Good day, and welcome to the Polaris First Quarter 2019 Earnings Call and Webcast. All participants will be in After today's presentation, there will be an opportunity to ask questions Please note this event is being recorded. I would now like to turn the conference over to Richard Edwards, Vice President of Investor Relations. Please go ahead.
Thank you, Andrew, and good morning, everyone. Thank you for joining us for our 2019 first quarter earnings call. A slide presentation is accessible at our website which has additional information for this morning's call. Scott Wine, our Chairman and Chief Executive Officer and Mike Speetzen, our Chief Financial Officer We'll have remarks summarizing the quarter and our full year expectations. And then we will take some questions after their remarks.
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 first quarter 2019 actual results and 2019 updated guidance are reported on an adjusted non GAAP basis unless otherwise noted. Please refer to our Reg G Reconciliation schedules at the end of this presentation for the GAAP to non GAAP adjustments.
Now, I'll turn it over to our CEO, Scott Wine. Scott?
Good morning and thanks for joining us. Earlier this month, we hosted the NCAA final 4 in Minneapolis. Seeing Tony Bennett's UVA team win it all was thrilling. Not simply because I'm a virginian, but primarily because his program embodies the teamwork, diligence, and leadership needed to succeed in this highly competitive environment. Our Powersports industry is also very competitive.
And in today's culture where it seems popular to malign capitalism, I am proud that players stand as an example of the virtue of free markets and strong competition for consumers and stakeholders alike. Yesterday, we published our 2019 corporate responsibility report. We call this program geared for good, and it describes our efforts to be a great company and corporate citizen. From maintaining trails and teaching safe riding skills to you to extensive community and veteran support, The Polaris Foundation is an excellent purveyor of good deeds. Our work to reduce energy usage and environmental impact is sound and continuously improving.
While our workplace safety program yields top tier results. We also invested heavily in the United States, spending over $200,000,000 in the last 3 years building new facilities that employ over 1500 American workers. Exemplary corporate stewardship is a winning strategy, and our employees win with us as our ESOP owns more than 5% of the company, and our earnings based program is among the most extensive in the market. Capitalism works and Polaris proud to be a vocal proponent and benefactor of this proven system. I'm also proud of how the Polaris team performed in the first quarter.
Our sales and earnings outpaced expectations, even as our RFM system, alertly adjusted several 1000 units out of our ship plan to protect dealer inventory. I am reluctant to blame weather for a weaker than expected ORV and motorcycle retail, but their sharp rebound in the final 2 weeks of March corresponded so closely with the improved weather that I must acknowledge it was a factor. Corinarily, I would be upset if our team did not utilize every tool to preserve a few basis points of market share. But considering our price increases and a few absurd promotions by our top competitors, the team wisely chose a measured response. Snow benefited from both weather and our industry leading lineup of sled, growing more than 20% and gaining nearly 5 points of market share for the season.
We were encouraged by the start for our full year in the Boat business, and it was a record first quarter for Steve Eastman's PG and A business. Ken Pucell and his team generated excellent momentum with the strategic sourcing initiative and should drive many more quarters of accelerating savings. We are still working to eliminate our significant tariff impact, but in the interim, we are making progress mitigating the associated costs. 1st quarter North American retail sales were down 3% as strong snow bill sales were insufficient to overcome a 10 plus retail. Motorcycles were also weak, but Indian again gained market share, although we did it with heavy weight instead of midsized bikes this quarter.
Side by side retail was down slightly and we lost about 0.5% of market share, but due to the retail cadence of the quarter, and the product categories where we lost ground, we are okay with how the quarter played out. Chris Musso took necessary price increases when our competitors did not. And even though we held promo close to flat year over year, our higher priced, higher margin premium, Ranger and Ranger vehicles performed quite well. The losses in ORV retail and market share were almost entirely limited to value ATVs and youth vehicles, where price sensitivity is most prevalent. From a calendar perspective, we had a very strong January followed by a sharp slowdown in February early March, then a significant recovery during the final 2 weeks of the quarter.
Customer demand remains strong until the final Sunday of the quarter and the positive momentum has continued so far in April. Properly placed and balanced dealer inventory underlies our strong start to April, which is also the second half of our spring sales event. Overall, North American dealer inventory was down 1% with ORV up 6% and snow and motorcycles down 28% and 5% respectively. We regularly discuss quarterly retail performance on these calls, but I rarely note the overall North American market share lead is significant and has been for years. Our team, brands, vehicles and accessories, dealer network, and session with winning the right way, make this large market share lead possible.
