Q4 2019 Earnings Call
Good morning, and welcome to the Polaris industries fourth quarter and full year 2019 earnings conference call.
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I would not want to turn the conference over to Richard Edwards, Vice President of Investor Relations. Please go ahead.
Thank you Gary and good morning, everyone. Thank you for joining us for 2019 fourth quarter and full year earnings call. A slide presentation is accessible at our website at <unk> IR Dot Polaris Dot com, which has additional information for this morning's call.
Scott wine, our chairman and Chief Executive Officer, and Mike Speetzen, Our Chief Financial Officer will have remark summarizing the quarter and for your expectation and then we'll take some question.
During the call we will be discussing various topic, what should be considered forward looking for the purposes. Other private Securities Litigation Reform Act 90, 95 actual results could differ materially from those projections in the board looking statements you can read our 2018 10-K for additional details regarding these risk and uncertainty.
All references to the fourth quarter and full year 2019, actual results and ARQ <unk> 2020 guidance are reported on an adjusted non-GAAP basis, unless otherwise noted please refer to our Reg G. reconciliations scheduled at the end of the presentation for the GAAP to non-GAAP adjustments now, we'll turn it over to our CEO Scott one thanks Richard.
Good morning, Thank you for joining us well we were battling in December to close the year strong I made time to see Navy football beat Army and then when the Liberty Boulder finished the season 11 into their recovery from 2018, three and eight record 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 coaching them out below.
That dialed in all year long well I would great. Our Polaris performance last year, a good bit better than three and eight we share Navy strong foundation and focused on execution and I like our chances to make a navy football like improvement in 2020.
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 both encouragingly, we had positive sales growth in every business segment during the quarter and for the full year, a true Testament to our strategy of the execution of our Polaris team.
We made bold price moves in 2019, which aided our topline but at times challenged us competitively.
Providing our best ever delivery performance and offering customer advantages through factory choice, our flexible and efficient operations were a key advantage that we will continue to exploit.
[noise] with lean activities, continuing to drive network wide productivity and strategic sourcing savings beginning to hit the bottom line, we delivered better than anticipated gross margin performance to finish the year.
Our power sports PJ unrelated aftermarket brands exceeded 1 billion an annual sales for the first time, which is an especially significant milestone for one of our most important and profitable parts of our business.
Caps for will part business retail.
Aspects also had another strong quarter of growth up 11% over the prior year period.
I'm proud of the work our team did last year to limit the impact of tariffs and with exemptions flowing through and mitigation efforts accelerating.
We will moderately reduce our tariff burden in 2020.
[noise] Indian motorcycles had two major product introduction last year with the MTR 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 in eight Tvs and snow.
We lag the RV market slightly which was up mid single digits in the quarter, but with the improvement built into our 2020 plans, we do not expect that to continue.
Indian retail returned to growth and market share gains in the fourth quarter outperforming in North American heavyweight market, which was down for the quarter end year.
Boat retail was up modestly with beginning to leading away keeping pace with the industry that was up mid single digits and its seasonally smallest quarter.
For the year Bennington gain market share and our dealer inventory reduction finished slightly ahead of plan.
Our model year 20 side by side retail ramp slowly slightly below our expectations, but improved in December and appropriate countermeasures are in place to ensure that we satisfy many more customers in a year ahead.
Snow sales have been strong and with the help of good start to winter. So at an 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 that that which is at the higher end of our comfort zone, but certainly manageable as we head into the spring selling season.
We are lowering our dealer retail flow management profiles for 2020 and expect to maintain our inventory turnover advantage in the industry.
No inventory contributed a 1% improvement, reflecting the solid snow conditions and strong demand for a 50 powered sleds.
We made several key leadership moves recently and I'm excited about their positive impact Steve Menneto has expertly latter motorcycle business for the past decade building the Indian branded business into a half billion dollar global enterprise boasting industry, leading growth and customer satisfaction.
Having grown up and as families Polaris dealership and led sales for off road vehicles, Steve's knowledge passion and relentless focus on results our timely additions to our largest business unit.
Mike Doherty is another 20, plus year Polaris leader, having letter Eightv business and significantly expanded our 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 MTR 1200.
Now, leading both motorcycles and international Mike's business Ackman, bold banking and global brand management experience should enable us to accelerate the work that Steve started.
These moves position us well to when the competitive battle in power sports.
Strategic growth is also extremely important and with Christmas those two years, leading RV and nearly 20 years a world class consulting experience. He is the right person to consolidate our strategy and accelerate our investments in growth with electric power trains.
We have extensive experience and a few products in our electric portfolio, and we are committed to being competitive and profitable and our electric endeavors.
