fourth-quarter sales were up 7% on a gaap and adjusted basis versus the prior-year driven by higher sales of vehicles motorcycles average selling price was at 8% during the quarter driven by the mix of products both in off-road vehicles and motorcycles continuing a trend. We've seen throughout 2019.
Fourth-quarter earnings per share on a gaap basis was a dollar fifty eight adjusted earnings-per-share was a dollar eighty-three flat with last year's fourth-quarter, the 2019 fourth quarter included approximately in a mental six cents per share of tariff and foreign exchange headwind along with increased promotions and warranty costs, which was offset by increased volume and mix manufacturing efficiency and a lower tax wage.
For the full year 2019 sales were up 12% on a gap and adjusted basis versus the prior-year all segments grew for the year on a gap and adjusted basis full year earnings per share on a gaap basis, which is $5.20 adjusted earnings per share with $6.32, which was in line with our expectations the full year EPS included negative impact of Terror from foreign exchange as well. If you'd investment strategic initiatives, which was somewhat offset by a combination of increased volume operational improvements the lower tax rate and lower share count gross profit margins on a gap and adjusted basis increase 40 basis points for the fourth quarter driven by favorable product mix and operating leverage, which was somewhat offset by tariffs foreign exchange and higher warranty expense. We provided more details a gross profit margin performance for 2019 in the supplemental section of this presentation turning to our segment performance.
Orbeez snowmobile segment sales were up 7% in Q4 driven by or bhejo good sales and G&A or bhejo good sales were driven by increased unit sales as well as a heavier mix of side-by-side sales, which drove average selling price is up by 10% for the full year or be slash snowmobile segment sales rep 7% driven by all categories motorcycle sales tax increase 37% on a gaap basis and 38% on an adjusted basis in the fourth quarter increased Indian motorcycle sales primarily in the heavyweight category were driven by the introduction of the Challenger off for your motorcycle sales increased 7% on a gap and adjusted basis driven by the introduction of the FTR and Challenger bikes partially offset by lower slingshot sales and anticipation of the new model introduction.
Adjacent market sales decreased 1% in the fourth quarter lower sales and our commercial government defense business where the key drivers for the full-year global Jason market sales increase 4%
after market sales were up 4% in the fourth quarter with both tap and our other aftermarket Brands increasing sales during the quarter tap sales were up 1% and our other aftermarket Brands group sales by 22% Thank you for the strong performance in our other aftermarket Brands was driven primarily by snow related sales.
Pull your aftermarket sales were up 2% over last year. Our boat segment sales were down 7% for the quarter as we sought to protect dealer inventory levels given poor weather conditions in 2019. Both sales rep over a hundred percent given we completed the acquisition midyear 2018 organically sales were down slightly International and PGA sales are embedded within our segments are international sales were down 1% for the fourth quarter up 2% on a constant currency basis declines in mea and Latin America were mostly offset by growth in asia-pacific and sales. We're sales rep 18%
full-year International
Was up 4% versus 2018 and up 9% on a constant currency basis.
Our parts garments and accessories sales increased 7% during the quarter and 9% for the full year. Now. Let me switch gears and move on to our guidance for 2020.
Our guns for the full year 2020 is as follows total company sales are expected to be up in the range of 2 to 4% versus 2019. The 2020 sales growth includes the following assumptions about overall Powersports Market is expected to grow at a similar rate to last year and the low single-digits percent range with the offer of vehicle Market growing particularly side by sides and the Motorcycle Market continuing to decline lastly. The Pontoon work is expected to grow in the low single-digits.
We anticipate average selling prices will continue to be positive. Although not as high as 2019 given we took a 3.5 price 3.5% price increase in January of 2019, which would not repeat in 2020. In fact, you were recall the earlier this month. We took price reductions on a few of our razors to be more in line with competitive pricing on comparable models. Remember, this is an MSRP pricing adjustment and we anticipate lower promotional spend offset the lower price levels.
adjusted
Earnings per share for 2020 is expected to be in the range of $6.80 to $7.05 compared to the full year 2019 adjusted EPS or $6.32 an increase of eight to 12 per month moving down the p&l our 2020 earnings per share guidance assumes the following.
We anticipate that adjusted gross profit margins will be up 4270 basis points due to ongoing operational improvements and lower promotional costs. A portion of the Improvement is driven by our plan to repurchase purpose some of our own National dollars and ORV which are reported as Contour sales into selling and marketing expense which were reported in operating expenses while tariff costs remain an ongoing issue. We have made great strides in our mitigation efforts as well as success around exemptions tariff costs and 2020 is anticipated to be down slightly from 2019 our guidance assume for the assumes the following related to terrorists.
