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Polaris Industries Inc  (NYSE:PII)
Q3 2018 Earnings Conference Call
Oct. 22, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone and welcome to the Polaris 2018 Third Quarter Earnings Results Conference Call. (Operator Instructions)

I would now like to turn the conference over to Richard Edwards, Head of Investor Relations. Please go ahead.

Richard Edwards -- Head of Investor Relations

Thank you, Will and good morning, everyone. Thank you for joining us for our 2018 third quarter earnings conference call this morning. A slide presentation is accessible at our website at www.ir.polaris.com, which has additional information for this morning's call. Today, you will be hearing remarks from Scott Wine, our Chairman and Chief Executive Officer; and Mike Speetzen, our Chief Financial Officer.

During the call, we will be discussing various topics, which should be considered forward-looking for the purpose 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 2017 10-K for a more detailed discussion of these risks and uncertainties.

Additionally, all references to third quarter 2018 actual results and 2018 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 W. Wine -- Chairman and Chief Executive Officer

Thank you, Richard. Good morning and thank you for joining us. I recently sent an email with the subject line that simply read -- tariffs-tariffs-tariffs. The word represent different things to different people. A strategic tool for progress, cost, benefits, protection, challenges, the list goes on. But as we will describe this morning, we are working tirelessly to limit the impact of tariffs on our business, employees and customers and that determination paid off in the third quarter.

A stronger economy usually comes at a cost, so while we saw the continued benefits of a healthy consumer demand throughout the quarter, the corresponding increases in logistics and commodities were not unexpected headwinds. Innovation is our proven methodology for overcoming obstacles and our new model year '19 vehicles spurred dealer orders and customer traffic in the third quarter. North American retail sales were up slightly versus the plus 13% compared from the prior year period, with RANGER's and mid-size motorcycles leading the way. Boat Holdings is maintaining their growth focus during the integration process and drove solid results in the first few months with Polaris.

International sales and profitability outperformed with Indian driving growth in our Opole plant boosting profitability. The revitalization effort at Transamerican Auto Parts is making progress, albeit slower than we would like, but strength in our core PG&A business is a positive offset.

A 1% increase in third quarter retail sales is not something we normally celebrate, but is a tribute to our dealers, our team and the improved product availability afforded by optimized dealer inventory levels that we were able to deliver that against the largest prior year comparison we've had in many years while spending less on promotion. We also kept our logistics cost increases well below market while leveraging RFM to deliver our best side-by-side on-time delivery performance since we began measuring.

The overall North American powersports industry was down primarily due to weakness in motorcycles and ATVs. Our RANGER and GENERAL product lines continue to perform well, which led ORV to modest growth for the quarter.

Indian was up low-single digits with strength in Scout and Bobber offsetting industry weakness and declines in Indian heavyweight bikes. Even amid unprecedented promotions by a competitor in September, we surpassed 25% market share in mid-size bikes for the first time in our history and look forward to building those riders into lifelong customers.

Slingshot retail was down again, and while we are working hard to gain traction with our partnerships and grassroot marketing efforts, we do not expect to return to growth until mid-2019 for Slingshot. Bennington posted strong third quarter retail and saw encouraging dealer demand for their new boats. Authenticity is extremely important to brands these days, particularly with the younger demographic, we are seeking to attract. Our Indian Motorcycle team and racers took this to heart as they launched the new FTR 1200 in the most authentic way possible. The flat track racer is our first standard bike and perfectly complements our fast growing mid-size segment. It is likely to be at least as popular in Europe as the US, so holding a launch in Cologne, Germany in conjunction with Intermonte, one of the largest motorcycle shows in the world only made sense. But the FTR story started several years ago when Indian reentered the flat track racing circuit after an absence spanning far too many decades. With newly designed bikes and an Indian heritage rich with racing success, our engineers and riders rebuilt the FTR legend on the track by winning almost always. With a three year record of 31 wins, out of 35 races and with our top rider Jared Mees winning nearly 60% of those races on its way to consecutive series championships, our flat track racing credentials are undisputed. Jared joined me on stage to launch the FTR 1200 and I have never felt better about being upstaged by both the man and a bike. We will not begin shipping the new bikes until spring but the authentic buzz around the world's fastest production Indian is already reaching a fever pitch. My team and I are spending a great deal of time on tariffs, but given the size complexity and importance of this issue, finding and implementing countermeasures requires our best efforts.

As I mentioned earlier, these efforts have largely been effective so far, allowing us to hold our 2018 gross tariff impact to the previous communicated $40 million. Despite its potentially significant impact on our business, we understand and firmly support the administration's stated goal of achieving much freer and fairer trade with China. Through a recent discussion and analysis, we now believe it is unlikely there will be a short or medium-term agreement with China on trade issues and with substantial impact of the 301 List looming, we are considering and taking more aggressive actions. Those actions fall into three primary categories; negotiation, pricing, and advocacy with the objective being the either largely mitigate or obtain relief from the 301 tariff impact.

We have successfully negotiated through the NAFTA rewrite and believe the new USMCA agreement will be neutral to Polaris. The more important negotiations are with our suppliers, who we fully expect to absorb their fair share of tariffs. I'm not sure that most Americans understand that Polaris and other American companies are the ones who pay China tariffs but since we do, we are pushing back on our Chinese suppliers to cover a reasonable portion of these costs. Our approach with domestic suppliers is similar. Polaris will not bear the full burden of these tariffs. Well, the direct impact of the to 232 Steel/Aluminum tariffs was not substantial, because we predominantly buy these metals from US suppliers, these suppliers did use the opportunity to raise prices.

We have partially offset these increases as well as List 1 of 301, through adjusting our own prices and negotiating with suppliers. However, addressing the much more severe repercussions of List 3 of 301 is a more daunting task. While we have modeled a path to cover a portion of this with price due to the unintended disparate impact on Polaris and our customers, we are primarily focused on seeking just and fair relief from 301 tariffs. We believe that our situation being accidentally but disproportionately punished by tariffs because of, we manufacture so much in the United States makes Polaris an outlier to the administration's intentions, which offers compelling reasons to consider our case for exemptions. When you also consider that our major foreign-based competitors largely avoided the 301 tariffs, our argument for relief gets much stronger.

Our commitment to productivity takes precedence over tariffs. So despite incentives that encourage different behavior, we will not take short-term actions to sidestep tariff impacts. With strong facts on our side and a competitive and capable team seek constructive solutions, we expect to successfully manage through this. We are proud to have the majority of our vehicles produced in the United States and we'll very strongly seek to avoid tariff penalties for doing so. With that, I'll turn it over to our CFO, Mike Speetzen for additional details and financial insights.

Michael T. Speetzen -- Chief Financial Officer

Thanks, Scott and good morning. We are pleased with our third quarter results, which were driven by a combination of solid sales growth, lower warranty, lower promotional costs and a delay in a portion of the tariff cost that we had anticipated would impact the third quarter. Third quarter sales were up 12% on a GAAP and adjusted basis versus the prior year, both contributed nine points of the growth, while our organic growth of approximately 3% was driven by continued strong ORV, Global Adjacent Markets, International and PG&A demand.

