Good morning, and welcome to the Polaris Q2 2019 Earnings Call and Webcast. All participants will be in a listen only mode. After today's presentation, there will be an opportunity Please note this event is being recorded. I would now like to turn the conference over to Richard Edwards, Head of Investor Relations. Please go ahead.
Thank you, Chad, and good morning, everyone. Thank you for joining us for our 2019 second quarter earnings call. A slide presentation is accessible at our website at www.ir.flares.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'll take some questions. During the call, we will be discussing various topics, which should be considered forward looking for the purposes of the Private Securities Litigation Reform Act of 1995.
Actual results could differ materially from those projections in the forward looking statements. You can refer to our 2018 10 K for additional details regarding these risks and uncertainties. All references to second quarter 2019 actual results and 2019 updated guidance are reported on 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. Now I'll turn it over to our Chairman and CEO, Scott Wine.
Scott?
Thanks, Richard. Good morning and thank you for joining us. Our significant research and development investments figure prominently in our major product launches, but we also do a lot that flies under the radar. An inspiring example of one of these less visible technology programs made news recently when it was revealed that a Polaris defense, MRASR on the deck of a Navy warship, upfitted with Marine Corps Air Defense System, brought down an Iranian drone in the Strait of Hormuz last week. We work hard to be good corporate stewards and demonstrate our purpose, but nothing beats playing a role in protecting American service men and women.
As a rule, I will not use a positive descriptor to refer to results that include both but I must commend our team for delivering respectable second quarter performance in a very tough environment. Tariffs remain the single largest contributor to our lower earnings but the aggressive and innovative mitigation efforts we are implementing reduced their impact. Our manufacturing and supply chain execution is at the best it has ever been which helps us overcome headwinds and the significant upside from our strategic sourcing project is still to come. The industry's competitive climate and by that I'm mostly referring to excessive promotions is unhealthy and unhelpful, but it is a game we know well and our growth inside by sides testifies the effectiveness with which Chris Musso and his team managed the off road vehicle business in the quarter. Parts Carmen And Accessories was very strong highlighting the innovation and quality of our offerings.
Our flat track racing success continues in 2019. And in Q2, we finally made the FTR 1200 available to the masses. Initial demand is in line with the bike's performance. Awesome. For weather hampered motorcycle ORV and especially boat retail, yet Bennington is still up year to date and gained share in the second quarter.
We continue to work diligently Second quarter North American retail sales were down 2% lagging the overall powersports industry, which was up modestly. Even with our strong brands and industry leading products, we knew we were taking a calculated risk with our Q1 price increases, the biggest for Polaris and the industry in over a decade. Not unexpectedly, the largest impact on volume and market share within our lower price and lower margin youth and value ATV segment. We chose to allocate more promotional dollars and both performed better by Indian gaining market share despite retail declining nearly 10%. Slingshot struggled in the quarter, but under new leadership, the team is making progress with the product marketing and overall execution.
Boat retail was down slightly in Q2, but our most consequential brand, Bennington, grew and gained market share. North American dealer inventory was up 1% at the end of the quarter, positioning us well for our model year 20 product introductions and our factory authorized clearance sale. We have institutionalized retail flow management across motorcycles and off road vehicles and are managing the retail trends closely. Disciplined inventory management has always been our strength at Bennington and boat inventory is also in good shape. The May 9th announcement that increased 3.01 List 3 tariffs to 25% was a blow to Polaris, not just in the increased costs, but also because it diminished the prospect for a near term comprehensive U.
S.-China trade agreement. Fortunately, our team was prepared and their execution of aggressive countermeasures and mitigation efforts along with the lifting of the 232 seal aluminum tariffs allowed us to offset the 2019 impact of the 301 List 3 increase. An excellent example of our mitigation efforts is the $30,000,000 of sheen parts that will move from China to U. S. Suppliers, including our WSI subsidiary.
The risk of 301 List 4 going into effect remains although the impact on Polaris would be limited as most of that final tranche would be direct to consumer goods. We continue to spend considerable time, energy and effort in our pursuit of just relief for the unintended impact of tariffs and U. S. Business units. We are making progress with the administration in Congress and although we have no assurances that relief will be granted, we are continuing to press our very strong case for fair resolution.
