Good day, everyone. Welcome to the Polaris earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Richard Edwards, Head of Investor Relations. Sir, please go ahead.
Thank you, Jaime, 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 Michael Speetzen, our Chief Financial Officer, have remarks summarizing the quarter and full-year expectations, and then we'll take some questions. During the call, we will be discussing various topics which should be considered forward-looking for the purposes of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. You can refer to our 2018 10-K for additional details regarding these risks and uncertainties. All references to third quarter 2019 actual results and 2019 updated guidance are reported on an adjusted non-GAAP basis unless otherwise noted.
Please refer to our Regulation G reconciliation schedules at the end of this presentation for the GAAP to non-GAAP adjustments. 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've launched an impressive array of products, executed a record factory-authorized clearance program, improved dealer sentiment, and made notable progress with tariffs. I could argue our most impactful move was introducing the 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. 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 are 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, these developments in off-road vehicles, we also revealed exciting new products in boats and motorcycles, making this the largest product news we have 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 endeavors 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 PG&A in the quarter with solid PG&A 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 entrants 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. 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 4 Wheel P arts retail stores and e-commerce sales up 9% year-over-year.
Third quarter North American dealer inventory was up 4% as we began delivering to meet demand for our model year 2020 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 are deploying to continue improving dealer profitability, and our most recent dealer sentiment surveys 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 in assurance that our 301 exclusion requests are being processed and 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 to tour our primary engineering and R&D center so 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 2020 innovation is an example of what the future holds. Our new RZR PRO XP, Hurricane deck boats, and powerful Indian motorcycles all testify to how we are leveraging our innovation tools and experience to extend our lead in 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 contributions 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 2020 offerings. 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 now offered in more than 125 locations and has 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 $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 to 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 whole goods 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 continued 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 continued 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 are encouraged about 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 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. Boat 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 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 unfavorable 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 Aixam 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 at $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 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, 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 inventory is 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%-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, while 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 40-60 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 105-125 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.
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/snowmobile 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 in 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%-30% for the full year compared to last year. Our bank leverage ratio, defined as total debt to EBITDA, improved sequentially to approximately 2.4x. 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, we 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. Equally importantly, our commitment to customer centricity will ensure that we exceed our market's ever more demanding expectations. New features in RIDE COMMAND will enhance customer experiences on the road and trail. 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 Jaime to open the line for questions.
Ladies and gentlemen, we'll now begin the question and answer session. To ask a question, you may press star and then one using a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. In the interest of time, we also please ask that you limit yourselves to a question and a follow-up. Please note that if you do have additional questions, you may rejoin the question queue. Again, that is star and then one to ask a question. Our first question today comes from Greg Badishkanian from Citi. Please go ahead with your question.
Great. Thank you. 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? Also, how did your strategy to counter, particularly at the value segment, change?
Craig, 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. 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's consistent with how we've managed the business throughout. The competitive landscape and promotions remained high. I don't know that they were any increasingly focused on that value segment than we'd seen previously, though.
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 promotions, both at the higher end as well as at the value segment? Would 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. Certainly, we've been hopeful that there would be more responsible use of promotions. Quite honestly, we've been more promotional, and I think the overall industry is going to continue to be promotional in this competitive environment.
I think, Craig, clearly the economic backdrop is going to play a heavy hand in that. 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 promo moving around to support what the dealers have. 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.
Yep, great. Thanks for the color.
Yep.
Next question.
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 feel like you've been trying that for 15, 16 months now. Is it right to interpret your comments as that there has been movement on that front and that maybe something now happens by year-end? 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. Just my follow-up on 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 bit about what may be going on in the U.S. market?
It seems like maybe there are 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.
Yeah. Okay. Well, we'll answer the questions in order. As usual, Robin, you're 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, and we're in the late stages of the process now, and we're certainly more confident, as I said, as we head into the fourth quarter, that our request for exemptions will be processed. Ultimately, there's a lot of ways that that can go, but ultimately, it's more positive than, based on the information that we've received, it's more positive than we felt since this thing began.