Earnings per share for the third quarter, on a GAAP basis, was $1.50. Adjusted earnings per share was $1.86, up 22% from Q3 2017. The improved earnings per share performance was driven by several factors. First, better retail performance, which drove slightly higher shipments and better retail credit income as well as a small amount of shipments that were originally anticipated for Q4. In addition, as I mentioned earlier, we incurred lower than originally expected tariff costs in the third quarter of approximately $8 million due to timing. We do anticipate a portion of these costs to push into Q4.

And lastly, lower share count due to lower dilution, given share price performance and slightly lower expected taxes provided some favorability. As Scott indicated earlier, we believe dealer inventory levels are appropriate given our current retail outlook and dealer profile targets. If you recall, our dealer inventory at the end of Q3 2017 was much lower than desired which was highlighted in just about every dealer survey conducted at the time. Our ORV dealer inventory, which represents about 70% of total dealer inventory was up 14% year-over-year in Q3 2018.

It's important to recognize that given the volatility we experienced last year with deliveries, it is more meaningful to compare the retail performance against shipment performance over an extended period of time. You can see from the chart on the lower right that ORV dealer inventory levels are essentially flat when you look at the last couple of years. During that same period, trailing 24 months retail and company shipment performance for North America were in alignment. Looking at this extended period allows for any abnormalities in a given quarter to be viewed in a larger context. Additionally, the feedback we're getting from our dealers through our quarterly survey indicates that the inventory levels are adequate and in fact some dealers are requesting increased shipments of certain models.

Finally, RFM for side-by-sides has been in place for almost a year now and stocking levels are close to being in line with the agreed upon inventory profiles established in conjunction with our dealers. And I'll remind you that we cannot ship above profile without the dealer requesting in advance. Moving to our third quarter segment performance. ORV/Snowmobile segment sales in Q3 were up 3% on a GAAP and adjusted basis, driven by strong ORV demand worldwide. Demand for the new ORV vehicles were strong during the quarter, particularly the new RANGER XP 1000 models. On a year-to-date basis, we gained share in ORV with ATVs gaining share and side-by-side share flat from a year ago. We're pleased with the momentum we're seeing with our new model year '19 lineup. As anticipated, promotional spending on a per unit basis was down during the quarter on a year-over-year basis and sequentially from the second quarter, as new products and more effective use of our promotional spend continue to drive retail sales during the quarter.

Snowmobile sales were down in Q3 due to the timing of shipments as a majority of our pre-sold snowmobiles are expected to ship in the fourth quarter this year compared to last year when a greater proportion shipped in Q3. Adjusted gross profit margins for ORV/Snowmobile segment were down due to the pressure from tariffs, logistics and commodities, as well as a modest negative impact from mix, offset somewhat by lower promotions and lower warranty.

Motorcycle sales were about flat on a GAAP and adjusted basis, primarily due to a continued weak overall North American motorcycle market, which was down low teens percent for the quarter. Indian Motorcycles gained market share again, despite the weak market driven by ongoing growth in our midsized bikes and the success of the new Chieftain Limited which is bringing new riders to the Indian brand in the bagger category. Slingshot was negatively impacted by a recall in Q3 which limited salable vehicles during the quarter. As expected, our average selling price declined during the quarter, reflecting the continued strength of our midsized motorcycle portfolio, which has lower ASPs than our heavyweight bikes.

We continue to experience strong demand outside North America with our international motorcycle sales increasing 18% in the third quarter, driven by the Scout lineup. Adjusted gross margin for motorcycles are up year-over-year, driven primarily by lower warranty and promotional costs, which more than offset mix, tariff, and commodity headwinds. Global Adjacent Markets sales increased 5% on a GAAP and adjusted basis in the third quarter, driven by continued growth in our commercial, government and defense businesses and continued growth in Polaris Adventures. Adjusted gross margins improved in the segment, driven primarily by volume and mix improvements.

Aftermarket sales were up 2% on a GAAP and adjusted basis driven by our other aftermarket brands, which include Kolpin, Klim, Pro Armor, Trail Tech and 509. The 21% growth was driven primarily by strong preseason snow orders.

TAP sales declined 1% as they were impacted by delayed accessory development and weakness in business-to-business sales in the South and Southwest. The Jeep and truck accessories are now launching and initial feedback has been very positive. Adjusted gross profit margins for the segment are up due to increased volume and mix and synergies being realized, offset somewhat by increased tariff and logistics costs.

Our new Boat segment, which we acquired on July 2nd, reported sales of $134 million, which is slightly better than our expectations. On a pro forma basis, Boats were up 17% year-over-year in Q3. While Boat Holdings will continue to run as a distinct business, the integration of financial processes, insurance plans, et cetera is progressing on track. We've provided a historical view of sales and gross profit data by quarter for Boat Holdings on our investor website for modeling purposes.

Adjusted gross profit margin was in line with our expectations.

Our international business continues its strong performance with sales up 10%, up approximately 13% when you remove the unfavorable impact from currency. The strong sales growth trends in the EMEA region continued in Q3 with sales up 17% in the quarter. Latin America was up slightly and Asia Pacific down slightly compared to the prior year. From a product standpoint, all segments increased sales during the quarter and market share gains continued in Indian Motorcycles. Our parts, garments, and accessories sales increased 8% during the quarter, driven primarily by ORV and strong accessory growth.

Now, let me move into full year guidance. We're maintaining our full year 2018 guidance for sales to be up 11% to 12% versus 2017 and for EPS to be in the range of $6.48 to $6.58. Adjusted gross profit margins are expected to decrease in the range of 60 basis points to 80 basis points, also unchanged from our previously issued guidance. Adjusted operating expenses are expected to be down approximately 120 basis points as a percent of sales, which is slightly lower than previous guidance driven by strategic investments we're making.

Financial services is now expected to increase high single digits, up from previous guidance due to improved penetration rates and strong year-to-date retail performance. Share count is now expected to increase approximately 1% which is lower than previous guidance due to higher anticipated share repurchases and lower dilution impacts. We repurchased 500,000 shares during the quarter and have now repurchased 2.1 million shares year-to-date. We have approximately 4.4 million shares remaining under the Board's current authorization and we expect to be in the market in the fourth quarter repurchasing shares, given the current share price. Foreign exchange and interest expense both remain unchanged.

Turning to gross profit margin. On a GAAP basis, Q3 gross profit margins were down 30 basis points to 24.3%. On an adjusted basis, our gross margins were down 70 basis points to 24.8% compared to last year, which was better than anticipated, primarily due to the timing of tariff costs going through the P&L as we were successful in pushing out some of the tariff-related cost into Q4 and beyond. Improved warranty expense and lower promotional costs were more than offset by mix, the addition of the Boats segment, tariffs, and higher logistics and commodity costs. It's important to note that Q3 gross margins, excluding the impact of tariffs and the Boat acquisition were up 30 basis points, consistent with our original guidance comments back in January that margins will begin to improve in the second half of 2018.

