Good day, and welcome to the Polaris first quarter 2019 earnings call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. 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, will 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 and 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 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 CEO, Scott Wine. Scott?
Good morning and thank you for joining us. Earlier this month, we hosted the NCAA Final Four 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 Polaris stands 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 youth, 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 invest heavily in the U.S., spending over $200 million in the last three years building new facilities that employ over 1,500 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 is proud to be a vocal proponent and benefactor of this proven system. I am 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 thousand units out of our ship plan to protect dealer inventory.
I am reluctant to blame weather for our weaker than expected ORV and motorcycle retail, but their sharp rebound in the final two weeks of March corresponded so closely with the improved weather that I must acknowledge it was a factor. Ordinarily, I would be upset if our team did not utilize every tool to preserve a few basis points of market share. 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 sleds, 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&A business.
Ken Pucel 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. First quarter North American retail sales were down 3% as strong snowmobile sales were insufficient to overcome a 10-plus percent decline in ATV retail. Motorcycles were also weak, but Indian again gained market share, although we did it with heavyweight instead of mid-size bikes this quarter. Side-by-side retail was down slightly, and we lost about a half a percent of market share. 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 RZR 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 and early March, then a significant recovery during the final two weeks of the quarter. Customer demand remained 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 obsession 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&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. 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 301 List 3 tariffs did not increase to 25%. We remain focused on achieving real relief, not just avoiding new tariffs. With the possibility of a U.S.-China agreement this quarter, we are actively evaluating the potential to reduce our 2019 impact. The retaliatory tariffs from Europe are harmful as we ramp up shipments of our FTR 1200 bikes this quarter. Bringing our Poland plant online will help, but is initially limited to Scout assembly.
From engineering and plant investments to technologies and even organization structures, our strategic purpose of being a customer-centric, highly efficient growth company drives everything we do. 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. Our Ranger Country tour will reach even more customers. Productivity and efficiency are enabled by our improvements in safety and quality. 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 billion in spend. Projected savings are at or above our initial estimates. A growth mindset is part of our culture. 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 ORV/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 million 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. First 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 quarter, due primarily to the timing of research and development investments, which will now likely occur in the second half of 2019. This expense timing change will not impact any of our programs. Foreign exchange had a negative impact on the quarter versus 2018, driven by a strong dollar, primarily against the EUR and the CAD. The negative impact in Q1 was slightly lower than we originally anticipated, which also contributed to earnings being better than expected. As a reminder, we plan full year 2019 expecting foreign exchange to have a negative impact on pre-tax profit of approximately $30 million or $0.40 per share, assuming an average EUR to USD rate at EUR 1.12 and the CAD to USD at CAD 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 plan rates given the dynamic currency environment. From a segment reporting perspective, ORV/snowmobile segment sales were up 4% in the first quarter, primarily due to favorable mix, PG&A sales, and increased prices. ORV sales increased 4% with 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 good 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, continued weak market trends, and increased competitive promotional spending. Global adjacent market sales and average selling prices decreased 7% in the 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 shortfall was driven by weakness in the wholesale and e-commerce channels. While we are disappointed with the performance, we have seen progress from the actions initiated in the latter part of 2018. Klim, Kolpin, and 509 benefited from the favorable snow conditions in the quarter. Our boats segment reported sales of $185 million for the quarter, slightly ahead of expectations and up 12% on a pro forma 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 accessory sales increased 8% during the quarter. Growth was driven by ORV/snow parts and accessories. Our full-year guidance. Our total company sales guidance remains unchanged at $6.75 billion-$6.9 billion, reflecting an increase of 11%-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 six percentage points to the growth, 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-$6.30 per diluted share, which reflects the benefit from better-than-anticipated foreign exchange rates 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 growth from an operational perspective. The allocation of our 2019 guidance between the first and second 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 in R&D investments. We anticipate second quarter sales growth will again benefit from the boats acquisition, 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. Let me reiterate a few key points.
