Q2 2019 Earnings Call
Good morning, and welcome to the <unk> Q2, 2019 earnings call webcast, all participants will be in listen only mode should you need assistance.
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After todays presentation, there will be an opportunity to ask questions.
Please note this event is being recorded.
I would now like to turn the conference over to Richard Edwards head of Investor Relations. Please go ahead.
Thank you Chad and good morning, everyone. Thank you for joining us for our 2019 second quarter earnings call. A slide presentation is accessible at our website at www Dot 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 have remarks, summarizing the quarter in full your expectations and then we'll take some questions.
During the call we will be discussing various topics, which should be considered forward 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 refer to our 2018 10-K for additional details regarding these risks and uncertainties.
All references to second quarter 2019, actual results and 2019 updated guidance are reported on the adjusted non-GAAP basis, unless otherwise noted.
Please refer to our regulated regulation G Reg.
Reconciliation schedules at the end of this presentation for the GAAP to non-GAAP adjustments now, we'll turn it over to our chairman and CEO Scott wine.
Thanks Richard.
Good morning, and thank you for joining us are significant research and development investments figure prominently in our major product launches, but we also do a lot that flies under the radar.
And inspiring example of one of these less visible technology programs made news recently when it was revealed that a Polaris defense M. Razor on the deck of a navy warship outfitted with Marine Corps Air Defense system brought down an Iranian drought in the straight horn removes last week.
We work hard to be good corporate stewards and demonstrate our purpose, but nothing beats playing a role in protecting American service men and women.
As a rule I will not use a positive this script or to refer to results that include both retail sales and earnings per share down year over year, but I must commend our team for delivering respectable second quarter performance in a very tough environment tariffs remained the single largest contributor to our lower earnings, but the aggressive and innovative mitigation efforts, we are implementing reduce their impact.
Our manufacturing and supply chain execution is that the best it has ever been which helped us overcome headwinds and the significant upside from our strategic sourcing project is still to come.
The industry is competitive climate and by that I am mostly referring to excessive promotions is unhealthy and unhelpful, but it is a game, we know well and our growth in side by sides testifies to the effectiveness with which Chris Chris Musso and his team manage the off road vehicle business in the quarter.
Parts garments and accessories was very strong highlighted innovation and quality of our offerings are flat track racing success continues in 2019 and in Q2. We finally made the FDR 1200 available to the masses initial demand is in line with price performance awesome.
Poor weather hampered motorcycle RV, and especially boat retail yet Bennington is still up year to date and gain share in the second quarter. We continue to work diligently toward resolution to our tariff issues, which I will address more thoroughly momentarily.
Second quarter, North American retail sales were down 2% lagging the overall powersports industry, which was up modestly.
Even with our strong brand and industry, leading products. We knew we were taking a calculated risk with our Q1 price increases the biggest for Polaris and the industry in over a decade.
Not unexpectedly the largest impact on volume and market share within our lower price and lower margin youth and valuate TV segments.
We chose to allocate more promotional dollars to our higher margin Ranger and razor lines, where products superiority is clearest and both performed better growing low single digits.
The North American motorcycle industry remained weak in the quarter as evidenced by India and gaining market share despite retail declining nearly 10%.
Slingshot struggled in the quarter, but under new leadership, the team is making progress with the product marketing and overall execution.
But retail was down slightly in Q2, but our most consequential brand Bennington grew and gain market share.
North American dealer inventory was up 1% at the end of the quarter positioning us well for our model year 20 product introductions and our factory authorized clearance sale, we have institutionalized retail flow management across motorcycles and off road vehicles and are managing the retail trends closely.
Disciplined inventory management has always been our strength at Bennington and vote inventories also in good shape.
The may 9th announcement that increased 301 lift three tariffs to 25% was a blow to Polaris not just in the increased costs, but also because it diminished the prospects for a near term comprehensive us China trade agreement.
Fortunately our team was prepared and their execution of aggressive countermeasures and mitigation efforts along with the lifting of the 232 steel aluminum tariffs allowed us to offset the 2019 impact of the thrill one lift three increase.
An excellent example of our mitigation efforts is a $30 million of machine parts. They will move from China to use suppliers, including our W. ESI subsidiary.
The risk of three a one list for going into effect remains although the impact on players would be limited as most of that final tranche would be direct to consumer goods.
We continue to spend considerable time energy and effort in our pursuit of just really for the unintended impact of tariffs on our us plants and us business units.
We are making progress with the administration and Congress and although we have no assurances that relief will be granted we're continuing to press our very strong case for fair resolution.
We have aggressively leveraged our tools and talent to strengthen the performance in our aftermarket business. So their second quarter progress was both expected and encouraging.