China 301 list three tariff remains of 25% list for a remains at 7. 5% No change to the retaliatory tariffs is contemplated and we've included in our guidance on a fact of all exemptions we received to date which equal approximately 10 million as well as the anticipated recovery of past terrorist paid for these Exempted items, which totals just over ten million.
adjust
That operating expenses are expected to improve slightly as a percent of sales down ten to twenty basis points in 2020, which includes the increase in selling marketing expense. I referred to earlier are or expenses essentially flat versus 2019 as we continue to execute efficiency programs to enable us to more effectively execute programs.
Income from Financial Services is expected to be about flat with last year retail financing availability remains at acceptable levels with the penetration rate expected to be in the mid thirty percent range loss inventory turns are expected to improve which is anticipated to lower the income from the Polaris acceptance joint venture.
Interest expense will continue to decline as our focus on using excess cash flow to reduce debt levels remains a priority in the near-term interest expense is expected to decline in the low teens percentage range for the year off. The income tax rate is expected to be approximately 22% for the full year 2020.
Sure account is expected to be up to 3% with minimal BuyBacks of our stock contemplated at this time. Lastly. Well currency is expected in negatively impacted 2020 pretax profit. The impact impact is significantly smaller than in past years. We anticipate the currency will be ahead one by about eight million to pre-tax profit largely due to the Canadian dollar and Euro we plan 2020 just assuming the average Euro to USD at a dollar ten and the cab USD at $0.75.
as a related
To Q1 of 2020 we anticipate q1 sales to be about flat compared to 2019 and gross profit margins are expected to be down approximately a hundred fifty to two hundred basis points in the first quarter given the mix of projects ships shipt specifically lower high-margin, side-by-side sales and higher motorcycle sales, which carry a lower gross margin.
Additionally q1 operating expenses will be at levels similar to Q4 of 2019 which is essentially the run-rate level of cost. We exited 2019 at the result of all these moving pieces is that are expected 2020 first quarter earnings per share will be slightly more than half of our 2019 first quarter EPS results of a dollar per share.
Now let me provide a little bit more detail on our sales guidance for our segments or VISA snowmobiles sales are expected to be up in the low single-digits percent with snow up mid-single digit percent in or RV sales up low single-digits percent Improvement will be driven by new products and improve retail execution.
motorcycles
Sales are anticipated to be up in the low double-digit percent range driven by new products.
Globo, Jason market sales are expected to be up high single-digits percent with growth expected in all product lines.
After market segment sales are expected to be upload a mid-single-digit percent with improved growth expected from tap. Our boat segment sales are expected to be up about flat be about flat to life year PG and a sales which are embedded within our segments are expected to increase in the high single-digit percent range.
On a gross margin segment reporting basis, we expect all segments gross profit margins to improve over 2019 on a comparable basis. Please see the supplemental section in the presentation for additional details off operating cash flow finished 2019 at $655 million up 37% driven primarily by improve working capital. We anticipate 2020 operating cash flow will be in September 2019 our Capital deployment framework remains unchanged Capital expenditures are expected to be at similar levels to 2019 at approximately $250 million which includes tooling required to support the supply chain transformation program. Our debt to Total Capital ratio of 60% is down from 2018 s ratio of 69% is anticipated and we expect to drive get you a lower in 2020.
so
the board's approval 2020 will become our 25th year of a consistently increasing dividend to shareholders, which is termed at dividend Aristocrat, the terminology initially referred to S&P 500 companies with life-giving and track records, but more recently has been applied universally to various sized companies with such a long history of increasing dividends and exclusive Club will be very proud to be associated with
RC repurchases were minimal in 2019 given our focus on debt reduction. We have approximately 3.2 million shares remaining under the current board authorization, but we do not anticipate significant share repurchases in 2020 given our desire to reduce the debt level with that. I'll turn it back over to Scott for some final thoughts. Thanks Mike the resiliency of both the consumer and the broader economy remains a tail end for the Powersports industry and our twenty-twenty plan anticipates. Those Trends continuing recession risk is likely to rise throughout the year and will remain Vigilant and ready with our contingency plans.
Agility is key to navigating evolving market and competitive landscape and our deployment of learning tools drives us to simplify our product line up while accelerating accelerating product Innovation and introductions walk across the portfolio expect us to be a more Nimble and aggressive competitor strategic sourcing is gaining momentum and remains on track to be the most impactful productivity initiative ever undertaken at Playgirl coupled with more efficient and accurately targeted promo spend and our ongoing tariff mitigation initiatives increased operating leverage will be a noteworthy driver of this year's earnings expansion.