Adjusted gross profit 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 80-110 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 in the mid-teens percentage range in 2019, up 10-20 basis points as a percentage of sales. The increase is related to the addition of operating expenses 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.
Lastly, interest expense will be up in the high 30% range versus 2018, given the debt taken on to finance the boats acquisition. This is slightly improved from our prior guidance, given the assumptions that the Fed will not raise rates in 2019. Our sales expectations by segment remain unchanged. All of our segments are expected to grow sales driven by our strong brands and innovation. Operating cash flow finished down $38 million in Q1, driven primarily by higher factory inventory 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 substantial driver of the anticipated cash flow improvement of approximately 20%-30%. With that, I'll turn it back over to Scott for some final thoughts.
Thanks, Mike. Our spring sales event is playing out well, with no apparent signs 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. We like our competitive position and are much more comfortable now that we are back to playing offense. 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, with the advent of exciting new bikes like the FTR 1200, Steve Menneto and his team are nowhere near done. With a 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. Andrew, please open the line for questions.
We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. To give parties an opportunity to ask a question, we ask that you, ask one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question will come from Jaime Katz of Morningstar. Please go ahead.
Hi, good morning.
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. Can you talk about what steps you might be taking to remedy that? 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.
Yeah, Jaime. We are certainly pleased with the non-TAP aspects of aftermarket. They're doing extremely well and have for the past 16 months or so. With the efforts that Craig Scanlon and the team are driving at TAP, we are reasonably comfortable that things are turning around. Mike indicated in his prepared remarks that we have seen signs of that in 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. We were taken off that. The team has rectified that, put the standard work in place. That should be an issue that doesn't repeat itself. We also went through with both of the websites that TAP sells through a conversion of the system that operates them.
Anybody that's gone through a conversion understands that you have to reprogram everything for the AdWords to pick up and whatnot. We did see a slowdown when we did it the first time with the 4WP site and then with the 4WP site more recently. We're very comfortable that the e-com piece is going to turn itself around. Wholesale's been a different challenge. What we've tried to do there is make sure that we're not selling to the extremely low-margin customers that ultimately drive prices down in the overall marketplace. Craig and team have done a good job of getting that turned around. Like I said, we are comfortable with the plans they have in place and that we should see improvement from here.
Okay. Can you guys just comment on the motorcycle segment and Slingshot? I think it would be helpful to think about Indian Motorcycle maybe a little bit separately, because when we look at the gross margin of the whole segment, my suspicion is that Slingshot is dragging that down pretty materially. Is there a way to help us think about Indian Motorcycle's margin profile independently of Slingshot, as that is more likely going to be what carries that segment longer term? Thanks.
Yeah, I think Jaime, there certainly is a difference. 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 the promotional side right now as we continue to move through some of the non-current inventory. At this point, there's not a huge structural difference between the two. Okay, next question.
The next question comes from Gregory Badishkanian of Citi. Please go ahead.
Great. Thanks. Could you talk about the promotional environment, how that changed throughout the first quarter into April? Obviously you mentioned that there were some absurd promotions from competitors and has that leveled off? You also mentioned that the value segment was primarily impacted. Will you have a competitive response in that particular segment with maybe additional promotions and discounting to counter that?
Yeah, I think the callout on what 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 mid-size bike segment for motorcycles. We've never reacted to some of these incredibly high when they've happened in the past, and we didn't this time. We think the programs we have in place, and as I indicated in the second half of March and early April, or actually April, has gone quite well. We're comfortable with the way the programs are working. We've been able to hold price 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.
They're lower price, the total price is lower, so therefore there's not as much margin there, so we have to be a little bit careful. Chris Musso and the team are reacting, and as well as Steve on the mid-size bike program. We tried a few things in the latter part of March and in early April, and our promotion activity is working. We were the least promotional in side-by-sides in the quarter. As you know, we're not afraid to be promotional where we need to be, and I think Chris and the team are dialing that in right as we head into the second quarter.