Our powersports aftermarket brand portfolio, which includes climb koeppen Fivenine pro armor and trail Tech has consistently delivered strong growth for the past 18 months and was up over 10% in the quarter.
Transamerican auto parts was flat in the period with a 95 stores strong for WP retail channel up 7% and e-commerce up 12% demonstrating the effectiveness of improvements Craig scandal. The team are driving.
The smaller wholesale channel was down 12% as we actively manage the portfolio towards more strategic higher margin customers.
Tap is well positioned for accelerating profitable growth in the second half and beyond.
Steve Eastmans transformation of RPG, and an aftermarket business has been very impressive and very profitable. So it makes sense to invest more here to facilitate faster growth.
We commenced operations earlier this month at our new state of the Arc 500000 square foot distribution center in Fernley, Nevada. It is our first distribution facility capable of supporting all of our businesses and brands and importantly enables one to two day parcel shipments to the west coast customers.
I will now turn it over to our Chief Financial Officer, Mike Speetzen, who will update you on our financial plans and resources.
Thanks, Scott and good morning for the second quarter sales were up 18% on a GAAP and adjusted basis versus the prior year.
Organic sales growth was 7% foreign exchange was a one point drag and the boats acquisition added 182 million of sales during the quarter.
Average selling prices were up 7% driven by price increases as well as favorable side by side mix.
Second quarter earnings per share on a GAAP basis was $1.42 adjusted earnings per share was $1.73 down 2% for the quarter, which slightly exceeded our previously issued guidance driven by a combination of tariff mitigation and timing of tariff costs.
I'd note that earnings growth adjusted for tariffs foreign exchange and interest rate increases would have been approximately 20% in the quarter, reflecting continued improvement in business fundamentals.
Foreign exchange had a negative impact on the quarter versus 2018, driven by a strong dollar primarily against the euro and the Canadian dollar. However, the impact was in line with our expectations.
For the remainder of the year, we're planning foreign exchange continued to have a negative impact on pretax profit. The full year impact is estimated to be approximately $30 million or 37 cents per share.
This assumes an average euro to us de rate of $1.12 and the CAD to U.S.D. at 74 cents.
If foreign exchange rates hold at current spot rates for the remainder of the year there could be additional favorability that has not yet been included in our revised 2018 guidance.
From a transactional perspective, we have hedged approximately 75% of our remaining 2019 exposure for Canada.
From a segment reporting perspective, Orbi Slash snowmobile segment sales were up 6% in the second quarter, primarily due to increased prices PGN AG growth as well as from the benefit of stronger side by side mix.
Snowmobiles were also up in the quarter, but Q2 is not meaningful.
Given the seasonality personnel.
Or of the whole good sales increased 4% given stronger side by side sales mix.
Average selling prices were up 9% for orbi during the quarter driven by the price increases and positive product mix.
Sales unit volume was down during the quarter in line with the retail volume decline, but as Scott indicated we are strategically targeting categories, where we can maximize profitability for the business given the significant tariff headwind we're battling.
Our premium Rangers generals and razors, all grew sales volume during the quarter with declines in the less profitable segments of value. You then trail.
Motorcycle sales increased 15% on a GAAP and 14% on an adjusted basis in the second quarter driven by strong shipments of Indian which included the newly introduced Fcr 1200.
ASP for the quarter was down 1% driven by foreign exchange, given strong international growth and the mix of midsize and standard bikes versus heavyweight.
And then grew market share for the quarter as we began retailing highly anticipated FDR 1200.
International sales were up 41% and PGN Acs sales were up 11% during the quarter driven primarily by the FDR 1200 shipments.
As a point of reference beginning this quarter, we're now adding the standard category of motorcycles to our midsize and heavyweight industry calculations, when referencing the north American motorcycle industry to capture the retail sales and market share for MTR.
I'd also remind you that the MTR 1200 volume is also driven by non North American retail, which is not reported in our retail sales figures, but is included on our motorcycle sales guidance.
Global adjacent markets sales were up 7% during the quarter driven by all product categories average selling prices were flat during the quarter.
Aftermarket sales were up 1% compared to last year with tap sales flat and our other aftermarket brands, increasing 12% during the second quarter.
Our boat segment reported sales of 182 million for the quarter on a pro forma basis. The boat segment sales were down 2%.
However, on a pro forma year to date basis boats are up 5%.
The decline in the second quarter can be attributable to a combination of year over year shipment timing as we approach the closing of the boat acquisition in July of 2018, and unusually wet weather patterns. During this years second quarter.
Our international sales were up 13% on a reported basis and up 19% when you remove the unfavorable impact from currency.
The growth was driven by motorcycles and global adjacent markets.