Productivity is better with growth and our internet.
Strategy is helping to make that happen in twenty-twenty with expectations for stronger growth in the asia-pacific region are new finish subsidiary allowing us to go Direct in all Scandinavian markets. Am driving improved margins. We have built a solid foundation for Global expansion and 2020 and Beyond.
The phase one trade agreement with China prevent additional terrorist from hitting Polaris and the more conciliatory tone and negotiations provides confidence that progress will continue. Our exemption requests are beginning to appear and we are extremely pleased to have a lower overall year-over-year tariff impact in 2020 our overarching goal of being a customer-centric highly efficient Growth Company drives everything we do and governs our page for the future investments in digital will continue to engage in Delight customers giving players products another means of differentiating themselves from the competition.
Consolidating or electrification efforts will accelerate the process of delivering Innovative profitable vehicles to win a rapidly changing Powersports environment and with the continued emphasis on safety and quality cup designed to Value. We will deliver the product quality and margin expansion our customers and shareholders demand and deserve the future remains bright and I am confident our team and our strategy as we leave the Powersports industry into a new decade with that. I'll turn it over to Gary to open the line for questions.
We will now begin the question-and-answer.
Accession to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys off to withdraw your question, please press * then two, please limit your questions to one with a single follow up at this time. We will pause momentarily to assemble our roster off. The first question is from Greg with City, please go ahead.
Great. Thanks. Your first question is broadly speaking. You're expecting the power sports Market to increase low single-digit in 20-25. I'm just wondering what what you're expecting from a through the macro-environment. Then I have one follow-up.
We macro-environment, you know, we still expect GDP is going to be in that 2 to 3 range and you know, the FED continues to be very aggressive and that tends to help, you know, markets and consumer sentiment wage. Well, so, you know, we think the the overall Powersports industry remains healthy, but you know, we're coming off a reasonably Good Year and and we believe that that low single-digit growth is is wage is good for for us in the industry.
Okay.
And then um specifically on ATVs cuz that you saw really nice Improvement there in 4 q is up like mid single-digit versus the trend of now mid single-digit somebody else popular about that that segment in in what led to the Improvement there. Yeah. Yeah. We are still proud to be the the number one player in a TVs in the global market. But you know, we did lose some share last year. It is the most price sensitive part of the market that we play in and you know, we probably took more risk there with our price increases last year and I think throughout the year we learn from that we made adjustments and I think we exited the year feeling comfortable that we know how to be very competitive and still make good money wage in in the TV market mean the Sportsman ATV The Innovation continues to be strong. We we like that aspect of the business. It's just it's it's not growing at the same rate as side-by-sides which is where we put a little birth.
Just but you know, we don't lose sight that we need to remain competitive in that price sensitive Market.
Yep. All right. Thank you.
The next question is from Jamie Katz with Morningstar, please go ahead. Hi. Good morning. I think I heard you guys say that the Pontoon industry was expected to be up at home rate this quarter, but you guys have about flat for sales and I think MarineMax put out some pretty interesting numbers last week. So I'm curious if you can sort of reconcile the current Cadence of Demand with the slowing market share gains. So we I guess a couple of things Jamie one, the the low single-digits for the month of June was for all of 2020 Bennington continue to gain share last year. And as I said in my prepared remarks, you know were protecting dealer inventory. We think we're in a good spot but similar to what we're doing with side-by-side in the first quarter is we're making sure that we're not shipping ahead of schedule, you know, it's to be seen in terms of how the weather will work out as we get into 2020.
but you know, we think we're going to be
Position ourselves to be in a good spot with the dealers having the right level of inventory and if the market ends up better, we're in a position to be able to ratchet up if we need to and and if the markets not quite as good we've got dealer inventory and a good spot off.
Okay, and then can you comment on what gives you guys some confidence that some of these issues in the global adjacent markets category begin to alleviate. I think there were a couple of different factors you pointed out to me for weakness now because it looks like we have that. Are you guys have that picking up pretty significantly last year and with respect to that what do you seeing for the European products as far as demand is concerned things like access them from Google. Thanks. I don't think we've underperformed nearly to the degree. You're referring to Jamie, but I will tell you we're we've made a good product moves and Leadership moves in our Global Jason Market, you know sleep continues to do very well at at axum and you know, they continuing to do with take share and that duopoly and you know, we feel good about the outlook for that business are good people business and their partnership with picnic continues to serve as well and we've got good, you know electric products continuing. Yep.
I want to that market and you know as we consolidate.