We have aggressively leveraged our tools and talent to strengthen the performance in our aftermarket business, So their second quarter progress was both expected and encouraging. Our Powersports aftermarket brand portfolio, which includes Kline, Colpin, 509, Pro Armour And TrailTech, has consistently delivered strong growth for the past 18 months and was up over 10% in the quarter. Transamerican auto parts was flat in the period with a 95 store strong 4WP retail channel up 7% and e commerce up 12%. Demonstrating the effectiveness of improvements Craig's standalone team are driving. The smaller wholesale channel was down 12% as we actively manage the portfolio towards more strategic, higher margin customers.
CAF is well positioned for accelerating profitable growth in the second half and beyond. Steve Eastman's transformation of our PG And A And Aftermarket business has been very impressive and very profitable. So it makes sense to invest more here to facilitate faster growth. We commenced operations earlier this month at our new state of the art 5 1000 Square Foot distribution center in Fernley, Nevada. It is our 1st distribution facility capable of supporting all of our businesses and brands and importantly, enables 1 to 2 day parcel shipments to the West Coast customers.
I will now turn it over to our Chief Financial Officer, Mike Beetson, who will update you on our financial plans and resources.
Thanks, Scott, and good morning. For the second quarter, sales were up 18% on a GAAP and adjusted basis versus the prior year. Organic sales growth was 7%. Foreign exchange was a 1 point drag and the Boats acquisition added $182,000,000 of sales during the quarter. Average selling prices were up 7%, driven by price increases as well as favorable side by side mix.
2nd quarter earnings per share on a GAAP basis was $1.42. Adjusted earnings per share was $1.73, down 2% for the quarter, which slightly exceeded our previously issued guidance, driven by foreign exchange and interest rate increases would have been approximately 20% in the quarter reflecting continued improvement in business fundamentals. Foreign exchange had a negative impact on the quarter versus 2018, driven by a strong dollar primarily against the euro and the Canadian dollar. However, the impact was in line with The full year impact is estimated to be approximately $30,000,000 or $0.37 per share. This assumes an average euro to USD rate of 1.12 and the CAD to USD at $0.74.
If foreign exchange rates hold at current spot rates for the remainder of the year, There could be additional favorability that has not yet been included in our revised 2019 guidance. From a transactional perspective, we have hedged approximately 75% of our remaining 2019 exposure for Canada. From a segment reporting perspective, ORB slash snowmobile segment sales were up 6% in the 2nd quarter, primarily due to increased prices, PG and A growth as well as from the benefit of stronger side by side mix. Snowmobiles were also up in the quarter, but Q2 is not meaningful given the seasonality for snow. ORV whole goods sales increased 4% given stronger side by side sales mix.
Average selling prices were up 9% for ORV during the quarter, driven by the price increases and positive product mix. Sales unit volume was down during the quarter in line with the retail volume decline, but as Scott indicated, we are strategically targeting categories where we can maximize profitability for the business, given the significant tear pad when we're battling. Our premium rangers, generals and razors all grew sales volume during the quarter with declines in the less profitable segments of value, youth and trail. Motorcycle sales increased 15% on a GAAP and 14% on an adjusted basis in the second quarter, driven by strong shipments of Indian, which included the newly introduced FTR1200. ASP for the quarter was down 1% driven by foreign exchange, given strong international growth in the mix of midsize and standard bikes, versus heavyweight.
Indian grew market share for the quarter as we began 41% and PG and A sales were up 11% during the quarter, driven primarily by the FTR 1200 shipments. As a point of reference, beginning this quarter, we are now adding the standard category of motorcycles to our midsize and heavyweight industry calculations. When referencing that the FTR 1200 volume is also driven by non North American retail, which is not reported in our retail sales figures, but is included in our motorcycle sales guidance. Global adjacent market sales were up 7% during the quarter, driven by all product categories. Average selling prices were flat during the quarter.
Aftermarket sales were up 1% compared to last year with TAP sales flat and our other aftermarket brands increasing 12% during the second quarter. Our Boat segment reported sales of $182,000,000 for the quarter. On a pro form a basis, the Boat segment sales were down 2%. However, on a pro form a year to date basis, boats are up 5%. The decline in the 2nd quarter can be attributable to a combination of year over year shipment timing as we approach the closing of the Boat acquisition in July of 2018 in unusually wet weather patterns during this year's second quarter.
Our international sales were up 13% on a reported basis and up 19% when you remove the unfavorable impact from currency. The growth was driven by motorcycles and global adjacent markets. Parts Garments And Accessories sales increased 10 percent during the quarter. All business segments were up for the quarter with growth coming primarily from accessory sales. Given our first half performance and the outlook for the remainder of the year, we are revising our full year guidance as follows.