I'm extremely proud of the digital tools and advances our team has made to improve how our customers experience our vehicles and 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 <expletive> calls has joined US as players is first chief Digital officer.
VIX experience as CEO of X., I technologies, and as groundbreaking and very relevant work as Chief Digital officer in Michelin group.
And the tools any background to take players to another level of digital engagement and execution. We're excited to have ham and look forward to seeing how much improved both the customer experience and our overall business.
Our commitment to innovation is a key reason Polaris exists and our history of high performing industry, leading vehicles testifies to its efficacy.
We remain dedicated to innovation, but consistent with our thank outside brand message, we're extending our reach an exciting ways such as factory choices unique vehicle offering camp razors amazingly funded large annual customer appreciation party and Polaris Adventures.
Experienced roughly.
130000 visitors last year.
Our focus on customers plainly shows in our investments exemplified by our recent ride command enhancements that enables buddy tracking AI enhance factory defect detection in our plans to improve quality and our new $50 million distribution facility in Nevada, which offers expedited deliveries to our west coast customers.
Our Las Vegas reveal of the 2020, slingshot was fun and exciting which mirrors, how we expect a much larger audience of customers the feels they experience its new automated manual transmission.
Auto drive will capture most of the headlines, but with 70% new content, including a more powerful higher revving Prostar engine significant interior enhancements and Eyecatching led lighting. The 2020 sites allure extends far beyond those who simply do not want to drive a stick.
The phenomenal Indian Challenger also boast a brand new liquid cooled engine, giving it best in class horsepower to go with this classic styling and cutting edge electronics.
It is aptly named as it invites riders to see what's around the next Ben and dares, our industry rivals to keep up.
With a dynamic market a charge political landscape and our positive leadership changes a consistent stable strategy is paramount to our success.
Our commitment to being a customer centric highly efficient growth company is unwavering and despite the on anticipated tariffs. We are working to overcome we remained focused on creating a path to our 2022 financial targets.
I'll now turn it over to our Chief Financial Officer, Mike Speetzen, who will update you on our financial results implants.
Thanks, Scott 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 offer vehicles motorcycles average selling price was 70% during the quarter driven by the mix of products, both and offer vehicles motorcycles, continuing a trend we've seen throughout 2019.
Fourth quarter earnings per share on a GAAP basis was $1.58 adjusted earnings per share was $1.83 flat with last year's fourth quarter.
The 2019 fourth quarter included approximately an incremental six cents per share Tara and foreign exchange headwind, along with increased promotions and warranty costs, which was offset by increased volume and mix manufacturing efficiency and lower tax rate.
For the full year 2019 sales were up 12% on a GAAP and adjusted basis versus the prior year all segments grew for the year on a GAAP and adjusted basis.
Full year earnings per share on a GAAP basis was $5 in 20 cents adjusted earnings per share was $6 in 32 cents, which was inline with our expectations.
The full year EPS included negative impact of Terra from foreign exchange as well as continued investment in strategic initiatives, which was somewhat offset by a combination of increased volume operational improvements a lower tax rate and lower share count.
Gross profit margins on a GAAP and adjusted basis increased 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 detail on gross profit margin performance for 2019 in the supplemental section this presentation.
Turning to our segment performance.
RV Slash snowmobiles segment sales were up 7% in Q4, driven by Orbi Hogan sales MPG anyway.
Orbi Hogan sales were driven by increased unit sales as well as a heavier mix of side by side sales, which drove average selling prices up by Tim 10%.
For the full year Orbi session on mobile segment sales were up 7% driven by all categories.
Motorcycle sales increased 37% on a GAAP basis, and 30% 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.
Full year motorcycle sales increased 7% on a GAAP and adjusted basis, driven by the introduction of the Fcr and challenger bikes, partially offset by lower slingshot sales in anticipation of the new model introduction.
Global adjacent markets sales decreased 1% in the fourth quarter lower sales in our commercial government defense business for the key drivers.
For the full year global adjacent markets sales increased 4%.
Aftermarket sales were up 4% in the fourth quarter with both tap and our other aftermarket brands increasing sales during the quarter.
Test sales were up 1% and our other aftermarket brands grew sales by 22% in Q4.
The strong performance in our other aftermarket brands was driven primarily by snow related sales.
Full year aftermarket sales were up 2% over last year.
Our boat segment sales were down 7% for the quarter as we saw to protect dealer inventory levels given poor weather conditions in 2019.
Full year boat sales were up over 100% given we completed the acquisition midyear 2018 organically sales were down slightly.
International and PGN as sales are embedded within our segments. Our international sales were down 1% for the fourth quarter up 2% on a constant currency basis declined in EMEA and Latin America were mostly offset by growth in Asia Pacific and sales where sales were up 17%.