Reproduction of Jim & Taylor done last year, we started to see the the benefits of that move later in the year. So, you know, obviously the the Polaris government and Military sales has it's a bit of a lumpy business, but you know, we like where we're positioned there. So overall Global adjacent markets is solid and got a good outlook.
Okay next question.
The next question is from Craig. Kenneson with Robert W Baird, please go ahead. Hey, good morning. Thanks for taking my question. I think the questions on our f m and I think you mentioned earlier in the call that you'd like to lower stocking profiles. What motivated that decision to lower profiles.
You know, we as I also pointed on the call our our turns are better than anybody else in the industry. So we're feeling good about that what part of our our FM plan is a regular ongoing dialogue with our dealers and as we did that we just realized there were certain models as we are improving our delivery performance that they don't need as much stock up. So part of what you're seeing is just a reflection of how much better. Our delivery performance is getting really nothing more than that.
and then
Sort of On a related note with respect to the Side by Side Market, maybe walk through the priorities for Steve bennetto as he takes over there. Is it is it product? Is it dealer relations, you know supply chain market share. What's the Mandate them? You know, I mean the Mandate is pretty simple market share gains and profitable growth and I really don't know that there's anybody in the world that I have more confidence in to be able to deliver that offer a vehicle business. You know, Chris mousseau did a nice job and I think Steve menneto comes in with just tremendously relevant and experience and you know internally, I call it a glass in a focus because me, he really has a Relentless focus on results you saw that in Indian and and already he's making a positive impact. So I think really it's retail execution market share gains and profitable growth is what we expect and you know, I I said my prepared remarks not only did Indian become a half billion dollar business pretty quickly when he left the business had the highest customer satisfaction scores in the industry. So, yep.
Dealer and customer satisfaction will also improve and just really the the execution of our sales force.
I think you'll see a a market Improvement there.
Thank you. I could go on to the next question is from Scotts Denver with cl King, please go ahead good morning. And thanks for taking my question money morning. Mike is talking about the first quarter guidance it here correct that the end of the day we're talking about half of what we did in the first quarter of last year and maybe if that was true just walked up getting some of the mechanics behind that. Yeah. So it's it's probably just a little better than half. You know, I think it really comes down to to mix this playing a big factor, you know, we're we're off essentially it's typically a pretty low quarter from a side-by-side shipment perspective and we're dialing that back given what's got referenced in terms of our f m as well as just making sure that we protect where we that's where we see dealer inventory, but we are ramping pretty heavily from a motorcycle standpoint. You can imagine what the new slingshot out as well as the success we've seen with Challenger that gives us a little bit of a mixed bag.
From a GP standpoint and then although we're not increasing our operating expenses substance.
Julie year-over-year the run-rate we left Q4 when you add that to the mix headwind that we're contending with is is really the challenge but you know, look, we'll push the team hard to make sure that we could drive that performance in q1. And uh, we think it's going to position us really well given the work that Steve and team are doing around retail execution within ORV.
And last just on terrorist looks like you guys have had some good success with getting some exemptions and think you said that there was some retroactive in there as well. Maybe just give us a break was a feeling for you know, the level that you think the effects still could come or benefits that could come next year. Yeah. We've made good progress. I'm really proud of the work with our team has done on all aspects are so you know remember it's it's both mitigation an exemption request and I think for most of the Year exemptions lag to the mitigation efforts towards the end of the month as I talked about on the the third quarter call. We were starting to feel more confident and that is starting to flow through
given how the that part of the
Government works. I'm not about to guesstimate what else can happen from here, but we're pleased with where we are now and we don't expect you to to get worse throughout the year. So that gives us a level of comfort going forth and Scott just I mean just to put some of the numbers in perspective cuz we didn't spend a lot of time in the call talking about it. You know, we ended 2019 with terrorists being around ninety million dollars. So that's obviously came in lower them were expecting part of that is, you know, we had lower volume and fourth quarter than we were originally anticipating but given, you know, we're phase one deal with shaking out as well as the continued effort by the organization push tariff mitigation. We were able to drive that number down and then as I referenced in my prepared remarks tariffs will be down slightly year-over-year and that includes the exemption as well as the recovery. The recovery process is is a bit cumbersome. We we essentially have to gather up everything that we've paid and then essentially submit that to customs and so we're trying to figure out the exact time.
That were assuming that the majority of that will happen in the first half.
In terms of the way, we've got our guidance bill, but it's got indicated. The government can be a little bit fickle Don this and in the exemption process is still relatively new. So we've got as much as we know built-in them in. I think the key message is that we're managing what we can manage and we've driven the number down year-over-year got it. That's all I have. Thanks. The next question is from Robin Farley with UBS would go ahead.