We're narrowing our full year total company sales growth guidance now expect sales to increase in the 12% to 13% range for the year. The North American powersports industry is expected to remain positive in the low to mid single digits percent range driven by growth in the side by side market while the motorcycle market is expected to remain weak. We continue to expect boat sales to contribute about 6% to a full year increase in sales versus 2018. We are narrowing our full year adjusted earnings per share for 2019, We're raising the lower end of our previously issued guidance by an additional $0.05 to $6.10 per diluted share, given our first half results, primarily from our Boat segment. We're maintaining the upper end of change in the 301 List 3 tariff rate from 10% to 25% on all components shipped after the effective date.
We're holding the upper end of the range despite this added cost given the positive tariff mitigation efforts the team has realized. The 301 List 3 tariff moving to 25% places an additional $30,000,000 of cost pressure on 2019 earnings. And as Scott pointed out, we've been able to mitigate existing tariff exposure and we're recognizing the benefit from the 2.32 tariff removal to essentially offset this added cost. The $30,000,000 of 301 List 3 25% annualizes out to $60,000,000 to $70,000,000 on a full year basis or an incremental $30,000,000 to $40,000,000 impact as we head into 2020. Excluding the tariff costs, along with the negative currency and higher interest costs, our underlying operating earnings performance is anticipated to improve 15% to 18 percent on a year over and Q4.
Mix, however, drives differences between the earnings within the quarters. Additionally, we have higher R and D costs in Q3 versus Q4 given supplier validation costs related to the supply chain transformation project. This coupled with the fact that our dealer show is expensed in Q3 drives approximately 55% of our 2nd half expected EPS guidance to be realized in the 4th quarter. Moving down the P and L, our previously issued guidance ranges remain unchanged as shown on this current slide. However, there are a couple of points I want to highlight.
First, adjusted gross profit margins, while expected to be down on an absolute basis, driven by tariffs and negative of those items, driven by higher volume, mix, price and productivity. We continue to see the competition promote aggressively in the second quarter, both in ORV and motorcycles, And while we are spending more on promotions than originally anticipated, we are being selective as to where we spend our promotional dollars, which is generating positive mix that offset the additional promotional costs. Gross profit margin expectations by segment also remain unchanged. We have provided the gross profit margin details by segment the appendix of this presentation. Secondly, adjusted operating expenses points as a percentage of sales, resulting from the addition of operating expenses from the Boat segment, the new multi brand distribution center in Fernley, Nevada, higher variable compensation costs, the costs associated with the 65th anniversary celebration and summer dealer meeting being held next week and lastly, the ongoing investment in research and development expenses.
Moving on to sales expectations by segment. ORB slash snowmobile sales are now expected to be up mid to high single digits. Our range has expanded from previous guidance with the mix of side by side products expect to be more favorable than previously anticipated expected to be up low to mid teens percent. We expanded the range from prior guidance given the weak market and a modest adjustment in the number of FTR 1200 expected to ship in 2019 as we cautiously ramped production to ensure we met high expectations around quality. Both global adjacent markets and aftermarket segment sales expectations remain unchanged at up mid single digits percent.
International and PG And A sales, which are included in the respective segments, are both performing better than anticipated. Therefore, we now expect international sales to increase mid single digits percent and PG and A sales to increase in the mid to high single digits percent range for the full year. And lastly, both sales expectations remain largely unchanged. Operating cash flow finished at $203,000,000 through the first half of twenty nineteen, up 23% over the same time last year, driven by lower working capital requirements. Cash flow is expected to improve approximately 20% to 30% for the full year compared to last year, unchanged from our previous expectation.
Our bank leverage ratio defined as total debt to EBITDA stands at approximately 2.46 times, well below and we will continue to focus on debt reductions for the remainder of 2019. With that, I'll turn it back over to Scott for some final thoughts.
Thanks, Mike. I'm encouraged by the way our players team battled through the first half, driving quality and productivity improvements that will pay dividends in the months and years ahead. The Powersports industry has been resilient and growing year to date, and we are excited to launch our model year 2020 product introductions to extend our reach. Over the weekend, we had reinforcing our conviction that these new products will we will continue to leverage technology to improve customer experience across the business. As we began our 2nd year in the boat business, We like the market share gains and growth at Bennington, and we use our boat dealer shows over the next few weeks to showcase plans for growth across all of our marine brands.
