Polaris Inc. (PII) Q3 2019 Earnings Report, Transcript and Summary

Good day everyone, and welcome to the Polaris Earnings Call. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. Please also note today’s event is being recorded. At this time, I would like to turn the conference call over to Mr. Richard Edwards, Head of Investor Relations. Sir, please go ahead.

Thank you, Jamie, and good morning everyone. Thank you for joining us for our 2019 third quarter earnings call. A slide presentation is accessible at our website at ir.polaris.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 and full year expectations, and then we will 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 third quarter 2019 actual results and 2019 updated guidance are reported on an adjusted non-GAAP basis unless otherwise noted. Please refer to our Reg G reconciliation schedules at the end of this presentation for the GAAP to non-GAAP adjustments. Now, I'll turn it over to our CEO, Scott Wine. Scott?

Thank you, Richard. Good morning and thank you for joining us. Over the past few months, we launched an impressive array of products, executed a record Factory Authorized Clearance program, improved dealer sentiment and made notable progress with tariffs. But I can argue our most impactful move was introducing evolved Polaris brand and Think Outside tagline, which features prominently in our new media campaign, highlighting our American heritage. This campaign is just the beginning of a concerted effort to not only resume gaining market share, but to bring new, more diverse community into powersports. Our portfolio, which now includes GEM, GOUPIL, TAP, Slingshot and Boats appeals to a broad audience. And with Polaris Adventures, Ride Command and Factory Choice, we are bringing exciting technology, tools and business models to the market. With more inclusive brand positioning and marketing muscle, we are well positioned to fully realize our expansive potential. I'm proud of our team's performance in the quarter as they further leverage the lean tools and productivity enhancements we're implementing across our operations to expand gross margins in a very tough environment while continuing to aggressively mitigate tariffs. We introduced great news in RANGER, RZR and GENERAL for Model Year ‘20. But with shipments planned for late in the quarter, we did not get any real retail benefit. We still delivered our second straight quarter of low single digit side-by-side retail growth. In addition to these developments in off-road vehicles, we also revealed exciting new products in Boats and Motorcycles making this the largest product news we've delivered in years. Our first wave of strategic sourcing savings hit in the quarter on plan both in timing and value and I am increasingly confident this will be the largest most impactful productivity project Polaris has ever executed. For over a year, we have devoted substantial time and energy toward gaining fair and just relief for our tariff issues. Outcomes from these endeavours have finally begun to catch up with our successful mitigation efforts and we enter the fourth quarter with confidence that the exclusion process will yield results. We saw strong performance from both international and PGA in the quarter with solid PGA attachment rates across all categories, particularly on ORV Factory Choice models. Both continue to represent significant growth opportunities. Overall, third quarter North American sales were flat year-over-year, up slightly from the prior quarter, but still lagging the overall powersports industry which was up modestly. We increased promotions to be more competitive, again focusing on generating a positive side-by-side mix to drive profitability. Despite a plethora of competitive interest in the category, we believe our Model Year ‘20 news and improved go-to-market plans will enable improving share performance going forward. We were not as aggressive with promotions in motorcycles. So Indian retail was down mid-teens. Although in a sluggish North American market share, we were almost flat and we grew in Europe. So overall, global market share for Indian was up for the quarter. We are seeing solid demand for our new snowmobiles. And despite a weakening boat market, Bennington delivered strong retail growth and market share gains in the quarter. TAP performance also improved with our four-wheel parts retail stores and e-commerce sales up 9% year-over-year. Third quarter North American dealer inventory was up 9 -- sorry up 4% as we began delivering to meet demand for our Model Year ‘20 vehicles and preparing for the height of the Factory Authorized Clearance sale late in September. With increasing concerns about a slowing economy, we were pleased with the performance of Retail Flow Management system, which reacts to sales cycles and optimizes inventory for our dealers. RFM is one of many tools we're deploying to continue improving dealer profitability, and our most recent dealer sentiment survey support, these efforts are succeeding. Boat inventory is slightly elevated and we will manage fourth quarter shipments to bring it in line for 2020. Our approach to tariffs has always involved equal aggressive pursuit of two approaches; mitigation and relief. For the former, we use our talented sourcing and logistics teams to prudently move parts out of China, negotiate with suppliers to limit impact, manage the country of origin to our favor and implement about 60 other mitigation initiatives. These efforts have been quite successful and despite escalated tariff rates, allowing us to again reduce the expected full year impact by $5 million. Our relief approach is focused on educating and informing the administration about the significant and disparate impact that Polaris and our employees suffer from 301 tariffs because of our heavy investment in U.S. manufacturing. This message has always been well received and we clearly see that the administration is committed to righting the trade imbalance with China and protecting American workers. Their support for Polaris' investment in America has culminated and assurance that our 301 exclusion requests are being processed is strongly considered. This takes time, but we expect to see our relief request adjudicated in the near future. During our recent dealer show, we allowed our dealers at two of our primary engineering and R&D centers so that they could see the fruits of our major investments in product creation capability. With a 60% increase in research and development spending over the past three years, the breadth and depth of our Model Year '20 innovation is an example of what the future holds. Our new RZR Pro XP Hurricane deck boats and powerful Indian Motorcycles, all testify that how we are leveraging our innovation tools and experience to extend our leading powersports. Mike Donoughe and his team of over 1,000 engineers work hand-in-hand with our global business units to bring the best technology and riding experience to our customers, while also playing an important role in the execution of our strategic sourcing work. Their contribution certainly enhance our innovation efforts as across our portfolio we drive a consistent focus on safety and quality performance and customer experience, which are the key attributes of our Model Year '20 offerings. We're also excited about the evolution of the Polaris brand and the opportunity it provides for us to invite new customers into our sport. So, for the first time in decades, we are running our new Polaris brand message on national TV. This ad serves as an inspiring reminder of the great American heritage that is an essential element of our company and our culture and complements our more traditional [FAC] and value-focused advertising. Creating a more enlightened inclusive brand is part of our broader organization-wide effort to elevate customer centricity. Pam Kermisch's customer engagement and growth initiative is reaching new demographics and gaining meaningful traction and sales with important new customer segments. The explosive growth of Polaris Adventures is one example as it’s now offered in more than 125 locations and is already served more than 100,000 customer rides this year, 90% of who are new riders to Polaris. I will now turn it over to our Chief Financial Officer, Mike Speetzen, who will update you on our financial results and plans.