I was going to ask on the
Situation as well and I know you got some exemptions late in the year, but it's still obviously a significant amount of tariff that you're paying. I guess how much longer would would you be fine paying that ninety million a year before you would say, you know, let's move production to Mexico so that we're competitively on on the same ground that that that other manufacturers are let me be clear. We're not fine playing ninety million dollars. I mean, we we accept it and we can deal with it and you know the fact that it's not increasing year-over-year gives us, you know, operating leverage that we're pleased with, you know, we are constantly evaluating unaware we manufacture and what makes sense for our customers in our employees and our shareholders and I tell you right now what's baked into our place and is that we will continue to assemble Vehicles where they are and you know, our expectation is we're going to see continued Improvement in the terrorist environment and
you know, we'll continue to evaluate if
If that doesn't become the case, but right now we've got a reasonable plan baked in and I think you know eight to twelve percent earnings guidance in spite of the significant terrorist is pretty darn good.
Okay, and then just one follow-up on the comments about q1 just to clarify you talk to about the margin impact because of lower mix of of south side, but I just want to clarify you're you're also talking about because we are a family just meant actual Lower Side by Side unit shipments in q1, right not just lower mix but actually in you know in a flute terms lower your view as well. Just want to clarify that cuz I think there was just some confusion about that. Thanks. Yeah, there would be Lower Side by Side Sales shipments.
Okay, thank you. The next question is from Michael Schwartz. The SunTrust Robinson Humphrey, please go ahead. Hey, good morning guys, Mike just clarification think in your statement. You mentioned that maybe just to make sure I heard this right in the quarter side-by-side ASP up 10% or were you talking about overall ORV wage? Overall ORV was up 10% but it's clearly being driven by side by sides, right? Okay. Thank you. And then just with the
with the
The sorry the 22% growth in in core aftermarket sales this quarter. I may have missed it. What was behind that and then did you did you say wage or Outlook was for the whole good Revenue growth for twenty twenty and o r v
Yeah, we we didn't talk whole good growth. You know, we obviously talked about what are segments sales emerging growth is and we talked about the low too low to mid 640 RV and obviously with PG&E I being up that can give you a sense that the unit sales are probably towards the the low end, um for aftermarket the growth and the 9th a portion was wrong driven by snow sales snow-related sales. We saw really good performance, you know everywhere from the Midwest to the mountains. And so that really drove, you know, the climb and 509 sales office in that business. The piece that we didn't mention is, you know tap was up which was good. It retail side of tap was up anywhere from mid-to-high single-digits. And so we continue to see really good performance there and walk more contraction more on the wholesale which tends to be the lower-margin side of the business and you know, that's more intentional than it is unintentional.
Okay, great. Thank you.
So the next question is from James Hardiman with wedbush Securities, please go ahead.
Good morning. I just want to make sure I understood a couple of things that you've said so or vs was up 10% in the quarter help me off of connect the dots between that and a TVs were actually stronger than side-by-sides sounds like you're saying mix was a positive but at least there that mixes a negative. What's the other type of mix that's driving such a big ASP. Yeah. So I mean the thing you gotta think through is we have a pretty high attachment rate from a PGA standpoint. So when you put that against the side by side versus an ATV, even with a TV having a stronger retail quarter, it just can't move the needle.
Okay, and and I guess bigger picture. How do I think about that for twenty twenty and you're basically telling us that at least in the first quarter side by side. They're going to be down in terms of shipments. I'm assuming that won't be the case for the year. But ultimately as I think about a low single-digit ORV number for the year, what's how do I think about Thursday in that context? Well, I mean the the ASP as I mentioned in my prepared remarks will be positive but it's not going to be anywhere near as much I mean, I think there was a pretty substantial calibration that happened with in 2019, you know, if you have to remember that we came in pretty heavy with our Factory Choice around our Ranger product line up the Northstar Ranger had incredibly successful. We don't expect that to change in terms of growth year-over-year. You just not going to get as much of a pop and then when you add into that that we had raised prices anywhere from 3 to 3 and half percent and we don't anticipate that dog.
the case and twenty twenty in fact we've taken
From the msrps down it'll be positive but just nowhere near as as much as we've seen so far.
Remember that the first quarter games is also is that reset if you will dealer inventory, we ended up plus five and you know I said that's at the higher end of our comfort zone and we're going to adjust the profile. So really it it's positioning us for a much better last three quarters of the year. Don't read anything more into it than that.