Just you maintained Indian market share. Harley appears to have been much more promotional in 2019 historically. 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. Now that we are dealing with it, we've been at this game for a long time. We know how to deal with the powersports industry's promotional, so we know how to do it. Really what mostly happened was in the mid-size segment. We gained market share in heavyweights. It was mostly promotional in mid-size, and I tell you, as soon as we saw what was happening, Steve Menneto and the team adjusted how they were approaching it, and we know how to turn it around. 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.
Thank you.
The next question comes from James Hardiman of Wedbush. Please go ahead.
Hey, good morning. wanted to talk about the ORV market share a little bit. Down a little bit, although on, I don't want to say meaningless product or meaningless categories. 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 2020 products on the ground, you'll be able to retake share?
No, we feel really good about our competitive position right now. again, the calendarization with weather and the way things played out was a little bit We're very encouraged by what we're seeing in April. Chris Musso and his team have really got just great products. I talked about the new model year coming out with the 65th anniversary that we're very encouraged about. We don't feel like we're playing with one hand tied behind our back at all right now from a product standpoint. as I mentioned, the work we're doing with CRM and lead management, we're getting much better leads into our dealerships. yeah, we're comfortable about our share position and how market share will play out in the second quarter.
James, what I would add to that is, the share loss in Q1 was, we never like 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 XP 1000, NorthStar. In those categories, we either held or gained share. 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. 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&D was moved from 1Q to the second half. I didn't know if there was anything beyond that, maybe some G&A expenses. I 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?
Yeah. We took the year up by $0.05. Roughly $0.03 of that was from foreign exchange, and the other two was interest rates. If you figure things held consistent with the first quarter, you're talking about roughly $0.03 a quarter. From an operating expense standpoint, yeah, primarily R&D, we shifted the timing around. That's not just program related. We also have R&D expenditures that's related to the recertification of suppliers as we go through the Gibson project. We also have some other strategic investments, 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, 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've been well north of 20% up year-over-year. I think it just really speaks to the underlying earnings power of the business. When you think about the fact that we really are not registering any of the Gibson savings yet, that's going to be latter in the year. I'm pretty confident about the earnings power that we've got and that once these tariffs are cleared away or at least minimized and the teams continue to work the counteractions, that we've got significant margin expansion opportunities.
Got it. Thank you.
Yeah. Thanks. Next question.
The next question comes from Robin Farley of UBS. Please go ahead.
Thanks. Yeah, I was going to ask along similar lines about the side-by-side market share, and you mentioned that it's in maybe the lower margin products. Is that something that we'll 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 your earnings growth is where it is?
Robin, to be clear, we care a lot about market share. The chart that I put into the deck this time that shows the historical trend demonstrates 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. As you know, we really started the sport performance market with the RZR 800 a decade ago. We have not done a complete refresh of that product in quite some time. I think as our competitors introduce products in that market, we are seeing more share loss at that 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. We're very comfortable with our current lineup of products to gain market share, as I told James.
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. Just for my follow-up question, motorcycle shipment guidance for the year is unchanged and up mid-teens, but Q1 was down 10%. I know part of that was just the comps last year, right? That Q1 had the highest motorcycle shipment change last year. Was there anything else about the timing of motorcycle shipments? 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. The number of units, the absolute unit move was not substantial, but on the base we're talking about 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 ORV 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. We're pretty confident about the full-year guidance that we've got.
Okay, great. Thank you very much.
The next question comes from Scott Stember of CL King Please go ahead.
Good morning.
Morning.
Good morning.
Morning. Just talk about boats. We see that the shipments, I will tell you, up 12% pro forma. Just talk about how retail performed during the quarter, just from your perspective at least, and how that has continued over into April.