Thanks, Scott and good morning, everyone. Third quarter sales were up 7% on a GAAP and adjusted basis versus the prior year. Average selling prices were up 7%, driven primarily by price increases as well as favorable mix driven primarily by side-by-sides and pre-ordered snowmobiles. Third quarter earnings per share on a GAAP basis was $1.42. Adjusted earnings per share was a $1.68, which was down 10% for the quarter, but exceeded our previously issued guidance driven by a combination of ongoing tariff mitigation, favorable product mix and timing of operating expenses, offset somewhat by higher promotional costs. Importantly, the underlying execution of the business continues to improve as evidenced by an increase in our gross margin versus Q3 of 2018, despite the tariff and FX headwinds. Our adjusted gross margins, excluding the impact of tariffs and FX was over 26%. Excluding the impact of tariffs, FX and interest, our EPS growth for the quarter was up almost 10%. Foreign Exchange continued to have a negative impact on our quarterly results driven by the strong dollar primarily against the euro and the Canadian dollar. However, the negative impact was in line with our expectations. For the 2019 full year foreign exchange is expected to have a negative impact to pre-tax profit for the year of approximately $30 million or $0.40 per share, unchanged from our previous guidance. Our average foreign exchange rate assumptions remain at $1.12 for the euro to USD and $0.74 for the CAD-USD. From a segment reporting perspective, ORV/Snowmobile segment sales were up 11% in the third quarter, primarily due to positive product mix driven by increased side-by-side sales, the timing of sales associated with our pre-ordered SnowCheck Snowmobiles, higher average selling prices and 10% PG&A growth. ORV wholegood sales increased 8% given stronger side-by-side sales mix and international growth. Additionally average selling prices were up 9% driven by the price increases as well as positive product mix. Importantly, sales unit volume was slightly lower than retail sales as we continue to protect dealer inventory in North America. We continue to strategically target the more profitable segments and models in our portfolio given the ongoing tariff and competitive pressures. This focus on more profitable models is driving positive mix at the sales line, as well as in gross profit margins. Gross profit margins were flat year-over-year including the negative impact of tariffs and foreign exchange. Motorcycle sales decreased 3% on a GAAP basis and 4% on an adjusted basis in the third quarter driven by lower shipments of Slingshots and Indian Motorcycles excluding the new FTR 1200. Average selling price was down 2% for the quarter driven by mix. International sales were up 28% from increased shipments of FTR 1200 and PG&A sales were up 8% during the quarter. Gross profit margins declined to 8% due to lower volumes, tariffs and mix. The North American motorcycle market continue to be highly promotional, resulting in Indian losing a modest amount of share during the quarter. Although we are moving out of the peak selling season for motorcycles and the overall motorcycle market is expected to remain challenged, we’re encouraged that our market share opportunity going forward with the pending launch of our new heavyweight motorcycle the Challenger, which we gave a sneak preview at our summer dealer meeting, as well as the ever increasing awareness of our new FTR 1200 worldwide. Global adjacent market sales were up 18% during the quarter driven by all product categories. Average selling prices were up 7% driven primarily by increases in our commercial, government and defense businesses. Gross profit margins improved 220 basis points driven by product mix. Aftermarket sales were up 3% compared to last year with TAP sales up 2% driven by strong retail performance offset by lower wholesale sales. Our other aftermarket brands increased 5% during the third quarter. We are encouraged to see our TAP business grow sales for the first time since Q4 of 2017. While it's still early, the team is making the tough decisions to get the business back to growing consistently. Gross profit margins declined due to tariffs and mix. Boats segment sales decreased 11% in the third quarter as the overall market growth slowed and we adjusted shipments to protect dealer inventory. While our Model Year ‘20 product launches were well received, we are monitoring the market closely and we will adjust where needed. Gross profit margins improved despite lower volume due to improved operations. Our international sales were up 8% on a reported basis and up 13% when you remove the unfavourable impact from currency. International growth for motorcycles was 23%, largely driven by the launch of the FTR 1200. Global adjacent markets increased 21% driven by both strength at XM and our defense business. Parts, garments and accessory sales increased 11% during the quarter. We continue to see a strong response to factory choice. This coupled with our industry-leading accessories, apparel and service parts offering drove the performance in Q3. Moving on to guidance, we refined our total company sales growth guidance and now expect sales to increase approximately 12% for the year. I'll cover the specifics by segment in a few minutes. We are narrowing our full year adjusted earnings per share guidance for 2019 by holding the upper end of our previously issued guidance range of $6.30 and raising the lower end of our previously issued guidance range by $0.10 to $6.20 per diluted share given our year-to-date operating results and ongoing success in mitigating tariff costs. Although we have updated our revenue guidance to the lower end of our previously issued guidance range, favorable mix coupled with tariff mitigation efforts helps to offset slightly lower volume and added tariff costs from 301 List 4A implementation. As Scott noted, we believe our strong policy arguments are making headway in Washington but I would also like to note that the 301 List 3 tariff moving from 25% to 30% will have an immaterial impact on our guidance given the deferment of the implementation date and the fact that most of our inventories are on hand to support Q4 production. Our underlying business remains strong. Excluding the tariff costs, negative currency impact and higher interest costs, our operating earnings performance for the full year 2019 is anticipated to improve 16% to 17% on a year-over-year basis. Moving down the P&L, our previously issued guidance ranges remain unchanged as shown on the current slide with the exception of the following: First, adjusted gross profit margins are expected to be down on an absolute basis driven by tariffs and negative currency. Have improved versus our previous guidance due to a slightly lower tariff impact, mix and productivity, partially offset by higher promotional costs and are now expected to be down 40 to 60 basis points year-over-year. Excluding tariffs and foreign exchange, our adjusted gross profit margins improved versus previously issued guidance and are now expected to be up 105 to 125 basis points, driven by mix, price and productivity. Secondly, adjusted operating expenses are expected to increase in the mid-teens percentage range in 2019, which is unchanged from our previous guidance. But when calculated as a percent of sales, are now expected to be up about 40 basis points, entirely driven by the narrowing of our sales expectations to the lower end of our previous guidance range. Our operating expenses are up year-over-year due to the addition of the Boat business, the new multi-brand distribution center in Fernley, Nevada which opened in July, the cost associated with the 65th anniversary celebration and dealer meeting held this summer and the ongoing investments in strategic and research and development projects. Moving now to sales expectations by segment. Rather than walk-through each segment sales guidance, let me summarize. ORV/Snowmobiles sales are now expected to be up in the high single-digits range as the mix of side-by-side products has improved as well as ongoing strength in international and PG&A. The improvement, ORV/Snowmobiles is more than offset by lower motorcycle and boat sales, given their respective weak markets. The remaining segment sales expectations remain unchanged. Operating cash flow finished at $436 million through the nine months of 2019, that's up 23% over the same time last year, driven by lower working capital requirements. Our cash flow expectations remain unchanged at up approximately 20% to 30% for the full year compared to last year. Our bank leverage ratio defined as total debt-to-EBITDA improved sequentially to approximately 2.4 times. And while this is well below our bank covenant requirements, debt reduction remains the primary use of excess cash flow for the remainder of 2019. ROIC on a trailing 12 month basis was 15.8%, well above industry norms. With that, I'll turn it back over to Scott for some final thoughts.