Right and you ultimately expect side-by-sides to continue to outpace ATVs for the year right forever. Yeah forever. Okay, and then just to clarify the Tariff question. So if I'm hearing this, right, you're you're the recovered terrorists that you paid in 2019 bring it in the 2020 gross profit numbers in terms of exemptions that you've already gotten. I'm assuming that that's going to continue to be the case. So as we move forward here for every exemption that you get let's say you get another fifty million dollars take it off that's going to be a hundred million dollars of of gross margin benefit. Is that how to think about things but I'm not going to come back those numbers you just use cuz the numbers but I'm going to notionally notionally you're correct as we get exemptions the way it works when we're notified our team goes through and takes a week or two to figure it off.
Cuz it is not an easy process. There's a lot of
Stipulations and and parameters in there once we've identified that our our components are exempt. We take an immediate revaluation our inventory. So that helps profit immediately for anything that we have inventory wage as well as shipping and then anything that we've paid to customs that's when we start aggregating that up and we'll put in an application and then we'll essentially get reimbursed for any of the Tariff expense that we've had and is a long and cumbersome process both in terms of gathering the paperwork as well as the filing and getting the cash. That's where we you know, we have very little experience. We've we've gotten some money recovered in a in the form of a lot of different checks and a very long process. So given how much money we're talking about as I mentioned in my script just over ten million dollars. We're going to be working aggressively to try and get that in as soon as we can.
Okay, it's helpful. Thanks guys. The next question is from Joe with Raymond James, please go ahead.
Good morning question heated sourcing you guys have not Quantified within the past curious how much savings are expecting in 2020 and how much how much would driver that's going to be or is expected to be for margin expansion this year, you know, like I said the long-term outlook for that still the highest productivity product we've ever had the money the 2019 and 2020 numbers are significant, but it's not increasing much year-over-year. We exit 20 20 with a very big and helpful number but the process of getting there doesn't really ramp up until the second half of the year. So, you know where it's just unhelpful to get into June quantifying the exact dollar amount because then you start to compare it year-over-year and what not, but it was a good number last year. It'll be about the same amount this year. But exit on a ram. That's probably 3 XL.
will gain this year and it's
Joe the the key component is we're still we're still heavy in the investment cycle and what I mean is that it's got indicated. The savings are on the right trajectory. We have a pretty heavy team internally that's being allocated to this as we work through wave to and there's obviously several waves of this as well as the engineering work that's associated with doing the validation around the initial parts that will go through that. We're we're moving supplies are changing the supply base. So the the encouraging thing is is that the savings are on Pace. It's encouraging that you're over your it's adding to both gross profit and and operating profit and it's got indicated. We start picking up momentum as we get into 2021.
Got it. Okay, and then just Switching gears to the owner of the 15 inch back in December . I'm sure is how it impacts, you know, your go-to-market strategy. I think it's got instead of talking about this earlier but it seems like the MSRP rollback for example on razors was a part of that and I guess should we expect you guys to be more proactive on pricing for emotion on the ground given that change going forward know remember what I talked about Steve background this family-owned dealership here and sales. So his his ability to listen to understand and then react and Implement changes based on Thursday from the field is is unparalleled. I mean, he's just really really good at it and but he's also really good at focusing on the bottom line. So I think what happens is you get a mix of of listening to bring it into the dealer in the sales force, but also being very protective of what we do with margins, you know, Mike talked about one of the things we're doing is actually decreasing ORV promotions a little bit and shifting some of that over dead.
to operating expense in in
Marketing and brand messaging and ultimately Steve knows is if you drive that right brand awareness, you don't have to give us away as much as on price. So I think you're going to see just overall excellent execution by the the sales force and and team and giving them better tools to to compete.
Okay, great. Thank you guys.
The next question is from David MacGregor with Longbow research, please go ahead good morning. It's cold in Weston for David MacGregor. Thanks for taking my question. So I guess to start off giving the summer recent media coverage of the new slingshot everyone seems excited for the new auto drive transmission. And I'm sure you guys are too. Can you update us on the production and subsequent Channel fill timeline for that numerous? Yeah, we're ramping up production now and it will start shipping, you know early part of March and you know, I was at the the reveal in Vegas and there's a lot of excitement about it and as there should be it's a it's a really refined excellent fun to drive vehicle. And I think you know the the teams done a nice job and you know, the dealers that I've talked to are are really excited about it. We've got you know, we're not betting the farm on this one. It's it's an aggressive plan, but certainly something we feel like is quite reasonable given the dog.
the benefits of the product and the year-over-year
Comparisons as we tried to you know exit the the le9 products throughout most of the year. So we're encouraged but it really will be a second second quarter play for us.