International, global adjacent markets and parts garments and accessories are all performing well, highlighting the disparity between North American unit volume and overall corporate revenue and demonstrating the positive impact challenging with promotions continuing to expand, we like our opportunity to gain market share. Our strategic sourcing initiative continues to yield positive results. Wave 1 is moving to implementation with savings now projected to exceed our aggressive targets. Wave 2 kicked off in May and we remain confident that this strategic sourcing project will be the largest productivity boost the company has ever executed. We are excited to welcome thousands of Polaris dealers around the world to our 65th anniversary dealer show here next week.
We plan to demonstrate clearly why we are so confident in our ability to lead the industry and drive profitable growth for many years to
questions.
Questions.
The first question will come from Jamie Katz of Morningstar. Please go ahead.
Hi, good morning guys. I'm curious I'm curious about aftermarket parts. It looks like for the second half of the year, you guys are anticipating sales that rise maybe at a high single digit pace, which is faster than, that segment has risen for you over the last few years since you've owned it. So is there something coming out in that segment that is giving you confidence that you can accomplish that run rate?
Yes, Jamie, as I indicated in my remarks, we had really strong growth in our retail segment, up 7%. Our e comm segment, up 12% in the quarter. And Craig Scanlon and the team have really put a lot of fundamental improvements in the business. So we feel good about that. And then our Our powersport portfolio, as I indicated, has also been continuing to grow strongly.
So I think as we reduce some of the headwinds we've seen in our wholesale business, and they start to get their arms around that. We just feel better about the way that business executed in the second quarter and what we're expecting to kind of the trends as we move into the second half of the year.
Okay. And then there wasn't too much discussion about, dealer floor space, but I'm curious as you have If you guys have been able to capitalize maybe on incremental floor space as Arctic Cat has incrementally weakened over the last year or so, whether or not dealers are more receptive to taking more of your product? Thanks.
Thanks, Jamie. Good question. But I'd tell you with RF him, you know, we have our profile set with our dealers. It's working extremely well. We do see as we introduce new products, as we're about to do, we tend to get more floor space to make sure that they can showcase and they increase their profiles a little bit.
But I wouldn't say that there has been a tremendous increase because of the shift in in that competitor.
Next question, Chad.
Certainly. Next question comes from James Hardiman with Wedbush. Please go ahead.
Hey, good morning. So, ORV retail was down a little bit in the second quarter. But the guidance for that segment was actually raised at a high end. Maybe walk us through how that works, what was incrementally more positive. You touched on a little bit of it, but maybe walk us through that bridge.
Yes. And James, as I pointed out, we actually pulled shipments down, unit shipments down in the 2nd quarter pretty much in line with retail again, a testament to how RFM works and adjust on a real time basis. Really, what we're benefiting from is, as we indicate from a retail standpoint, side by side sales are growing ATBs Contracting and that gives us a boost from an ASP standpoint But you also have to consider, there's international revenue. It wasn't much of a factor in Q2, but as we look out for the balance of the year, international growth will help ORV as will PG And A. And so those really fed into the revision in terms of the mix expectation the growth coming from PG And A, which obviously, the accessories that go with our side by sides are a big component of that.
Got it. And then, sort of a 2 part tariff question here. So the $30,000,000 of 301 List 3. You've got some exemptions, I think, pointed out, but I'm assuming that none of those exemptions were on the list 3 stuff since that window just opened up few weeks ago. And so if you're successful with exemptions, is there still the potential for $30,000,000 of upside as we work our way through that.
And then if at all possible, and I'm not going to ask you for guidance for 2020, but how do I think about 2020 in terms of the incremental tariff piece that we've gotten over the last few months. Obviously, for 2019, there was $30,000,000 and you were able to offset that. Should I think about that being offset in 2020 as well, or were there some timing effects that still make the incremental piece for 2020. If everything stays where it is right now go up.
That's a long two part question. It's obviously it's a complex topic, but you actually summarized it accurately. There are no exemptions for List 3, 301 yet. There might be, and really it's unlikely that we're going to get significant relief from exempts like part by part exemptions. We that's why we're working so hard to get overall relief from this 3 zero one List 3 tariffs.
As Mike indicated, we've really done a nice job of offsetting it with mitigation efforts this year. Ken and his team have worked every single angle to and then with the benefit of the 232 CLO luminous, we did not increase it. But Mike said in his prepared remarks that the increase is up, the flow through to next year would be an incremental $30,000,000 to $40,000,000. I don't think we're going to provide tariff guidance beyond that.
Yes, James, the only piece that would be incremental to that is obviously, we still had some of the 2.32 impact this year and that obviously won't reoccur next year. And then we're doing a lot of work around the retaliatory tariffs. So my expectation is that if nothing else changes, meaning no tariffs are reduced, no tariffs are added, we'd be up a little bit as we head in 2020, which is going to primarily from this incremental 301 List 3 at 25%, less some capability that we'll get out of 232 and the retaliatory starting to be reduced as we ramp motorcycle production in Europe.