We've mentioned tariffs several times this morning because they are top of mind within Polaris. The total impact for 2018 has not changed, primarily because of the tremendous efforts the team put in to delay a portion of the expected impact. This allowed us to essentially absorb the latest addition to the 301 tariff List 3 without an increase to the impact to the Company.

We anticipate a portion of the tariff impacts that were delayed from Q3 coupled with the start of the 301 List 3 tariff will impact the fourth quarter. As a result, while the impact profile looks different than we originally anticipated, we can maintain our total Company gross profit margin guidance, which is to see our margins come down 60 basis points to 80 basis points as a percent of sales versus last year. The entire year-over-year reduction in margin is driven by the tariffs and the impact of layering in the Boat business.

I know what's on your mind next, what does this mean for 2019? We're not providing any quantitative guidance around the impact of tariffs for next year as we're still working through several countermeasures as Scott alluded to earlier. We will provide more clarity at our fourth quarter call in January, when we anticipate being able to more completely discuss not only tariffs and the countermeasures we're executing, but also the other aspects of our plan for 2019.

Sales and gross profit margin expectations by segment are shown here on Slide 20. The sales changes from the previous guidance are as follows. We now expect ORV/Snow sales to be up low double digits, driven by the strong year-to-date sales. Motorcycle sales are now expected to be down low single digits, driven by the weak heavyweight industry and lower Slingshot sales throughout the year. Aftermarket sales are now expected to be up low single digits, given the year-to-date results.

Gross margin expectations for our segments changed as follows. Motorcycles gross profit is expected to be down due to lower volume and mix. Global Adjacent Markets gross profit margin expectations declined primarily due to mix and higher warranty costs.

Our operating cash flow performance was down year-to-date through the third quarter as expected given the timing of accrual cash payments and higher factory inventory needed for model year changeover and execution of RFM. Our outlook for operating cash flow expectations remains unchanged, and is expected to be down in the high single digit percentage range.

ROIC came in at just over 18% while still above the competitor average and well above our weighted average cost of capital, we were down approximately 80 basis points, driven by the acquisition of Boat Holdings in July.

With that, I'll turn it back over to Scott for some final thoughts.

Scott W. Wine -- Chairman and Chief Executive Officer

Thanks, Mike. I will use my closing comments to offer some initial thoughts on 2019. Despite the recent increase in market volatility, not to mention interest rates and tariffs, the positive influences on the US economy still outweigh the risks, and we expect GDP growth to continue. We anticipate the powersports industry will perform similarly to this year, with ORV growth staying positive, offsetting continued weakness in the motorcycle industry.

With that industry backdrop and ongoing product and service innovation across the Polaris portfolio, we anticipate another year of retail growth. We're regularly asked to quantify next year's tariff impact, but at this point, we cannot provide an accurate number. Between nearly 50% of our potential impact coming indirectly through our domestic suppliers, ongoing calibration of our mitigation efforts and ambiguity around our ability to gain relief, there is simply too much uncertainty to provide a guess at this time.

For our previous comments, the potential damage from 301 List 3 is notable, but so are our mitigation efforts. We have valid reason to believe that our situation warrants some form of relief and are aggressively pursuing this rightful request. Our strategic sourcing initiative is making good progress, although the cost of validating new suppliers and parts will be high, the savings are well worth the investment and we look forward to the program benefits beginning to ramp up in the second half of 2019.

We expect continued sales and profitability growth at Boat Holdings as we will provide support to their innovation and productivity efforts. The new leadership team at TAP is driving aggressive actions and we anticipate improving performance from them throughout the year. Our core PG&A business has built positive momentum and the successful launch of Factory Choice and continued innovation in products and services will keep it going.

I will wrap up with a simple thank you to our Polaris team. Facing major headwinds and challenges, they have successfully kept us on our full year guidance, while driving exciting innovation and product development, specifically designed to broaden our appeal and expand the markets and customers we serve. We have a lot of work to do. But this dedicated and competitive team will always put in the effort to win.

With that, Will, would you open the lines for questions?

Questions and Answers:

Operator

Thank you. And we will now begin the question-and-answer session. (Operator Instructions) The first question of today will be James Hardiman with Wedbush Securities. Please go ahead.

James Hardiman -- Wedbush Securities -- Analyst

Hi, good morning, guys. Thanks for taking my call. So I'm trying to think of ways to ask a question that you've largely said you're not going to answer, and I'm sure, you're going to appreciate.

Scott W. Wine -- Chairman and Chief Executive Officer

Forward (ph) 2019.

James Hardiman -- Wedbush Securities -- Analyst

Exactly. So let me ask two questions, maybe you could just around the edges give us an indication. If we just think about the magnitude of goods that are being penalized coming into the United States, Lists 3 is $200 million versus $34 million in List 1, so it's 6 times as big. I guess, one way to look at is -- is that a reasonable starting point. I understand that there is a whole lot of countermeasures at play here but it's -- your overall exposure 6 times, is that a reasonable estimate or I guess, I don't know if you want to answer that, I guess asked another way, yes go ahead.

Scott W. Wine -- Chairman and Chief Executive Officer

It's not, James. Obviously part of the reason that we are as aggressive as we are and trying to offset this is becasue of disproportionate impact we have and we only source about 15% (ph) of our stuff directly from China, little bit right in that range and then the fact that our domestic suppliers, of which 75% of our suppliers are domestic, but they also source some and we think that's slightly higher percentage but not tremendously. So it's just with List 3. As you will notice, who was exempted, it was anybody that was direct to consumer, most of these were B2B and other B2B industries, they can pass those on in the value change, without much significant impact. In our business, when we buy, we pass it on directly to consumers.

So that's why there is significant impact but, and I -- I tried to allude to in my remarks and I'll say it again. We have three strategies. We are already implementing some pricing and we've modeled in much more aggressive pricing if we have to use that tool. We are actively negotiating with our suppliers to make sure they maintain their fair share, and we have a tremendous advocacy effort going on to make sure that that relate. When you factor what those three efforts combined are, it significantly mitigates the impact and we'll have a better idea of what the tariff -- the gross tariff impact is in January. We'll also have a better idea of what our mitigation actions will recover and that is why we are not talking about it now.

James Hardiman -- Wedbush Securities -- Analyst

That's actually really helpful and you kind of answered what was going to be my follow-up question. So 15% of your -- is that your cost of goods sold comes directly from China and then of the 75% that's coming from domestic suppliers. I don't know -- care to venture or guess, how much of that is sort of two-step from China.

Scott W. Wine -- Chairman and Chief Executive Officer

We said -- I intended to say, slightly more than the 15% that we directly source.

James Hardiman -- Wedbush Securities -- Analyst

I see, what you are saying. Okay.

Michael T. Speetzen -- Chief Financial Officer

Yes, and James.

Scott W. Wine -- Chairman and Chief Executive Officer

Mike. Go ahead, Mike.

Michael T. Speetzen -- Chief Financial Officer

James, let me just add a little more color to that, because I think Scott said 15%, It's roughly a 50/50 split in terms of what comes direct and what's indirect. Obviously, the indirect piece is a little bit more challenging, but if you back up and think about the $40 million that we've articulated, which obviously has been layering in through the course of the year. About 60% of that is 301 and if you think about the fact that we delayed a fair amount of that out of the third quarter, a lot of that's really hitting more in the fourth quarter, so that gives you a sense of the magnitude.