We are confident that our 65th anniversary year product news will keep the trend going. As much as we like that market share chart, it only portrays units and just like our retail performance, it does not directly correlate to our overall Polaris revenue. This issue is becoming more prevalent with the addition of Boats, our international adjacent markets, PG and A, TAP and aftermarket businesses now comprise approximately 50% of our total sales. Thanks to our lineup of global businesses and their portfolio of great products, the Polaris brand is strong and getting stronger outside of North American powersports. Our projected full year tariff impact is unchanged, but that fact is in sharp contrast to the significant countermeasures we have deployed and the progress that the administration in China are making towards a favorable resolution.
As we expected, the 30 one List 3 tariffs did not increase to 25%. But we remain focused on achieving China agreement this quarter, we are actively evaluating the potential to reduce our 2019 impact. The retaliatory tariffs Europe are harmful as we ramp up shipments of our FTR 1200 bikes this quarter. Bringing Poland plant online will help but it is initially limited to scout assembly. From engineering and plant investments to technologies and even organization structures, our strategic Customer centricity was behind our large investment in CRM, which is supporting better customer service and higher value lead management.
Ranger Factory Choice has been a home run and our Ranger Country Tour will reach even more customers. Productivity and efficiency are enabled by our improvements in safety and quality, and we expect further advances in value creation to come with the evolution of RFM and our continued implementation of strategic sourcing. The program's first wave covers almost $1,000,000,000 in spend and projected savings are at or above our initial estimates. A growth mindset as part of our culture, and that drives the innovation we see not just in vehicles, but in processes, technologies, and even sales and marketing. I'll now turn it over to our Chief Financial Officer, Mike Speetzen, who will update you on our financial results and plans for 2019.
Thanks, Scott, and good morning. For the first quarter, sales were up 15% on a GAAP and adjusted basis versus the prior year as expected. During the quarter, sales growth in ORB slash snow was partially offset by lower sales in motorcycles and global adjacent markets, with most of our sales growth coming from the addition of the boats business, which added $185,000,000 of sales during the quarter. Our average selling prices were up 7% driven by a combination of the favorable mix and price increases that were implemented in early 2019. 1st quarter earnings per share on a GAAP basis was $0.78, adjusted earnings per share was $1.08, down 4% for the quarter, which exceeded our expectations, driven by lower operating expenses and favorable foreign exchange rates.
Operating expenses were lower than anticipated during the 18. However, this expense timing change will not impact any of our programs. 2018, driven by attributable to $30,000,000 or $0.40 per share, assuming an average euro to USD rate at $1.12 and the CAD to USD at $0.74. As we've done in the past, we've adjusted our full year guidance based on the currency benefit realized in Q1, but we will hold the balance of the year's guidance at the original planned rates given the dynamic currency environment. From a segment reporting perspective, ORV snowmobile segment sales were up 4% the first quarter, primarily due to favorable mix, PG and A sales and increased prices.
ORV sales increased 4%, which higher side by side sales offset by somewhat lower ATV sales. Average selling prices were up 11% for ORV during the quarter, driven by a combination of favorable product mix, as well as the price increases. Snowmobile whole goods sales were down for the quarter, driven by timing of shipments versus last year. Motorcycle sales decreased 10% in the first quarter. Both Indian and Slingshot sales were down during the quarter given challenging weather and continued weak market trends and increased competitive promotional spending.
Global adjacent market sales and average selling prices decreased 7% first quarter, primarily due to the timing of government sales and negative product mix. Aftermarket sales were flat with last year, with TAP sales down 2% and our other aftermarket brands increasing significantly during the first quarter. Tap's shortfall was driven by weakness in the wholesale and e commerce channels, and while we are disappointed with the performance, we have seen progress from the actions initiated in the latter part of 2018. Climb, in the quarter. Our Boat segment reported sales of $185,000,000 for the quarter, slightly ahead of expectations and up 12% on a pro form a basis compared to Q1 of 2018.
Boat show traffic during the quarter was strong, which tends to be a good leading indicator of orders. The Larson acquisition has been completed and production has started ramping up at our Syracuse, Indiana facility, where we currently manufacture our Rinker brand. Our international sales were down 4% on a reported basis but up approximately 3% excluding the unfavorable impact from foreign currency driven by strength in our Indian motorcycle business. Our parts, garments and accessories sales increased 8% during the quarter, Growth was driven by ORV slash no parts and accessories. Now moving onto our full year guidance.
