Polaris Inc. (PII) Q1 2018 Earnings Report, Transcript and Summary

Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Polaris First Quarter 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Richard Edwards, Head of Investor Relations. Mr. Edwards, you may begin.

Thank you, Julie. And thank you everyone and good morning – thank you for joining us for our 2018 first quarter earnings conference call. A slide presentation is accessible at our website at www.polaris.com/irhome, which has additional information for this morning's call. Today, you will be hearing prepared comments from Scott Wine, our Chairman and Chief Executive Officer; and Mike Speetzen, our Chief Financial Officer. 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 2017 10-K for a more detailed discussion of those risk and uncertainties. Throughout the presentation today, all references to first quarter 2018 actual results and 2018 updated guidance are reported on an adjusted non-GAAP basis unless otherwise noted. Adjusted refers to GAAP results excluding TAP integration expenses, the impact associated with the Victory wind-down, restructuring and realignment costs, supply chain transformation cost, EPPL impairment and gain on Brammo investment and the impact of the Tax Reform bill. We have provided a reconciliation of the adjusted non-GAAP to GAAP results, which is shown in appendix of this Presentation. Now, I'll turn it over to our CEO, Scott Wine.

Thanks Richard. Good morning and thank you for joining us. We were in Arizona recent for product testing, not to mention a welcome respite from the snow, and it was difficult to contain the excitement about the incredible new vehicles we will launch in the months and years ahead. Innovation is the most consistent driver of growth in our industry, and with products like these, we expect to get paid for our step-function increase in research and development funding. We are optimistic about the future, but in some ways, the future is already here, as our first quarter product innovations across all three major businesses represents the most significant start of the year innovation in Polaris history, and we intend to maintain a product news pace that will be tough to match. These product launches created more excitement than impact in the quarter, but the innovation in our marketing plans, outstanding execution by our sales teams and the improving consistency in quality from our factory drove strong retain and financial results. There is not much positive to say about the motorcycle industry in the first quarter, but Indian continued to win on the track and with customers, and both Indian and Slingshot gained market share. Dealer and consumer demand for Indian Motorcycles, especially our expanding our Scout lineup remains robust and our new model introduction should only augment interest and sales. Allowing the negative headlines and market volatility, the relative strength in the global economy was hard to deny, as we saw growth in each of our four segments. International sales were also up over 25% as favorable currency rates boosted already strong European demand for snowmobiles, Indian motorcycles and off road vehicles, all up double digits. Our Global Adjacent Market business generated robust 20% plus revenue growth in the quarter and Bob Mack's team is actively evaluating strategic acquisition target that can add to our strong and improving returns and results. Our team emphasized and solidly executed the fundamentals to start the year as our model year 2018 product quality trends are significantly improved, RFM implementation for RANGER and RZR continues to progress and dealer inventory is generally in good shape as we head into seasonality. Although snow remains much higher than we and our deals would like. We also did not like to talk to tariffs, much less that actual implementation in the first quarter, resulting in related increased in commodity prices and untimely spike in logistics cost is providing a healthy challenge for our teams to offset. The 3% increase in first quarter North American retail sales was driven by the strong performance of our industry leading side-by-side portfolio where we gained market share even as promotional expenses decreased year-over-year. While far from robust, the continued improvement in the important oil and ag markets is encouraging. Motorcycle retail was up modestly as Indian continued to gain market share domestically and internationally. Snow underperformed again in the first quarter losing market share and dragging down our overall retail by 200 basis points. The weakness in snow retail drove a sizable increase in snowmobile inventory making it the major contributor to the 6% growth in overall North American dealer inventory. ORV dealer inventory was flat, although we made steady progress throughout the quarter in availability to support the spring sales event. Similarly, motorcycle inventory was up just over 10% as we positioned for the long-awaited beginning of spring in the onset of the riding season. Our cross functional RFM team is continuing to make progress drawing us ever closer to a true dealer pull model. A few people have contributed more to the success of RZR and the overall growth for off road vehicle business than Craig Scanlon. So, when Greg Adler informed us of his decision to hand over the reins of Transamerican Auto Parts, Craig was my top choice to replace him. Building on Greg's efforts to extend TAP's position as an omni-channel industry leader, we are confident that Scanlon under the experienced leadership of Steve Eastman will guide the TAP team to new heights. We are proud of the significant growth and market leadership we achieved – have achieved over the years. Our ability to attract new customers and demographics to the power sports industry is far from where it could or should be. With the recent addition of Julie Gilbert, we expect to change that. Julie is an innovator, a driver and a leader with an extensive track record of breaking barriers and opening new markets. As our Chief Customer Engagement and Growth Officer, Julie will partners with Steve Menneto and Chris Musso to find new ways to make our vehicles, our marketing and our business even more welcoming to people of all backgrounds. In March, we were in Chicago to hold the largest Polaris supplier conference ever to kick off our Strategic Sourcing initiative and we were encouraged by the response as we are by the momentum the program is building. With nearly 900 suppliers in attendance and most new to Polaris, there was significant interest in winning a portion of the $1 billion of annual spend targeted in this first round. This is a cross-functional retooling of our sourcing process, not a simple rebidding exercise. So, the savings will take some time to materialize, but the strategic alliances we are creating will be key to reaching our aggressive innovation, quality and productivity goals. We have strategically moved more of our product launches out of the traditional third quarter for several years now. But with the Q1 introduction of the epic 850 Patriot snow engine and corresponding sleds, our most advanced high-end RZR and innovative use RANGER and of course the coolest Indian Motorcycles ever, we have made a precedent that will be tough to follow. From all new vehicle innovations like a RZR RS1, the novel safety novel safety features like geo-fencing technology along with the best most-refined, most-rugged multi passenger utility vehicle ever built, and our new RANGER Crew XP 1000, we're staying on the gas with product innovation and development. Few of these vehicles made it into consumer hands in Q1, but shipments are ramping up and the vehicles will be available in dealerships this quarter. With that I'll turn it over to our CFO, Mike Speetzen.