Okay, thanks. And then just follow up speaking to the to the broader motorcycle category motorcycles are Indian motorcycles. Excuse me, rub low single-digits driven by challenging. I guess the progress is going. Well there are you can you say or give any detail on whether or not you believe you're taking share from other players in the heavy touring category? Despite it being a seasonal quarter for motorcycles. And then also are you seeing any signs of cannibalization of the chieftain line following the Challenger intro? Well you remember it's a very very low quarter. But as we sat on the call, we did take share in the fourth quarter and we expect that to continue in in 2020. But yeah it we we expected wage a little bit of cannibalization, but they're very different products that fixed bearing liquid cooled engine. I mean it's a tremendous bike, but it's not for everyone and I think there's still a good partner of
portfolio for the chieftain
Product and then we expect Challenger obviously to outperform this year as it approaches a very large segment of the market that we hadn't previously played in.
Okay. Thank you so much.
The next question is from Gerrick Johnson with BMO Capital markets, please go ahead.
Hey, good morning on your morning on your retail page. You should side-by-side retail. The growth is coming from Ranger in general. You didn't call out the prox. So I'm wondering what the status of the Pro X P is the rollout of the products p and and where it is and how much more you have to go and how it's performing. Thank you. Yeah, well, you know, the consumers may have bought the pro XP absolutely love it. They see it for the the excellent performance of the refined product that it is, you know it did as I mentioned in my prepared remarks, you know, we did I'm out of your twenties we're slightly below our ramp expectations but improved in December . So I think the more our dealers than you know, we're able to to to tell people about the products the better I feel and I think you'll see us make some improvements in that razor line up throughout the year that should be very helpful to us, but certainly as it was in the fourth quarter, you know Ranger in general continue age.
Be the the key drivers of side-by-side growth, but you know, we're we're very optimistic about the razor.
Portfolio as we move throughout the year.
Okay, great. And then and lastly for me litigation expense in in nineteen, I was at the high end of your guidance and the guidance grows and 20/20. So what's the outlook for litigation? And when does that fact that you know that call out start to go down? Thank you. Yeah, I mean it's it's tough to say, you know, it's obviously public information in terms of some of the the legal case that we're dealing with and we obviously don't comment directly on those but I think the the message is we are putting the right money behind it. We've got the right team both internally and externally in place. We feel confident in our position and we're going to defend that and that's you know, we'll keep the the street status as we work through that.
Okay, thank you. Next question is from Tim Condor with Wells Fargo. Please go ahead and gentlemen just a couple of things. I wanted to Circle back on a TV the 500cc and Below what again it seems like you're maybe shifting away from that segment of the market. Is that the right interpretation to have or maybe just down sizing I guess is maybe a better way to put it and then from the supply chain perspective some things in the news. Unfortunately at ask the question here. But any impact from the from the same coronavirus impact on the whole supply chain. I know it's again, it's it's only been a couple of weeks but anything at this point that you're hearing seen or or concerned about but it is not correct to assume that we are D emphasizing the the five hundred and Below segment it is again, as I said earlier, it's the most price sensitive.
a part of the market and when we did our
Price increases last year that by definition took the biggest hit so we had some adjustments we needed to make and I think we feel comfortable with how we've navigated that, you know, we're working with our dealers to make sure that the you know, they're competitive with that segment of the market, you know, it it's not going to drive profitable growth forever, but it's important for the brand and it's important for our our dealers. So I feel good about where we're positioned there, but we're certainly not walking away. It was just the early actually the first three quarters of the year the impact of the price increases that hurt us more in that segments. We can over a virus is you know, something we're watching closely. We have limited or actually stopped travel to China right now while we sort through that. You know, it's no secret that you know, we have a a strong team and business there and we do Source some parts there and we don't see A disruption from that. It's really, you know, the restrictions that they have dead.
Are more on people moving not.