Thanks, Mike. From product and brand positioning to managing tariffs and driving quality and productivity, we are well positioned heading into the final months of the year. It is particularly important for us to create momentum to exit this year, as we are keenly aware of the slowing global economy and the debilitating uncertainty around trade and politics. Alternatively, the strength of the U.S. consumer bolstered by accommodative interest rates provides reasons for optimism heading into 2020. Propped up by a proliferation of product news the powersports industry has the potential to remain positive led by side-by-sides which should offset ongoing motorcycle weakness. Balancing the risks however, we will likely plan for a flat market relying on market share gains for growth. 2020 will be our first full year of meaningful strategic sourcing savings and the related prospects for significant productivity and quality gains are very encouraging. Winning in a competitive industry requires product innovation, which we will always strive to deliver, but equally importantly, our commitment to customer centricity will ensure that we exceed our markets ever more demanding expectations. New features and Ride Command will enhance customer experiences on the road and trail, but that is only a fraction of our plans for leveraging our digital innovations to create a competitive advantage. Factory Choice will increasingly give dealers and customers the exact vehicle they want, and RFM will provide the best inventory replenishment system in the industry. While the political and economic headwinds are likely to increase as we transition into 2020, I am confident that our team will take full advantage of our reduced tariff burden and our broadening product offerings to resume market share gains. No matter what happens with the economy or the competitive landscape, I will bet on this Polaris team to win by simply delivering on our commitment to Think Outside and being a customer-centric highly efficient growth company. With that, I'll turn it over to Jamie to open line for questions.