Thanks Scott and good morning. As Scott stated, we're pleased with our first quarter results which were driven by strong sales growth and improved execution. First quarter sales were up 12% on a GAAP and adjusted basis versus the prior year. The growth in sales was driven primarily by strong ORV and PG&A demand, continued strength in adjacent markets and international growth. First quarter earnings per share on a GAAP basis, was $0.85. Adjusted earnings per share was $1.06, when adjusted for Victory wind down, integration, network realignment, the impact of the Polaris- Eicher joint venture wind down and the again on our Brammo investment taken during the quarter. The increase was driven by a combination of strong sales growth, operating expense leverage and the expected lower tax rate. Our earnings growth excluding the impact of tax reform was a very healthy 20% demonstrating the leverage we're driving on revenue growth. Now let me review our segment performance. ORV/Snowmobile segment sales were up 15% in Q1 driven by improved ORV shipments of side-by-sides worldwide as demand accelerated during the quarter. As Scott highlighted, we had a record retail quarter for our ORV business and we gained a modest amount of market share. This also gives us another data point indicating that our quality, innovation and dealer relations are moving in the right direction. Our Snowmobile results were below our expectations this past season. We are pleased to report that North American pre-season snow check orders for model year 2019 are at a 17-year high driven by strength of the new 850 Patriot Engine. Motorcycle sales increased 9% on a GAAP basis and were up 4% on an adjusted basis in Q1. We had a minor favorable adjustment to Victory wind down promotional reserves in the quarter that was adjusted out of the GAAP results. Growth in Motorcycles was driven by continued strong Indian Motorcycles sales which were up low-double digit percent range in the first quarter. Sales of Slingshots were down as expected given a tough compared to Q1 of 2017 where we were recovering from a prior stopped sale of Slingshot from Q4 of 2016. Sales of our Indian Scout lineup were very strong, and we saw solid demand for the new Indian Chieftain Elite introduced in February. Global Adjacent Market sales increased 24% in the first quarter primarily driven by growth in Aixam and Goupil and Government/Defense. Aftermarket sales were up 1% with TAP sales down 1%$ and our Other Aftermarket brands increasing 22% on a combined basis. TAP sales were down in the first quarter primarily driven by weak overall light duty truck sales in North America which impacted wholesale revenue. TAP retail sales remain strong year-over-year. Our international business performance was stronger in the quarter with sales up 27% with currency representing 11 percentage points of the increase. Sales growth was particularly strong in the EMEA region which makes up about two-thirds of our international business. We remain the market leader in ORV outside North America and our motorcycle business is growing significantly faster than the motorcycle market in the regions with which we operate. And finally our parts, garments and accessories sales increased 5% during the quarter driven primarily by accessory business. We've added over 400 accessories to the PG&A portfolio since mid-last year which are contributing to our current performance. Parts sales were down driven by lower recall part demand and international PG&A sales grew in the mid-teens percent for the quarter. Now let me move on to cover our full year guidance. We now expect to deliver total company sales growth in the 4% to 6% range for the year, up from our previous guidance of 3% to 5%. We continue to expect the North American powersports industry to be flat to up slightly for the year driven by growth in off-road vehicles and a down motorcycle market. Adjusted gross profit margins are expected to increase in the range of 40 to 60 basis points, unchanged from previously issued guidance. I'll provide more comments on gross margins in just a few minutes. Adjusted operating expenses in dollars are expected to be up slightly for the year, but down 40 to 60 basis points as a percentage of sales, also unchanged, with research and development expense increasing about 10% for the year to support innovation and new product development. Income from financial services has improved modestly and is now expected to be up low-single digits percent, driven by expected increase, retail sales and growth in our extended service contract business which we brought in-house late last year. The income tax rate is unchanged and expected to remain at approximately 23% for the full year. Share count is unchanged and expected to increase approximately 2%. Although we repurchased only a minimal amount of shares in the first quarter, we anticipate repurchasing approximately 2 million shares for the 2018 full year, to partially offset additional dilution given our higher stock prices and option exercises. We have approximately 6 million shares remaining under our Board's current authorization. Foreign exchange was a net positive impact for the first quarter driven by a strong euro. As a reminder, we planned 2018 using the average rates realized during 2017 of the euro to US dollar of $1.13 and the Canadian to U.S. of $0.77. From a transactional perspective, we have approximately 60 percent of our exposure hedged for Canada, Mexico and Australia combined. If foreign exchange rates were to hold at current spot rates, there's some favorability that has not been included in our 2018 guidance. We chose to hold the balance of the year's guidance at the original planned rates, given currency volatility and uncertainty around commodity, freight and tariffs that we're facing. For the full year we're narrowing our adjusted EPS guidance by increasing the lower end of the range to $6.05 per diluted share, given the strong first quarter performance and keeping the upper end of our range unchanged at $6.20 per share. Our sales outlook improved slightly given Q1 performance. The additional earnings associated with the improved revenue performance are anticipated to be offset by added tariff and commodity cost, as well as higher freight cost that we're forecasting for the remainder of the year. As it relates to Q2, we anticipate continued sales growth, but anticipate that our EPS growth on a percentage basis will be up year-over-year at a slightly lower rate of increase in the 41% realized in the first quarter. Sales expectations for our segments are as follows; ORV/Snowmobile sales are now expected to be up mid-single digits with Snow down mid-single digits percent, and ORV and PG&A sales up mid-single digits percent. Our confidence of maintaining ORV market share is improved given our first quarter results and all brands are experiencing solid momentum. Motorcycle sales are anticipated to be up high-single digits percent unchanged from prior guidance. We continue to expect both Indian and Slingshot to grow sales in 2018 with Indian motorcycles growing faster than the market and gaining share again this year. Global Adjacent Markets sales are now expected to be up high-single digits percent given our Q1 results with growth expected in all businesses. The aftermarket segment sales are now expected to be up low-single digits percent, and lastly International and PG&A sales which are included in each of the respective segments are expected to increase in the high-single digits and mid-single digit percent range respectively for 2018. And now let me turn to gross profit margin. On a GAAP basis, gross profit margins improved 390 basis points to 24.9% in the first quarter. On an adjusted basis, our gross margins were flat 2017, with the expected reduction of warranty expense, favorable currencies and positive VIP savings offset by higher than anticipated logistical costs in unfavorable mix. We begin to experience the rise in commodity prices in last year's fourth quarter, but they've accelerated into 2018. As I indicated in our January call, we factored in a modest amount of commodity costs increase in our original guidance. However, in the past few months the commodity, freight and traffic pressures have intensified. As a reminder, steel and aluminum represent about 8% of our cost of goods sold, about 5% of steel and about 3% aluminum. Roughly 60% of our steel and aluminum buys come from suppliers in the U.S., 40% is imported. However, only about 10% to 12% of the imported amount would be considered direct buys of steel and aluminum, thus representing only about a $3 million increase in our steel and aluminum costs on an annual basis as a result of the tariffs. Initially, we feel confident that we can cover these additional costs for savings elsewhere. We've completed further analysis on the potential impact of changes we are now seeing in the spot market for steel and aluminum, and concluded that we are facing more risk than originally anticipated. In addition, we are seeing increased logistics cost driven by fuel, driver storages and cap shortages that were created by regulatory changes enforcing Q1. Higher tariff and commodity and logistics costs have all placed increased pressure on our gross profit margins for the year. We've built approximately $15 million into our guidance for these additional costs for the remainder of 2018 or about 30 basis points of additional pressure on gross profit margin assumptions. We are working on contingency plans to cover as much as possible, which includes the possibility of our freight surcharge. We are also using some of the foreign exchange favorability to offset the additional cost headwind. As a result, we are maintaining our gross profit margin guidance as up 40 to 60 basis points for the year. I'd also point out that we have not included the potential impact from the section 301 tariff that could be imposed against China. Should this be imposed, we anticipate we could face an additional $10 million to $15 million of costs headwind. We are continuing to monitor the developments and work countermeasures. One last point I want to covers promotional costs. On an aggregate and per unit basis, our promotional costs were down in Q1 and we continue to expect them to be down on a year-over-year basis. Some recent dealer surveys have implied that Polaris is the most promotional OEM in the ORVs industry, however our data shows otherwise. Yes, we will remain competitive in the marketplace, but given our most recent innovation and strategically utilizing a promotional dollars and pricing actions. We believe we can remain competitive while spending less on promotions on an aggregate basis. There is no change to our gross profit margin expectations by segment. Our operating cash flow performance was down as expected, given the seasonal cash outlays in Q1 and higher factory inventory in preparation of the peak retail selling season and new product introductions. Our outlook for operating cash flow has not changed and is expected to be down about 10% due to higher incentive compensation payments and higher working capital to support the growth of the business. With that, I'll turn it back over to Scott for some final thoughts.