Our total company sales guidance remains unchanged at $6,750,000,000 to $6,900,000,000, reflecting an increase of 11% to 13% versus 2018. We continue to expect the North American powersports industry to be up low single digits percent for the year with growth in the off road vehicle market and a decline in the motorcycle market. We expect boat sales to contribute about 6 percentage points to the growth and foreign exchange is anticipated to be a drag on growth of about 1%. We're increasing our full year adjusted earnings per share guidance for 2019 by $0.05 on both the lower and upper end of the previously issued guidance. And now expect net income to be in the range of $6.05 to $6.30 per diluted share, which reflects the benefit from better than anticipated foreign exchange rate during the first quarter and lower than anticipated interest expense given the latest signals that the Fed will not raise rates in 2019.
While our earnings expectations remain lower on a year over year basis, I want to reinforce that before the impact of tariffs, currencies and interest rates, we continue to expect significant earnings the first half of the year remains unchanged as well. We expect lower earnings in the first half on an absolute and as a proportion of the year, given the impact of tariffs, FX, as well as the continued ramp and R and D investments. We anticipate 2nd quarter sales growth will again benefit from the Boats Act position, increasing in the mid to high teens with earnings per share expected down a similar percentage as Q1 on a year over year basis. Aside from foreign exchange and interest, there are no other changes to our guidance. Margins are expected to be down on an absolute basis, driven by tariffs and foreign exchange.
Operationally, our margins are expected to improve in the range of 80 to 110 basis points driven by higher volume mix, productivity and price. Gross profit margin expectations by segment also remain unchanged. We have provided the gross profit margin details by segment in the appendix of this presentation. Adjusted operating expenses are expected to increase the mid teens percentage range in 2019, up 10 to 20 basis points as a percentage of sales. From the boat businesses, added expenses related to the new multi brand distribution center in Fernley, Nevada, higher variable compensation costs the costs associated with the summer dealer meeting and ongoing investments in research and development.
And lastly, interest expense will be up a high 30% range versus 2018, given the debt taken on to finance the Boats acquisition. This has slightly improved our the due to shipment timing between the first and second quarters, as well as costs associated with the tariffs. Factory inventory is expected to improve as we move through the year, which is a driver of the anticipated cash flow improvement of approximately 20% to 30%. With that, I'll turn it back over to Scott for some final thoughts.
Thanks, Clive. Thanks, Mike. Of either the U. S. Economy or our consumers slowing down, we are reasonably positive about 2019.
The Powersports industry is always competitive which is good for customers and those of us that serve them. The ongoing weakness of North American motorcycle market is well documented and shows no sign of turning around soon. However, Indian has demonstrated its ability to grow and capture market share and with the advent of exciting new bikes like the FTR 1200, Steve Menneto and his team are nowhere near done. With the full year strategic sourcing work under our belt, we are much more optimistic about the savings and value creation our teams will deliver. I'm not quite as optimistic about tariffs, but certainly expect that the worst is behind us and that throughout 2019, the news will improve.
We are working diligently to make sure that happens.
Questions. Session. The first question will come from Jamie Katz of Morningstar. Please go ahead.
Hi, good morning. I'm curious about TAP. I think the weakness that you guys are attributing to the segment this quarter, this wholesale and e commerce parts of the business is what you attributed to the weakness last quarter. So can you talk about what steps you might be taking to remedy that? And then, you know, how fast that can be remedied given that the aftermarket segment, it looks like you still have mid single digit guidance for the year on the upside?
Thanks.
Yes, Jamie, we are certainly pleased with the non half aspects of aftermarket. They're doing extremely well and half for the past 16 months or so. With the effort that Craig Scanlon and the team are driving at CAPP. We are reasonably comfortable that things are turning around and Mike indicated in his prepared remarks that we have seen signs of that the first quarter. On the e commerce side, we did have a bit of an issue with Amazon Prime where we actually didn't perform up to the program requirements.
And so we were taken off that. The team has rectified that, put the standard work in place. So that should be an issue that doesn't repeat itself. We also went through with both of the website that taps sells through a conversion of the system that operates them. And anybody that's gone through conversion understands that you have to reprogram everything for the AdWords to pick up and whatnot.
And we did see a slowdown when we did it the first time with 4WD site and then with the 4WP site more recently. So we're very comfortable that the e comm piece is going to turn itself around Wholesale has been a different, challenge. What we've tried to do there is make sure that we're not selling at the extremely to the extremely low margin customers, that ultimately drive prices down in the overall marketplace. And Craig and team have done a good job of getting that turned around. And like I said, we are comfortable with the plans they have in place and that we should see improvement from here.