Well, retail performance in the first quarter was down slightly just because of weather. Just like some of our other bit motorcycles, kind of similar. People just don't buy it when there's snow on the ground, that's somewhat similar for boat retail. As Mike mentioned, the traffic at the boat shows was very good for us. I talked to Bob this morning, the trends that we're seeing as we start the second quarter are favorable. We feel good about our lineup. We talked about repositioning Bennington a little bit. Let's say our lineup didn't include some of the lower priced, smaller boats, the pontoons that were doing quite well last year. We feel good about the lineup we have and the way the year's starting out for us in boats. We ramped up production of the Larson brand, that's going well.
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.
Just the last question. Going back to the question you just had earlier about TAP and losing, I guess, your prime status with Amazon. Can you just talk about did you get that back after you made the necessary changes?
Yes, we did.
Okay.
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.
Thanks, Scott.
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. Correct me 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 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, 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. The conversations we are had and what we read suggests 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 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. At the same time, continue our very aggressive mitigation efforts. We've got this about as well dialed in as it can be for something that's been so harmful to us. 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.
Just to follow up on that. In an extreme case, 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.
Morning.
Mike, just wanted to ask you a question on FX. Obviously, it was a benefit to the quarter versus your expectations, I think you said within your guidance, you're maintaining the expectations that you set out from the beginning of the year. If I just look at it today, what would the benefit be if FX ended at today's rate?
Mike, what we did is we built in the first 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, 3 and 4. 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-$0.04 benefit as we move forward relative to our guidance. Just with the decision, I guess, the RFM 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 improved retail, improved weather, et cetera, 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? Remember, as we go into the second 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 we have really done a lot of work with our profiles to understand what products our dealers need to have in order to optimize retail performance for us and their profitability. 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.
As demand picks up, we'll certainly ship more, but we're also mindful in the second quarter is that we're heading into the new model year stuff. We need to make sure that we manage inventory appropriately, that we've got the right stock in place, whether it's for the factory-authorized clearance sale or to make room for the new product. We're managing a lot of things throughout the second quarter, and I feel very comfortable with the way the team has positioned that. 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. 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 Joseph Altobello of Raymond James. Please go ahead.
Okay. Hey, guys. Good morning. Wanted 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. How should we think about the profitability of that segment? 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 year?
Joe, the impact of that inbound tariff is pretty substantial. I think the motorcycle business is going to be challenged this year. The good news is that we've got the Poland facility up and running and producing Scouts, obviously, we'll be migrating the FTR production there that supports the European volume. We think we'll be well-positioned as we get out of 2019 heading to 2020. 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. I was just reiterating the impact, not stating something new.
Okay, understood. On cash flow, a little bit lower than it was last year, obviously, in the first quarter. Seems like it's very second-half weighted. I know you touched on it a little bit earlier, maybe give us what the drivers are for that change in cadence, and is this how we should think about your cash flow going forward, very much second-half weighted?
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. As we start to clear through that, the improvement actions that we've got within the business will 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. The team is pushing hard on that. We continue to expect that to occur throughout the year. 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.
Yep.
The next question comes from Craig Kennison of Robert W. Baird. Please go ahead.
Yeah, 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 weather seemed 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?
We didn't see any signs of that being a factor. I just hesitate to blame weather because we don't really take credit for weather when it's really good. 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 it helped a little bit.
Yeah. Craig, we went off and looked at it, and to Scott's point, we hate pointing at weather, something so uncontrollable. 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.
Once that clears up, it seems to be pent-up demand that recovers in the coming month or two. 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 for the amount was enough to trigger when you think about the cost of our products.
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. I'm really proud, not just on the off-road side, but Chris and Steve are kind of partnering up. One of the most important things first of all, delivery is always a big issue. Ken and his team have improved delivery, and I think our RFM system's in place, and they're helping that. The factory choice is really helping their margins. The CRM system that we've invested heavily in, the quality of leads that we're giving to our dealers is up dramatically. That helps our retail. They're more efficient with their sales personnel. That's really encouraging. I think Chris was just down in the Southwest. RideNow, they are the largest dealer group that we sell to.