Thanks Mike. Overall we are pleased with the strong performance of the Polaris' team in the broad momentum they created to start 2018. I am less content with Polaris in the associated commodity cost escalations that are increasingly difficult to offset. We support positive modification to trade agreements and will always advocate for free and fair trade, but do not expect efforts to achieve these goals to result in higher prices for our customers, impact our ability to sell internationally or otherwise harm our business. Our core markets will remain highly competitive, but in both motorcycles and off-road vehicles, we have never been better position to win. Innovation is our hallmark and it is driving the introduction of an impressive slate of new products to augment our existing armada. We are complimenting this by making meaningful advances in execution across the business; on time delivery is improving, lead generation for our dealers is up nearly 80%, and warranty claims are down dramatically for model year 2018 vehicles. We have now completed our extensive product looked back in the associated recalls have been announced. Well these events were disconcerting disarmed, they actually represent important progress in our regulatory relationships and demonstrate the effectiveness of our safety and quality system. Our objective is to make safety and quality of competitive advantage, and we have the people and processes in place to do that. We will never eliminate recalls entirely, but as a result of our extensive and ongoing work, our system is designed to both reduce the frequency of recalls and the number of vehicles impacted. Mike Dougherty and his team have spread the growth of Indian motorcycles by driving strong international sales in every region of the world. Their efforts are proving equally effective for International offered vehicle sales which are fully factory supporting accelerated growth in Europe. Ken Pucel is keenly focused on safety and quality, and his spare hitting these improvements was simultaneously driving better results on delivery and cost. The work he and his team were doing reflects our commitment to becoming a productivity powerhouse. No one step will get us there, but a single biggest opportunity is our strategic sourcing initiative. Getting this right will be extremely challenging, which is to be expected consenting at $200 plus million annual savings target. But with the enthusiastic cooperation of our suppliers and get through proven playbook, we are confident in the outcome. The Polaris' team is passionate, hardworking and dedicated to producing the great vehicle and products, which supports our efforts to be customer centric, highly efficient growth company. With that, I'll turn it over to Julie to open the lines for questions.