Got it.
Thank you. Our next question comes from Scott Stember with CL King. Please go ahead.
Good morning and thanks for taking my questions.
Good morning, Scott.
Can you maybe talk about retail a little bit on ORV in the release you talked about, I guess, were you explaining why the industry was up and some competing products in the market that weren't there before? Can you maybe just talk about the areas where you were going up against that. I imagine it was more in the value in the youth side. But maybe just give us a little color on that.
Yes. Really, I think that the new products that we haven't been up against before is really a Honda entering with the talent, more than anything else. But And most of our retail challenges, if you will, as we talked about in our prepared remarks, we're really in the value ATV, the youth products, somewhat in the trail razor segment where we haven't refreshed the product in quite some time. And we chose with our pricing increases not to put as much promo on some of those lower margin product lines. And we actually saw that hurt volume and market share.
But we are we have a real product advantage with Ranger and Ranger right now. We chose to capitalize on that. And I think it allowed us to manage the quarter reasonably well. I will tell you that, we've got a very good plan as we roll both with new products and our factory authorized clearance sale. And I expect us to, to continue to execute our retail and share play improving and better in the second half.
Scott, what I would add to Scott's comments is keep the word discipline in mind when you think about how we're going at promotion. There's some competitors out there that aren't being disciplined. We're going to be smart about it. As I said in my prepared remarks, we're on the work around each program to make sure that it's got the right financial profile and we're protecting where we need to protect.
Got it. And then last question about retail. I know there's been a lot made about weather and how much has impacted the quarter, whether it was April, May or June. Maybe just give us an indication of how it impacted your businesses maybe by line boats or the motorcycles and maybe just by month as well, just let us know, how much weather really impacted June in particular? Thanks.
That is not we don't have refined data on that. And if we did, we probably wouldn't share it. I will tell you that, throughout the April was better weather, but May in June, both were difficult. It's probably hardest on boats, second hardest on motorcycles and then least hard on off road vehicles, but it's certainly not helpful to any of our product lines when it's raining. And I think the Midwest really had is the most
impact of wetness in the second quarter. Scott, we did see, I've seen a lot of the reports that came out around boats. We did see a pickup at the end of June in early part of July when weather did improve. So we know that that was definitely a factor.
Next
question.
That comes from David Tamberrino with Goldman Sachs. Please go ahead.
Yeah, great.
I
just wanted to add more into the mitigation actions that you've taken so far. I think you called out about $20,000,000 of benefit for this year. What have you done? What else are you looking to put in place and how much of this incremental tariffs are incremental $40,000,000 year over year into 2020 as where we currently stand? Do you think you could mitigate from some of your incremental actions from here?
Obviously the number we gave you is what we think we won't be able to mitigate. That's how we calculate impact, but I will tell you that, as Ken likes to say, we haven't had our next best good idea. And the work that they're doing, whether it's changing country of origin, which has been quite helpful to us, As I indicated, moving of some of the machine part sourcing we've done from China traditionally to some of our suppliers, including our own WSI subsidiary. We've got bonded warehouses to make sure we're not paying tariffs when we shouldn't pay tariffs. Really, it is a unrelenting focus on reducing that impact.
And I think Lucy and I spent a lot of time in Washington trying to get the relief should. So we're not spending so much non value added time trying to work around the tariffs and the impact on the company. But I'm really proud of the way the team has been able to navigate the impact thus far.
Okay. And then just lastly from an inventory perspective, ended the quarter up a little bit year over year. Do you feel as if there's any particular product where you have a little bit too much excess inventory at the dealer now and you need to pull back for 3Q or do you think you're in a good position ahead of your product launches?
We feel good.
Yes, we took the opportunity when we saw retail softening in Q1, to make sure that as we loaded up Q2, knowing that we have model your changeover, factor authorized clearance, new products coming out that we were making sure we were disciplined. We put a comment on the chart, that we're at 95% of our RFP profile. So we're sure that we have enough room, if things were to move from where we've got them projected right now.
Next question comes from Robin Farley with UBS. Please go ahead.
Thank two questions. One is, I I know you commented about the tariff impact of 34,000,000 to 40,000,000 into 2020. I just wanted to clarify, was that after any offsets from the 2.32 that won't recur next year. And and if not, can you just remind us the dollar amount of 2.32 that it won't recur next year? Thanks.