Okay. And then you guys just comment on the motorcycle segment and Slingshot? I think it would be helpful because to think about Indian maybe a little separately because when we look at the gross margin of the whole segment, my suspicion is that slingshot is dragging that down pretty materially. So Is there a way to help us think about Indian's margin profile independently of Slingshot as that is more likely going to be what carries that segment longer term? Thanks.
Yes, I think, Jamie, there certainly is a difference. And I think given that Slingshot is still early in its introduction, there's opportunity to improve that. Right now, I would tell you that between the two segments, there is not a dramatic difference. Slingshot has taken a bit of a dip down because we're heavier on promotional side right now as we continue to move through some of the non current inventory. But at this point, there's not a huge structural difference between the two.
Okay, next question.
The next question comes from Greg Badishkanian of Citi. Please go ahead.
Great. Thanks. Could you talk about the promotional environment? How that changed throughout the first quarter? Into April because obviously you mentioned that there were some absurd promotions from competitors and that leveled off.
And you also mentioned that the value segment was primarily impacted. So will you have a competitive, response in that? Particular segment with maybe additional promotions and discounting to counter that?
Yes, I mean, I think, the call out on what I and I did use the word absurd. I'll admit that was really related to some of the issues we saw in the Southwest earlier in the quarter. And then in the midsize bike segment for motorcycles. And we just we've never reacted to some of these incredibly high when they've happened in the past and we didn't this time. And we think the programs we have in place and it's as I indicated in the second half of March early April or actually April has gone quite well.
So we're comfortable with the way the programs are working. We did we've been able to hold price very, very well. We are going to make sure that we're competitive on the value ATV side of the thing of the board. And with youth, I mean, just their lower price, the total price is lower. So therefore, taking, there's not as much margin there.
So we have to be a little bit careful. But Chris Musso and the team are reacting and as well as Steve on the mid size bike program, we tried a few things in in the latter part of March early April and our promotion activity is working. So we were the least promotional in, side by side in the quarter. And, as you know, we're not willing to not afraid to be promotional where we need to be. And I think, Chris and the team are are dialing that in right as we head into the 2nd quarter.
And just you maintained Indian market share Harley appears to have been much more promotional, in 2019 historically. So how does that backdrop feel in terms of the promotions from your competitors primarily Harley on the motorcycle side?
Well, it's interesting. I thought they were the brand that was never going to be promotional, but, now that we are dealing with it, we've been at this game for a long, long time. I mean, we know how to deal with the powersports industry's promotional, so we know how to do it. And as soon and really what mostly happened was in the midsize segment, we gained market share in heavyweights So as most of the promotional and midsize, and I'd tell you as soon as we saw what was happening, Steve Menneto and the team adjusted how they were approaching it and and we know how to turn it around. So we're comfortable playing this game and we believe that we can expand margins in motorcycles over time even as others in the industry decide to be much more promotional.
The next question comes from James Hardiman of Wedbush.
Share a little bit. Down a little bit, although on, I don't want to say meaningless products or meaningless categories, but Scott, obviously, you don't take that lightly. I think you talked about sort of regaining share during the balance of the year. I guess my question is, do you see that happening as soon as the second quarter or is it more about once we get the model year 'twenty products on the ground, then you'll be able to retake share?
No, we feel really good about our competitive position right now. I mean, And again, it was just that was the calendarization with weather and the way things played out was a little bit but we're feeling we're very encouraged by what we're seeing in April. And, Steve, I mean, Chris Musso and his team have really got, I mean, just great products And, I talked about the model year, the new model year coming out with the 65th anniversary that we're very encouraged about, but We don't much better leads into our dealerships. So yes, we're comfortable about our share position and how we will how market share will play out in the 2nd quarter.
And James, what I would add to that is the share loss in Q1 was we never liked to see the loss, but it was relatively small. The key for us is in the categories where we make significantly higher margins where it is, the premier products, like the Turbo S, the Ranger XP1000, Northstar. In those categories, we either held or gained share. And so, we've got to address some of the lower end of the spectrum, but in the areas where it matters, most for us. We're pretty proud of the accomplishments and we think we can continue to hold and gain momentum as we go through the year.
That's helpful. And then maybe along those lines, with some of the premium products, well, maybe this wasn't the reason, but it was a really good margin quarter at least versus the way that the Street was modeling it, not as much of that flowed through to the full year guide Mike, you talked about this a little bit in the prepared remarks, but maybe walk us through that one more time. Sounds like R and D was moved from 1Q to the second half. I didn't know if there was anything beyond that, maybe some G and A expenses. And then, guess the last question would just be if FX rates were to stay where they are now, what kind of a benefit would we be looking at for the full year?
