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Polaris Industries Inc (NYSE:PII)
Q3 2019 Earnings Call
Oct 22, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Operator: Good day, everyone and welcome to the Polaris Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please also note, today's event is being recorded.

At this time, I would like to turn the conference call over to Mr. Richard Edwards, Head of Investor Relations. Sir, please go ahead.

Richard Edwards -- Vice President Head of Investor Relations

Thank you, Jamie, and good morning, everyone. Thank you for joining us for our 2019 third quarter earnings call. A slide presentation is accessible at our website at ir.polaris.com, which has additional information for this morning's call. Scott Wine, our Chairman and Chief Executive Officer, and Mike Speetzen, our Chief Financial Officer, have remarks summarizing the quarter and full year expectations, and then we'll take some questions.

During the call, we will be discussing various topics which should be considered forward-looking for the purposes of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. You can refer to our 2018 10-K for additional details regarding these risks and uncertainties. All references to third quarter 2019 actual results and 2019 updated guidance are reported on an adjusted non-GAAP basis, unless otherwise noted. Please refer to our Reg G reconciliation schedules at the end of this presentation for the GAAP to non-GAAP adjustments.

Now, I'll turn it over to our CEO, Scott Wine. Scott?

Scott Wine -- Chairman and Chief Executive Officer

Thank you, Richard. Good morning and thank you for joining us. Over the past few months we launched an impressive array of products, executed a record Factory Authorized Clearance program, improved dealer sentiment and made notable progress with tariffs. But I could argue our most impactful move was introducing the evolved Polaris brand and Think Outside tag line, which features prominently in our new media campaign, highlighting our American heritage.

This campaign is just beginning of a concerted effort to not only resume gaining market share but to bring new, more diverse community into powersports. Our portfolio which now includes GEM [Indecipherable] TAP, Slingshot and Boats appeals to a broad audience. And with Polaris adventures ride, command and factory choice, we are being exciting technology, tools and business models to the market. With more inclusive brand positioning and marketing muscle, we are well positioned to fully realize our expensive potential.

I'm proud of our teams performance in the quarter as they further leveraged lean tools and productivity enhancements we are implementing across our operations to expand gross margin in a very tough environment while continuing to aggressively mitigate tariffs. We introduced great news in RANGER, RZR and GENERAL for model year 2020 but with shipments planned for late in the quarter, we did not get any real retail benefit. We still delivered our second straight quarter of low-single-digit side-by-side retail growth.

In addition, these developments in Off-Road Vehicles, we also revealed exciting new products in Boats and Motorcycles, making this the largest product news we have delivered in years. Our first wave of strategic sourcing savings hit in the quarter on plan both in timing and value, and I am increasingly confident this will be the largest, most impactful productivity project Polaris has ever executed.

For over a year, we have devoted substantial time and energy toward gaining fair and just relief for our tariff issues. Outcomes from these endeavors have finally begun to catch up with our successful mitigation efforts and we entered the fourth quarter with confidence that the exclusive process will yield results.

We saw strong performance from both international and PG&A in the quarter with solid PG&A attachment rates across all categories, particularly on ORV Factory Choice models both continue to represent significant growth opportunitiesOverall third quarter North American sales were flat year-over-year up slightly from the prior quarter but still lagging the overall powersports industry which was up modestly. We increased promotions to be more competitive again focusing on generating a positive side-by-side mix to drive profitability.

Despite a plethora of competitive entrants in the category we believe our model year '20 news and improved go-to-market plans will enable improving share performance going forward. We were not as aggressive with promotions in motorcycles so Indian retail was down mid-teens although on a sluggish North American market share we were almost flat and we grew in Europe. So overall global market share for Indian was up for the quarter. We are seeing solid demand for our new snowmobiles and despite a weakening boat market Bennington delivered strong retail growth and market share gains in the quarter. TAP performance also improved with our 4-wheel parts retail stores and e-commerce sales up 9% year-over-year.

Third quarter North American dealer inventory was up nine up 4% as we began delivering to meet demand for our model year '20 vehicles and preparing for the height of the Factory Authorized Clearance sale late in September. With increasing concerns about a slowing economy we were pleased with the performance of Retail Flow Management system which reacts to sales cycles and optimizes inventory for our dealers. RFM is one of many tools we are deploying to continue improving dealer profitability and our most recent dealer sentiment surveys support these efforts are succeeding.