Full year International sales were 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 guidance 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 the overall powersports market is expected to grow at a similar to last year and the low single digits percent range with the offer vehicle market growing particularly side by sides and the motorcycle market continuing to decline lastly, the punch to market 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 will not repeat in 2020.
In fact, you will recall that earlier this month, we took price reductions on a few of our reserves to be more in line with competitive pricing on comparable models.
Remember this isn't 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 in 80 cents to $7.05 compared to the full year 2019, adjusted EPS of $6 in 32 cents, an increase of 8% to 12%.
Moving down the piano, our 2020 earnings per share guidance assumes the following.
We anticipate that adjusted gross profit margins will be up 40 to 70 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 promotional dollars and Orbi, which are reported as contra sales in the selling and marketing expense, which are reported in operating expenses.
While tariff costs remain and ongoing issue, we have made great strides in our mitigation efforts as well as success around exemptions.
Tariff costs in 2020 is anticipated to be down slightly from 2019.
Our guidance assumed for the assumes the following related to tariffs.
China Thrill, one list three tariff remains at 25%.
Good and we've included in our guidance the impact of all exemptions, we received to date, which equal approximately $10 million as well as the anticipated recovery of past heres paid for these exempted items, which totals just over 10 million.
Adjusted operating expenses are expected to improve slightly as percent of sales down 10% 20 basis points in 2020.
Which includes the increase in selling marketing expense I referred to earlier.
Our R&D expenses essentially flat versus 2019, as we continue to execute efficiency programs to enable us to more effectively execute programs.
Income from financial services and 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 30% range. While dealer inventory turns are expected to improve which is anticipated to lower the income from the pillars 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 low teens percentage range for the year.
The income tax rate is expected to be approximately 22% for the full year 2020.
Share count is expected to be of 2% to 3% with minimal buybacks of our stock contemplated at this time.
Lastly, while currency is expected inevitable negatively impacted 2020 pretax profit the incremental impact is significantly smaller than in past years, we anticipate the currency will be a headwind by about 8 million to pre tax profit largely due to the Canadian dollar in euro.
We plan 2020, assuming the average euro to you as the at $1.10 and the CAD Usdnine 75 cents.
As it relates 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 150 to 200 basis points in the first quarter given the mix of product ships shipped specifically lower high margin side by side sales and higher motorcycle sales, which carry a.
Yes.
Additionally, Q1 operating expenses will be at levels similar to Q4 of 2019, which is essentially the run rate level cost we exited 2019 at.
The result of all these moving pieces that are expected 2021st quarter earnings per share will be slightly more than half of our 2019 first quarter EPS results of $1.80 per share.
Now, let me provide a little bit more detail on our sales guidance for our segments.
Oh RV slash snowmobiles site sales are expected to be up in the low single digits percent with snow up mid single digits percent and Orbi sales up low single digits percent.
Improvement will be driven by new products and improved retail execution.
Motorcycle sales are anticipated to be up in the low double digit percent range driven by new products.
Global adjacent market sales are expected to be up high single digits percent with growth expected in all product lines.
Aftermarket segment sales are expected to be up low to mid single digits percent with improved growth expected from tap.
Our boat segment sales are expected to be up about flat be about flat to last year.
PGN, a sales which are embedded within our segments are expected to increase in the high single digits 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.
Operating cash flow finished 2019 at 655 million up 37% driven primarily by improved working capital.
We anticipate 2020 operating cash flow will be at similar levels to 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 that supply chain transformation program.
Our debt to total capital ratio of 60% is down from 2000 eighteens ratio of 69% as anticipated and we expect to drive this ratio lower in 2020.
Subject to the boards approval 2020 will become our 25th year of a consistently increasing dividend to shareholders, which is termed a dividend aristocrats.
The terminology initially referred S&P 500 companies with long dividend 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.
Our served 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 tailwind for the Powersports industry and our 2020 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 lean tools drives us to simplify our product lineup, while accelerate accelerating product innovation and introductions 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 Polaris.
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 years earnings expansion.
Productivity is better with growth and our international strategy is helping to make that happen in 2020.
With expectations for stronger growth in the Asia Pacific region.
Our new finished subsidiary, allowing us to go direct it all Scandinavian markets and our Vietnam JV driving improved margins. We've built a solid foundation for global expansion in 2020 and beyond.
The phase one trade agreement with China presented additional tariffs from hitting Polaris and the work conciliatory tone in the negotiations provides confidence that progress will continue.
Our exemption request are beginning to appear and we're 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 plans for the future investments in digital will continue to engage and delight customers, giving Polaris products. Another means of differentiating themselves from the competition.