The other piece of information I gave you, because we've talked about it on prior calls, because I know the question will come up probably later in Q&A. We've been able to offset about 30% of that $40 million through pricing actions. Just to give you a sense of what we've been able to offset, as well as what's essentially sitting in our guidance right now which is just over $0.30 worth of impact to EPS.

James Hardiman -- Wedbush Securities -- Analyst

But the 15%, just so we're clear is direct and indirect.

Michael T. Speetzen -- Chief Financial Officer

Yes.

James Hardiman -- Wedbush Securities -- Analyst

Right. Okay, great. Thank you, guys.

Richard Edwards -- Head of Investor Relations

Next question.

Operator

And our next questionnaire today will be from Greg Badishkanian with Citi. Please go ahead.

Greg Badishkanian -- Citigroup Investment Research -- Analyst

Great. Yes, I just wanted to focus in on the retail, could you, I know you had really tough compares last quarter, in the third quarter of last year. Just midteens of costs for ORV, so why do you think or what was the key driver of the positive growth this quarter, if you were to maybe prioritize, what you think really drove the adverse.

Scott W. Wine -- Chairman and Chief Executive Officer

You know, James (ph), we were -- as you know, Mike and I both referred to it, the fact that RFM is really working. I mean, we've got profiles established with side-by-sides and the availability of product was so much better than it was a year ago. Throughout the quarter and really July and August were remarkably strong and even September, as we started to roll out the new product, we felt good about our retailers, so ORV was in pretty good shape. I will tell you that Chris Musso and his team, in addition to product innovation, what they're doing with their promotions and efficiency and dealer activation is really giving us a competitive advantage and I think, we're only going to build on that as Factory Choice rolls out. So that was really, really encouraging, the fact that we were able to post a positive number against a plus 13 compare.

Greg Badishkanian -- Citigroup Investment Research -- Analyst

All right, perfect. The -- let's see, so and also one of your competitors Arctic Cat mentioned that they were seeing some integration issues, some company-specific issues in their report last week. I'm just wondering, is that something that you're seeing or are they just not as big of a competitor that your -- it's going to move the needle for you in a positive direction.

Scott W. Wine -- Chairman and Chief Executive Officer

It's the latter.

Greg Badishkanian -- Citigroup Investment Research -- Analyst

Okay, all right. And also just in terms of the oil and ag markets, just a little color there, how much of a contributor that was?

Michael T. Speetzen -- Chief Financial Officer

Yes, I think oil was up slightly in the quarter, which is good. And I think consistent with the theme around stabilizing. Ag, was a little bit negative, but again, I think some of that is just timing and the compares we have to -- where we were at last year.

Scott W. Wine -- Chairman and Chief Executive Officer

Okay, thanks Greg.

Operator

And our next questionnaire today will be Robin Farley with UBS. Please go ahead.

Robin Farley -- UBS -- Analyst

Great, thanks. Just I'm circling back to the tariff issue. I wonder if you could -- you mentioned. I know -- in fact that we asked about enough, I am sure. But maybe you could give a little bit more sort of the timeframe for when you might have some view on any kind of relief that you might get, is it possible that you would have some certainty around that before early next year. I know, there is an ongoing thing but just sort of frame the period where there might be uncertainty for an investors.

Scott W. Wine -- Chairman and Chief Executive Officer

I mean -- whenever you involve politicians in a decision, it adds to the uncertainty. So despite the fact that we believe the facts and story are very much on our side and ultimately, it requires action out of Washington and that's the discussions we're having. We -- our target as we've communicated is to have clarity by the first quarter earnings call. There is no certainty, that's the case, but trust that that's the goal.

Robin Farley -- UBS -- Analyst

Okay. Thanks. And then you also mentioned that about 30% of the tariff impact you're able to offset with pricing, and so that's great in theory that would carry through into next year. I wonder, if you could -- some of the other things that you've done to mitigate the impact of tariffs -- are those things that were sort of you were temporarily able to maybe push some expenses back a quarter or two or are there other parts of things that you're doing internally to mitigate other expenses that actually can carry forward into next year as well or has it been just kind of trying to move around the timing of some things just to get through 2018, before you know about mitigation from negotiating.

Scott W. Wine -- Chairman and Chief Executive Officer

Robin, I appreciate you asking that question. Because I want to make it clear. Literally if -- it is legal and ethical and it doesn't negatively impact our long-term productivity roles. We are going after it, and I will tell you that Ken and his team are really making good progress on with domestic suppliers saying -- hey, we are not taking that price increase but you have to share in it or more recently, making sure our Chinese suppliers saying -- hey, if you want to continue to be a supplier to us, you're going to have to take some of these costs. As Mike said, we've got aggressive pricing actions that we've taken and much more than we've modeled. There's just -- Mike, you want to just add any more to.

Michael T. Speetzen -- Chief Financial Officer

Yes. A couple of things, Robin. One is we were conservative when we built in, how quickly the tariffs would impact us. And you can imagine where it's direct, we're paying that as the goods come in, to customs. It's where the indirect comes in, that we've seen, probably more of a delay in timing and that's where Ken and his team are working hard to make sure that we're not just let the suppliers come out and push our price increase. So there is a fair amount of work there. I think from a pricing standpoint. Outside of the surcharge we did put logistics, which was not in the number I was communicating. The price impacts have largely been in our aftermarket or our parts, garment and our accessory business. The 301 List 3 obviously as we indicated, has a much more substantial impact and that starts to get into price decisions we'd have to make in our off-road vehicle and motorcycles business and as you can imagine, that's a pretty complicated process to go through. And as Scott alluded to in his opening comments, we have a disproportionate impact relative to many of our foreign competitors.

So, we're working through price elasticity and some of those types of things, it just take a little bit more time and a little bit more complicated.

Richard Edwards -- Head of Investor Relations

Okay, thanks, Robin. Next question.

Operator

And the next questionnaire today will be David Beckel with Bernstein Research. Please go ahead.

David Beckel -- Bernstein Research -- Analyst

Hi guys, thanks for the question. I was curious, just on the share losses this quarter, does that -- I realize it was a difficult comp, but, is that in any way associated with pullback in promotional spending.

Scott W. Wine -- Chairman and Chief Executive Officer

It was simply a reduction in -- I mean, it is the tough comp. And we just -- when you grow that much in a quarter, last year we had a disproportionately high market share, and we just gave some of that back. Now we -- like I said, we're really pleased with the efforts around the way where our digital advertising efforts, our CRM progress, the way we're engaging dealers and managing promos. So, we're really encouraged by that, and early signs are that the fourth quarter -- we're OK.

David Beckel -- Bernstein Research -- Analyst

Great. And second question unrelated on financing partners. Are you seeing any pressure as interest rates rise from them to pass along some of those interest rate increases to the customer or less of a willingness to lend to this part of the business or this -- the powersports business in general?