Both inventory is slightly elevated and we will manage fourth quarter shipments to bring it in line for 2020. Our approach to tariff has always involved equal aggressive pursuit of two approaches: mitigation and release. For the former we use our talented sourcing and logistics teams to prudently move parts out of China negotiate with suppliers to limit impact manage the country of origin to our favor and implement about 60 other mitigation initiatives.

These efforts have been quite successful and despite escalated tariff rates allowing us to regain to again reduce the expected full year impact by $5 million. Our relief approach is focused on educating and informing the administration about the significant and disparate impact that Polaris and our employees suffer from 301 Tariffs because of our heavy investment in U.S. manufacturing. This message has always been well-received and we clearly see that the administration is committed to righting the trade imbalance with China and protecting American workers.

Their support for Polaris' investment in America has culminated in assurance that our 301 exclusion requests are being processed and strongly considered. This takes time but we expect to see our relief request adjudicated in the near future. During our recent dealer show we allowed our dealers to tour our primary engineering and R&D centers so they could see the fruits of our major investments in product creation capability. With the 60% increase in research and development spending over the past three years the breadth and depth of our model year '20 innovation is an example of what the future holds.

Our new RZR PRO XP Hurricane deck boats and powerful Indian motorcycles all testify to how we are leveraging our innovation tools and experience to extend our lead in powersports. Mike Donoughe and his team of over 1000 engineers worked hand in hand with our global business units to bring the best technology and riding experience to our customers while also playing an important role in the execution of our strategic sourcing work. Their contributions certainly enhance our innovation efforts as across our portfolio we drive a consistent focus on safety and quality performance and customer experience which are the key attributes of our model year '20 offerings.

We're also excited about the evolution of the Polaris brand and the opportunity it provides for us to invite new customers into our sport. So, for the first time in decades, we are running our new Polaris brand message on national TV. This ad serves as an inspiring reminder of the great American heritage that is an essential element of our company and our culture and complements our more traditional FAC and value-focused advertising.

Creating a more enlightened inclusive brand is part of our broader organizationwide effort to elevate customer centricity. Pam Kermisch's customer engagement growth initiative is reaching new demographics and gaining meaningful traction and sales with important new customer segments. The explosive growth of Polaris Adventures is one example, as it now offered in more than 125 locations and has already served more than 100,000 customer rides this year, 90% of who are new -- are new riders to Polaris.

I will now turn it over to our Chief Financial Officer Mike Speetzen, who will update you on our financial results and plan.

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

Thanks Scott and good morning everyone. Third quarter sales were up 7% on a GAAP and adjusted basis versus the prior year. Average selling prices were up 7%, driven primarily as well as favorable mix, driven primarily by side-by-sides and preordered snowmobiles.

Third quarter earnings per share on a GAAP basis was $1.42. Adjusted earnings per share was $1.68 which was down 10% for the quarter, but exceeded our previously issued guidance, driven by a combination of ongoing tariff mitigation, favorable product mix, and timing of operating expenses, offset somewhat by a higher promotional cost.

Importantly, the underlying execution of the business continues to improve as evidenced by an increase in our gross margin versus Q3 of 2018, despite the tariff and FX headwinds. Our adjusted gross margins excluding the impact of tariffs and FX was over 26%. Excluding the impact of tariffs, FX, and interests, our EPS growth for the quarter was up almost 10%.Foreign exchange continue to have a negative impact on our quarterly results, driven by the strong dollar primarily against the euro and the Canadian dollar. However, the negative impact was in line with our expectations.

For the 2019 full year, foreign exchange is expected to have a negative impact to pre-tax profit for the year of approximately $30 million or $0.40 per share, unchanged from our previous guidance. Our average foreign exchange rate assumptions remain at the $1.12 for the euro to USD and $0.74 for the CAD to USD. From a segment reporting perspective, ORV/Snowmobile segment sales were up 11% in the third quarter, primarily due to a positive product mix, driven by increased side-by-side sales, the timing of sales associated with our preordered SnowCheck Snowmobiles, higher average selling prices, and 10% of PG&A growth.