No timeframe for Mexico then in terms of?
No. Part of our argument has been, if we don't get relief, we would have to think about production moves. I think that is something that the administration doesn't want to see happen, and we don't want to see it happen. We're really pleased and proud of our American workforce, and we want to continue to be able to support that. We are certainly evaluating all options, but the relief that we are now expecting should be able to limit production moves, the requirement for that. That's how we're planning at this point. On the motorcycle industry, I suspect it is just a difference in the markets 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 product entrants, so that could also contribute.
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.
Robin, we said words like modest and slight. It's literally 10-20 basis points of market share for Indian. It's very small.
Oh, great. That's very helpful. Thank you.
Our next question comes from Jaime Katz from Morningstar. Please go ahead with your question.
Hi. Good morning, guys.
Hi, Jaime.
I'd like to hear about the boat business. I think it was a bit weaker than we had anticipated. 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. Bennington had a very good third quarter retail performance. Really, the beginning of the year was impacted by weather, and we were playing catch up a little bit. We felt better about the third quarter compared to the year-to-date performance. Because of the weather, we had higher inventories as we exited the quarter, and we're going to try to work through that in lower shipments to manage that down as we had 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 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. I think the reaction to the dealer inventory levels and being able to pull back on shipments. What Jake and the team are doing in terms of managing the cost base in the company as well shows up in the fact that we still anticipate gross profit margins to hang right around 20%. Given the volume reduction that we're anticipating, that speaks to the cost management discipline that the team continues to have.
Okay, that's really helpful. I think the outlook for motorcycles implies that the fourth quarter will be really robust on the shipment front. 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 feeding 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. There's an element of that that's playing into our expectations for better results in the fourth quarter. Primarily, it's the, as Mike talked about, we teased it at the dealer show, the introduction of Challenger. That will come out very soon, and that will play a fairly significant role, as much of a major product introduction in motorcycles that we've had in quite some time. That really is what's driving the change in trajectory into the fourth quarter. Next question.
Our next question comes from James Hardiman from Wedbush Securities. Please go with your question.
Hey, good morning. Just to clarify that last point, Scott. Challenger, you actually think will have a meaningful impact on 4Q retail?
More so on sales. 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. It really is more of a sell-in than it is an expected boost. It'll have more impact on sales than retail in the quarter.
Got it. Two questions from me. Hopefully we'll never get to this point given your confidence on the exemption or the exclusion process, but
Mike, 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? Scott, just degree of confidence that you'll outgrow the ORV market in 2020?
Well, James, I wish I could put a number in front of you, I'm not going to. 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 volume's going to do next year, and we're obviously early in the process of rolling up our budget plan for next year and thinking through that. Second, 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.
We'll give more color on that in January because we should have a much better view given that we'll have another couple of months under our belts, and we can see where the exclusion process shakes out.
As far as 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 in a very promotional category, we paid the price for that on market share. We've talked about that, I will tell you we're pleased with our model year 2020 product introductions. At the end of the day, we've got really great culture here, but the ridiculous competitiveness, which I often refer to, is one that I think is going to kick in here. 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.
Excellent. Thanks, guys.
Yep.
Our next question comes from Scott Stember from C.L. King. Please go ahead with your question.
Good morning, and thanks for taking my questions.
Morning.
Yep.
Just embedded within the sales decline within motorcycles. Could you better flesh 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 the rest of the year.
Good question, Scott. We remain extremely excited about the potential of FTR. Not our best execution in two ways. One, because of our focus on quality, we were late in delivering that and really missed a good part of the season. We actually underestimated demand for our highest-end race replica bikes. We had a kind of a mix problem that wasn't quite as good as we thought. 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 remain very encouraged about the bike. The reviews have been very good. 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.