[Operator Instructions]

Hey Julie, we are ready to go.

Your first question comes from Robin Farley with UBS. Please go ahead. Your line is open.

Great. Thanks. You mentioned that for the ORV market, you are looking for mid-single digit increase in sales. I think that was the shipments comment. I wonder if you could talk about your expectation for retail, which I think you've previously had also said would be mid-single digit for the year, but I am wondering if that is higher now given the growth in Q1. And then just for my follow-up question if I could ask about on the motorcycle side. How much do you think if it was a weather issue, and another word is April looking different than the Q1 trend? Thank you.

Yes. So Robin, this is Mike. I'll answer the first one. Yeah. We had raised our shipment guidance to mid-single digits. I would say that, you know given RFM we are going to see retail moving in roughly the same direction as what our company shipments are, and that's obviously different by quarter. Our shipments were up pretty heavy in Q1 and retail was up 6%, a lot of that is exceeding the channel ahead of the spring selling season, but based on a little bit better retail, we took our shipment guidance up for the balance of the year.

And on the motorcycle front Robin, you know as you could imagine, we look very granularly at how sales progressed. In the regions where spring actually hit, our motorcycle sales Indian, specifically are doing quite well, but for much of the East Coast and Midwest spring is just barely arrived. Obviously, demand from our dealers is really strong and we expect to see that when the riding season finally gets here too to pick up. And really April hasn't been much better in much of the northern perhaps United States from a weather perspective.

Great. Thank you very much.

Thanks.

Your next question comes from Tim Conder with Wells Fargo Securities. Tim, your line is open.

Thank you. One question and a follow-up here, the supply chain savings, Scott or Mike who wants to take this. So it's fair to say that they should start benefiting margins late in 2019 and then scale beyond that, and then any comments you can give on the Slingshot retail. I think you even said that they was down as expected on the wholesale side in Q1, but any retail comments somewhat was what just asked on the – and maybe it fits in with the Indian part, but maybe it might be a little bit different.

Sure, Tim. Actually the strategic sourcing initiative, some of the projects will actually start in the fourth quarter of 2018, but won't be much of a meaningful impact. Obviously, we've got ongoing VIP work that is driving most of our material savings in 2018, but really in 2019 is where it starts to ramp up throughout the year, but it will be early 2019 where we start to see benefit, and then it will ramp up throughout the year and then we'll get that ongoing savings for the next several years.

On the Slingshot front, as you probably heard us say in the past that is the most seasonal product we have and we just don't sell many other when there are snow on the ground. So that has not been helpful as the weather was not great, but we are excited now to have 45 states granting the autocycle certification. So we are expecting good thing throughout the rest of the spring selling season.