Parts garments and accessories sales increased 10% during the quarter all business segments were up for the quarter with growth coming primarily from accessory sales.
Given our first half performance and the outlook for the remainder of the year, we are revising our full year guidance as follows.
We are narrowing our full year total company sales growth guidance and now expect sales to increase in the 12% to 13% range for the year.
The North American Powersports industry is expected to remain positive in the low to mid single digit percent range driven by growth in the side by side market. While the motorcycle market is expected to remain weak. We continue to expect boat sales to contribute about 6% to the full year increase in sales versus 2018.
We are narrowing our full year adjusted earnings per share for 2019, we are raising the lower end of our previously issued guidance by an additional five cents to $6.10 per diluted share given our first half results primarily from our boat segment.
We're maintaining the upper end of the range at 630 per diluted share.
The revised EPS range includes the added costs related to the change in the thrill one list three tariff rate from 10% to 25% on all components shipped after the effective date.
We're holding the upper end of the range. Despite this added cost given the positive tariff mitigation efforts the team has realized.
The 301 list three tariff moving to 25% places an additional 30 million of cost pressure on 2019 earnings and as Scott pointed out weve been able to mitigate existing tariff exposure and we are recognizing the benefit from the 232 tear from mobile to essentially offset this added cost.
The $30 million of 301 list three at 25% Annualizes out to $60 million to $70 million on a full year basis, or an incremental $30 million to $40 million impact as we head into 2020.
Excluding the tariff costs, along with the negative currency and higher interest costs, our underlying operating earnings performance as anticipated improved 15% to 18% on a year over year basis, reflecting the continued progress we're making in business fundamentals.
For the second half of 2019, our revenue is evenly split between Q3 and Q4.
Mix, however drives differences between the earnings within the quarters. Additionally, we have higher R&D costs in Q3 versus Q4, given supplier validation costs related to the supplier supply chain transformation project.
This coupled with the fact that our dealer shows Expensed in Q3 drives approximately 55% of our second half expected EPS guidance to be realized in the fourth quarter.
Moving down the piano, our previously issued guidance ranges remain unchanged as shown on this current slide. However, there are a couple of points I want to highlight.
First adjusted gross profit margins, while expected to be down on an absolute basis, driven by tariffs and negative currency are up 80 to a 110 basis points prior to the effects of those items driven by higher volume mix price and productivity.
We continued to see the competition promote aggressively in the second quarter open Orbio motorcycles, and while we are spending more on promotions than originally anticipated we are being selective as to where we spend our promotional dollars, which is generating positive mix that offset the additional promotional costs.
Gross profit margin expectations by segment also remain unchanged. We have provided the gross profit margin details by segment in the appendix of this presentation.
Secondly, adjusted operating expenses are expected to increase in the mid teens percentage range in 2019 up 10 to 20 basis points as a percentage of sales, resulting from the addition of operating expenses from the boat segment, the new multi brand distribution center in Fernley, Nevada higher variable compensation costs the costs associated with the 65th anniversary celebration and summer dealer meeting being held next week and lastly, the ongoing investment in research and development expenses.
Moving on to sales expectations by segment.
Orbi Slash snowmobile sales are now expected to be up mid to high single digits. Our range has expanded from previous guidance with the mix of side by side products expected to be more favorable than previously anticipated as well as stronger international and PGM sales.
Motorcycle sales are now expected to be up low to mid teens percent, we expanded the range from prior guidance given the weak market and a modest adjustment and the number of MTR 1200 bikes expected to ship in 2019, as we cautiously ramp production to ensure we met high expectations around quality.
Both global adjacent markets and aftermarket segments sales expectations remain unchanged at up mid single digits percent.
International and PGS sales, which are included in the respective segments are both performing better than anticipated. Therefore, we now expect international sales to increase mid single digits percent and PGS sales to increase in the mid to high single digits percent range for the full year.
And lastly boat sales expectations remain largely unchanged.
Operating cash flow finished at 203 million through the first half of 2019 up 23% over the same time last year, driven by lower working capital requirements.
Cash flow is expected to improve approximately 23% for the full year compared to last year unchanged from our previous expectations.
Our bank leverage ratio defined as total debt to EBITDA stands at approximately 2.46 times well below our bank covenant requirements and we will continue to focus on debt reductions for the remainder of 2019.
With that I'll turn it back over to Scott for some final thoughts thanks, Mike I'm encouraged by the way our players team battled through the first half driving quality and productivity improvements that will pay dividends in the months and years ahead.
The powersports industry has been resilient and growing year to date and we're excited to launch our model year 20 product introductions to extend our reach over the weekend, we had a pre launch event with our closest partners and social media Influencers.
And received outstanding feedback reinforcing our conviction that these new products will raise the bar in their respective segments.