Scott, I made a couple points, and if you look back at slide 14 in our deck, you can see we had 23% growth internationally, and that was largely driven by the introduction of the FTR. Even given the facts that Scott laid out, you can see it drove substantial growth. We also saw PG&A growth in motorcycles, which a portion of that comes along with the fact that we had gotten accessories out earlier for FTR than a typical motorcycle launch.
Got it. That's very helpful. Staying within motorcycles, Scott, maybe just talk about Slingshot. I know we're a couple of years, 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?
Yeah, Scott, I will tell you that our execution of Slingshot has not been our best effort. That's stating the obvious, I think. That said, I think Steve Menneto and Chris Sergeant, who now leads that business for us, have really done a very good deep dive into what that customer segment is like and what it takes to succeed. 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 2021 product is going to look like. After they saw that, not a single dealer, actually one dealer decided they didn't want to continue with this, but everybody's excited about it.
That'll 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 efforts. 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.
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?
Yeah. The TAP sales are, call it roughly 40%-50% through the various channels that they've got. We suspect that some of the wholesale reduction is actually coming back through our retail channel as we continue to be a little bit more discerning about the customers that we're doing business with. 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 a ways to go, but it is a positive sign.
Got it. That's all I have. Thank you.
Thanks.
Our next question comes from Michael Swartz from SunTrust. Please go ahead with your question.
Hey, good morning, guys. Hey, Mike, I apologize if I missed this if you said this on the call, but did you quantify the savings from strategic sourcing that you started seeing in the quarter? How should we be thinking about that going into 2020 and beyond?
Yeah, no, we didn't. In past calls, the comments I've made is, while we are seeing savings in 2019, the investment we're making around validation costs is offsetting that. 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, is we get into next year. Then that's when we start to get kind of a more of a run rate level of savings, at least for the first wave. Then obviously we'll be looking for a little bit of the wave 2 to start kicking in. 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're 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. 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. Now we're lowering expectations here today. I guess, what did you see during the quarter? Maybe what were you hoping for during the quarter or 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. 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. With that we had to adjust down our outlook.
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. We had been seeing the weakness and bringing it down to Scott's point, the third quarter kind of pushed us down into that high single digits.
Okay, great. Thank you.
You bet.
Next question.
Our next question comes from Joseph Altobello from Raymond James. Please go ahead with your question.
First of all, [look at stat], Thanks. Hey guys, good morning. It's Joe. Quick question on tariffs.
Hey Joe.
I know, Mike, you mentioned earlier that 2020 is still very unclear. I think if I go through my notes, you had said that the incremental impact from List 3 going from 10% to 25% next year was about $30 million-$40 million and you could probably offset about half of that through mitigation, full year of the Section 232 tariffs being lifted, the motorcycle tariffs into Europe going away, et cetera. I guess one, is that still the case? Two, if List 3 does go to 30%, and again assuming no exemptions, does that imply an incremental $20 million on top of the $30 million-$40 million next year?
Well, the first part of your math is right. That's the comments that I made last quarter. I think I've made comments before that talks about the List 3 being about 40% of our tariff exposure. 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 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 lists.
Okay. Understood. Maybe secondly, in terms of new product launches, you mentioned that the RZR PRO XP and the Ranger 1000 kind of shipped a little too late this quarter to have an impact on numbers. Given the seasonality of those businesses, when do you think we get more definitive evidence that they're translating into share gains? Could we see something like that in December or would we have to wait more into the March quarter?
I think our expectations is we'll see some adoption in the fourth quarter, primarily that's going to be a 2020 benefit. That's how we've got it designed. We will be immensely disappointed if we don't see those retail trends start to pick up throughout the fourth quarter.
Got it. Okay. Thank you guys.
Yep. Next question.
Our next question comes from Gerrick Johnson from BMO. Please go ahead with your question.