And Scott if I may one other follow-up, you commented on promotions in the quarter. Can you talk about the cadence of promotions throughout the quarter? Any color there?

No.

Okay.

Thanks Tim. Next question.

Your next question comes from Greg Badishkanian with Citigroup. Greg, your line is open.

Thank you. So with your increased confidence in ORV where you raised your guidance a bit, what do you think the key components of that are? Is it upcoming new product? How you're existing new products for selling? Your product supply being better, recalls being in the rear view mirror. What do you think strivings that improvement?

Where was the pretty good list, Greg? Okay. I'll say, what Chris Musso and his team are doing is, is actually quite impressive because with the launch of the RANGER XP 1000 last year and now the Crew model just released. We definitely have the best utility vehicle in the marketplace with the Turbo S coming out. We've got the best high end sport rack vehicle in the marketplace. But in addition to great products, they are putting a lot of efforts. You might have heard in my prepared remarks that dealer leads were up almost 80% in the quarter and even better than that we are training our dealers to follow up on these leads to drive incremental sales and that's helping. So, a really good sales force execution. The work we are doing with CRM is quite good. And I think that combination and ultimately the dealer engagement both with communication and working towards higher profitability is also helping. So it's a multi-pronged approach and Chris and his team are doing excellent job with it.

It makes sense. And then just as my follow-up. The promotional spending, you know one of your ERP and you mentioned that it was less promotional out there for non-current inventories. So, just when you take a step back looking at the category, would you expect so that maybe improvement in the competitive environment to remain pretty consistent throughout the year and into next year?

Yeah. I mean Greg, the way we've got it laid out right now, I mean we saw a promotional spend favorability in the first quarter as I mentioned in my prepared remarks and that's promotional that will be out in the marketplace really heavily in the second quarter because we are crew when we ship the units in. So I think that's reflective of what we've said in terms of with the new products that we've got out, the improved competitive position that we're in. We feel like we can use less money and be more successful given the current dynamic.

All right. Thanks guys.

Your next question comes from Jaime Katz with Morningstar. Jaime, your line is open.

Thanks. Good morning guys. So I'd like to tap into the aftermarket segment and I am curious that in the commentary it looks like you guys are saying that light duty truck sales are a little bit weaker, but originally when you acquired the business, my understanding was that more than half of the sales were coming from existing autos in the market or at least that's what the initial slide said. So, can you articulate maybe if that has changed over the last year and a half? And then talk about what the end market looks like now because initially when you acquire the business, I think it was supposed to be a $10 billion market, and I think on recent slides I've seen that number has changed maybe to $8 billion. So any color would be helpful? Thanks.

Thanks [Robin]. As we talked about a little bit in our prepared remarks, the retail side of Transamerican Auto Parts still did very well in the first quarter. Where we were under a little bit of pressure, is in the wholesale side and that's where we have more exposure to the new model introductions. And our thoughts on how much of the business is for the second and third buyers in the used market hasn't changed a bit, but it doesn't mean that we are immune from the new product introduction cycles, specifically on the Jeep side which accounts for just under 50% of our business. And when the new model was being introduced and actually came out, consumers are waiting for us to develop the right products and making sure that we have that work available. So I don't think it changes anything, it's just a part of the cyclicality of new product introductions in that space, and with the overall light truck market being down it just didn't help us at all either. But lots of positive momentum there, but some work to do on the wholesale side which we expect will benefit is ultimately we have more products available for the new Jeep models.

Do you guys have any insight to what the acquisitions in that space look like? I think that cap had a strategic acquisition framework. I am just curious how that business grows and how it contributes to the overall business over time?

Yeah. I mean the one thing we've learned about the business is where we do best both in terms of sales and margins, and we have our own products to sell through our own channels. And that's the work that Greg Adler was starting and Craig will finish up, and Stevie been tough, but they'll manage through. So, if you think about those terms where we could find good products that we could push through our channels that would be the types of acquisitions we would look for, but obviously, our most important priority right now is driving profitable growth in our current business.

Thank you.

Your next question comes from James Hardiman with Wedbush Securities. James, your line is open.

Good morning. Thanks for taking my call. So, as I think about bridging in the ORV category, the mid-single ORV retail number and the 17% reported whole good growth number. Maybe walk us through some of the major components. I think you threw out there that ASPs were up 4%. What's driving that? It seems like International helps, but then there is an inventory component here. I think there was a mentioned about exceeding ahead of the selling season, didn't know if that was more this year than last year. And I guess maybe more importantly, how should I think about those relationships over the remainder of the year?