ORV wholegood sales increased 8% given stronger side-by-side sales mix and international growth. Additionally, average selling prices were up 9%, driven by the price increases as well as positive product mix. Importantly, sales unit volume was slightly lower than retail sales as we continue to protect dealer inventory in North America. We continue to strategically target the more profitable segments and models on our portfolio, given the ongoing tariff and competitive pressures. This focus on more profitable models is driving positive mix at the sales line as well as in gross profit margins.

Gross profit margins were flat year-over-year including the negative impact of tariffs and foreign exchange. Motorcycle sales decreased 3% on a GAAP basis and 4% on an adjusted basis in the third quarter, driven by lower shipments of Slingshots and Indian Motorcycles excluding the new FTR 1200.

Average selling price was down 2% for the quarter, driven by mix. International sales were up 28% from increased shipments of FTR 1200 and PG&A sales were up 8% during the quarter. Gross profit margins declined to 8% due to lower volumes tariffs and mix. The North American motorcycle market continued to be highly promotional resulting in Indian losing a modest amount of share during the quarter.

Although we are moving out of the peak selling season for motorcycles and the overall motorcycle market is expected to remain challenged we are encouraged by our market share opportunity going forward with the pending launch of our new heavyweight motorcycle the Challenger which we gave a sneak preview at our summer dealer meeting as well as the ever increasing awareness of our new FTR 1200 worldwide. Global Adjacent Markets sales were up 18% during the quarter driven by all product categories. Average selling prices were up 7% driven primarily by increases in our commercial government and defense businesses. Gross profit margins improved 220 basis points driven by product mix.

Aftermarket sales were up 3% compared to last year with TAP sales up 2% driven by strong retail performance offset by lower wholesale sales. Our other aftermarket brands increased 5% during the third quarter. We are encouraged to see our TAP business grow sales for the first time since Q4 of 2017. While still early the team is making the tough decisions to get the business back to growing consistently. Gross profit margins declined due to tariffs and mix. Boat segment sales decreased 11% in the third quarter as the overall market growth slowed and we adjusted shipments to protect dealer inventory. While our model year '20 product launches were well received we are monitoring the market closely and we'll adjust where needed.

Gross profit margins improved despite lower volume due to improved operations. Our international sales were up 8% on a reported basis and up 13% when you remove the unfavorable impact from currency. International growth for motorcycles was 23% largely driven by the launch of the FTR 1200. Global Adjacent Markets increased 21% driven by both strength at Aixam and our defense business. Parts Garments and Accessories sales increased 11% during the quarter. We continue to see a strong response to Factory Choice. This coupled with our industry-leading accessories apparel and service parts offering drove the performance in Q3.

Moving on to guidance we refined our total company sales growth guidance and now expect sales to increase approximately 12% for the year. I'll cover the specifics by segment in a few minutes. We are narrowing our full year adjusted earnings per share guidance from for 2019 by holding the upper end of our previously issued guidance range at $6.30 and raising the lower end of our previously issued guidance range by $0.10 to $6.20 per diluted share given our year-to-date operating results and ongoing success in mitigating tariff costs. Although we have updated our revenue guidance to the lower end of our previously issued guidance range favorable mix coupled with tariff mitigation efforts helped to offset slightly lower volume and added tariff costs from 301 List 4A implementation.

As Scott noted we believe our strong policy arguments are making headway in Washington but I would also like to note that the 301 List three tariff moving from 25% to 30% will have an immaterial impact on our guidance given the deferment of the implementation date and the fact that most of our inventories on hand to support Q4 production. Our underlying business remains strong. Excluding the tariff cost negative currency impact and higher interest costs our operating earnings performance for the full year 2019 is anticipated to improve 16% to 17% on a year-over-year basis.

Moving down the P&L our previously issued guidance ranges remained unchanged as shown in the current slide with the exception of the following: first adjusted gross profit margins while expected to be down on an absolute basis driven by tariffs and negative currency have improved versus our previous guidance due to a slightly lower tariff impact, mix in productivity, partially offset by higher promotional costs and are now expected to be down 40 to 60 basis points year-over-year.