[Operator instructions]. Our first question today comes from Greg Badishkanian from Citi. Please go ahead with your question.

Could you talk about promotion by your competitors within the value segment versus the broader ORV segment in let's say third quarter as well as the current month versus what you saw in the second quarter, and kind of the change that you saw and also how did your strategy to counter particularly as the value segment change?

Greg, we -- as we said in the prepared remarks, we continue to be focused on using promo to manage mix towards our more profitable side-by-side segments. So we were again not as promotional with our value offerings in the quarter, which again really puts pressure on ATV market share and volume more than anything else. That is -- that's consistent with how we manage the business throughout. The competitive landscape and promotions remained high. I don't know that there were any increasingly focused on that value segment than we've seen previously, though.

Okay, I know this is a hard question, but how would you expect maybe the industry to play out over the next few quarters in terms of our promotion both at the higher end as well as at the value. Do you expect that to moderate a bit as we get into next year or not?

I always like to say that hope is my least favorite strategy. But, certainly we have been hopeful that there would be more responsible use of promotions. But quite honestly, we've been more promotional and I think the overall industry is going to continue to be promotional in this competitive environment.

And I think Greg, clearly the economic backdrop is going to play a heavy hand in that. I mean if the consumer confidence levels remain where they are, things should be okay. The thing we're keeping an eye on is the industrial segment with both manufacturing and industrial production being down here pretty consistently. That has us obviously watching and if that starts to put pressure on the category, we could see you promo moving around to support what the dealers have. I think the good news for us is we've managed our dealer inventory level using RFM. In my prepared remarks, I talked about our unit shipments were actually slightly lower than retail, as we continue to make sure that the dealers have the right level in the event that unforeseen circumstances happen.

Our next question comes from Robin Farley from UBS. Please go ahead with your question.

Great. Thanks. You talked about the potential for an exemption from tariffs and I thought you have been trying that for 15, 16 months now. Is it right to interpret your comments as like that there has been movement on that front and maybe something now happens by year end? And does that change the potential for you to think about moving production to Mexico, just trying to think about what timeframe might be for that decision of yours? And then, just my follow up for an unrelated topic is, you talked about Indian market share being down, some others in the motorcycle business have talked about their market share being down today as well. Can you describe a little about what maybe going on in the U.S. market? It seems like, maybe there is some share gains by some manufacturers that really hadn't gained share in a long time, but it could just be different industry definitions that are leading to that so? Thanks.

Yes. Okay. We we'll answer the questions in order. As usual Robin, you are quite perceptive on my comments. We have been working this tariff issue very hard for quite some time. We did see a change in engagement and a willingness to listen and ultimately act in. We're in the late stages of the process now and we are certainly more confident. As I said, as we head in the fourth quarter that our request for exemptions will be processed and ultimately there is a lot of ways that, that go back but ultimately it's a more positive than -- based on the information that we’ve received it's more positive than we felt since this thing began.

And so, the timeframe for Mexico that in terms of not something...?

I mean, part of our argument has been if we don't get relief we would have to think about production moves and I think that is something that the administration doesn't want to see happening. We don't want to see it happen. We're really pleased and proud of our American workforce and then we want to continue to be able to support that. So, we are certainly evaluating all options, but the relief that we're now expecting should be able to limit production moves, the requirement for that, and that's how we're planning at this point. On the motorcycle industry, I suspect it is just different in the markets that, that we play in. I will tell you that some of the European bike manufacturers have been more aggressive in the U.S. And they've had a couple of new products. And so that could also contribute. But mostly, I would say it's a difference in how we look at market segments where we just don't play in that lower level CC space.

And Robin, we said words like modest and slight, it’s literally 10 basis points to 20 basis points of market share for Indian, so very small.

Our next question comes from Jaime Katz from Morningstar. Please go ahead with your question.

I'd like to hear about the boat business. I think it was a bit weaker than we had anticipated. And if you could talk about how that's tracking versus your expectations, and maybe what your prognosis is for the rest of the year into next year that would be really helpful? Thanks.

Sure. Jaime, as I said we've got several good brands in our boat business Bennington being the largest and most important and Bennington had a very good third quarter retail performance. I mean really we had -- the beginning of the year was impacted by weather and we were playing catch up a little bit and we felt better about the third quarter compared to the year-to-date performance. So we -- but because of the weather we had higher inventories we exited the quarter and we're going to try to work through that and lower shipments to manage that down as we head in 2020. Overall, we're pleased with the dealer reactions to the new products that we introduced this summer and we feel like we're reasonably positioned to keep that business on track. Yes, the overall market has been weaker than we thought this year and now we’ll manage the business accordingly, but ultimately pleased with our share gains and the outlook that we have for the business.