Consolidating our electrification efforts will accelerate the process of delivering innovative profitable vehicles to win in a rapidly changing powersports environment and with a continued emphasis on safety and quality coupled with designed to value, we will deliver the product quality and margin expansion, our customers and shareholders demand deserve.
The future remains bright and I'm confident our team and our strategy as lead to Powersports industry into a new decade with that I'll turn it over to Gary to open line for questions.
We will now begin the question and answer session.
To ask the question you May Press Star then one on your Touchtone phone.
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Please limit your questions to one with a single follow up at this time, we will pause momentarily to assemble our roster.
The first question is from Greg vanished Canyon with Citi. Please go ahead.
Great. Thanks.
First question, just broadly speaking you're expecting the power sports market to increase.
Low single digit and 2020.
Im just wondering what what you're expecting from sort of macro.
Environment than I had one follow up.
The macro environment, we still expect GDP is going to be in that two to three range and the fed continues to be very aggressive and that that tends to help you to markets in consumer sentiment as well. So we think the overall powersports industry remains healthy.
But we're coming off a reasonably good year and we believe that that low single digit growth is is good for a job for us in the industry.
Okay.
And then.
Specifically on Eightv, because that really nice improvement there.
For Q is up like mid single digit versus the trended down mid single digit.
Two needed.
We'll look back that got segment and what led to the improvement Tom there.
Yes, yes, we are still proud to be the AD. The number one player in a Tvs and global market, but we did lose some share last year. It is the most price sensitive.
Part of the market that we plan and 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.
On the TV market need to sportsmen eightv the innovation continues to be strong.
We we like that aspect of the businesses just it's not growing at the same rate and side by sides, which is where we put a little more emphasis but we don't lose sight that we need to remain competitive in that price sensitive market.
Yes, Okay all right. Thank you.
The next question is from Jamie Katz with Morningstar. Please go ahead, hi, good morning.
Thanks, you guys sans the punching industrial is expected to be up low single at a low single digit rate this quarter.
You guys have about flat.
For sales and.
Thanks, Marine Max put out some pretty interesting numbers last week's I'm curious if you can sort of reconcile the current cadence of demand with the slowing market share gains.
Yes, so we I guess a couple of things Jamie one the the low single digits for the pontoon was for all of 2020.
Binnington continue to gain share last year and as I said in my prepared remarks, we're.
Protecting dealer inventory, we think we're in a in a good spot but.
Similar to what we're doing with side by sides in the first quarter is we're making sure that were not shipping ahead of schedule.
It's to be seen in terms of how the weather will work out as we get into 2020, but we think we're going to position ourselves to be in a good spot with the dealers have in the right level of inventory in.
If the market ends a better we're in a position to be able to ratchet up if we need to and if the markets not quite as good we've got dealer inventory in a good spot.
Okay, and then can you comment on what gives you guys from confidence that some of these issues and that global adjacent markets category begin to alleviate I think there were a couple different factors you pointed out channel 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 are you seeing for the European products as far as demand is concerned things like XM bill. Thanks.
I don't think we've underperformed nearly to the degree you're referring to Jay but I will tell you were on we've made good product move and leadership moves in our global adjacent market.
Fleet continues to do.
Very well add debt exome and now you, they're continuing to do take share and that do obviously and we feel good about the outlook for that business are you Peel business in their partnership with picnic continues to serve us well and now we've got good.
Electric products continuing to flow into that market and as we consolidated production of.
Jim and Taylor Dunn last year, we started to see though the benefits of that move later in the year. So obviously the.
The Polaris.
Government and.
Military sales has its a bit of a lumpy business, but you do we like where we're positioned there. So overall global adjacent markets is solid and got a good outlook.
Okay next question.
Your next question is from Craig Kennison with Robert W. Baird. Please go ahead.
Hey, good morning, Thanks for taking my question I think.
For the questions and RFM and I think you mentioned early in the call that you plan to lower stocking profiles, what motivated that decision to lower profiles.
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 RFM plan is a regular ongoing dialogue with our dealers.
And now as we did that we just realize 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 delivery performance is good.
Really nothing more than that.
And then sort of unrelated note with respect to side by side market, maybe walk through the priorities for Steve Menneto as he takes over there as it is that product is a dealer relations and supply chain market share what's the mandate there.
I mean, the mandate is pretty simple market share gains and profitable growth and I really don't know that there is anybody in the world that I have more confidence and to be able to deliver that and our offer vehicle business.
Chris Musso did a nice job and I think Steve Menneto comes in with just tremendously relevant in experience and.
Internally I call. It a glass eating focus because me he really has a relentless focus on results you saw that an Indian and and already he is making a positive impact. So I think really its retail execution market share gains in profitable growth is what we expect and you know I said in my prepared remarks, not always in India and become a half billion dollars business.