A lot of that questions James. So, here as I characterized it was the first quarter. I think the fact that our dealer inventory ended flat year-over-year, there was a fair amount of getting inventory back into the channel. I think most of you have either picked up through your surveys or through general industry surveys that we had some gaps in our inventory in the fourth quarter and we feel like we've got ourselves into a better position. Yes, we did exceed inventory ahead of the prime selling season into April and May, and so that will be supported by the retail growth expectations that we have going forward, and certainly PG&A and International will play a piece of that. The relationship going forward is obviously we are going to see some of that shift. As I mentioned, when I was answering Robin's question, mid-single digit growth for the business is pretty tightly correlated to what we are expecting from a retail standpoint so you can kind of figure out the math that we are going to have some difficult comps in Q3 given the retail performance we had last year, as well as some of the shipment strength that we had in the back half of the year. So, some of it's going to be driven by comps and some of it's also driven by the fact that we are trying to get the inventory at the right spot here coming out of the Q1 timeframe.

And just on the ASP front, what drove that in 1Q and is that sustainable I guess?

Yes. So ASP was really driven by the RANGER business growing much more quickly than our RZR business. They were both up significantly, but RZR grew higher. We have higher ASPs there. The issue is we have slightly lower margins. I'll always caveat that because they are still significantly better than the average for the company, but on a relative basis, they are little bit lower. So, while we did have higher ASPs, we obviously saw a net neutral impact from a margin standpoint.

Got it. And then, FX. Obviously it's a nice positive. Hopefully, it's offsetting some of the commodity and tariff pressures, anyway to give us sensitivity around that? I remember when FX was getting worse we would all try to figure out the sensitivity there. I don't know, maybe sensitivity or even just quantify the EPS benefit if rates hold where they are right now?

Yes. So, we saw just – caught about a $6 million benefit in the first quarter. Now that was completely offset by the higher primarily logistical cost that I referenced in my prepared remarks. As I stated in my prepared remarks, if the rates hold, we should see probably somewhere between $10 million and $15 million of benefit through the balance of the year. The reason we didn't play that is; one, we have still seen some volatility in the currency rates; and two, there is a lot of uncertainty around things like the tariff, the 301 tariff against China that would obviously present a pretty significant challenge for us in the back half. So, if those things don't happen and the foreign exchange rates hold, we could see a pretty nice uptick here in Q2, Q3, and Q4.

Your next question comes from Scott Stember with C.L. King. Scott, your line is open.

Good morning guys. Could you talk about the logistical cost that you have in the quarter. Scott, you talked about the untimely – maybe just talk about what happened and whether or not that has cleared up in the current quarter? Thank you.

No. Scott, actually what we're seeing – we had anticipated that logistical line haul rates were going to increase through the course of the year. And what we saw is, we saw a spike really start to happen in Q1 and we've confirmed that across the industry that we're not unique. It's an issue that many are seeing. It's a combination of higher fuel rates. There is a shortage of drivers, which is creating some capacity issues. Certain logistical routes, i.e. coming out of Mexico are becoming more challenging and more expensive and federal regulations around electronic logs which had been in place but really wasn't enforced is now under enforcement, which has taken some truck out of the pool of assets. So, we did see that escalate. That will abate as we go towards the end of the year. It will still continue to be a headwind, but given that we had anticipated rates would be increasing through the year, the gap between what we're seeing and what we plan for will get much smaller. So, it will be a component about a third of the $15 million that we identified. The balance is really coming from the steel and tariff – steel and aluminum tariff as well as the spot market adjustments that I referenced in my prepared remarks.

Got it. And just one follow-up on Eicher. So you guys had a pretty big write-down on that. Maybe just talk about the status of that business and the prospects there?

Yeah. So, the Board met in kind of late February, early March, that's the Board of the Eicher-Polaris joint venture. We had been trying to sell the business. I think we had talked about that in prior calls and had really no luck. So, we came to a mutual agreement that we were going to wind the business down. What we recorded in Q1 is essentially the impairment of the investment that we have in the joint venture. And as we indicated in the Reg G schedule, we do anticipate that there could be some follow-on cost, although we don't think they are going to be material. It's going to be the follow-up to wind down the dealerships and the suppliers, which is well underway and we expect would be done by the end of May.

Your next question comes from David Beckel with Bernstein Research. David, your line is open.

Hey guys, thanks a lot for the question. First question, Scott, you've mentioned some – you had mentioned M&A opportunities in your prepared remarks with respect to GAM in particular. Curious, what exactly are you looking at, at the moment? What sort of size and how important is that to growth? And just on sort of tangentially related, I guess Polaris Adventures which is something you started recently, how big of an opportunity do you see something like this becoming, and is the opportunity really more about the sell into the facilities themselves or customer development?