Jaime, one of the things we talked about was how well that business is run and I think the reaction to the dealer inventory levels and being able to pull back on shipments. But what Jake and the team are doing in terms of managing the cost base and the company as well shows up in the fact that we still anticipate gross profit margins to hang right around 20%. And given the volume reduction that we're anticipating, that speaks to the cost management discipline that the team continues to have.

And then I think the outlook for motorcycles implies that the fourth quarter will be really robust on the shipment front. And I'd like to hear if you can bridge the gap between sort of the outlook for Polaris and then the industry weakness that seems to be pretty pervasive for you to meet that goal because there seems to be sort of a wide margin between those two factors? Thanks.

There's two elements leading into that Jaime, one is Steve Menneto and his team have done a really good job of what I'll call dialing in the competitive landscape and understanding where we need to be with pricing and promotions. And overall ground game to be competitive there. So there's an element of that that's playing into our expectations for better results in the fourth quarter, but primarily it's the -- as Mike talked about we teased it at the Dealer Show with the introduction of Challenger that will come out very soon and that, that will play a fairly significant role as much of a major product introduction in motorcycles that we've had in quite some time. So that really is what's driving the change in trajectory into the fourth quarter.

Our next question comes from James Hardiman from Wedbush Securities. Please go ahead with your question.

Just to clarify that last point, Scott. So Challenger you actually think will have a meaningful impact on 4Q retail?

More so on sales, I mean, it’s such an important part of the portfolio James that we need to get it into dealers so consumers can actually see it and take a look at it before the spring selling season. So, it really is more of a sell in than it is an expected boost to have more impact on sales in retail in the quarter.

Got it. And then, two questions from me. So, hopefully we will never get to this point, giving you confidence on the exemption for the exclusion process. But Mike can you maybe give us an idea, if everything that's been announced in terms of tariffs goes through without any mitigation, what's the incremental earnings impact on 2020? And then Scott, just degree of confidence that you will outgrow the ORV market in 2020?

Well James, I wish I could put a number in front you, but I'm not going to. But what I would do is, I would point back to the comments I made last earnings call where I talked about the impact of our List 3 going up to 25% and retaliatory going away and 232 going away. We really don't have a better view right now for a couple of reasons. One, it’s predicated on what we think volumes are going to do next year and we're obviously early in a process of growing up our budget plan for next year and thinking through that. Second, and more importantly is, the status of the exemptions, because that obviously could play a pretty substantial role in impacting what those tariffs would be as we roll forward. So, we will give more color on that in January because we should have a much better view given that we will have another couple of months under our belts and we can see where the exclusion process shakes out.

And as far as the -- how we feel about getting back to share gains in off-road vehicles, we took a big risk with our significant price increase coming into this year and a very promotional category. We paid the price that, our market share and we’ve talked about that. And I will tell you, we are pleased with our Model Year ‘20 product inductions. And at the end of the day one of the -- we've got really great culture here, but the ridiculously competitiveness, which I often refer to is one that I think is going to kick in here and the execution that you'll see from our off-road vehicle team is likely to improve to the point where we should be able to get back to share gains in 2020.

Our next question comes from Scott Stember from C.L. King. Please go ahead with your question.

Just embedded within the sales decline within motorcycles, could you better flush out FTR? I know the last couple of quarters you've talked about how you would expect some of the strength in motorcycles to your guidance to come from that. Maybe just talk about a little more granular how the FTR rollout went in the quarter and how you expect that to roll or to play out for rest of the year?

Good question Scott. We remain extremely excited about the potential of FTR. Not our best execution in two ways: One, we were -- because of our focus on quality, we were late in delivering that and really missed the good part of the season. And then, we actually underestimated demand for our highest end race replica bikes. So we had a kind of a mix problem that wasn't quite as good as we thought. So, there was a greater demand for the race replica than there was for our base models and so we've had to adjust some of that mix. We remained very encouraged about the bike. The reviews have been very, very good. So it has played out below our expectations this year, we understand why and we feel good about prospects for FTR and Challenger as we head into 2020.

And Scott, I made a couple points and if you look back at Slide 14 in our deck, you can see we have 23% growth internationally and that was largely driven by the introduction of the FTR. So given the fact that Scott laid out you can see it drove substantial growth, and we also saw PG&A growth in motorcycles which a portion of that comes along with the fact that we've gotten accessories out earlier for FTR than our typical motorcycle launch.

And staying within motorcycles Scott maybe just talk about Slingshot, I know we're a couple of years, we’re two or three years into some slower times or demand for that product. How are some of the newer models for 2020 doing and what are your thoughts about the offering going forward into 2020 and beyond?

Yes. So, Scott I will tell you that our execution of Slingshot has not been our best effort that’s -- stating the obvious I think. With that said, I think Steve Menneto and Chris Sergeant, who now leads that business for us have really done a very, very good deep dive into what that customer segments is like and what it takes to succeed. And if you got to the Dealer Show, you might have noticed there was a little black tent inside the show where every dealer got one ticket to come in and see what the Model Year ‘21 product is going to look like. And after they saw that, not a single dealer, actually one dealer decided they didn't want to continue with us. But everybody is excited about it. That will launch early next year and we're really encouraged with these refinements that we've got a better hit on the market than we had with the current effort. So we're encouraged about it. It's not a slam dunk but we believe that the repositioning of the product and the brand marketing and messaging will make 2020 a better year for Slingshot.