It's moving. So we feel good about our supply chain being able to continue to function smoothly. Okay, and then and then lastly gentleman Granite small corner and so forth and then click on the Challenger launched and that but the the motorcycle operating loss in the quarter anything of note there Beyond those points. Yeah. So it's it's a couple of things Tim one tariffs off, you know, we continue to have inbound terrorists and then, you know, obviously with the ramp of a pole a producing the retaliatory has started to come down so that took a little bit of pressure off the fourth quarter of really the issue was as as you well know. We had a couple of recalls that were announced bolt on our Indian heavyweight as well as the slingshot in the fourth quarter and the heavyweight recall extended to all Heavy. Wow. It was an easy fix a small fix a quick fix, but it was still substantial in terms of dollars on a relatively small quarter of of income and might can you quantify the just the collective recall dead?
expense in Q4
Yeah, we haven't provided that publicly to him. Okay? Okay. Thank you by the next question is from Joseph spoke with RBC Capital markets, please. Go ahead. Thanks Scott. I was wondering if you could just talk a little bit about the decision to create the SVP of electrification. Is that something driven by something? You've seen from a consumer or dealer portion something you've seen maybe evolved with the technology or or is it a response to to maybe something you've seen from some competition? It is absolutely not a response to anything. What it is is just there a reflection of what I've learned over the last decade and this, you know, we've had a number of runs at the electric portfolio. And you know, if you think about the Powersports industry and and how it tends to lag. It's a a five to 10-year lack of Automotive in almost every aspect and if you just think is what's happened there what's happened here? Yep.
You know, we feel like there's a bit of an inflection.
point now not not because what our competitors are doing just from what our knowledge is about how we lag the
The Auto industry and you know, so we're looking at what we've got in the portfolio and it's it's not shabby. We have some very decent electric products in there and our Global adjacent markets have some good capability there. But if we look at the next, you know, 3 to 5 years, we know that we're going to have to be much more competitive our Core Power Sports market and you know, Chris is experience to help us do that was I was was just to to really too good to pass up. So, you know, we're already seeing in you know, just six weeks in the role is making good progress and you know, it's going to take some adventures and we want to be really really wise and smart as we go down that path and you know, Chris's is the perfect person to help us do that. But you know, the board is excited about it. I'm excited about it. And I was really clear in my remarks. This is still about adding to our profitable growth. It's not about entering into a segment where we're going to lose a bunch of money with a lot of other people have done right and and I know you mentioned you you've got some juice
Interesting electric product there. Maybe it's too early but as Chris been able to sort of give
A range of you know investment needed over the next three to five years in order to you know to achieve that profitable growth.
He's given us actually, I mean he's working very closely with you know, Minato and dirty and the rest of the team. We have some general ideas and it's kind of in line with other Investments. We've made it. I don't think you'll see it be a an outsized investment that spikes compared to other stuff we've done in the past. Thank you. The next question is from Mark Smith with liquid Capital markets, please. Go ahead. I guess first off. Can you walk through or give us any breakdown on the slingshot impact to the 2020 guidance within motorcycles?
Well, it's it's obviously a big portion of the low double-digit growth that we indicated. You know, if you think about it, there's this whipsaw effect where we may intentionally were bringing shipments down throughout 2019 is we were draining out the le9 the prior power plant inventory and trying to get the channel set up for you know recharging it with the New Jersey drive a slingshot all new slingshot and and given the SPs that we have on that. I mean if you look at you know, the average retail is somewhere in the low 20s high 20s that gives you a good sense that you know pushing that unit volume up. Your rear is is obviously driving a a decent portion of that now it's not all of it, you know Challenger we anticipate will continue to have strong growth as we head in June two twenty20 as will FDR.
Okay.
And then last question for me just kind of broad-based Scott is we look at the competitive environment people continue to come out with with good product and it's a competitive environment. How much is the future do you see I'm coming from maybe not as much product but kind of telling your story whether it be digital and and how much that comes down to your new hires in in helping kind of expand customer base and telling a story of of who you are and what your products are, you know, Mark one of the things that I still love about the Powersports industry is how it's just great for capitalists like me. I mean, it is a very very competitive market and it sucks always has been and I think it always will be and I like betting on our team to win the competitive battle over the long-term. I mean, I mean it it was not easy working through some of the the recall issues. We had and off the Tariff issues we've had but I feel good at it's going to be a less. There's no drama in our plan this year. It's a pretty straightforward year. I feel really good about our ability of a team to execute make no mistake wage.
Still expect to win with product. I mean, you know, whether I said six years ago. I told our team we're not going to win with.
Travel suspension forever. So it is one of those deals where we're going to make those Investments. And I mean, I think you're going to be thrilled when you see the products that come out this year across the portfolio, but what we expect Vic to do in his cheap digital lobster roll and Chris to do leading the electrification aspects, you know, those are going to be key contributors and don't underestimate what's already happening with players Adventures as we give people a different way of of enjoying the players brand. So I think across the portfolio you're going to see us better with customer engagement off with safety and quality Better With Our Brands But continuing to expect to win with product.
Right. Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Richard.
Thank you, and I just want to thank everyone again for participating in the call this morning, and we look forward to talking to you again after the first quarter. Thanks again. Goodbye. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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