Excluding tariffs and foreign exchange, our adjusted gross profit margins improved versus previously issued guidance and are now expected to be up 105 to 125 basis points, driven by mix, price and productivity. Secondly, adjusted operating expenses are expected to increase in the mid-teens percentage range in 2019, which is unchanged from our previous guidance. But when calculated as a percent of sales, are now expected to be up about 40 basis points, entirely driven by the narrowing of our sales expectations to the lower end of our previous guidance range.

Our operating expenses are up year-over-year due to the addition of the Boat business, the multibrand distribution center in Fernley, Nevada, which opened in July. The costs associated with the 65th anniversary celebration and dealer meeting held this summer and the ongoing investments in strategic in research and development projects.

Moving now to sales expectations by segment. Rather than walk through each segment sales guidance let me summarize. ORV/snowmobile sales are now expected to be up in the high-single digits range, as the mix of side-by-side products has improved as well as ongoing strength in international and PG&A. The improvement in ORV/snowmobile is more than offset by lower motorcycle and Boat sales given our respective weak markets. The remaining segment sales expectations remain unchanged.

Operating cash flow finished at $436 million through the nine months of 2019. That's up 23% over the same time last year driven by lower working capital requirements. Our cash flow expectations remain unchanged and up approximately 20% to 30% for the full year compared to last year.

Our bank leverage ratio defined as total debt-to-EBITDA improved sequentially to approximately 2.4 times and while this is well below our bank covenant requirements, debt reduction remained the primary use of excess cash flow for the remainder of 2019. ROIC on a trailing 12-month basis was 15.8%, well above industry norms.

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

Scott Wine -- Chairman and Chief Executive Officer

Thanks, Mike. From product to brand positioning to managing tariffs and driving quality and productivity, we are well positioned heading into the final month of the year. It is particularly important for us to create momentum to exit this year as we are keenly aware of the slowing global economy and the debilitating uncertainty around trade and politics.

Alternatively, the strength in the U.S. consumer bolstered by accommodative interest rates provides reasons for optimism heading into 2020. Propped up by a proliferation of product news, the powersports industry has the potential to remain positive, led by side-by-side which should offset ongoing motorcycle weakness. Balancing the risks however, we will likely plan for a flat market relying on market share gains for growth. 2020 will be at our first full year of meaningful strategic sourcing savings and the related prospects for significant productivity and quality gains are very encouraging.

Winning in a competitive industry requires product innovation, which we will always strive to deliver. But equally and importantly, our commitment to the customer-centricity will ensure that we exceed our market's ever more demanding expectations. New features in ride command will enhance customer experiences on the road and trail. But that is only a fraction of our plans for leveraging our digital innovations to create a competitive advantage.

Factory Choice will increasingly give dealers and customers the exact vehicle they want and RFM will provide the best inventory replenishment system in the industry. While the political and economic headwinds are likely to increase as we transition into 2020, I am confident that our team will take full advantage of our reduced tariff burden and our broadening product offerings to resume market share gains.

No matter what happens with the economy or the competitive landscape, I will bet on this Polaris team to win by simply delivering on our commitment to think outside and being a customer-centric highly efficient growth company.

With that, I'll turn it over to Jamie to open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question today comes from Greg Badishkanian from Citi. Please go ahead with your question.

Gregory R Badishkanian -- Citigroup Inc Research Division -- Analyst

Great. Thank you.Could you talk about promotion by your competitors within the value segment versus the broader ORV segment in let's say third quarter as well as the current month versus what you saw in the second quarter and kind of the change that you saw? And also how did your strategy to counter particularly at the value segment changed?

Scott Wine -- Chairman and Chief Executive Officer

You know, Greg we as we said in the prepared remarks we continue to be focused on using promo to manage mix toward our more profitable side-by-side segments. So we were again not as promotional with our value offerings in the quarter which again really puts pressure on ATV market share and volume more than anything else. Now that is that's consistent with how we've managed the business throughout. The competitive landscape and promotions remained high I don't know that there were any increasingly focused on that value segment that we've seen previously though.

Gregory R Badishkanian -- Citigroup Inc Research Division -- Analyst

Okay. I know this is a hard question but how would you expect may be the industry will play out over the next few quarters in terms of promotion both at the higher end as well as the value chain? Do you expect that to moderate a bit as we get into next year or not?