And just real quick on TAP, it's good to see the retail sales popping back up. Could you just remind us how much of TAP sales are retail versus wholesale?

Yes, the TAP sales are call it roughly 40% to 50% through the various channels that they've got and we suspect that some of the wholesale production is actually coming back through our retail channels. We continue to be a little bit more discerning about the customers that we're doing business with. And as I said in my prepared remarks, the fact that we're starting to make traction in some of the key areas is a testament to the effort Craig and his team are executing on, we still have ways to go, but it is a positive sign.

Our next question comes from Michael Swartz from SunTrust. Please go ahead with your question.

Mike -- and I apologize if I missed this if you said this on the call. But could you quantify the savings from strategic sourcing that you started seeing in the quarter and I guess how should we be thinking about that going into 2020 and beyond?

Yes, no, we didn't. But in past calls the comments I've made is the -- what we are seeing savings in 2019, the investment we're making around validation costs is offsetting that. And obviously, we're getting the early stage savings. Where we start to actually pick up momentum is I think we talked about at the Dealer Meeting, Investor Day, as we get into next year, because then that's when we start to get kind of more of a run rate level of savings at least for the first wave and then obviously we will be looking for a little bit of the wave 2 start kicking in. So, we talked about $200 million coming from the program, but that obviously happens over time. I think Scott hit the right points, which is the fact that they're coming through. They are on plan. The teams are executing, it’s very encouraging and we think it’s going to play a big part in getting our margins up over the next three or four years.

Okay. Great. And then second question maybe related with boats and motorcycle. I guess coming out of July you had maintained your expectations or even increased around motorcycle I believe at that time and that were lower than expectations year-to-date. I guess what did you see during the quarter, maybe what were you hoping for during the quarter, planning for during the quarter that maybe didn't come through or come to fruition?

Both in the U.S. and in Europe, we saw weaker market conditions than we expected. We just had -- based on what we saw from the second quarter, we thought going into the third quarter we would see sequentially improving results and we saw just the opposite. So, with that, we had to adjust down our outlook.

And Mike, just going back, when we started out the year, we had motorcycles at high teens and we had adjusted that last go around into kind of low double-digits to mid-teens. So we have been seeing the weakness and bringing it down and then to Scott’s point the third quarter kind of pushed us down into that high single-digits.

Our next question is from Joe Altobello from Raymond James. Please go ahead with your question.

Good morning, it’s Joe. A question on tariffs. I know, Mike you mentioned earlier that 2020 is still very unclear. But I think if I go through my notes, you had said that the incremental impact of List 3 going from 10% to 25% next year was up $30 million to $40 million. You could probably offset about half of that through mitigation full year for 232 tariff being lifted, the more simple tariffs, [Europe] going away et cetera. So I guess, one, is that still the case? And two, if List 3 does go to 30% and again assuming those exemptions, does that imply an incremental $20 million on top of the $30 million to $40 million next year?

Well, the first part of your math is right, that's the comments that I made last quarter. And I think I have made comments before the talks about List 3 being about 40% of our tariff exposure. So I think you can probably get yourself close from a math standpoint. The reason we're holding back from providing any kind of perspective for next year, I mean I outlined some of the perspectives earlier, but it really comes down to the success we anticipate from an exemption perspective and those are aimed squarely at List 3, which is one of our biggest exposure list.

Okay. Understood. And then, maybe secondly, in terms of new product launches, you mentioned that, the RZR products, the RANGER 1000 kind of shipped a little too -- actually a little too late this quarter have an impact on numbers. So, given the seasonality of those businesses, when do you think we get more definitive evidence of those translating into share gains? Can you see something like that in December or it is way more into the March quarter?

Yes. I think our expectations is, we will see some adoption in the fourth quarter, but primarily that's going to be a 2020 benefit. That's how we've got it designed, but we will be immensely disappointed if we don't see those retail trends start to pick up throughout the fourth quarter.

Our next question comes from Gerrick Johnson from BMO. Please go ahead with your question.

I have two questions. First, we're finding that the election cycle is a growing concern for dealers. Are you seeing any cautiousness and their willingness to stock 2022 to their prior plan? That's number one. And number two, on Polaris Adventures, is there any way you can quantify how it has affected the rest of your business? You’ve seen some nice superlative verbiage but any numbers we can put behind that to quantify it? Thank you.

So, as far as stocking, we've got profiles for all of our dealers, we've seen the pre-orders. We have to allocate our newer models and we're on allocation out into 2020 for the Pro XP and some of the new product offerings. So demand seems very good. The sentiment with our dealers really is quite positive. I think they see the election outlook differently than most of America does. So I don't think there is concern right now. But so that's reasonably good. We think our dealers are in a good place, our dealer sentiment surveys are moving in the right direction. So that's generally positive. And the other question was around?