Pretty quickly.
When he left the business had the highest customer satisfaction scores in the industry. So I think dealer and customer satisfaction will also.
Improve and just really the execution of our Salesforce I think you'll see a market improvement there.
Thank you.
I could go on.
Yes.
Connect the next question is from Scott Stember with C.L. King. Please go ahead.
Good morning, Thanks for taking my questions.
Good morning.
Just talking about the first quarter guidance, so that you're correct.
They were talking about half of what we did.
The first quarter of luster, and maybe if that was true just walk through again some of the mechanics behind that.
Yes, so it's probably just a little better than half.
I think it really comes down to mix is playing a big factor.
We're essentially it's typically a pretty low quarter from a side by side shipment perspective.
And we're dialing that back given what Scott referenced in terms of RFM as well as just making sure that we protect.
Where we see where we see dealer inventory.
But we are ramping pretty heavily from a motorcycle standpoint.
You can imagine with the new slingshot out as well as the success, we've seen with challenger.
That gives us a little bit of a mix challenged from a GP standpoint, and then although we're not increasing.
Our operating expenses substantially year over year. The run rate. We left Q4, when you add that to the mix headwind that were contending with is is really the challenge but.
You'll look we'll push the team hard to make sure that we drive that performance in Q1, and we think it's going to position us really well given the work that Stephen team are doing around retail execution within orbi.
And last just on Terrace looks like you guys have had.
Some good success with getting some exemptions and thank you said that there was some retroactive is in there as well maybe just give us can you give us.
A feeling for the level that you think that still could come or benefits that could come next year.
Yeah, we've made good progress.
I'm really proud of the work that our team has done on all aspects casino remember, it's both mitigation and it exemption request and I think for most of the year exemptions XOM lagged the mitigation efforts towards the end of the year you as I talked about on 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 guestimate.
What else can happen from here, but we're pleased with where we are now and now we don't expect it to to get worse throughout the year. So that gives us a level of comfort going forward and Scott just I mean, just to put some of the numbers and perspective.
Because we didn't spend a lot of time in the call talking about it we ended 2019 with tariffs being around $90 million. So that's obviously came in lower than we were expecting part of that is we had lower volume in fourth quarter.
Than we were originally anticipating but given where phase one deal was shaking out as well as the continued effort by the organization to 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 exemptions as well as the recovery.
The recovery process is a bit cumbersome, we we essentially have to gather up everything that we've paid and then essentially submit that customs and so we're trying to figure out the exact timing of that we're assuming that the majority of that will happen in the first half in terms of the way we've got our guidance built.
But as Scott indicated the government can be a little bit filled on this and in the exemption processes still relatively new so we've got as much as we know built in there and I think the key messages that we're managing what we can manage and we've driven the number down year over year.
Got it Thats all I have thanks.
The next question is from Robin Farley with you Yes. Please go ahead.
Thanks.
And tear situation as well and I know you got some exceptions late in the year, but it's still obviously a significant amount of tariffs that you're paying I guess how much longer.
Would you be fine paying that.
90 million year.
Before you would say listen if production to Mexico City, where competitively on on that same ground that Tom that other manufacturers are.
Let me be clear, we're not find playing $90 million me, we accept it and we can deal with it in.
The fact that it's not an increasing year over year gives us operating leverage that were.
I'm pleased with we are constantly evaluating where 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 plan is that we will continue to assemble vehicles, where they are and our expectation is we're going to see continued improvement in the tariff environment and.
We'll continue to evaluate if that doesnt become the case, but right now we've got a reasonable planned baked in and I think 8% to 12%.
Earnings guidance in spite of the significant terraces pretty darn good.
Okay.
And then just one follow up on that comments about Q1, just to clarify you talked about the margin impact because of lower mix of of side by side.
But I just like every time you are out you're also talking about because they are from adjustment actual lower side by side unit shipments in Q1, right not just lower mix, but actually in absolute terms lower year over year as well just want to clarify that because I think there's just some confusion about that thanks.
Yes, there would be lower side by sides sales shipments.
Okay. Thank you.
Your next question is from Michael Swartz with Suntrust Robinson Humphrey. Please go ahead.
Hey, good morning, guys.
Like just clarification I think in your statements you mentioned that.
Maybe just want make sure I heard this right in the quarter side by side Asps were up 10% or were you talking about overall RV.
Overall, RV was up 10%, but it's clearly being driven by side by side.
Okay. Thank you.
And then just with the.
With the the sorry, [laughter], 22% growth in core.
Aftermarket sales this quarter.
May have missed what was behind that and then did you did you say what your outlook was for whole good revenue growth for 2020 in RV.