Our innovations are not limited to vehicles, and we will continue to leverage technology to improve customer experience across the business.
As we begin our second year in the boat business, we like the market share gains and growth at Bennington and we use our boat dealers shows over the next few weeks to showcase plans for growth across all of our marine brands.
International Global adjacent markets and parts garments and accessories are all performing well highlighting the disparity between North American unit volume and overall corporate revenue and demonstrating the positive impact of our diversification.
The motorcycle industry remains challenging with promotions more than products, putting pressure on our Indian business.
With FDR 1200 production accelerating in the second half and our portfolio continuing to expand we like our opportunity to gain market share.
Our strategic sourcing initiative continues to yield positive results wave one is moving to implementation with savings now projected to exceed our aggressive targets.
Wave two kicked off in May and we remain confident that this strategic sourcing project will be the largest productivity boost the company has ever executed.
We are excited to welcome thousands of Polaris dealers from around the world to our Sixtyth anniversary dealer show here next week.
We plan to demonstrate clearly why we are so confident in our ability to lead the industry and drive profitable growth for many years to come.
With that we'll open the line for questions. Thank you.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then too.
We please ask that you limit yourself to one question and one follow up if you have additional questions you may reenter the question queue.
At this time, we will pause momentarily to assemble roster.
The first question will come from Jamie Katz of Morningstar. Please go ahead.
Hi, Good morning, guys I wanted David Im curious about aftermarket parts it looks like for the second half of the year you guys are anticipating sales that rise maybe at a high single digit pace, which is faster than.
That segment has risen for you off in the last two years from coupon debt, so this or something.
Coming out in that segment that is giving you confidence that you can accomplish that run rate.
Yes, Jamie as I indicated in my remarks, we had really strong growth in our retail segment up 7% our E Com segment up 12% in the quarter and Craig Scanlon and the team have really put a lot of fundamental improvements in the business.
So we feel good about that and then our.
Our powersports portfolio as I indicated has also been continuing to grow strongly so I think as we reduce some of the headwinds we've seen in our wholesale business and they start to get their arms around that we just feel.
Better about the way that business executed in the second quarter, what we're expecting that kind of the trends as we move into the second half of the year.
Okay, and then there wasn't too much discussion about.
Dealer floor space, but im curious as you have.
If you guys have been able to capitalize maybe incremental floor space and Arctic cat is incrementally weekend over the last year, or so and whether or not dealers are more receptive to taking more of your product. Thanks.
Thanks, Jamie Good question, but I tell you with RF EMEA, we have our profile set with our dealers, it's working extremely well.
We do see as we introduce new products is we're about to do we tend to get more floor space to make sure that they can showcase in they increase their profiles, a little bit, but I wouldn't say that there has been a.
Tremendous increase because of the the shift in in that competitor.
Next question.
Certainly that question comes from James Hardiman with Wedbush. Please go ahead.
Good morning.
So on the retail was down a little bit in the second quarter.
But the guidance for that segment was actually raised in high end, maybe walk us through how that works what was incrementally.
More positive you touched on a little bit of it.
But maybe walk us through that that bridge.
Yeah, and James is as I pointed out we actually pulled shipments down unit shipments down in the second quarter pretty much in line with retail again, a testament to how RFM works and adjust on a real time basis.
Really what we're benefiting from as we indicated from a retail standpoint side by side sales are growing atps contracting and that gives us a boost from an ASP standpoint.
But you also have to consider there's international revenue it wasn't much of a factor in Q2, but as we look out for the balance of the year International growth.
Well Hell Barbie.
As will PGN today.
And so those really fed into the revision in terms of the mix expectations the growth coming from PGK, which obviously.
The accessories that go with our side by sides are of a big component of that.
Got it.
And then.
Sort of a two part.
Tariff question here, so the $30 million to $30 million of through one was three.
You've got some exemptions I think you pointed out, but I'm, assuming that none of those exemption.
Were on the list, we spun off since that window, just opened up a few weeks ago and so if you're successful with exemption does that.
Is there still the potential for $30 million of upside.
As we work our way through that and then if at all possible and I'm not going to asking for guidance for 2020, but just how do I think about 2020 in terms of.
The incremental tiering piece that we've gotten.
Over the last few months.
Obviously for 19, there was $30 million in you're able to offset that should I think about that being offset in 2020 as well or were there some timing effects that will still make the incremental piece for 2020.
If everything stays where it is right now go up.
That's a long two part question.
Yes.
It's obviously, it's a comp complex topic, but you actually summarized it accurately there are no exemptions for list three threeo one yet.
There might be and really it's it's unlikely that we're going to get significant relief from exempt like part by part exemptions. We that's why we're working so hard to get overall relief from this this 301 list three tariffs.