Yes. So we took the year up by $0.05, roughly $0.03 of that was from foreign exchange and the other $0.02 was interest rates. So if you figure things held consistent with the 1st quarter, you're talking about roughly 0 point 0 $3 a quarter. From an operating expense standpoint, yes, I mean, primarily R and D, we shifted the timing around that. That's not just program related.
We also have R and D expenditures that's related to the recertification of suppliers as we go through the Gibson project. And then we also have some other strategic investments. And I think the team rightfully so, was careful as we went through the first quarter, just given the uncertainty of coming out of the end of last year, given the stock market volatility, And then some of the weather issues that we had, the point I would also make, we did have a good margin quarter, but when you look at the impact that FX had, and that tariffs had on our first quarter, our earnings would have been well north of 20% up year over year. And so I think it just really speaks to the underlying earnings power of the business. And when you think about the fact that we really are not registering any of the Gibson savings yet, that's going to be later in the year.
I'm pretty confident about the earnings power that we've got and that once these tariffs are cleared away, we're at least minimized and the teams continue to work counter actions that, we've got significant margin expansion opportunities.
Got it. Thank you.
The next question comes from Robin Farley of UBS. Please go ahead.
Thanks. I was going to ask a long similar lines about the side by side market share. And you mentioned that it's in the maybe the lower margin products. Is that something that will see at the dealer show some new product in those categories? Or are you really not necessarily concerned about your market share?
In those product categories? I guess in other words, how should we think about your market shares? In other words, is market share not the goal here ultimately if this growth is if your interest is where it is.
Robin, to be clear, we care a lot about market share. I mean, that the chart that I put into the deck this time, that shows the historical trend demonstrate that we pay really close attention to it and we're quite good at maintaining and sustaining and improving market share. What we talked about in ORV was really the value ATVs, not as much on the side by side. Where we had issues. We are, as you know, we really started the sport performance market with the razor 800 a decade ago.
And we have not done a complete refresh of that product in quite some time. And I think as our competitors introduce products in that market, we are seeing more share loss at that the lower end 50 inch segment than we are in other places. It's not that we don't care about it. We just don't have a new product there. As you know, we don't talk about what products that we're bringing to market.
But we're very comfortable with our current lineup of products to gain market share, as I told James, And with what we're bringing to market later this year, we think it'll just give us more opportunity to expand off road vehicle market share.
Okay. No, great. That's helpful. Thank you. And then just for my follow-up question, just motorcycle shipment guidance for the year is unchanged.
Up mid teens, but Q1 was down 10%. I know part of that was just the comp last year, right, that Q1 had the highest motorcycle shipment changed last year. Was there anything else about the timing of motorcycle shipments? Because it looks like it'll then be up significantly for the rest of the year.
To keep in mind is the numbers that we're talking about, it's the law of small numbers. So the number of units, the absolute unit move was not substantial, but on the base we're talking about it, it's over amplified. At this point, we don't have a significant change other than the timing similar to what we had with our org business as RFM reacted to the demand signals, as Scott referenced earlier, the good news being that we've seen retail momentum continue into April. So we're pretty confident about the full year guidance that we've got.
The next question comes from Scott Stember of CL King. Please go ahead.
Maybe just talk about boats. We'll see that the shipments will tell you up 12% pro form a. Maybe just talk about how retail performed during the quarter. Just from your perspective at least and how that has continued over into April?
Retail performance in the first quarter was down slightly just because of weather. Just like some of our other bid motorcycles, kind of similar. People just don't buy it when there's snow on the ground and that's somewhat similar for a boat retail. As Mike mentioned, we're the traffic at the boat shows was very good for us. I talked to Bob this morning and the trends that we're seeing as we start the second quarter are favorable.
So we feel good about our lineup. We talked about repositioning Bennington a little bit. We were Let's say our lineup didn't include some of the lower priced, smaller boats, the pontoons that were doing quite well last year. And so we we feel good about the lineup we have and the way the year starting out for us in boats. And we ramped up production of the Larson brand and that's going well.
So overall, I think we're encouraged as we head into the second quarter about where boats are. I mean, the acquisition is playing out, at or above our expectations.
All right. And just the last question, Going back to the question you just had about the earlier about a tap and losing, I guess, your prime status with Amazon. Could you just talk about did you get that back after you made the necessary changes?