Yes, it's, so Robin, the 30 to 40 is just purely the list 3 at 25%. So that's an annual value of $60,000,000 to $70,000,000, but it's incremental $30,000,000 to $40,000,000. The $232,000,000 tariff in the retaliatory going away. We did not quantify those. They're in the $10,000,000 to $20,000,000 range to give you a rough order of magnitude.
Okay, great. That's helpful. Thanks. And then also just on the increase in already shipment guidance here. You mentioned that a higher mix of side by side.
So obviously the, ASP would be higher you know, next was was there also a good increase in that shipment rate, or was it mostly the AST mix?
There was a little bit of an increase in the shipment because we're making that shift change. From an overall standpoint, from a unit that wasn't anything material But when you look at the value of those units that we've got going in from side by side standpoint, there's a big price ASP advantage. Unfortunately, a fair amount of that is getting eaten up by the, incremental promotion that we've had to put in place. But again, we're making sure that we're evaluating each of those decisions independently.
Okay, great. And if I could just put one last one in there. I was just looking at your European sales, and I think your comments for talking about the growth of international in the second half and, you know, other than powersports or at least one other in powersports comment on Europe being weaker than they expected. So I wonder if you could just give us your take on kind of European retail demand overall? Thanks.
Well, you know, motorcycle industry in Europe is significantly better, stronger than it is here. So we feel encouraged by it, especially as we're launching the FTR as we always indicated that that really is a bike, targeted as much as Europe as anything. But with our second half product offerings, we believe that, that'll be as attractive as in Europe as it is here. So we think the market is, it's better than the overall European economy. The powersports market and motorcycle market is better than the overall European economy.
And we're encouraged by that.
You know, Robin, we you saw that we raised our guidance for international from low to mid single digits and that's not just a motorcycle driven movement.
Okay, great. Thanks very much.
The next question comes from Greg Badishkin with Citi. Please go ahead.
Great.
In terms of the wet spring, do you think that's lost sales or would you expect to get some of that lost sales back?
We think it varies by industry. With motorcycles, And boats, it tends to be, you're going to lose the vast majority of it. They lose the riding season or the boating season. And are less likely to purchase. Offered vehicles, we think it tends to have less of an impact.
People have thought about those purchases a little bit longer and, we'll still continue to we've seen that recover a little bit better. But we think we lost some of it.
Okay. All right. And then just to clarify, in terms of the intense promotions in the value segment, that's been pretty consistent, but it's still aggressive now, you know, you said that you're seeing in July, right?
Yes, I'm not sure that we've really seen a notable change recently. They are down from what we saw at the beginning of the year. But, that's been pretty consistent.
Okay. Just finally, the upcoming 65 year celebration, new product launches.
Greg, you're breaking up. We can't hear you. Maybe if you get back in the queue,
Thank you. Go ahead. Thank you. Could you see a I'm sorry about that. Could you see a step up in terms of the new products that are coming out in terms of innovation?
Or would you expect that to be pretty, pretty similar new product is the last year or 2, or could we see a step up this year when we come out to the shop?
I mean, we don't talk about what we're going to launch, but we are spending more money. So therefore, you naturally expect, we're going to get a good return that we'd get more and better products. And I think that's consistent with what you'll see.
Perfect. Thanks guys.
Thanks. Thanks.
Yes. And that's from Joseph Spak with RBC. Please go ahead.
Thanks guys. Maybe just turning to, boats. I was wondering if you could talk a little bit about your inventory situation given to weather and some of your comments you just mentioned about, being tougher to sort of pick up sales. And then is there an opportunity over time to do something more RFM like with that business?
Yes. They already the Vogtle family just had a really good operating model. I'll just remind you when we bought the business, it had returns on invested capital of over 100. So they really understand this idea of flow. The weather impact, there's nothing you can do.
You've got to ship in before the season. So I think boat inventory was up high single digits, but it's already depleted in July. I think we're feeling better about that. We did cut shipments in the second quarter and, retails picked up in July. So we're feeling really good about where boat inventory is overall.
So, and as I said, we're having our dealer shows this week in the next couple of weeks for the boat brands. And I think they're going to be pleased with the innovation that the Polaris and both teams have worked together to bring to the market.
And then just on motorcycles, nice sales increase with the FTR, which looks great, by the way. So you had sales up like $25,000,000 year over year, but gross profit up only $2,000,000. And I know there's a lot of stuff going on with tariffs and promotions etcetera, but Was there also some element of startup or launch costs with that FTR that sort of gets a little bit better as you move to the back half?