As Mike indicated weve.
Really been a nice job of offsetting it with mitigation efforts this year.
Ken and his team have worked every single angle too and then with the benefit of the 232 steel aluminum we did not increase it but Mike said in his prepared remarks that the increases up.
The flow through to next year would be an incremental $30 million to $40 million.
I don't think we're going to provide tariff guidance beyond that.
Yes, James the only piece that would be incremental to that is obviously, we still had some of the 232 impact this year and that obviously will won't recur next year.
And then we're doing a lot of work around the retaliatory tariffs. So my expectation is that if nothing else changes, meaning no tariffs or reduce no tariffs are added.
We'd be up a little bit as we head into 2020, which is going to come primarily from this incremental thrill. One list three a 25% less some favorability that we'll get out at 232 and and the retaliatory starting to be reduced as we ramp motorcycle production in Europe .
Got it.
Thank you. Our next question comes from Scott Stember with CL King. Please go ahead.
Good morning, and thanks for taking my questions.
Good morning, Scott.
Maybe talk about retail a little bit or be it in the release you talked about.
Yeah, I guess are you explaining why the industry was up in some competing products in the market that weren't there before maybe just talk about the areas, where you were going up against that I imagine it was more on the value in the used side.
But maybe just give us a little color on that.
Yes, really I think that the new products that we havent been up against before is really a honda entering with the talent.
More than anything else, but.
At the most to our retail challenges if you will as as we've talked about in our prepared remarks were really evaluate TV the youth products and somewhat in that trail razor segment, where we havent refresh the product in quite some time and we chose with our price increases not to put as much promo on some of those lower margin.
Product lines, and we actually saw that hurt volume and market share, but we are we have a real product advantage with Ranger and razor right now we chose to capitalize on that and I think it allowed us to to manage the quarter reasonably well I will tell you that.
We've got a very good plan as we roll both with new products in our factory authorized clearance sale and I expect us to.
To continue to execute our retail and share play.
Improving and better in the second half.
Scott and I would I would add to Scott's comments is keep the word discipline in mind. When you think about how we're going to promotion.
Well there are some competitors out there that aren't being disciplined.
We're going to be smart about it as I said in my prepared remarks, we are doing the work around each program to make sure that it's got the right financial profile, and we will protect and where we need to protect.
Got it and last question about retail I know, there's been a lot made about whether how much it impacted.
The quarter weather was April may or June .
Maybe just give us an indication of how it impacted your businesses, maybe by by line boats or view the motorcycles and maybe just by month as well just let us know.
How much weather really impacted June .
Particular.
Thanks.
You know that is not we don't have refined data on that and if we did we probably wouldn't share. It I will tell you that.
Throughout the April was better weather, but may and June both were difficult, it's probably hardest on boats.
Second hardest on motorcycles, and then leased hard on off road vehicles, but it's certainly not helpful to any of our product lines. When it's raining and I think the Midwest really had is that the the most impact of.
Wetness in the second quarter, and we you know Scott we did see.
I've seen a lot of the reports came out around bodes we did see a pickup at the end of June and it really part of July when weather did improve so we know that that was definitely a factor.
Thanks.
Yes. Thanks.
Question.
That comes from David Tamberrino with Goldman Sachs. Please go ahead.
Okay great.
Just wanted to dive more into the mitigation actions that you've taken so far I think you called out about $20 million of benefit for this year.
What have you done what health or you're looking to put in place and.
How much of this incremental tariffs or incremental $40 million year over year into 2020 ask where we currently stand do you think you could.
Could mitigate from some of your incremental actions from here.
Well, obviously the number we gave you is what we think we won't be able to mitigate that's how we calculate impact, but I will tell you that.
As Ken likes to say, we Havent had our next best good idea and now the work that they're doing whether it's changing country of origin, which has been quite helpful to us.
As I indicated moving of some of the machine part sourcing we've done from China traditionally to some of our U.S. suppliers, including our own Ws I subsidiary I mean, we've got bonded warehouses to make sure we're not paying terrace, when we shouldn't pay tariffs.
Really it is a unrelenting focus on reducing that impact and I think Lucy and I spend a lot of time in Washington trying to get the relief. We should so were not spending so much non value added time trying to work around the tariffs and the impact on the company, but I really proud of the way the team has been able to navigate the impact thus far.
Okay, and then just lastly from an inventory perspective.
Ended the quarter up a little bit year over year do you feel as if theres any particular product, where you have a little bit too much excess inventory at the dealer sort of now and you need to pull back for Threeq or do you think you are in a good position how does your product launches.
We feel good.
Yes, we took the opportunity when we saw retail softening in Q1.