Yes, we didn't talk whole good growth.
We obviously talked about what our segment sales margin growth is and we talked about the low to.
Low to mid singles for our RV.
And obviously with PG can you maybe an update that can give you a sense of the unit sales and probably towards the low end.
For aftermarket the growth in the non tap portion was really driven by snow sales snow related sales. We saw really good performance everywhere from the Midwest to the mountains and so that really drove.
The climb.
And fivenine sales in that business. The piece that we didn't mention is tap was up which was good in retail side of tap was up anywhere from mid to high single digits and so we continue to see really good performance, there and a more contraction more on the wholesale which tends to be lower margin side of the business and that's more in.
Attentional than it is unintentional.
Okay, great. Thank you.
The next question is from James Hardiman with Wedbush Securities. Please go ahead.
Hi, good morning.
I just want to make sure I understood a couple of things that you've said so orbi asked fleet he was up 2% in the quarter.
Help me sort of connect the dots between that and Eightv Directionally stronger then side by sides.
Sounds like you're seeing mix was a positive but at least there that mix is a negative so what's the other type of mix, that's driving such a big ASP well, yes. So I mean the thing you got to you think through is we have pretty high attachment rate from a PGN a standpoints. So when you put that against the side by side versus in HCV, even with Eightv, having a stronger retail quarter.
Got it.
I just can't move the needle.
Okay, and I guess bigger picture, how do I think about that for 2020, you're basically telling us that at least in the first quarter side by sides are going to be down in terms of shipments I'm, assuming that won't be the case for the year, but ultimately if I think about a low single digit RV number for that.
A year.
How do I think about ASP in that context.
Well I mean, the the ASP as I mentioned in my prepared remarks will be positive, but it's not going anywhere near as much I mean, I think there was a pretty substantial mixed calibration that happened.
Within 2019, if you have to remember that we came in pretty heavy with our factory choice.
Around our Ranger product lineup and North Star Ranger has been incredibly successful we don't expect that the 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 3.5%.
And we don't anticipate that being the case in 2020 in fact, we've taken some of the MSRP is down.
It will be positive, but just nowhere near as much as we've seen so far.
And remember they are now the first quarter. James is also is that reset if you will have a dealer inventory I mean, we ended at plus five and I've said that the higher end of our comfort zone, and we're going to adjust the profile. So really it its positioning us for a much better last three quarters of the year don't read.
At a more into it than that.
Right you ultimately expect side by sides to continue to outpace eightv use for the year right.
However.
Forever [laughter], Okay, and then just to clarify on the tariff question. So if I'm hearing this right you're you're.
The the recovered terrorists that you paid in 2019 are included in the 2020 gross profit numbers.
In terms of exemption that you've already gotten it I'm assuming that that's going to continue to be the case. So as we move forward here forever, we exemption that gap. So you get another $50 million taken off that's going to be a $100 million of of gross margin benefit is that I would think pumping.
Im not going to comment on those numbers you just use because as well our numbers night, but I'm going to kind of Notionally Notionally, you're correct is as we get exemptions the way. It works when were notified our team goes through and takes a week or two to figure it out because it is not an easy process theres a lot of stipulations and parameters in there. Once we've identified that are our components are exempt.
Yeah, we take an immediate revaluation our inventory so that helps profit immediately for anything that we have inventoried as well shipping and then anything and we paid to customs. That's when we start aggregating that up and we will put in an application and then we will essentially get reimbursed for any of the tariff expense that we've had and is a long and cumbersome process.
Yes, both in terms of gathering the paperwork as well as the filing and getting the cash that's where we we have very little experience, we've gotten some money recovered.
And it came 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 $10 million, we're going to be working aggressively to try and get that and as soon as we can.
Okay. That's helpful. Thanks, guys.
So.
Question is from Joe Altobello with Raymond James. Please go ahead.
Hi, guys good morning.
First question on sourcing.
But not quantify this in the past serious how much meetings are expecting 2020.
How much how much the 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's still the highest productivity pratik we've ever had the.
The 2019, and 2020 numbers are significant but it's not increasing much year over year, we exit 2020 with a very.
Big unhelpful number, but the process of getting there doesn't really ramp up until the second half of the year.
So where it's just unhelpful to get into quantifying the exact dollar amounts. Because then you start to compare year over year and whatnot.
But it was a good number last year it will be about the same amount this year, but exit on a ramp be rate, that's probably three X what will gain this year.
I think Joe the key component is we're still.
We're still heavy in the investment cycle and what I mean is is that as Scott indicated the savings or on the rate trajectory, we have a pretty heavy team internally thats being dedicated to this as we work through wave two and there is obviously several waves of this as well as the engineering work that is associated with doing a validation around the initial parts that will go through that we're moving supply.