Scott Wine -- Chairman and Chief Executive Officer

I have I always like to say that hope is my least favorite strategy but certainly we've been hopeful that there would be more responsible use of promotions. But quite honestly we have been more promotional and I think the overall industry is going to continue to be promotional in this competitive environment.

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

And Greg clearly the economic backdrop is going to play a heavy hand in that. I mean if the consumer confidence levels remain where they are I think it should be OK. The thing that we're keeping an eye on is the industrial segment with both manufacturing and industrial production being down here pretty consistently. That has us obviously watching and if that starts to put pressure on the category we could see promo moving around to support what the dealers have. I think the good news for us is we've managed our dealer inventory level using RFM. In my prepared remarks I talked about our unit shipments were actually slightly lower than retail as we continue to make sure that the dealers have the right level in the event that unforeseen circumstances happen.

Gregory R Badishkanian -- Citigroup Inc Research Division -- Analyst

Thanks for the color.

Richard Edwards -- Vice President Head of Investor Relations

Next question.

Operator

Our next question comes from Robin Farley from UBS. Please go ahead with your question.

Robin Margaret Farley -- UBS Investment Bank Research Division -- Analyst

Great. Thanks.You talked about the potential for an exemption from tariffs and I feel like you've been trying that for 15 16 months now. Is it right to interpret your comments as like that there has been movement on that front? And that maybe something now happens by year-end? And does that change the potential for you to think about moving production to Mexico? Just trying to think about what time frame might be for that decision of yours. And then just my follow up for an unrelated topic is you talked about Indian market share being down. Some others in the motorcycle business talked about their market share being down today as well.

Can you describe a little bit about what may be going on in the U.S. market? It seems like maybe there are some share gains by some manufacturers that really hadn't gained share in a long time but it could just be different industry definitions that are leading to that though.

Scott Wine -- Chairman and Chief Executive Officer

Yeah.Okay. We'll answer the questions in order. As usual Robin you're quite perceptive on my comments. We have been working this tariff issue very hard for quite some time. We did see a change in engagement and a willingness to listen and ultimately acting. We're in the late stages of the process now and we're certainly more confident. As I said as we head into the fourth quarter that our request for exemptions will be processed and ultimately there's a lot of ways that that can go. But ultimately it's more positive than based on the information that we received it's more positive than we felt since this thing began.

Robin Margaret Farley -- UBS Investment Bank Research Division -- Analyst

And so no time frame for Mexico that in terms of not something

Scott Wine -- Chairman and Chief Executive Officer

No I mean part of our argument has been if we don't get relieved we would have to think about the production moves. And I think that is something that the administration does and want to see happen and we don't want to see it happen. We're really pleased and proud of our American workforce and then we want to continue to be able to support that. So we are certainly evaluating all options but the relief that we are now expecting should be able to limit production moves the requirement for that.

And that's how we're planning at this point. On the motorcycle industry I suspect it is just the difference in the markets that we play in. I will tell you that some of the European bike manufacturers have been more aggressive in the U.S. and they've had a couple of new product and so that could also contribute. But mostly I would say it's a difference in how we look at market segments where we just don't play in that lower level CC space.

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

And Robin we said words like modest and slight it's literally 10 to 20 basis points of market share for Indian. So it's very small.

Robin Margaret Farley -- UBS Investment Bank Research Division -- Analyst

Okay. That's very helpful. Thank you.

Operator

Our next question comes from Jaime Katz from Morningstar. Please go ahead with your question.

Jaime M. Katz -- Morningstar Inc -- Analyst

Hi. Good morning, guys.

Scott Wine -- Chairman and Chief Executive Officer

Hi. Good morning.

Jaime M. Katz -- Morningstar Inc -- Analyst

I'd like to hear about the Boat business I think it was a bit weaker than we had anticipated and if you could talk about how that's tracking versus your expectations and maybe what your prognosis is for the rest of the year and to next year that would be really helpful.

Scott Wine -- Chairman and Chief Executive Officer

Sure Jaime. As I said we've got several good brands in our Boats business Bennington being the largest and most important and Bennington had a very good third quarter retail performance. I mean really we had the beginning of the year was impacted by weather and we were playing catch-up a little bit. And we felt better about the third quarter compared to the year-to-date performance.