To make sure that as we loaded up Q2, knowing that we have model year changeover factory authorized clearance new products coming out that we were making sure we're disciplined we put.
A comment on the chart.
That were at 95% of our RFM profile. So we're making sure that we have enough room.
If if things were to move from where we've got some projected right now.
Got it helpful. Thanks, guys.
Yes.
Question comes from Robin Farley with US. Please go ahead.
Thanks, two questions one is on.
I know you commented about the tariff impact is $30 million to $40 million to 2020, I just wanted to clarify I wish that hatched or any offsets from the Q3 Q will recur next year and the traditional can you just remind us the dollar amount to 32 that won't recur next year. Thanks, Yes.
So robin the the 30 to 40 is just purely the list three.
At 25%, so thats, an annual value of 60 to 70, but it's an incremental 30 to 40.
The 232 tariff.
And the retaliatory going away, we did not quantify those.
They are in the $10 million to $20 million range to give you a rough order magnitude.
Okay, Great. That's helpful. Thanks, and then just on the increase in order to shipment guidance you mentioned the higher mix of side by side. So obviously there.
Yes, ki would be higher.
Next question.
Surely the increase in that shipment rates or was it maybe the Tas K Max.
There was a little bit of an increase in the shipment because we're making that that shift change.
From an overall standpoint from a unit there wasn't anything material, but when you look at.
The value of those units that we've got going on from side by side standpoint, Theres a big price.
ASP advantage. Unfortunately, a fair amount of that is getting eaten up by the.
Incremental promotion that we've had to put in place, but again, we're making sure that we're evaluating each of those decisions independently.
Okay, great and if I could just one last one there I was just looking at your European sales will take your comments were talking about the growth of international the second half.
Our sports or at least one of their power sports common southern Europe being weaker than expected I Wonder if you could just give us your take on kind of European retail demand overall thanks.
Well you know motorcycle industry in Europe is significantly better stronger than it is here.
So we feel encouraged by especially as we're launching the FDR as we've always indicated that that really is a bike.
Targeted as much as Europe is anything, but with our second half product offerings.
We believe that that will be as attractive is in Europe . As it is here. So we think the market is it's better than the overall European a kind of the power sports market in motorcycle market is better than the overall European economy, and we're encouraged by that.
Robin we you saw that we raised our guidance for international from low to mid single digits and Thats not just a motorcycle driven movement.
Okay, great. Thanks very much.
The next question comes from Greg Badishkanian with Citi. Please go ahead.
Great.
Right.
So the wet.
Spring do you think Thats lost sales or would you expect to get some.
Some of that lost sales back.
We think it varies by industry.
With motorcycles and boats it tends to be you're going to lose the vast majority of it they lose the riding season or the boating season and are less likely to purchase offered vehicles. We think it tends to have less of an impact.
People have thought about those purchases a little bit longer and.
We will still continue to.
We've seen that recover a little bit better but.
We think we lost some of it.
Okay all right.
And then just to clarify in terms of the intense promotion.
Segment, that's been pretty consistent it's still it's still aggressive.
You said, yes.
July right.
Yes, I'm not sure that we've really seen a notable change recently they are down from what we saw at the beginning of the year.
But.
That's been pretty consistent.
Okay.
Just finally, the upcoming Sixtyth year celebration.
New product launches.
The.
Okay.
Yeah, Greg Greg you are breaking up we can't hear you.
Maybe if you can you make an okay.
Thanks, Dave I'll go ahead, and hence we could you could you could you see Oh, sorry about that could you see a step up in terms of the new products that are coming out in terms of innovation, where would you expect that to be pretty pretty similar.
New products is the last year or two or could we see a step up this year when we come back to the shop.
You know as I.
We don't talk about what we're going to launch, but we are spending more money. So therefore, you would naturally expect dime, if we're going to get a good return that we get more and better products and I think that's consistent with what what you'll see.
Perfect. Thanks, guys.
Thanks, Thanks, Good luck.
Yes, Thats from Joseph Spak with RBC RBC. Please go ahead.
Thanks, guys.
Maybe just turning to.
Boats I was wondering if you could talk a little bit about.
Your inventory situation or given the weather and some of your comments you just mentioned about.
Being tougher to sort of pick up sales and then is there an opportunity over time to do something more RFM like with the with that business.
Yes, we they are already.
The mobile family just had a really good operating model as I'll just remind you when we bought the business. It had returns on invested capital of over 100. So they really understand this idea of flow the the weather impact.
Yes, Theres nothing you can do Youve got to ship in before the season, So I think.
Boat inventory was up by high single digits, but it's already depleted in July I think we're feeling better about that we did cut shipments in the second quarter and.
Yes, retails picked up in July so we're feeling really good about where boat inventory is overall so.