Yes, we did. And what importantly, I believe the team has made the sustainable process improvements that will allow us to make sure that we keep it in place.
Got it. That's all I have. Thank you.
The next question comes from David Beckel of Bernstein. Please go ahead.
Hey, thanks for the question. Most of mine have been asked and answered, but I did want to circle back on the Chinese tariffs. If I'm wrong, it sounds like you're reasonably confident there will be a resolution here, before too long, but in the off instance, in which case, there isn't a satisfactory resolution and maybe state things stay status quo as they are today. Do you have plans in place in the near term to rectify your financial position with respect to those tariffs?
Well, I mean, I'd we've been at this now for about a year and we are, working incredibly hard on the administrative side of things, trying to make sure that everybody understands the disparate impact we have on the mitigation side of things, to ensure that if they're in place, they hit us. What we are the conversations we are had and what we read suggest that There is a desire at the very senior levels of both the U. S. And China for an agreement to be in place. I think that is necessary for many reasons not the least of which that it's beneficial to Polaris, but we believe that to happen.
If there is not a resolution and I believe the the schedule has it that it could be late May, early June sometime this quarter that such an agreement would be in place. If it doesn't happen, we will revert back to our very extensive efforts to make sure that we would be in line to get relief. And at the same time, continue our very aggressive mitigation efforts. So, we've got this about as well dialed in as it can be for something that's been so harmful to us. But, as I said in my remarks, and I believe this to be true, there's a lot better chance of upside in tariffs from here.
And just to follow-up on that, in an extreme case, would you be how extensive would it be to sort of reposition your supply chain from China to another, source market?
It's really, really hard.
Got you. Okay. That's helpful. Thank you. The next question comes from Michael Swartz of SunTrust.
Please go ahead.
Hey, good morning guys. Mike, just wanted to ask you a question on FX. Obviously, it was a benefit the quarter versus your expectations. But I think you said within your guidance, you're maintaining the expectations that you set out from beginning of the year. So if I just look at it today, I mean, what would the benefit be if FX ended at today's rates?
Yes. So, Mike, what we did is we built in the 1st quarter favorability, which was the $0.03 I mentioned earlier. We've got the Canadian dollar at $0.74 and the euro to $1.12. If you look at the rates where they are today, they're pretty close to that. Which is why we basically held guidance in terms of Q2, Q3 and Q4.
And as I indicated in one of the responses I had earlier, if rates held consistent with what we saw in Q1, it's probably a $0.03 to $0.04 benefit, as we move forward relative to our guidance.
Okay. That's great. And then just with the decision, I guess, RSM to kind of check some of the shipments in the first quarter, I guess, based on weather and slower retail. Is that to say that as we see better or improve retail, improved weather, etcetera, in the second quarter that most of those shipments should show up in the second quarter, or is that something that will play out through the remainder of the year?
Well, remember, as we go into the 2nd quarter, we're looking at a lot of factors. The RFM system, we don't really get to decide. The system tells us what to do and we react to it and we choose not to ignore it because, you know, we have really done a lot of work with our profiles understand what products our dealers need to have in order to optimize retail performance for us and their profitability. So the system tells us to do that and we react to it. We did it with motorcycles.
We did it with off road vehicles in the first quarter. So as demand picks up, we'll certainly ship more, but we are also mindful in the second quarter is that we're heading into the new model year stuff. So we need to make sure that we manage inventory appropriately that we've got the right stock in place whether it's for the factor authorized clearance sale or to make room for the new products. So we're managing a lot of things throughout the second quarter, and I feel very comfortable with the way the team is position that. And it's worth noting the work that Ken and his supply chain and factory teams have done have put us in a position.
So our delivery times and schedules are about as good as they've ever been. So that enables us to react quickly to what's going on in the marketplace.
Okay, great. That's it for me. Thanks, guys.
The next question comes from Joe Altobello of Raymond James. Please go ahead.
Hey guys, good morning. So I want to circle back on motorcycles for a second. Obviously, first quarter down a bit. You guys kept your guidance in terms of sales for the full year intact, did mention that you are going to experience some tariffs, obviously, as you ship those bikes into Europe. So how should we think about the profitability of that segment?
I mean, you've talked about gross margin being down in percentage, but would we expect to see on an absolute basis profitability for that business up this
substantial. So I think the motorcycle business is going to be challenged this year. I mean, the good news is, is that we've got the Poland facility up and running and producing scouts. And then obviously, we'll be migrating the FTR production there that supports the European volume. And so we think we'll be well positioned as we get out of 2019 heading to 2020.