Alright, I'll start with second question. I'll come back to the acquisitions. But actually Bob Mack owns both, so he owns our – as corporate development and the Global Adjacent Markets. You know he's got our acquisition work and he also has Polaris Adventures. The idea behind Polaris Adventures through the year is what we have learned is our single best marketing tool by a fairly large margin is what we call very accurately butts in seats. And the more people that we can give the experience or riding Polaris vehicles we sell. So, the sell-in, really releasing the products, it's a profitable business in and of itself, but we're not creating Polaris Adventures for the idea of having this wonderful large services business, but rather to have an idea to introduce people to the sport of off-roading and driving Slingshots through the mountains and all the other – snowmobiles in the Midwest and other mountains. I mean really it's a great chance for us to give people an opportunity at a low cost to use the product. That's the purpose of Polaris Adventures. On the M&A front, I mean as you've heard me say many times, we do not have an M&A strategy. We have a corporate strategy that at some times will execute through M&A and that applies to all four of our businesses. You know we – we really like the Global Adjacent Markets business and the work that we're doing with electric vehicles and other transport in that segment is really attractive, but I was not specifically talking about acquisitions in that space. I was talking about acquisition across the four business units and there are attractive businesses in each and when I say attractive, it means that it matches our returns profile, but it also typically has great products, great brands and great distribution. And when we find those three and it matches our financial framework, you know we'll typically get pretty excited about it and I will tell you we have several of those right now.

Your next question comes from Michael Schwartz with SunTrust. Michael, your line is open.

Just wanted to – maybe you could remind us your hedging practice around input cost, mainly steel and aluminum and maybe how we should expect some of the increased cost there to move through, I guess the P&L this year timing wise?

Yeah, I think from a timing standpoint, Mike, it's going to be a little bit in the Q2 and it's going to be more heavily weighted to Q3 and Q4. The team has done some advanced forward bias, so we essentially locked in steel and aluminum out, pretty well into Q2 and what we're seeing now is those forward spot rates are much higher. The hope is, is that they will start to come down as more clarity has started to bleed into the market around exactly how these tariffs are going to work. But essentially, we've used those to estimate what we think that impact is. So, it's primarily a Q3, Q4 impact.

Your next question comes from Craig Kennison with Baird. Craig, your line is open.

Hey great. Thanks for taking my question. Scott, you mentioned progress in dealer engagement. We've seen that in our surveys as well. I'm curious where you think you've made the most progress and where you see opportunities to improve with dealers?

Yeah, Craig, that's pretty simple. We have incredibly good data there. Obviously, delivery is – you know if we don't deliver the vehicles on time, they can't make the sale and therefore it affect the profitability. So, delivery was a big detractor for us in the fourth quarter. And Ken and his team did great work to get our factory flowing well and delivery really went way down in the list of concerns. Communication is a big, big piece, and I think whether it's communication of our programs or you know just communication of shipment timing, that also improved. As I mentioned, the lead generation has been good. And overall, the way we're structuring our promotion, is more dealer friendly. And we're not giving as much to the consumer more that's going in the dealer pockets and I think those are the – probably the two or three main drivers of it. But, you know it's a cross-functional effort across Polaris and ultimately it's the CRM implementation that we're making. It's providing us much better data to make sure that we're driving all of the things. Now, we still got ways to go, but we are seeing in our own surveys, a steady improvement in dealer engagement.

And then my second question has to do with interest rates. Just how do you frame the impact of higher rates on consumer demand and also dealer stocking decisions given that cost of lowering inventory?

Yeah, I think Craig, couple of things. On the flooring it really – it'd have to move quite a bit to have an impact. I mean, the advantage we have in terms of the partner we have with Wells Fargo is the funding rate is quite low and so it can help us in terms of how much of that we have to pass on to the dealer. And I would say it's even true with the consumer, unless we see a substantial move in interest rates, you know a combination of fractional moves as well as the fact that we can cover some of those costs through our promotional spend budget and the way we allocate that, we really just – we haven't seen anything that's telling us if that's going to be an issue. The issue we've really had has been around a lot of the sub-prime folks coming in and trying to get qualified which we've continued to keep a pretty high hurdle rate on. We've spent more time trying to make sure we're looking at the files to make sure we're granting credit where it's appropriate, but we're not going to open those gates up and incur the losses associated with that.

[Operator Instructions] Your next question comes from Joseph Spak with RBC Capital Markets. Joseph, your line is open.

Thanks. I just wanted a clarification on the TAP commentary. Is the weakness or I guess shortfall versus what you guys expected really due to you not having product for the new launch, because if I look at actual sales, I mean light trucks were up over 10% in the quarter, jeeps 20%, wranglers over 30%, so if that's the case, I mean how long I guess; A, does it take to get the aftermarket product; and then B, what's the typical experience for how long that takes for that consumer to then come in and outfit those vehicles.

Joe, it's not like our Polaris aftermarket where we keep our aftermarket engineers embedded with our vehicle engineers, all the way to the process. So, when the product launches, we have it ready for sale. Now, the Jeep aftermarket businesses that they own have that benefit. So, there are some OEM parts available when the product comes out. But we actually have to buy the Jeep and then go back and design products for it and depending on the type of product, you know it could be anywhere from a couple of months to a – I think probably the longest is maybe six months. So, it does take us a while and most consumers want to make sure that we have a broad portfolio of offerings before they bring it in for updating. So, that was the slight delay, and then we feel good about the way the team is reacting and, obviously with retail being up, like I mentioned, it's just a matter of getting that wholesale business turned around which we expect to happen throughout the year.