Michael T. Speetzen -- Chief Financial Officer

No. The financing environment remains strong. You have to remember that the majority of the folks, we have 60%, 70% of our folks buy on credit, half of which is through our own retail partners, half of them are through retail partners with our dealers. They are highly focused around the payment and the interest rate movements are having very little impact on the overall payment, number 1. Number 2, we've gotten smart and creative with our promotional programs to help dampen some of that and so between those two things, I think, it's pretty much a muted effect right now.

David Beckel -- Bernstein Research -- Analyst

Great. Thanks a lot.

Richard Edwards -- Head of Investor Relations

Thanks. Next question?

Operator

And the next questioner today will be Craig Kennison with Baird. Please go ahead.

Craig Kennison -- Robert W. Baird & Co. -- Analyst

Thanks for taking my question. Scott, I know you have strong relationships with senior policymakers. Do you have reason to believe your advocacy work has traction at this point to provide relief?

Scott W. Wine -- Chairman and Chief Executive Officer

Yes, Craig, every -- one of the things we know is that everybody is trying to get their piece of relief, but we've been very aggressive and communicating with both the administration and Congress about the despaired and disproportionate impact we have. And what we've found is everybody understands the story. I mean, it's not like we are going and talking about a story that nobody wants to help. They recognize that punishing a company that invested significantly in American manufacturing footprint that causes them a disparate impact on tariffs, nobody thinks that's the right thing to do. That said, the actual work to get relief is not easy. So it's going to take our best efforts to get there. You might have seen, we just hired a new Government Relations, Ellen McCarthy in DC. So, she's there on the ground every single day carrying the message -- myself and Lucy Dougherty, our new General Counsel have been there carrying the message, and they're being receptive to it. But ultimately, those relationships and those messages have to convey in a change and that's what we're working to get.

Craig Kennison -- Robert W. Baird & Co. -- Analyst

And as a follow-up, one of the other buckets was pricing, and I guess my question is on affordability. You've got inflation moving through your supply chain, you've got interest rates moving higher. Are you concerned at all that the affordability of the powersports lifestyle could diminish a little bit as that flows through?

Scott W. Wine -- Chairman and Chief Executive Officer

Mike said it earlier. I mean, a lot of our customers buy on credit. So it's the -- when you talk about the affordability, it's an extra few dollars in their monthly payment. So we are not as worried about that. I mean, the strength of the consumer remain strong, and as long as -- the full burden of tariffs doesn't obr something else, doesn't tip over the economy, we expect our consumers to -- our powersports consumers to remain in the game. And don't forget that as we are getting this inflation that you talked about, we've also got this very large strategic sourcing initiative that we're driving, now there's a lag time because it's so complicated to get those savings. But we certainly expect that to come in and be a beneficiary over time.

Craig Kennison -- Robert W. Baird & Co. -- Analyst

Thank you.

Operator

And our next questioner today will be Scott Stember with C.L. King. Please go ahead.

Scott Stember -- CL King & Associates, Inc. -- Analyst

Good morning, and thanks for taking my questions.

Scott W. Wine -- Chairman and Chief Executive Officer

Hi, Scott.

Michael T. Speetzen -- Chief Financial Officer

Hi.

Scott Stember -- CL King & Associates, Inc. -- Analyst

Can you talk about Slingshot, I know that obviously sales have been down over the last year or so, and we've had recalls and Scott, you made comments you don't expect to see some relief there or an increase in sales until I guess, next year. Maybe just talk about what's going on there as far as product innovation, and besides the recalls or anything else that's been weighing on sales and what makes you confident that next year will be a better year than this year. Thanks.

Scott W. Wine -- Chairman and Chief Executive Officer

We are obviously not pleased with the way Slingshot has gone the last couple of years. We've got a lot of work being done to refine the product to make it better for consumers and it still attracts interest wherever it's ridden. There are constraints that we found to people that want to buy. One is the fact that, it takes a full garage tall. So it's not like a motorcycle where people can park it between cars. So we've had to factor that into how we do it. So we've launched it with Polaris Adventures and it's doing quite well in that environment, but we do have some really good innovation coming with the Slingshot product next year. It's why we talked about feeling better about returning to growth in the second half.

Scott Stember -- CL King & Associates, Inc. -- Analyst

Got it. Maybe just talk about the Boat business with regards to some of these inflationary costs. I know that there is a totally different set of circumstances and suppliers there, but maybe just talk about how the Boat business could be impacted. And that's all I have. Thank you.

Scott W. Wine -- Chairman and Chief Executive Officer

Mike's got a really good way of describing, actually it's -- what's interesting about talking about inflation in Boats is the disparity between how the core power sports industry compares.

Michael T. Speetzen -- Chief Financial Officer

Yes, so it's interesting the Boat business is far more about localized supply chain. The biggest impact was what we saw happening with aluminum. And given the production is highly concentrated in Indiana, but it's obviously a heavy US manufactured good. The minute we saw the pricing move, the OEMs were all able to essentially move price. Now each of us move in a different way, depending on content. But again, you're talking hundreds of dollars, you're talking about Boats that even there are wealthy folks who are buying, so it's not going to matter from a price standpoint or Boats that are being financed that hit more of the typical demographic and again you're talking a matter of $5 to $6 on a monthly payment. So it's really not had much of an impact. I mean, obviously, we're watching the inbound tariffs -- retaliatory tariffs in Canada that were levied against Boats, but our business is relatively small, so that's been pretty muted.

Richard Edwards -- Head of Investor Relations

Next question?

Scott W. Wine -- Chairman and Chief Executive Officer

Yes, thanks, Scott.

Operator

And our next questioner today will be from Tim Conder with Wells Fargo Securities. Please go ahead.

Tim Conder -- Wells Fargo Securities -- Analyst

Thank you. Maybe a little bit of clarification on -- back on the favorite topic here, tariffs. So $8 million (ph), Mike, you said, you were able -- you guys were able primarily through the supply chain to push into Q4. What in total on the incremental 301 List 3 are you anticipating here in Q4, I guess collective with that $8 million?

Michael T. Speetzen -- Chief Financial Officer

Well, I mean essentially it's a perfect offset, Tim. I mean, we've held the $40 million at a gross level. Some of that is stuff that slid out of Q3, but really the bulk of it is the 301 List 3 coming into effect.

Tim Conder -- Wells Fargo Securities -- Analyst

Okay. And then, on that, my other question would be, so we've got the List 3, what is left should List 4 come up. And then the previous question (ph) with Canada here and the EU. Do you have any expectations as to when those 232s or some of those retaliatories could be repealed?

Scott W. Wine -- Chairman and Chief Executive Officer

Tim, I do know that if you -- and we've had a lot of talks with the administration on the topic. The goal is to get agreements done as they've done with USMCA, get Europe resolve their -- or in an agreement, get Japan resolved in an agreement, then it's kind of a block if you will to help reach a better conclusion in China. That obviously is going to take time, but that is what they're working toward. And we believe -- that's why our conversations and our focus right now is on 301 because we believe that's where the biggest and longest term impact is. We think the other issues are going to be resolved.