Hi, good morning. I have two questions. First, we're finding that the election cycle is a growing concern for dealers. Are you seeing any cautiousness in their willingness to stock 2020 to their prior plan? That's number 1. Number 2 on Polaris Adventures. Is there any way you can quantify how it's affected the rest of your business? You've used some nice superlative verbiage, but is there any numbers we can put behind that to quantify it? Thank you.
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. The 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 they're as concerned right now. 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. The other question was around-
Polaris Adventures.
Polaris Adventures. That's just been a home run for us. 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 butts in seats. When people ride our products, they want to spend more time in it. The translation of those 100,000 riders into sales, it's in the very low single digits right now. The incremental that's having impact on our Polaris brand and our business and bringing more people in is extremely positive. 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.
It's a financially good deal for us, so we like that as well.
Okay, great, guys. Thank you very much.
Thanks, Gerrick.
Our next question comes from Tim Conder from Wells Fargo Securities. Please go ahead with your question.
Thank you. Gentlemen, thanks for all the color, much appreciated. I would like to maybe just return again to the List 4 and then the List 3. 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?
No, you got that exactly right, Tim.
Okay. List 4, gentlemen, quantification there. Mike, if you could remind us, I know there's an exemption process rolling out on that also. Just an update from that perspective. 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 at List 4A that is currently in place, the impact for us is 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.
Okay.
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.
Mm-hmm. Okay.
Okay, thanks, Tim. Next question.
Our next question comes from David MacGregor from Longbow. Please go ahead with your question.
Yeah, good morning, everyone. Wanted to just ask about side-by-side growth. I guess you've had positive mix within ORVs. The ATV category is a fairly mature category at this point. How successful have you been in terms of getting people to mix up out of ATVs into side-by-sides? As people make that step, what's kind of your retention level as opposed to competitive element?
I mean, I've been with the company 11 years, and for 11 consecutive years, we've moved people from ATVs into side-by-sides. I actually think the ATV market is about stable now. It's not going to continue to go down. I think it'll go up and down with economics, not unlike snow. 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 this way for a while and move up and down slightly. On side-by-sides, it's just a better solution for most people. I think we've been able to maintain this position where we're three times larger than the nearest competitor, and that's 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.
Once people get into the brand, they tend to stay there. That's one of the reasons why. More of the new entrants are entering into side-by-sides as opposed to the old, where they used to enter in ATVs and then move up. 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. 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're important to us.
Are you able to break out what % 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're 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 as steel prices went. To what extent, I guess, were you hurt by steel prices going up, and we would expect the reverse of that on the way down?
Yeah, I think, David, some of that's built into the, when we talked about the favorability next year coming from Section 232 going away as well as retaliatory. With Section 232, really the impact was that it raised steel and aluminum prices, and then we've seen those prices subsequently coming down. The benefit for us this year is somewhat paced, because our team had done a really good job of getting out ahead of the impacts and doing some forward locks and hedging essentially. As those start to wind down, we would fully anticipate that that would come through and show up in a commodity benefit for the company. We're not, obviously, at a point where we want to quantify that in isolation outside of all the other things that we got going on in the business.
We will provide perspective on that as well as other key components like logistics and tariffs when we give guidance in January.
Thanks very much.
Yeah. Next question.
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 think you explained sort of what's going on from a top line and retail inventory perspective, you had gross profit basically flat on a $15 million sales drop. Even in the past, you've talked about the variable cost nature of that business, it seems like there was something else going on as well. Was it mix or were there some cost or synergy savings that sort of helped out the gross profit there?
Well, actually, mix was unfavorable for us. 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. We talked about their incredibly high returns on invested capitals on the business we bought. Basically, we just didn't need to screw that up. 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. The 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 comment?
The only other thing I'd add, Joe, is we do get rebates coming back from our engine suppliers, and sometimes those can move around between quarters. We got a little bit of a benefit. As Scott said, the operational improvements that the team's focused on, as well as just managing their cost base, is a big part of what drove the performance as well.