And then – just temperature of the ag customer, because I think the beginning of the year, it seemed like maybe there were some benefits from tax reform and I don't know if you have put any sort of programs in place to educate them to take advantage of that. But now obviously, you know the farmer seems to be a little bit more on the cross-hairs of the trade ware. So, do you have any feelings there on what those customers are thinking?

Yeah. Remember Joe, it's not really the farmers that we're selling to. It's just those regions of the country where there are lot of farms and you know clearly, certain parts, actually here in the Midwest where I think more of the concern around the tariffs might be hit, but no, we've still seen good demand in those areas.

And last, just housekeeping, how much of the $15 million higher commodity freight for the year was actually in the first quarter?

We have higher logistics cost in Q1, but we offset that with foreign exchange and a little bit better mix performance than we had expected.

Your next question comes from Seth Woolf with Northcoast Research. Seth, your lines is open.

Good morning everybody. Thanks for taking my question. Just first, I wanted to dig in a little bit to the ORV margins. It looks like you know the commentary with warranties and then FX kind of offsetting some of the other issues. I would have thought that margins might come in a little bit better, but in the press release you called mix and I was just wondering is that RANGER from RZR, because I always thought side-by-side gained share of shipments from ATVs?

Yeah, I meant it really comes from the fact that RANGER business grew both in units and in dollars faster than our RZR business. So, even though it has very high margins, they are not as high as the RZR business, and so we saw a negative mix impact on a year-over-year basis.

Then the second question, you know, we've – talking to dealers, one of the things that's really stuck out is the initial reception to the RS1 and it seems like you know allocation initially have been limited, but it's been you know really successful, so just can you step back and thinking about this product and where it could potentially fit in. How do you guys think about this segment of the market that you've kind of created? How big could it be?

We don't speculate much on size, especially with new product like that. But certainly the dealer and ultimately the consumer demand has been – a little bit higher than we anticipated, and quite frankly, we found that ourselves during development, it is just a really, really fun vehicle to drive. And for customers that don't necessarily feel as comfortable on an ATV, you know that straddle and handle bar ride is great for some and not for others. So, I think what Solo does is really offer RS1, it offers that customer a chance to really enjoy trails in a very unique way with the steering wheel. Now, I think what Chris and the team are doing is, suggesting that people buy two, so they can take them out with their friends and still have that experience is then pretty good and we're encouraged by it, but not ready to call it a Grand Slam product for us.

Your next question comes from Drew Lipke with Stephens. Drew, your line is open.

Just on the ORV guidance for mid-single digits, I'm curious does that imply or do you assume you are going to hold market share in ORV within that guidance?

Yes.

And then, just maybe talking a step back longer-term, you know thoughts on incremental margin expectation and kind of mid-single digit growth environment in the ORV. Now the recalls are behind us, warranty costs are going to normalize and you have this roll-out of the Strategic Sourcing initiative. How should we think about laying a longer term incremental gross margins there?

Well, I mean, they are going to get better from where we are today. You know we're looking at incremental margins that ought to be in that 40% plus range.

Your next question comes from Brett Andress with KeyBanc Capital Markets. Brett, your lines is open.

I just wonder, can you elaborate a little bit more on the recalls and specifically your settlement with the CPSC, I guess how does that change the regulatory landscape for you guys going forward? And in terms of the recall, I know it's the nature of the business, but what inning do you think we're in as it relates to the bulk of what's to come?

Alright, well, obviously we have been in very close relationship with the Consumer Product Safety Commission for several years now, and that entails, as I said in my prepared remarks, you know we had a lot of work to do, just to go through all of our historical products, identify anything that had potential thermal risk, and then deal with that. And when we reached the settlement, we actually went through and said, anything that we know of, we will address, and that's what the latest recalls – thermal recalls were related to that fact. We're closing that chapter. Now, the part of what we did during the last couple of years is really enhance our capability to monitor and manage and identify quickly any issues that may arise in the field, and you know that's what the CPSC expect and that's what we expect and we have a really robust process for how we communicate to them with what we're working on and what we're watching. But there was during the period of time, there was a heightened level of scrutiny. We provided them more data than that was required by the law and we're just now getting back into what I'll call a more standard operating procedure. And as I said in my prepared remarks, you know we've addressed the known issues and worked through that historical backlog, so obviously we will – as new issues arise, we'll address them as we said, we believe that our systems are such that, there will be fewer in nature and less vehicles involved when they happen, because we catch them earlier. But largely we're feeling much better about our quality and safety systems and our results show it in the model year 2018 products, and we're glad to have that one done.

Okay. That's all the questions we have. I want to thank everyone for participating in the call this morning. And we look forward to talking to you next quarter. Thank you again and good bye.

This concludes today's conference call. You may now disconnect.