Tim Conder -- Wells Fargo Securities -- Analyst

Okay. And then the List 4, what's left there (inaudible).

Scott W. Wine -- Chairman and Chief Executive Officer

I think, it's $269 billion worth of stuff. Now as with the first two list, it didn't affect us that much. We think, and the reason they left -- if you just anyway -- the reason that we are not as concerned about List 4, is it's mostly consumer direct and that's why they left it off because they don't want to go after consumer direct and have this huge inflation hit the US customer. So it's going to affect the retailers significantly more than it affects us. And I don't think they won't --

Richard Edwards -- Head of Investor Relations

Okay Tim, thanks. Next question?

Tim Conder -- Wells Fargo Securities -- Analyst

Thank you.

Operator

And our next questioner today will be Jaime Katz with Morningstar. Please go ahead.

Jaime Katz -- Morningstar -- Analyst

I'm not going to ask you about tariffs.

Scott W. Wine -- Chairman and Chief Executive Officer

Because you are Jaime, thank you.

Jaime Katz -- Morningstar -- Analyst

I'm going to ask you about profitability in the Motorcycles segment though and I'm curious if the downtick that's expected in the gross margin is mostly from just lower Slingshot demand or if there's something else that's flowing through there, timing-wise or anything else in the fourth quarter that is acting as a drag on that metric.

Scott W. Wine -- Chairman and Chief Executive Officer

That's an insightful question. It is predominantly driven by mix, as we continue to see, aggressive growth of our midsize business and it's offset by weaker demand, it's really industry -driven weaker demand in our touring and bagging segment. So -- and those are notoriously weak. Because of RFM, we can't ship what they don't sell and retail sales or the bigger bikes, the more heritage style bikes was -- was below our expectation.

So it really is predominantly a mix -- slightly tariff-driven as it's flowing through there, just like it is the ORV business but predominantly it's a mix issue.

Michael T. Speetzen -- Chief Financial Officer

Yes, and I mean, Jaime, you got to remember that we've essentially completed the wind down of Victory which left our Spirit Lake facility without those units. And so, obviously, as we continue to ramp Indian that'll backfill that, but with the heavyweight market being more challenged than we had originally expected. And with those being higher margin bikes, you can imagine that that's made the absorption challenges that we initially thought we had a little bit more substantial.

Scott W. Wine -- Chairman and Chief Executive Officer

That said, the new -- and part of it was the late introduction of our model year '19 product news in Indian. So the new Chieftain is doing very well with consumers, but that it's kind of late in the season and we didn't get too much of that out there. So we believe that our product lineup. When we are on-trend, Indian gained significant market share and we believe with FTR 1200 being an example, we're increasingly on trend with all of our new bike introduction. We're never going to walk away from the Heritage bikes, but certainly if consumers are moving more toward a more trend-based styling, we'll be able -- sure to deliver that.

Jaime Katz -- Morningstar -- Analyst

Okay and then for TAP or after parts segment. I'm assuming that most of the mid-single digit increase in shipments in the fourth quarter is from that stalled launch of Jeep products. Is there anything else we should be thinking of in there.

Scott W. Wine -- Chairman and Chief Executive Officer

No, I think, that's pretty much it. But our core powersports aftermarket that I referenced being up 21% in Q3, we expect that to continue, given the aftermarket for preseason and what will hopefully be a good season of snow sales.

Jaime Katz -- Morningstar -- Analyst

Okay, awesome. Thank you.

Scott W. Wine -- Chairman and Chief Executive Officer

Thank you.

Operator

And our next questioner today will be Eric Wold with B Riley. Please go ahead.

Eric Wold -- B. Riley FBR -- Analyst

Thank you, good morning. Unfortunately, I will go back to quickly on tariffs for one question. Just given the countermeasures you've taken on production improvements, price increases, et cetera, are you doing enough so that there is a chance depending on the level of relief you may or may not get or even general tariff reductions or changes. Could you actually see the countermeasures become an overall tailwind to margins kind of in the medium to long-term. And then given the comments around affordability with consumers and your few dollars per month on the payment, if you do get relief -- would you consider taking prices back down or that not necessarily getting that affordability.

Scott W. Wine -- Chairman and Chief Executive Officer

We are going to be very careful with what we do with price and we believe, with overall inflation, not just tariff-related that there is a need for the powersports industry to start to raise prices as a little bit and as the industry leader, we're not afraid to lead on price. You know that we have not yet even begin to think about this turning into a tailwind but you're right, if we got relief and we've done all of these other countermeasures opportunity, it could be. And ironically, I mean that's where our competitors are right now. So, we're just trying to get back to even and -- and we'll have a competitive advantage. But that's the work we're trying to do.

Eric Wold -- B. Riley FBR -- Analyst

And then just, one quick follow-up for Mike, and a quick numbers question. The $20 million or so about interest expense in the quarter, anything unusual in there in terms of one-time charges and what not associated with the acquisitions or the financing or is that the good interest level going forward.

Michael T. Speetzen -- Chief Financial Officer

No it's reflective of -- we essentially had the debt in place at the beginning of July, so I think, it's pretty indicative of what to expect.

Eric Wold -- B. Riley FBR -- Analyst

Perfect, thanks, guys.

Richard Edwards -- Head of Investor Relations

Next question.

Operator

And our next questioner today will be Joe Altobello with Raymond James. Please go ahead.

Joe Altobello -- Raymond James -- Analyst

Thanks. Hi, guys. Good morning. I just want to ask about the North America powersports industry broadly, if you look at overall retail that was growing that that long ago, it was down low single in the June quarter, now down midsingle despite what is a pretty healthy macro backdrop. We've got very low unemployment, rising consumer confidence, how do you grow the pie or you and the rest of the industry, grow the pie so to speak beyond the 3.5 million to 4 million (ph) powersports participants that we see right now in the US

Scott W. Wine -- Chairman and Chief Executive Officer

Well, I mean, Joe, that is, obviously our competitors are talking about that. We've got consistent efforts on that and we don't like to talk all that much about some of the stuff we're doing strategically. But trust -- when Mike said, when OpEx was going up a little bit, it was with strategic investments, that those are directly related to what you are asking about is -- how we expand the pie? I mean, we are -- we are not as worried. Now, you got to think about, really it's the heavyweight motorcycle segment that's pulling down the industry right now. And part of the reason that Q3 was a little weaker is simply because Polaris being the largest player had a difficult compare and we only grew 1%.

So we've typically been, help pull the industry up. So we don't think it's a -- indicative of a trend at all and our efforts to bring in more women, more minorities, younger people in the industry is a concerted effort going on then with that -- within the Company. And I think, as we move into '19, you'll start to see some of those come to fruition.

Michael T. Speetzen -- Chief Financial Officer

Joe, I'd just point you back to our retail slide where, I mean at the end of the day, the market, being down is really being driven by motorcycles and it's really being driven on the heavyweight side. If you look at the core offered vehicle industry. It was up low-single digits, and as Scott referenced with us being the industry leader, up 13% last year and up modestly this year. I think, that would still tell you that the off-road vehicle space at least is still pretty healthy.