I mean, there's always that aspect, Joe, but I will tell you that, when I look at second quarter for motorcycles alone, there was 300 basis points of drag created from tariffs, because what you have to remember is motorcycles is dealing with 2 tariffs. They're dealing with all this inbound stuff we have on 301, but they're also dealing with a very hefty retaliatory tariff. Now, we've got the scout production up and running. Going incredibly well. We're working on getting FTR up and running.
So we think we'll be in a good spot to be able to mitigate that next year if those tariffs are still in place. We'll still have a drag on heavyweight. It's much less, and it doesn't make sense for us to move production over there at this point. Yes.
Great, thanks.
The next question comes from Gerrick Johnson with BMO Capital Markets. Please go ahead.
Good morning.
A
couple of things on the balance sheet caught my eye. Your own inventory up 22% and then warranty reserve up 25% year over year. So can you talk about those two lines, please?
Yes. So from an inventory standpoint, the thing to keep in mind is, number 1, we added boats which adds over $50,000,000 worth of inventory. We've also got unorder of magnitude somewhere in the range of $30,000,000 sitting in there that's a bump up versus last year from tariffs, because if you remember, we really didn't have a whole lot of tariff in inventory at that point in time. And then really we've got inventory buildup as we get ready the new product launches, we'll be obviously launching shortly after the 65th, dealers show and making sure that we're prepared for that. And then from a warranty standpoint, there's a couple of things.
The reserve is up. We actually last year had a couple of reserves that we reversed kind of holdovers from the legacy recall issues that we had as we got further into those. We were able to true up those reserves. The other thing to keep in mind is We have about $8,000,000 to $10,000,000 worth of boats warranty that's been added year over year as we bring that business on board. And then we did in the 3rd or 2nd quarter, we did have, several small recalls and service bulletins that added a little bit of cost, nothing material or significant.
Our next question comes from Michael Swartz with SunTrust. Please go ahead.
Hey, good morning guys. Just wanted to touch on the competitive environment again and maybe just as a point of clarification, did the was the competitive environment in the second quarter in off road vehicle a little stiffer than maybe what you would have expected going into the quarter?
The competition wasn't heavier, the promotions were significantly more. I mean, what, Mike used the word discipline and that is a word that I wish our competitors would start to think about because some, and it's true, not just in off road vehicles. We saw it in motorcycles as well. I mean, I think the most accurate term I can use for it is ridiculous. I mean, when you're putting, literally 1000 and 1000 of dollars on vehicles that, just it's not necessary and we were quite surprised by it.
And as I said, we were we chose not to do anything at our where we already had lower margins in our our value in used products. So that's why we lost some volume and share there. But, I think as we grow into, we we're going to be aggressive with factory authorized clearance. So we always are. I think we're going to take the knowledge of what we learned in the second quarter and apply some of those those learnings to how we execute promotion in the third quarter and through factor authorized clearance.
And then really it's an innovation game that wins and I think we feel really good about the Monterey 20 product launches. But, no, I would tell you that the competitive promo from people that should know better, was disappointing.
Okay. That's helpful. And then Scott, maybe just quickly on Slingshot. I know it's a smaller part of the business. But just given what you've seen in retail there, I mean, maybe just discuss your level of commitment, sounds like you're doing some things there.
To turn that around. But any color you can provide on maybe what you're doing and again, longer term commitment to that?
My commitment to any business is if I see a future of profitable growth, pretty simple. Now, Mike's got a whole bunch of other stuff going to look at, but my simple lens is through that view of can we see a future and be confident of future profitable growth. So with that lens, we feel good about Slingshot both from the products that are in the portfolio, but really the execution that we're learning We do have a number of dealers that do really well with Slingshot. The problem is it's just not enough of them. But we're learning from those dealers and applying those learnings other places.
And we're seeing the results of that, like I said, we've got new leadership in there. They're really digging in and and we do feel like we've got a and I've said all along, this is gonna be slog of a year for Slingshot. But as we move into, to 2020, we feel better about our ability to play in that segment. And, so we're very committed to it until something changes and tells us that we don't see a future profitable growth.
All right. Thanks a lot, Scott.
The next question comes from Craig Kennison with Baird. Please go ahead.
Hey, good morning. Thanks for taking my questions. Mike, you mentioned you're undershipping relative to the RFM profile. Why would that be?