They were very encouraged about the way our engagement with them is going and the opportunities that we have to grow together going forward. It's a multifaceted approach, but it really starts with giving them the right products that allow them to deliver profitable growth. Some of the digital tools that we're working on is incredibly good. We repositioned the sales force, the efficiency of which we're dealing with them is better. I think we're seeing, we do more extensive surveys than you can imagine. 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 Rolli of North Coast Research. Please go ahead.
Hi. I was hoping if you could expand on the boat segment margins. This was the third 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.
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. We feel comfortable that we'll be able to get those margins up as we've indicated, close to 20%. 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. We do have enough margin improvement opportunities on the legacy Rinker, Hurricane, and Godfrey lines that we should be able to achieve our objectives.
Okay, great. A quick follow-up from speaking with dealers, it seems like more people or more Slingshot dealers at least are starting to put in termination papers or trying to get out of the agreement. Could you comment on what you're seeing there and how that impacts how you think about Slingshot moving forward?
Yeah. Obviously, we've got work to do on Slingshot, but I will tell you, part of that work is repositioning our dealer network, where 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. We learned what they're doing, we compared it to what's happening at the rest of the network, 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. We feel good about that. It's not just we need improvements in our dealer network. We need improvements in the product.
I think I'm very disappointed in how that business has performed to date, I'm also encouraged that we know what happened, we know how to fix it, our plans and actions are in place to put that business in a better position as we exit 2019 and start to accelerate the turnaround in 2020.
All right. Thank you.
Thanks.
The next question comes from David MacGregor of Longbow. Please go ahead.
Yeah, thanks for taking the question. Maybe I'll ask another dealer question as well, but with respect to Indian Motorcycle, any growth in the U.S. dealer network, and what are your plans, if any, for the U.S. expansion? Just, again, maybe what's changing in terms of yours and competitive dealer incentives?
Yeah. We said last year that we were going to manage dealer expansion to make sure that we focus on dealer profitability. We wanted to ensure that our Indian dealers were solidly profitable before we added more to the network. We're comfortable where we are now. Steve and his team have plans in place that we've got new dealers signed up, and we'll pass the 200 dealer mark sometime in the next few months. 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. We think with the bike lineup we have and that we're bringing to market, that that's possible.
Then, 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 assume 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 rid of some of our competitors' aged inventory.
I think most of the competitive motorcycle were probably driven by the manufacturer. That was a combination that really drove the mid-size promo so high was the combination of both financing, really long favorable financing terms and then just cash incentives as well. No, like I said in my remark, we're comfortable dealing with it. We know the game and we feel like from a promotional standpoint, we're as good as anybody in the industry.
Thanks a lot.
The next question comes from Tim Conder of Wells Fargo Securities. Please go ahead.
Thank you. I just wanted to follow up on two. One, Scott, you guys have talked about some additional product coming this year on the Slingshot side, obviously in response to a prior question, what you're doing on the dealer network. How much longer will you give rope here? Maybe some automatic and upgrading the dealer network. Are we looking at a 3-year type of period, I guess, to evaluate sort of continuing or not with Slingshot? 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 exemptions that you would be granted, how much do you see the China tariffs that can be mitigated through those avenues alone?
On the 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 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 businesses going forward. My simple one is there a future of profitable growth or not? 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.
Right now, we are comfortable that there's a strong future of profitable growth there over time. What was the other question?
Trade deal exemption.
Oh, the trade.
Exemption on trade deal.
The strategic sourcing program that we're engaged in is really, really good. Through it, we're evaluating all of our suppliers. One of the things that I've required the team to do is where we have a China source, we've got to have an alternative source. We just make sure we have that available. When I said it was hard earlier to switch out, there are some certain parts that it's difficult to move anywhere else. Remember, to move our parts in some cases is very, very difficult from an engineering and validation standpoint. 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 and if they were to extend into the future.
Okay, thank you.
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.