But
it's no I mean, Mike, our guidance hasn't changed. We knew this was going to be the case. We'd always planned on the FTR shipping from Spirit Lake over to Europe. So this was, I was just reiterating the impact, not stating something new.
Okay, understood. And then on cash flow, a little bit lower than it was last year. Obviously, in the this quarter. Seems like it's very 2nd half weighted. I know you touched on this a little bit earlier, but maybe give us what the drivers are for that change in cadence.
And is this how we should think about cash flow going forward very much second half weighted?
Yes, I think some of it, Joe, is just the cadence of our inventory. I spoke to it a little bit in my opening remarks that our inventory was elevated, which is a direct reflection of what RFM does So as we start to clear through that and then the improvement actions that we've got within the business, we'll continue to play out as we go through the year. The thing I'd point out is even though our inventory was elevated above what we expected it to be given the RFM triggers, we're still improving on a turns basis year over year. And so The team is pushing hard on that. We continue to expect that to occur throughout the year.
And when you look at it relative to where our inventory position was last year, that's really where a lot of that cash flow improvement comes from.
Got it. Okay. Thank you, guys.
The next question comes from Craig Kennison of Robert W. Baird. Please go ahead.
Yes, good morning. Scott, just to build on your opening comments, Tony Bennett is from Wisconsin.
I figured you and James would like that.
Absolutely. Well, my first question has to do with tax refunds. I know whether seem to be a factor this quarter, but to what extent do you think delayed tax refunds, which appeared to normalize later in the quarter impacted demand?
I don't we didn't see any signs of that being a factor. It, again, what And I just hesitate to blame weather because we don't really take credit for weather when it's really good. So I don't like to blame weather when it's bad, but certainly that's what most closely correlated to the sharp improvement that we saw in the second half of March. And I don't think it was related to tax returns, but maybe helped a little bit.
Yes, I mean, Craig, we went off and looked at it. And to Scott's point, we hate pointing at weather, something so uncontrollable, but We have done the analysis where we've looked at whether it's a cold or a warm quarter and there is a definite correlation specifically to our side by side business where the colder wet weather does tend to drive the demand. And then once that clears up, it seems to be pent up demand that recovers in the coming month or 2. And As far as tax, I had our tax team go out and look at a number of articles and the specifics. I just don't think the delay or the amount was enough trigger when you think about the cost of our products.
And then just a question on dealer engagement, I know, Scott, that's been a priority for you. What are you doing to drive better dealer engagement scores?
Our team took that to heart coming out of the whole recall situation, we saw an opportunity to do significantly better. And, I mean, I'm really proud not only not just on the off road side, but Chris and Steve are kind of partnering up. One of the most important things, well, first of all, delivery is always a big issue. So Ken and his team have improved delivery and I think our RFM systems in place and they're helping that. The factory choice is really helping their margins.
But the CRM system that we've invested heavily in the quality of leads that we're giving to our dealers is up dramatically. And that helps our retail. It's they're more efficient with their sales personnel. So that's really encouraging. I think Chris was just down in the Southwest.
Right now, well, not probably. They are the largest dealer group that sell to. And they were very encouraged about the way our engagement with them is going and the opportunities that we have to grow together, going forward. But it's a multifaceted approach, but it really starts with giving them the right products that allow them to deliver profitable growth. But Some of the digital tools that we're working on is incredibly good.
We've repositioned the sales force. So there's the efficiency of which we're dealing with them is better. So I think it's we're seeing we do more extensive surveys than you can imagine. And so we're seeing the scores improve and we believe there's a good bit of room to go from here.
Thanks. The next question comes from Brandon Rollay of Northcoast Research. Please go ahead.
Hi. I was hoping if you could expand on the boat segment margins. This was the 3rd consecutive quarter where they declined more than 100 basis points. Kind of what's going on there and how do you expect that to play out throughout the rest of the year? Thanks.
Yes, we, we've got a number of initiatives underway and some of that is just the volume levels that we had in Q1 and the mix of boats. But we feel comfortable that we'll be able to get those margins up as as we've indicated close to 20%. And we have the right synergy activities and actions underway to make sure that we achieve that. There's definitely a little bit of pressure as we made sure that we had a full value lineup within the Bennington portfolio, given the fact that we've gained share in Q1, even though it is a low retail quarter, it's clearly those efforts are working, but we do have enough margin improvement opportunities on the Rinker Hurricane and Godfrey lines that we should be able to achieve our objectives.