Okay. Secondly, Scott, you mentioned ROIC and the very strong ROIC levels at the corporate level used to be a hallmark. Obviously, with some of the recall challenges and then the tariffs, that's been sliding. I guess, 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? Would you ultimately need some relief in tariffs to sort of get back there as well?
Joe, in my prepared remarks, I talked about us just being shy at 16%, which is 2X 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. I would say, historically, having ROIC at 30% would put you in a position not to invest in certain things. It's probably not a great area to be. Certainly with the fact that we've got two recent acquisitions that have put about a billion and a half dollars worth of a 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. The tariffs have put a damper on that to some extent.
Even if those were to remain in place and basically neutral as we go forward, we would certainly expect, barring another acquisition, that we should be able to get into the high teens, if not the low twenties. 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.
Very helpful. Thank you.
Okay, next question.
Our next question comes from Mark Smith from Lake Street. Please go ahead with your question.
Hi, guys. Can you talk first off just a little bit about dealer inventory and your comfort with that being up as well as how the project's going with a focus on lowering Slingshot inventory so you can get that new product out?
Dealer inventory was up overall 4%. As I said, the way you execute a factory-authorized clearance sale is have enough older products in the category to sell. That was more or less planned. 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. Our model year introductions, Mike talked about it, but the way the factories are working, we really were efficient in getting those products out there on time. We're well-positioned from a dealer inventory perspective. Now, we do need to deliver good retail in the fourth quarter. We're comfortable that we'll be able to do that. What was the other question? I'm sorry.
Oh, just on Slingshot-
Slingshot inventory
how that inventory is going.
Yeah, no. I said the team has taken a different approach, understanding a better way to market and execute the ground game there. We're seeing the traction there. Obviously, with the planned introduction of a new product in calendar year 2020, we've got to get that inventory down, and we're comfortable with where we are heading into the end of the year.
Okay. If I can get one more. Canadian dollar, we've just seen a little bit of strength here. Mike, maybe a hypothetical $0.05 move in Canadian dollar. How incremental would that be?
Well, it would be somewhat isolated, obviously, to the fact that we just got two months left in the year. I think we've talked in the past about a cent move, that will equate to about $5 million for the year. There could be a little bit of an impact in the quarter. We're still tracking a little bit lower from a EUR standpoint. As I mentioned in my prepared remarks, we're at $1.12 in our guidance and forecasting. I think this morning when I checked, we're tracking at about $1.11. 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'll move the numbers meaningfully.
If they do, we'll obviously provide color on that.
Great. Thank you.
All right. Thank you.
Last question coming from Craig.
Our final question comes from Craig Kennison from Robert W. Baird. Please go ahead with your question.
Hey, thanks for squeezing me in. First question, just back on slide seven. For what % of your tariff exposure have you applied for exclusion?
For the List 301, which is the Big Kahuna, if you will, we're about 95% exclusion request submitted, and it just becomes the final 5%, there's a diminishing rate of return for the time, energy, and effort to get those in. Essentially it's the vast majority of our burden there. I don't think there's 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.
Scott, what's the notification process you receive from the government?
There's one notification process. It is the issuing of.
Federal Register
Federal Register, and it happens indiscriminately. We think there's a list coming out imminently. Again, it's a random process and you literally find out when it's on there. You'll know when we know.
Sounds good. My final question then, on Factory Choice, Scott, is there any metric that frames your % of sales through Factory Choice today and where that figure could be headed over time?
We keep track of it internally, and it's been exceptionally good. As I've probably articulated before, it's an incredibly complex process. I'm so proud of what Ken and Chris Musso and the team have done to figure this out and make the capability exist. It's been purposely constrained, if you will. We're working through that, and we think the demand continues to be exceptionally good, and it really does provide a unique competitive advantage. We expect for many years to come for that to be an increasingly important part of our sales.
Thank you.
Okay. I want to thank everyone for participating this morning in the call, and we look forward to talking to you again next quarter. Thanks again.