Buyers are changing the supply base.
So the encouraging thing is is that the savings are on pace.
It's encouraging that year over year, it's adding to both gross profit and operating profit and as Scott indicated we start picking up momentum as we get into 2021.
Got it Okay, and then just switching gears to dealers who succeeds.
Back in December I'm curious, how it impacts your go to market strategy, Scott instead of talking about earlier, but it seems like the MSRP roll back for example on reserves was a part of that and I guess should we expect you got even more proactive on pricing promotion on the ground given that change going forward.
No remember what I talked about the background. This family owned dealership. He ran sales. So his his ability to listen to understand and then react and implement changes based on input from the field is is unparalleled let me just really really good added and.
But he's also really good at focusing on the bottom line. So I think what happens as you get a mix of of listening to react into the dealer in the Salesforce, but also being very protective of what we do with margins Mike talked about one of the things. We're doing is actually decreasing O RV promotions, a little bit in shifting some of that over to operating expense in may.
Marketing and brand messaging and ultimately Steve knows is if you drive that right.
Brand awareness, you don't have to give us way as much as on price. So I think youre going to see just overall excellent execution by the salesforce and team and giving them better tools to to compete.
Okay, great. Thank you guys.
Your next question is from David Macgregor with Longbow Research. Please go ahead.
Good morning.
In for David Macgregor, Thanks for taking my question.
So I guess sort off given the some of the 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 new model.
Yeah, we're ramping up production now I think we'll start shipping early part of March.
And I was at 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 funded drive vehicle and I think.
The teams done a nice job in the dealers that I've talked to are really excited about we've got we're not betting the farm on this one its.
It's an aggressive plan, but certainly as something we feel like is quite reasonable given the and the benefits of the product in the year over year comparisons as we tried to exit the only nine.
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 a follow up speaking to the to the broader motorcycle category.
Motorcycles.
And motorcycles excuse me were up low single digits, driven by challenger. So I guess to progress is going well there are.
Are you can you say or give any detail on whether or not you believe you are taking share from other players.
In the heavy taurine category, despite it being seasonally small quarter from motorcycles and then also are you seeing any signs of cannibalization of the achieved in line.
Following the challenger in true.
Well you remember, it's a very very low quarter, but as we said on the call. We did take share in the fourth quarter and we expect that to continue in.
In 2020.
But yeah it we theres.
We expected I'm, 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 Theres still a good part in our portfolio for the chieftain.
Product in and we expect a challenger obviously to outperform this year is 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 Garrick Johnson with BMO capital markets. Please go ahead.
Hey, good morning.
Turning on your good morning on your retail page issues, such as I said retail.
The growth is coming from Ranger in general.
You didn't call approach.
Wondering what the status of the Pro X P is the rollout of the.
Thanks, Pete and where it is and how much we have to go and how it's performing thank you, yes, well you know the consumers that have.
But the pro XP, absolutely love it they see it for the excellent performance through the refined product that it is.
You know it did as I mentioned in my prepared remarks, we did armada your twentys were slightly below our ramp expectations, but improved in December so I think the more our dealers then.
We are able to a tissue to tell people what the products the better they feel and I think you'll see us make.
Some improvements in that razor lineup throughout the year that should be very helpful to us, but certainly as it was in the fourth quarter in a range you're in general continue to be the the key drivers of side by side growth, but we're very optimistic about the razor portfolio as we move throughout the year.
Okay, Great and then and lastly from me litigation expense and.
Tie into your guidance and the guidance grows in 2020, so what's the outlook for litigation and when does that.
That cost start to go down thank you.
Yeah, I mean, it's tough to say.
Well, it's obviously public information in terms of some of the the legal.
Cases that we're dealing with and we obviously don't comment directly on those but I think the messages 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 Thats, we'll keep the street status as we work through that.
Okay. Thank you.
Next question is from Tim Conder with Wells Fargo. Please go ahead.
And gentlemen, just a couple of things I wanted to circle back on the TV. The 500 CCN below Woody again, it seems like your meaty shifting away from that segment of the market is that right interpretation to have or maybe just deemphasizing I guess was maybe a better way to put it.
And then from the supply chain perspective, some things in the news. Unfortunately, it asked the question here, but any impact from that from the Corona virus impact on the whole supply chain.
No. It's again, it's only been a couple of weeks, but anything at this point that you're hearing seen or or concerned about.
Yes.
It is not correct to assume that we are de emphasizing the the 500 and below segment. It is again as I said earlier, it's the most price sensitive 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 we're working with our dealers to make sure that that.
Their competitive with that segment of the market.