Okay, great. And then a quick follow-up from speaking with dealers, it seems like more people are more Slingshot dealers at least are starting to put in termination papers or trying to get out of the agreement. Kind of could you comment on what you're seeing there and how that impacts how you think about Slingshot moving forward?
Obviously, we've got work to do on Slingshot, but I will tell you, and part of that work is repositioning our dealer network. We don't have the right dealers. One of the exercises that, Steve and team went through was they went to the top 25 and we do have more than 25, but the top 25 dealers that do really well with Slingshot, and we learn what they're doing. And we compared it to what's happening at the rest of the network and we're trying to make sure that we go through that. Part of the terminations are likely to come because we're setting higher expectations.
And, we feel good about that. But it's not just we need improvements in our dealer network, we need improvements in the product. And I think, I'm very appointed in how that business has performed today. But I'm also, encouraged that we know what happened. We know how to fix it and our plan and actions are in place to put that business in a better position as we exit 2019.
And and start to accelerate turnaround in 2020.
All right. Thank you.
The next question comes from David McGregor of Longbow. Please go ahead.
Yes, thanks for taking the question. Maybe I'll ask another dealer question as well, but with respect to Indian motorcycles, any growth in the U. S. Dealer network and what are plans, if any, for the U. S.
Expansion? And this, again, maybe what's changing in terms of yours and the competitive dealer incentives?
Yes. No, we are, we said last year that we were going to manage dealer expansion to make sure that we focused on dealer profitability. We wanted to ensure that our Indian dealers we're solidly profitable before we add more to
the network.
We're comfortable where we are now. Steve is, and his team have plans in place that we've got new dealers signed up we'll pass the 200, dealer mark sometime in the next few months. And then, we think over time the U. S. Is probably going to support about 300 dealers and we'll just methodically work our way there.
It really is about growing profitable dealers and market share along the way. And we think with the bike line, if we have and that we're bringing to market, that that's possible.
Scott, did you see anything in terms of change in yours or your competitors' dealer incentives? You talked earlier about promotional activity being elevated. I'm assuming you were referring to the consumer incentives, but what about for the dealers?
I think the dealer incentives were probably more prevalent on the off road vehicle side as they were getting out rid of some of our competitors aged inventory. The combination of I think most of the motorcycle, the competitive motorcycle, were probably driven by the manufacturer, but in that was a combination that really drove the midsize promo so high was the combination of both financing mean, really long favorable financing terms and, and then just cash incentives as well. But no, like I said in my remark, we're comfortable dealing with it. We know we know the game and, and we feel like from a promotional standpoint, we're as good as anybody in the industry.
The next question comes from Tim Conder of Wells Fargo Securities. Please go ahead.
Thank you. Just wanted to follow-up on 21. Scott, you guys have talked about some additional product coming this year on the Slingshot side. And obviously in response to your prior question, which doing on the dealer network, how much longer will you give rope here? I mean, if you maybe some automatic and upgraded the dealer network.
Are we looking at a 3 year type of period, I guess, to evaluate, sort of continuing or not with Slingshot? And then maybe a more difficult question to ask, but if you had to put some type of parameters on it, a combination of whatever potential type of trade deal and and exemptions that you would be granted, how much do you see the the China tariff that can be mitigated through those avenues alone?
Yes. Well, on SlingShot side, I will say we have not put our best foot forward with that product yet. I'm really confident that the plans we have in place are going to give us, give that business the best chance of success. Until we've done that you can't really consider it. My requirement is we've got every return on invested capital metric you could want as we look at our business is going forward.
But my simple one is, is there a future of profitable growth or not? And I will tell you, as I look at where we are with Slingshot and what we're bringing to market for Slingshot, not necessarily this year, but over the next couple of years, I'm very comfortable that there is a future of profitable growth for that business. If that proves not to be true, we will reconsider our investment. But right now, we are comfortable that there's a strong future of profitable growth there not trade for you? The strategic sourcing program that we're engaged in is really, really good.
Through it, we're evaluating all of our suppliers. And one of the things that I've required the team to do is where we have, China source, we've got to have an alternative source. So we just make sure we have that available. When I said it was hard earlier to switch out, I mean, there are some certain parts that it's just it's in difficult to move anywhere else. And remember, to move our parts in some cases is very, very difficult from an engineering and validation standpoint.
But we're comfortable. I feel very good about where the negotiations are, and I feel very good about where our team has positioned us to deal with them as they currently exist
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. I want to thank everyone for your time this morning and we look forward to talking to you again next quarter. Thanks again. Goodbye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.