Polaris Adventures

Oh! Adventures, Adventures has been a homerun for us. And I will remind you, I talked about the Polaris brand and how pleased we are with how that's rolling out. At the end of the day, the single best sales and marketing tool we have is busts in seats. When people ride our products, they want to spend more time in it and the translation of those hundred thousand riders into sales, it's in the low, very low single-digits right now, but the incremental that's having impact on our brand and our business and bringing more people in is extremely positive. And our investment there is going to continue because it never fails when people ride the product, that's the best indication to get them into the sport for a longer period of time and that means sales. So -- and it's a financially good deal for us, so we like that as well.

Our next question comes from Tim Conder from Wells Fargo Securities. Please go ahead with your question.

I would like to maybe just return again to the List 4 and then the List 3. And Scott very clear that hope is not a strategy but it also seems to be clear that you're expecting some type of resolution, definitive color here before year end on the List 3 exemptions. Just a little more anything else you can add there? And then...

We got that exactly right, Tim.

Okay, and then List 3 gentlemen, quantification there Mike, if you could remind us and then I know there's an exemption process rolling out on that also, just update from that perspective? Then the second follow up question would be, how much of the share loss you talked about the price increases how that hurt you and maybe the timing there wasn't good but you’re anticipating new products. How much of the share loss was just due to the timing of the new products do you believe Scott?

Tim, on List 4 or List 4A that is currently in place, the impact to us relatively small. That said, there's an exclusion process that will open up at the end of October and we absolutely will be filing for exclusion on that as well. As it relates to share loss, I’d go back to the comments that we had in our prepared remarks. It was not in the categories that our new products are aimed at as much as it was in the value categories as we’ve talked about in our prior call.

Our next question coming from David MacGregor from Longbow. Please go ahead with your question.

Wanted to just ask about side-by-side growth and I guess you have positive mix within ORVs, the ATV category is fairly mature category at this point. How successful you have been in terms of getting people to mix up all of ATVs into side-by-sides? And as people make that step, what is kind of your retention level as opposed to competitive element?

Well, I mean, I am with the company 11 years, it’s for 11 consecutive year as we've moved people from ATVs into side-by-side. So, I actually think the ATV market is about stable now. It's not going to continue to go down. I think it will go down with -- up and down with economic not unlike snow. I mean, I would say, ATVs are kind of like the snow business right now and it’s kind of a level that's going to stay away for a while and move up and down slightly. On side-by-sides, it’s just a better solution for most people, and I think we've been able to maintain this position where we're 3 times larger than the nearest competitor and that's a kind of a key focus for us, is not only to maintain that but to extend that and we do that with our product offerings. And once people get into the brand, they tend to stay there and that's one of the reasons why -- but more of the new entrants are entering into side-by-sides as opposed to the old -- where they used enter in ATVs and then move up. But that said, we're not giving up on the ATV market. This year has been tough. We had to allocate. We had limited promo dollars to go around, and we chose to put them more on side-by-sides, but I think in the future, you'll look for us to continue to be competitive in ATVs. We like the market. We like the customer and they are important to us.

Are you able to break out what percentage of side-by-side growth has come from ATV migration?

No.

Okay. Second question is just, I guess on steel prices, I don't know to what extent you are able to talk at this point about the potential benefit to gross margins from lower steel prices. Maybe one way to think about it is just to what extent did you benefit from steel prices -- and to what extent I guess you -- were you hurt by steel prices going up and do you expect to reverse that all the way down?

I think David, some of that builds into the -- when we talked about the favorability next year coming from 232 going away as well as retaliatory. With 232, really the impact was that it raised steel and aluminum prices and then we have seen those prices subsequently coming down. The benefit for us this year is somewhat paced because our team has done a really good job of getting out ahead of the impacts and doing some forward locks and hedging essentially. But as those start to wind down, we would fully anticipate that, that would come through, and show up in commodity benefit for the company. We're not obviously at a point where we want to quantify that isolation outside of all the other things that we get going on the business, but we will provide perspective on that, as well as other key components like logistics and tariffs when we give guidance in January.

Our next question comes from Joseph Spak from RBC. Please go ahead with your question.

Thanks. Good morning. Just wanted to turn back to Boats for a second. I mean I think you explained sort of what's going on from a top-line and retail inventory perspective. But you had gross profit basically flat on a $15 million sales drop and even in the past you've talked about the variable cost nature of that business. But it seems like there was something else going on as well, was it mix or were there some costs or synergy savings that sort of helped out the gross profit there?

Well, actually mix was unfavourable for us. So, I think the efforts that the team drove and Mike talked about it are quite significant. Part of those are synergy savings and part of just a very effective way that they manage that business. And then we talked about they are incredibly high returns on invested capitals on the business we bought, and they're continuing that. I mean, basically we just didn't need to screw that up. But we mixed down as we introduced more smaller lower priced boats from a market share perspective, where we had actually seen some share losses the previous year. So mix was not helpful but the ongoing efforts to drive productivity and efficiency within the factories has been very beneficial. Mike you want to add color?