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 we feel good about where we're positioned there, but we're certainly not.
Walking away it was just the early.
That makes you the first three quarters of the year the impact of the price increases that hurt us more.
In that segment the can over virus is.
Something we're watching closely we have limited we're actually stopped traveled to China right now, while we sort through that.
It's no secret that we have a strong team and business there and we do source. Some parts there we don't see a disruption.
From that it's really.
The restrictions that they have are more on people moving not parts 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 quarter and so forth the and then the challenger launch in that but the motorcycle operating loss in the quarter or anything of note there beyond those points.
Yes, so it's a it's a couple of things Tim one tariffs we continue to have inbound tariffs and then obviously with the ramp of poli producing the retaliatory has started to come down so that took a little bit of pressure.
The fourth quarter really the issue was as you well know we've had a couple of recalls that were announced bolt on R&D in heavy weight as well as a slingshot in fourth quarter and.
The heavyweight recall extended to all heavyweights. 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 income.
And Mike can you quantify the just the collective recall expense in Q4.
Yes, we haven't provided that publicly Tim.
Okay. Okay. Thank you.
The next question is from Joseph Spak with RBC capital markets. Please go ahead.
Hi, Thanks, Scott I was wondering if you could just talk a.
A little bit about the decision to create the SVP of electrification is that something driven by youve something you've seen from the consumer or dealer portion something you've seen maybe evolved with the technology or or is it a response to to maybe something you're seeing from some competition.
It is absolutely not a response to anything what it is just there.
A reflection of what I've learned over the last decade Ines, we've had a number of runs at the electric portfolio.
And you know if you think about the powersports industry and how it tends to lag. It's a five to 10 year lag of automotive in almost every aspect I mean, if you just think is what's happened there what's happened here.
And we feel like there is a bit of an inflection point now not not because what our competitors doing just from what our knowledge is about how we lag the.
The auto industry and so we're looking at what we've got in the portfolio and it's not shabby, we have some very decent electric products in there and our global adjacent markets has a good capability there, but if we look at the next.
Three to five years, we know that we're gonna have to be much more competitive our core powersports market.
And.
Chris is experience to help US do that was was was just.
To to really too good to pass up so we're already seeing in just six weeks in the role he is making good progress and it's going to take some investments and we want to be really really wise and smart as we go down that path and.
Chris 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 what a lot of other people have done.
Right and I know you mentioned, you've got some some interesting electric product they're made maybe it's too early but has 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 it to achieve that profitable growth.
He has given us actually he's working very closely with Menneto and already in the rest of the team.
We have some general ideas and it's kind of inline with other investments we've made it easier I don't think you'll see it via an outsized investment that spikes compared to other stuff we've done in the past.
Okay. Thank you.
The next question is from Mark Smith with Lake Street Capital markets. Please go ahead.
Hi, guys I'll first off can you walk through or give us any breakdown on those slingshots impact 2020 guidance within motorcycles.
Well it's.
It's obviously a big portion of the.
Doubled low double digit growth that we indicated.
If you think about it theres this whipsaw effect, where we intentionally we're bringing shipments down throughout 2019, as we were draining out the elie nine the prior power plant.
Inventory and trying to get the channel set up for.
Recharging it with the new auto drive Slingshot, all new slingshot.
And given the Asps that we have on that I mean, if you look at the average retail is somewhere in the.
Low 20 to high Twentys that gives you a good sense that pushing that unit volume up year over year is obviously driving up a decent portion of that now it's not all of it.
Calendar, we anticipate will continue to have strong growth as we head in.
To 2020 as will Fcr.
Okay and then last question for me just kind of broad based Scott as we look at the competitive environment people continue to come out with good product and it's a competitive environment how much of the future do you see really coming from.
Maybe not as much product, but kind of telling your story, whether it be digital and how much that comes down to your new hires and help you kind of expand customer base and tell the story of who you are what's your products are.
You know Mark what are the things that I still love about the Powersports industry is how it's just great for capitalist like me I mean, it is a very very competitive market and it. It always has been than 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.
Yes, I mean, it was not easy working through some of the recall issues we had in.
The tariff issues Weve add but I feel good it's going to be a less there's no drama and 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, we still expect to win with product I mean, either whether I said six years ago I told our team, we're not going to win with horsepower 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 and his chief Digital officer role and Chris to do.
Leading the direct electrification aspect you know those are going to be key contributors and don't underestimate what's already happening with Polaris Adventures as we give people a different way of.
Of enjoying the Polaris brand, so I think across the portfolio, you're going to see us better with customer engagement, better with safety and quality better with our brands.
But continuing to expect to win with product.
Great. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Richard Edwards for any closing remarks.
Thank you and as I 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 bye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.