Well, we're just trying to make sure that we leave enough room. You know, it's tough to get a solid projection around what's going on with retail and we saw coming out of the first quarter. We intentionally did that just knowing that we were coming up against factor authorized clearance in the model year changeover, to make sure that we had flexibility and put the dealers in a really good spot with all the new products coming out.
Thank you. And then with respect to to read choice as we see it, that's a different kind of innovation. It differentiates Bollaris in a different dimension, I guess. And also gives dealers a crack at maybe better margins. How are your current factory choice options forming?
And how quickly can you roll that capability out to other products?
Well, you know, it is performing exceptionally well and I appreciate you actually acknowledging that it's real innovation on in and of itself. The work that our teams did over really a couple of years to put the capability within our supply chain and factories to bring that to market, was quite impressive. The uptake has been exceptionally good. The execution has been impressive I think we're rolling out to more categories, as we go into the model year 2020 product line. Motorcycles has already done a version of it.
But I think the learnings that we've really gone into Ranger and start to apply that to other categories. Is, is quite exceptional. So that's, it really, we're making as many as we can, to fulfill demand there, but we're gonna continue to expand that category. And we're seeing the uptake not only in how fast those retail, but you mentioned for dealers is another real benefit there.
The next question is from Tim Conder with Wells Fargo Securities. Please go ahead.
Thank you, gentlemen, and congrats again to the team on the execution here in a difficult period. Just a couple of follow ups here. On motorcycles, it has the outlook excluding FTR. Has that changed here over the last 90 days?
Yes, it has. That's why we've widened the range from low to mid teens. We obviously, as I mentioned in my prepared remarks, we pulled back a little bit on the shipments of FTR just given some of the focus around making sure we had the product absolutely positively right. But we have seen weakness in other areas and that's why we expanded the range. Scott spoke to it earlier.
We have seen some very aggressive promotional activity in the marketplace from our largest competitor. We're dealing with that as best we can, but we're going to continue to be disciplined.
Okay, okay. And then, and then, Mike, just to follow-up again on to clarify the 2 32, then a couple of the earlier questions you said, I think it was about a $10,000,000 to $25,000,000 range on the $232,000,000 that you had not factored in 20. Is that a gross number or is that just would
be the incremental savings
on 2.32 in 2020?
All right. So let me, I'm going to make sure I try and do this as clear as I can because I have a feeling we'll be talking about this after we get off the call. So, you know, we've got the 301 List 3 going to 25 percent. That adds $30,000,000 to $40,000,000 in 20.20. I think Robin had asked the question around $232,000,000 and the retaliatory my response to that was those are $10,000,000 to $20,000,000 of favorability, meaning as we've ramped up production in Poland, we obviously start to avoid some of those retaliatory tariffs.
And with the 232 tariff being canceled this year, obviously, as we roll into next year, the fact that we had cost in 2019 will not recur. And I commented that that was $10,000,000 to $20,000,000.
Okay. And that's collective encompassing both those two items
or each? Correct. Collective. Okay.
Okay. Thank you for
The next question comes from Joe Altobello with Raymond James. Please go ahead.
First question, just wanted to clarify, the $60,000,000 to $70,000,000 of annualized increase from 3.01 List 3. I think you guys have previously said that was $80,000,000 So why didn't that come down by $10,000,000 to $20,000,000?
Well, I mean, I think some
of it's just getting more refinement. I will say as unfortunate as this is to say, we've become very good at working through what these tariffs mean. And Ken's team has spent a lot of time studying the materials that we have coming in direct from China as well as making sure that we understand the indirect, which has a lot more complexity to it because that's where we have suppliers in the North America, for example, that are using parts from China and how does that flow through. So it was more of a refinement. It moved around $10,000,000 to $20,000,000, but that's the key driver.
Okay. That's helpful. And secondly, if and when there is a new NAFTA I guess through Congress, is there a major impact for you guys from that?
I'll give our trade and government affairs team a lot of credit. There won't be hardly any change, it's U. S. MCAs, what they call it in. Now we don't expect material change and how that impacts the Polaris, but only because we were able to work with the USTR to make sure that that was managed properly.
So now feel reasonably good about that. Interestingly, we are trying to leverage votes for USM to help us get, tariff relief. So, that could be a more helpful agreement than I originally thought.
Great. Thank you, Scott.
Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Richard Edwards for any closing remarks.
Thank you. And I want to thank everyone for participating this morning. We appreciate that. And for those of you that will be attending our analysts investor meeting this coming Sunday, Monday. We have some exciting products to show and demonstrate.
So we look forward to seeing you there. Again, thanks for participating this morning and we'll talk to you next quarter. Goodbye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.