And as I said, we're having our dealer shows.
This week in the next couple of weeks for the for the boat brands and I think they're going to be pleased with the innovation that the Polaris is Dan.
And both teams have worked together to bring to market.
And then just on motorcycles and nice sales increase.
With the Fcr, which looks great by the way. So you had sales up like 25 million year over year, but but gross profit up only 2 million and I know, there's a lot of stuff going on with.
Tiresome promotions et cetera, but was there also some.
Element of.
Startup or launch costs without fcr that sort of gets a little bit better as you move to the back half.
Yes, I mean, there's there's always that aspect, Joe, but I will tell you that.
When I look at second quarter for motorcycles alone. There was 300 basis points of drag created from tariffs because what you have to remember is motorcycles is dealing with two tariffs that are dealing with all this inbound stuff that we have on three a one but they are also dealing with a very hefty retaliatory tariff now.
We've got the scout production up and running is going incredibly well, we're working on getting fcr up and running so we think we'll be in a good spot to be able to mitigate that next year. If those tariffs are still in place we will still have a drag on heavy weight, it's much less.
And it doesn't make sense for us to move production over there at this point.
On AD Alderson I should say yep.
Great. Thanks.
The next question comes from Garik Johnson with BMO capital markets. Please go ahead.
Good morning.
Good morning, Thanks, Hi, a couple of things on the balance sheet call My your own inventory up 22%.
And then warranty reserve up 25% year over year. So you can you talk about those two lines. Please.
Yes, so from an inventory standpoint, the thing to keep in mind is number one we added boats.
Which adds over $50 million rhythm inventory.
We've also got an order of magnitude somewhere in the range of $30 million sitting in there that's a bump up versus last year from tariffs because if you remember we really didn't have a whole lot of tariff in inventory at that point in time.
And then really we've got inventory build up as we get ready for the new product launches will be obviously launching shortly after the 60 good.
Dealer show and making sure that we're prepared for that.
And then from a warranty standpoint, there's a couple of things.
The reserve is is up.
We actually last year had a couple of reserves that we reversed kind of holdovers from the.
Legacy recall issues that we had as we got further into those we were able to true up those reserves. The other thing to keep in mind is we have about $8 million to $10 million worth of boats warranty. That's been added year over year as we bring that business on board and then we did in the third or the second quarter, we did have.
Several.
Small recalls and service bulletins that added a little bit of costs nothing material or significant.
Okay. Thank you Mike.
You bet.
Our next question comes from Michael Swartz with Suntrust. Please go ahead.
Hey, good morning, guys.
Just wanted to touch on the competitive environment again, and maybe just as a point of clarification did the competitive environment in the second quarter in off road vehicle.
I will defer to maybe what you would have expected going into the quarter.
The competition wasn't.
Heavier the promotions were significantly more I mean, what might might use the word discipline and that is a word that I wish our competitors would start to think about because some and it's true not just in off road vehicles, we saw it in motorcycles as well I mean.
I think the most accurate term I can use for it is ridiculous and when you're putting.
You know.
Literally thousands and thousands of dollars on vehicles that just it's not necessary and we were quite surprised by it.
And.
As I said, we were we chose not to do anything at our.
Where we already had lower margins than our our value and new products. So thats why we lost some volume and share there, but you know I think as we grow into we were going to be aggressive with factory authorized clearance. So we always are I think we're going to take the knowledge of what we learned in the second quarter and apply some of those.
Those learnings to to how we execute promotion in the third quarter and through factory authorized clearance and then really it's an innovation game that wins and I think we feel really good about.
The amount of your 20 product launches, but no I would tell you that the the competitive promo from people that should know better was disappointing.
Okay Thats helpful. Then Scott maybe just.
Quickly on on Slingshot, I know its smaller part of the business, but just given what you've seen in retail there I mean, maybe just discuss what your level of commitment sounds like you are doing some things there.
Did turn that around but any color you can provide on maybe what you're doing and then again longer term commitment to that.
You know our.
My commitment to any business is if I see a future of profitable growth.
Pretty simple and now Mike's got a whole bunch of other stuff and he's going to look at but but my simple lenses through that view of can we see a future and be confident of future profitable growth.
So with that lens, we feel good about slingshot, both from the products that are in the portfolio, but really the execution that we're learning.
We do have a number of dealers that do really well with slingshot.
The problem is it's just not enough of them, but we're learning from those dealers and in applying those learnings other places and we're seeing the results of that.
Like I said, we've got new leadership in there, they're really digging in and we do feel like we've got a and I've said all along this is going to be a slog of a year for slingshot, but as we move into 2020, we feel better about our ability to play in that segment and.