Joe Altobello -- Raymond James -- Analyst

It's a fair point. Thanks, Mike. And then secondly, I guess, I must. I'm sort of forced to ask a tariff question, right. So.

Michael T. Speetzen -- Chief Financial Officer

Not really.

Joe Altobello -- Raymond James -- Analyst

But it will anyway, (inaudible). It looks like you did get some tariff relief on motorcycle component, is that related to the 301 tariffs and how much does that help?

Scott W. Wine -- Chairman and Chief Executive Officer

Now the retaliatory stuff is the EU, on motor. And that's where really -- the only place where motorcycles are hit specifically is on EU retaliatory tariffs, which are competitor got a lot of focus from the President on, and that -- we can manage. We've got -- that is not -- I mean, it's certainly, it's noise to us, but it's not a significant concern like the other things we're talking about.

Michael T. Speetzen -- Chief Financial Officer

Is there something different you were asking, Joe?

Joe Altobello -- Raymond James -- Analyst

No -- but in terms of the tariff update slide, it says the successful exclusion application on motorcycle parts and other components.

Michael T. Speetzen -- Chief Financial Officer

Yeah, I mean there is -- with the exception of List 3, which I think everybody is putting a lot of pressure on the administration. There is an exclusion process, where you can go on and plead your case. And so we've had instances where we've been successful. But I would caution you that it's relatively small, as you can imagine the exclusions have to go through some pretty high hurdles and the good news is we are able to get some things through. The bad news is, we're still based on a pretty substantial impact.

Joe Altobello -- Raymond James -- Analyst

Okay, that's what I thought. Thank you, guys.

Richard Edwards -- Head of Investor Relations

Thanks, Joe. Next question?

Operator

And the next questioner today will be David MacGregor with Longbow Research. Please go ahead.

David MacGregor -- Longbow Research -- Analyst

Hi everyone. While you are clearing -- I have just question on the FAC, Scott. While you're clearing your prior year carryover inventory, I guess through this sales event. Are your new model '19s' retail sales up year-over-year. And if so, can you say by how much?

Scott W. Wine -- Chairman and Chief Executive Officer

We -- even though we were really, really efficient. In fact, I said the best ever we've had in a model year launch in getting new products out, it is not a significant portion of our -- you think about, I mean you suggest -- you started the question with factory authorized clearance. We're not looking, in fact, some of our competitors do it. We adamantly do not put promotions on new products. Now fair enough, a lot of customers come in and look for something on sale and they buy up the new products, but that was not, it's not a significant number that we focus on. We really look at the fourth quarter is where we expect to be able to generate most of our sales of -- thing. I will tell you though that the introduction of Factory Choice, which gives the customers and dealers an opportunity to make differentiated vehicles from the factory was very, very popular and we think that will be something that helps us going forward.

David MacGregor -- Longbow Research -- Analyst

You're still every year, you're sort of rolling out new product against the backdrop of FAC promotional and carryover inventory, right. So there should be some kind of a year-over-year compare, so I guess, I was trying to get your comment on.

Michael T. Speetzen -- Chief Financial Officer

Yes I mean, David. One way to think about it is our inventory position this year, although were up, is much healthier from a current versus noncurrent. And so I think as you think about the retail compare that we have and you think about the retail we put up in the quarter, that would tell you that we had pretty strong reception of our model year '19 and I referenced it in my prepared remarks around the RANGER XP 1000 which we've seen great success with. We've seen significant retail on not only the core unit, but also with the accessories and upfit capability that has.

David MacGregor -- Longbow Research -- Analyst

Okay, thanks. And then just a follow-up, I guess, a question on preliminary 2019 outlook, and I realize, it's still early. But just wonder, if you could comment at least directionally on how you would expect your commodity supply contracts to reset if commodity spot markets kind of remain where they were right now.

Scott W. Wine -- Chairman and Chief Executive Officer

Yes, we'll talk about that in January.

David MacGregor -- Longbow Research -- Analyst

Very good. Thanks very much.

Scott W. Wine -- Chairman and Chief Executive Officer

Thank you.

Richard Edwards -- Head of Investor Relations

Next question.

Operator

And the next questioner today will be Michael Swartz with SunTrust. Please go ahead.Michael Swartz , your line is open for questions.

Michael Swartz -- SunTrust Robinson -- Analyst

Hi guys, I just wanted to talk about motorcycles, I think at the end of the quarter, you said inventories were flat, but just given your commentary about how you're seeing, how you see that market playing out next year. Can you maybe give us some color around maybe the inventory profile?

Scott W. Wine -- Chairman and Chief Executive Officer

While the inventory profile is based on what we expect to sell and talk with our dealers on. So if we are currently seeing and therefore expecting less of our heritage bigger bikes to be sold, we'll profile less of those in the mix. That said and as I indicated, the new Chieftain is doing very, very well. We've got Roadmaster lead out there that we believe is still a good market for us. So as we launch FTR, they is certainly going to be a profile shift to more midsized bikes which where we are gaining so much market share. We're not at all disappointed in that, but it does mean that and we're not done innovating with heavier bikes. But as we get on trend with our heavyweight bikes, we expect that we'll be able to grow, but I mean to answer your question directly, we set profiles based on what we expect to sell and right now, we expect that to be shifting to more of our newer bikes.

Michael T. Speetzen -- Chief Financial Officer

I think, Michael, one way to think of it is, we've been on RFM for while now with motorcycle business, and that means that it reacts pretty quickly. If the dealers aren't selling bikes, they are not putting orders into the factory, and I think that's why you see a tighter alignment around what's happened with retail with our Company sales and the fact that inventories are flat. So I think, if you were talking to Steve Menneto, I think, he'll tell you the inventory levels are appropriate and healthy.

Michael Swartz -- SunTrust Robinson -- Analyst

Okay, great.

Richard Edwards -- Head of Investor Relations

Okay, thanks. Next question.

Operator

And the next questioner today would be Joseph Spak with RBC Capital Markets. Please go ahead.

Joseph Spak -- RBC Capital Markets -- Analyst

Thank you. Mike, maybe just to follow-up on that real quick, I think this is another quarter where you mentioned factory inventory still higher -- going through some of the RFM stuff. When should we expect that to be completed?

Michael T. Speetzen -- Chief Financial Officer

I think, what you'll see is a tighter alignment by the time we get to the end of the year, Joe. I mean, I think we've had a couple of quarters, Q2 and Q3 specifically where inventory levels last year were abnormally low and that's the reason I added some of the comments into my prepared remarks. We went back and looked at where we've been through the course of the last couple of years, and as I mentioned, we've had tight alignment. Just to put it in perspective, even though the inventory levels are up in the third quarter, we under shipped retail by several thousand units within the quarter. So when you start peeling the -- the 12% performance in our off-road vehicle space back and you look at the underlying retail, you look at the ASP change. You look at the strength we had in international and PG&A, it shows you that we are starting to get a lot tighter alignment because we feel like the inventory levels are getting pretty darn close to where they need to be from a profile standpoint.