The only other thing I would add Joe is we do get rebates coming back from our engine suppliers and sometimes those can move around between quarters. So we got a little bit of a benefit but Scott said the operational improvements that the team is focused on as well as just managing their cost base is a big part of what drove the performance as well.

And then secondly, and Scott you mentioned ROIC in this, that is a very strong ROIC level at the corporate level, it used to be a hallmark. I mean obviously some of the retail challenges and then tariffs that that's been sliding. I guess with the -- if the world sort of stays as it is now with the SSI efforts, is that enough to get at least the incremental ROIC back to sort of that very strong double-digit level or would you ultimately need some relief in tariffs to sort of get back there as well?

Yes, so Joe in my prepared remarks I talked about us just being shy of 16% which is to 2x to our cost of capital, 2x the S&P 500 and higher than what our competitors average out at. We are down from where we've been historically. Now, I would say historically having ROIC a 30% would put you in a position not to invest in certain things so that's probably not a great area to be. And certainly with the fact that we've got two recent acquisitions that have put about a $1.5 billion worth of combination of goodwill and intangible assets on the books and we're still earning out of that in the early periods. I think we're actually poised to continue forward with good progress. Now, the tariffs have put a damper on that to some extent, so even if those were to remain in place and basically neutral as we go for we would certainly expect barring another acquisition that we should be able to get into the high teens if not the low 20s, which again would put us in an incredibly attractive position relative to the cost to run this business as well as relative to our competitive set.

Our next question comes from Mark Smith from Lake Street. Please go ahead with your question.

Can you talk to first off just a little bit about dealer inventory and your comfort with that being up as well as how the project is going with a focus on lowering Slingshot inventory so you can get that new product out?

So dealer inventory was up overall 4%. As I said, that was a -- the way you execute a backdrop like clearance sales have enough older products in the category to sell. So that was more or less plan and we're very comfortable with ORV inventories, our mix as we head into the fourth quarter, gives us the opportunity to drive continued side-by-side growth. The RFM process continues to work extremely well. I mean, our ability to -- and then our model year introductions, I mean just Mike talked about it but the way the factories are working, we really were efficient in getting those products out there on time. And so we're well-positioned with the year end as we expected. Now we do need to deliver good retail in the fourth quarter and we're comfortable that we will be able to do that. What was the other question, I'm sorry.

Just on Slingshot, how that inventory is going?

Yes. No, that has been -- again, as I said, the team has taken a different approach understanding a better way to market and execute the ground game there and we're seeing the traction there. Obviously, with the planned introduction of a new product in model year -- not model year but calendar year '20 we've got to get that inventory down and we're comfortable with where we are heading into the end of the year.

Okay. And if I can go one more, Canadian dollars, we've just seen a little bit of strength here. Mike, maybe a hypothetical nickel move in Canadian dollar, how incremental would that be?

Well, I mean, it would somewhat isolated obviously due to the fact we just got a couple of months left in the year. I think we have talked in the past about a $0.01 move in that will equate to about $5 million for the year. So, there could be a little bit of a impact in the quarter. We're still tracking a little bit lower from a euro standpoint. As I mentioned in my prepared remarks, we're at $1.12 in our guidance and forecasting, and I think this morning when I checked we're tracking at about $1.11. So, at this point, foreign exchange has largely played out as we anticipated. It has had some volatility and movement back and forth within the months. But at this point, we just don't see anything moving dramatically outside of that range that will move the numbers meaningfully. But if they do we will obviously provide color on that.

Alright. Last question?

Our final question comes from Craig Kennison from Robert W. Baird. Please go ahead with your question.

First question, just back on Slide 7, for what percentage of your tariff exposure, have you eyed for exclusion?

Well, for the List 3, 301, which is the big kahuna if you will, we're about 95% exclusion request submitted and that's -- just becomes the final 5%, there is a diminishing rate of return for the time, energy and effort to get those in. And so, essentially it’s the vast majority of our burden there. And I don't think there is any chance that we get all of that relief, but the fact that, we get a good number there, I think potentially a really good number there, could be helpful.

And Scott, what’s the notification process you received from the government?

There is one notification process. It is the issuing of the Federal Register and it happens indiscriminately. We think there's a list coming out imminently, but again it's a random process and you just -- you literally you find out when it’s on there. So, you will know when we know.

Sound good. My final question then on Factory Choice, Scott. Is there any metric that frames your percentage of sales through Factory Choice today and where that figure could be headed over time?

I mean we keep track of it internally and it's been exceptionally good. It is -- as I probably articulated before, it’s an incredibly complex process. I mean, I'm so proud of what Ken and Chris Musso and the team have done to figure this out and make the capability exist. So, it's been purposely constrained if you will, but we're working through that and we think the demand continues to be exceptionally good and it really does provide a unique competitive advantage and we expect for many years to come for that to be an increasingly important part of our sales.

I want to thank everyone for participating this morning and the call and we look forward to talking to you again next quarter. Thanks again. Goodbye.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.