So we're very committed to it until something changes and tells us that we don't see a future profitable growth.
Alright, Thanks, a lot Scott.
The next question comes from Craig Kennison with Baird. Please go ahead.
Hey, good morning, Thanks for taking my questions. Mike You mentioned, you're under shipping relative to the RFM profile why would that be.
Well, we're just trying to make sure that we leave enough room.
It's tough to get a solid projection around what's going on with retail and what we saw coming out of the first quarter.
We intentionally did that just knowing that we were coming up against factory authorized clearance in the model year changeover to make sure that we had flexibility and put the dealers in a really good spot with all the new products coming out.
Thank you and then with respect to factory choice as we see it.
A different kind of innovation that differentiates Polaris in a different dimension I guess.
And also gives dealers that Craig maybe better margins. How are your current factory choice options performing and how quickly can you roll that capability out to other products.
But you know it is performing exceptionally well and it's I. Appreciate you actually acknowledging that it's real and innovation on ended up itself. The work that our teams did over really a couple of years to put the capability within our supply chain in factories to bring that to market.
It was it was quite impressive the uptake has been exceptionally good.
The execution.
Has been impressive I think we are rolling out to more categories. As we go into the model year 20 product line motorcycles is already done a version of it but I think the learnings that we really gone into Ranger and start to apply that to other categories is is quite exceptional so thats. It.
Really we were making as many as we can.
To fulfill demand there, but we're going to continue to expand that category and we're seeing the uptake not only in how fast those retail, but the profitability that you mentioned for dealers is another real benefit there.
Thank you.
The next question is from Tim Conder with Wells Fargo Securities. Please go ahead.
Thank you gentlemen, and congrats again to the team on the execution here in a difficult period.
Just a couple of follow ups here on motorcycles.
It has the outlook, excluding MTR has that changed here over the last 90 days.
Yes it has.
That's why we widened the range from low to mid teens.
We obviously as I mentioned in my prepared remarks, we pulled back a little bit on the shipments of MTR just given some of the.
Focus around making sure we had the product absolutely positively right.
But we have seen weakness in other areas and Thats why weve expanded the range Scott spoke to it earlier, we have seen.
Some very aggressive promotional.
Activity in the marketplace from our largest competitor.
We are dealing with that as best we can but we are going to continue to be disciplined.
Okay, Okay, and then and then Mike just to follow up again on the clarify the.
232.
Couple of the earlier questions. You said I think it was about a $10 million to $25 million range on the 232 that you had not factored in for 2020 is that.
Is that a gross number or is that just would be the incremental savings onto 32 in 2020.
All right. So let me make sure I trying to this is clear as I can go and we'll be talking about this after we get off the call. So we've got the thrill. One list three go into 25% that adds 30 to 40 million in 2020.
I think Robin it asked the question around 232 and the retaliatory.
My response to that was those are $10 million to $20 million of favorability, meaning as we've ramped up production in Poland. We obviously start to avoid some of those retaliatory tariffs and with the 232 tariff being canceled this year, obviously as we roll into next year. The fact that we had cost and 2019 will not recur and I commented that was $10 million to $20 million.
Okay and Thats collective.
And then comes in both those two items or.
Collective collective okay total.
Okay. Thank you for the clarification you bet.
Again, if youd like to ask a question. Please press Star then one.
The next question comes from Joe Altobello with Raymond James. Please go ahead.
Thanks, Hey, guys good morning.
First question just wanted to clarify the $60 million to $70 million of annualized increase from three along with three I think you guys at the previous said that was $80 million.
So why did that come down, but by $10 million to $20 million.
Well I mean, I think some of it's just getting more refinement you know I will say as unfortunate as this is to say we've become very good at working through with these tariffs Maine.
You know in Ken's team has spent a lot of time studying the materials that we have coming in direct from China as well as making sure that we understand.
The indirect which has a lot more complexity to it because thats, where we have suppliers in the North America. For example that are using parts from China, and how does that flow through so it was more of a refinement moved around $10 million to $20 million, but.
That's the key driver Okay. That's helpful and secondly, if and when there is a new NAFTA.
That gets through Congress is there a major impact for you guys from that.
I'll give our.
Trade and government affairs team a lot of credit.
No we don't we don't expect.
Material change and how that impacts the Polaris, but only because we were able to work.
Tariff relief so.
That that could be a more helpful agreement than I originally thought.
Great. Thank you Scott.
Ladies and gentlemen, 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 I want to thank thank everyone for participating this morning.
We appreciate that and for those that you a view that we will be attending our analyst Investor meeting this coming Sunday Monday, we have some exciting products to show and demonstrate so we look forward to senior there again thanks.
For participating this morning, and we'll talk to you next quarter good bye.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.