Scott W. Wine -- Chairman and Chief Executive Officer

And I just want to reiterate how RFM works, now that it's fully implemented across the business, once we set a profile, that's what we ship to. And in fact the dealer has to specifically request about profile shipments before we will ship them in. So little bit of quarter-to-quarter noise sometimes because of new product innovation in -- ultimately dealer stocking but for anyone to ever suggest that there is anything other than our shipping to demand is not possible.

Joseph Spak -- RBC Capital Markets -- Analyst

Thanks. And then Scott, you mentioned in your opening remarks, commitment to productivity and clearly without the great productivity, I think the current situation might be even worse. But, should we read into that that you're sort of even going through the process of identifying further programs and if that's true, can you just remind us sort of like an average payback?

Scott W. Wine -- Chairman and Chief Executive Officer

Well, I mean the average payback on most of our product initiatives is quite significant, especially the strategic sourcing one which is still the biggest lever we have. But what we're seeing as we increase volume and start to put these factories operating as much closer to their designed capacity, that's very helpful to us. The design to value work that really Menneto kicked off in motorcycles, but ultimately it's fire and rescue (ph) business will also be a nice lever for us. So it is -- it's a multi-faceted productivity effort, but more it's a methodology and a mindset as it relates to some of these ongoing commodity and tariff pressures. That we're just not going to do stupid things, like go set up a new factory to transform something to avoid paying a tariff. I mean, why would we put a new factory in Mexico when the whole purpose of the tariffs is to do more American manufacturing. We're not going to do things like that, that's what I was referring to with our predominant focus on productivity.

Michael T. Speetzen -- Chief Financial Officer

I think, Joe, when you think about timing, that gets tricky, changing and going through validation takes us time on a fair amount of our product. And the way I would think about it is, most of the efforts we have under way right now are trying to countervail what could be a substantial increase given the tariffs that have been put in place on both steel, aluminum, and the China goods. So tough for us to quantify, that's what we're trying to work through right now, and hopefully, we'll be in a much better spot, come January to give you guys some insight into that.

Joseph Spak -- RBC Capital Markets -- Analyst

Thank you.

Richard Edwards -- Head of Investor Relations

Okay, next question?

Operator

And the next questioner today will be Seth Woolf with Northcoast Research. Please go ahead.

Seth Woolf -- Northcoast Research -- Analyst

Hey, thanks for taking my question. So just to wrap this up, I guess on the tariffs for me, taking some of the comments about, you guys expect to have a better handle on all this in January, would that mean that as you go through the process of trying to get an exemption, you would know that by January or could it last longer? And then is this, an all or nothing thing, and Mike, you said, you've been able to get some relief, so I mean, how does that -- how those two factors work out?

Scott W. Wine -- Chairman and Chief Executive Officer

Well, Seth, I mean, I'm sure you've taken a negotiating class. It's impossible to know when the other side is going to give you the result that you desire. I will tell you that, as I said earlier, our goal is to have an answer by the January call, but there's no certainty that that will happen, but that is exactly what we are working toward.

Seth Woolf -- Northcoast Research -- Analyst

Okay, thank you. And then as we just the -- the other point of clarification, when we talk about direct and indirect, I think you said 15% of COGS, is that -- that is total COGS, not just the purchase materials?

Michael T. Speetzen -- Chief Financial Officer

It'll be total COGS and of that 15%, it's roughly 50:50 between what we buy direct and what we buy through US or other suppliers that source some of their components through China.

Seth Woolf -- Northcoast Research -- Analyst

Okay, thank you, guys.

Richard Edwards -- Head of Investor Relations

Okay, last question?

Operator

And the last questioner today will be Gerrick Johnson with BMO Capital. Please go ahead.

Gerrick Johnson -- BMO Capital Markets -- Analyst

All right, thanks, last two questions. So you still pulling out restructuring charges, can you remind us where we are in this journey?

Michael T. Speetzen -- Chief Financial Officer

Yes, I think, Gerrick, there were a couple of actions, we announced the wind down of our Indian Motorcycle business down in Brazil. It was relatively small, but we had some dealer payments. We went through the changes associated with winding down Victory and some of the associated closures and movements associated with that. I think the biggest outstanding item that we have money and therefore is some of the work we're doing with the consulting group around our supply chain, and I anticipate that would carry into next year, but that will be a much smaller amount we should as we get into next year from a Reg G standpoint, have the majority of the EPPL and the Victory Motorcycle wind down off the page. So I think, it really going to be down to any M&A that we do, the intangible amortization, and then probably a smaller amount of restructuring.

Gerrick Johnson -- BMO Capital Markets -- Analyst

Okay, sounds good, Mike. And lastly, sorry for being dense here, but how is List 3 having a disparate impact to Polaris than say Honda and ORV or Harley and heavyweight motorcycles. Thank you.

Scott W. Wine -- Chairman and Chief Executive Officer

See now, I'll actually thank you for asking that tariff question. The issue is, with Harley is -- we don't -- I mean there are good -- I mean, tremendous significant competitor motorcycles and they are more akin to the same issues that we face. So they're kind of like us, but predominantly what we're talking about is the off-road vehicle, which is our biggest business as you know and how that impact is disparate. And if you look, I mean, notwithstanding the smaller Arctic Cat did also had some of the same issues, but really the main competitors in this industry are either Canadian or Japanese. Our Canadian competitor assembles every single one of their off-road vehicles in Mexico, thereby avoiding the impact of the 301 tariffs. Our Japanese competitors, most of them, in fact, I think all of them have assembly plants in the US, but as you know they don't source mostly from China. They source predominantly from their Japanese suppliers. Therefore, they don't pay the tariffs. So ironically, it's just us and whatever Harley is paying that are facing the impact.

Gerrick Johnson -- BMO Capital Markets -- Analyst

All right. Very clear. Thank you, Scott.

Richard Edwards -- Head of Investor Relations

All right, that's all of the time we had this morning. I want to thank everyone for participating and we look forward to talking to you in January on our fourth quarter call. Thanks again, goodbye.

Operator

And the conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Duration: 65 minutes

Call participants:

Richard Edwards -- Head of Investor Relations

Scott W. Wine -- Chairman and Chief Executive Officer

Michael T. Speetzen -- Chief Financial Officer

James Hardiman -- Wedbush Securities -- Analyst

Greg Badishkanian -- Citigroup Investment Research -- Analyst

Robin Farley -- UBS -- Analyst

David Beckel -- Bernstein Research -- Analyst

Craig Kennison -- Robert W. Baird & Co. -- Analyst

Scott Stember -- CL King & Associates, Inc. -- Analyst

Tim Conder -- Wells Fargo Securities -- Analyst

Jaime Katz -- Morningstar -- Analyst

Eric Wold -- B. Riley FBR -- Analyst

Joe Altobello -- Raymond James -- Analyst

David MacGregor -- Longbow Research -- Analyst

Michael Swartz -- SunTrust Robinson -- Analyst

Joseph Spak -- RBC Capital Markets -- Analyst

Seth Woolf -- Northcoast Research -- Analyst

Gerrick Johnson -- BMO Capital Markets -- Analyst

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