So we but because of the weather we had higher inventory as we exited the quarter and we are going to try to work to that and lower shipments to manage that down as we head into 2020. Overall we are pleased with the dealer reactions to the new products that we introduced this summer and we feel like we're reasonably positioned to keep that business on track. Yes the overall market has been weaker than we thought this year and we're managing the business accordingly but ultimately pleased with our share gains and the outlook that we have for the business.

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

Jaime one of the things we talked about was how well that business is run and I think the reaction to the dealer inventory levels being able to pull back on shipments. But what Jake and the team are doing in terms of managing the cost base and the company as well shows up in the fact that we still anticipate gross profit margins to hang right around 20%. And given the volume reduction that we're anticipating that speaks to the cost management discipline that the team continues to have.

Jaime M. Katz -- Morningstar Inc -- Analyst

Okay. That's really helpful. And then I think the outlook for motorcycles implies that the fourth quarter will be really robust on the shipment front. And I'd like to hear if you can bridge the gap between sort of the outlook for Polaris and then the industry weakness that seems to be pretty pervasive for you to meet that goal because there seems to be sort of a wide margin between those two factors.

Scott Wine -- Chairman and Chief Executive Officer

Yes. There's two elements leading into that Jaime. One is Steve Menneto and his team have done a really good job of what I'll call dialing in the competitive landscape and understanding where we need to be with the pricing and promotions and overall ground gained to be competitive there. So there's an element of that that's playing into our expectations for better results in the fourth quarter. But primarily it's the as Mike talked about we teased a bit at the dealer show the introduction of Challenger. That will come out very soon and that will play out a fairly significant role as much of a major product introduction in motorcycles that we've had in quite some time. So that really is what's driving the change in trajectory into the fourth quarter. Okay. Next question?

Operator

Our next question comes from James Hardiman with Wedbush Securities. Please go ahead with your question.

James Lloyd Hardiman -- Wedbush Securities Inc. -- Analyst

Just to clarify that last point Scott so Challenger you actually think will have a meaningful impact on 4Q retail?

Scott Wine -- Chairman and Chief Executive Officer

More so on sales. I mean it's such an important part of the portfolio James that we need to get it into dealers so consumers can actually see it and take a look at it before the spring selling season. So it really is more of a sell-in than it is an expected boost to have more impact on sales than retail in the quarter.

James Lloyd Hardiman -- Wedbush Securities Inc. -- Analyst

Got it. And then two questions for me. So hopefully we'll never get to this point given your confidence on the exemption or exclusion process. But Mike maybe give us an idea if everything that's been announced in terms of tariffs goes through without any mitigation what's the incremental earnings impact on 2020? And then Scott just degree of confidence that you will outgrow the ORV market in 2020?

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

Well James I wish I could put a number in front of you but I'm not going to. But what I would do is I would point back to the comments I made last earnings call where I talked about the impact of our List three going up to 25% and retaliatory going away and 232 going away. We really don't have a better view right now for a couple of reasons. One it's predicated on what we think volume is going to do next year and we're obviously early in the process of rolling up our budget plan for next year and thinking through that. Second and more importantly is the status of the exemptions because that obviously could play a pretty substantial role in impacting what those tariffs would be as we roll forward.

So we'll give more color on that Jaime where because we should have a much better view given that we'll have another couple of months under our belts and we can see where the exclusion process shakes out.

Scott Wine -- Chairman and Chief Executive Officer

And as far as the how we feel about getting back to share gains in off-road vehicles we took a big risk with our significant price increase coming into this year and we and a very promotional category. We paid a price for that our market share. And we've talked about that. I will tell you we're pleased with our model year '20 product introductions. And at the end of the day one of the we got really great culture here but the ridiculously competitiveness which I often refer to is one that I think is going to kick in here and the execution that you'll see from our off-road vehicle team is likely to improve to the point where we should be able to get back to share gains in 2020.

Operator

Our next question comes from Scott Stember from CL King. Please go ahead with your question.

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

Good morning, and thanks for taking my questions.

Scott Wine -- Chairman and Chief Executive Officer

Good morning. Hi

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

Just embedded within the sales decline within motorcycles could you better flush out FTR? I know the last couple of quarters you talked about how you would expect some of the strength in motorcycles to your guidance to come from that. Maybe just talk about a little more granular how the FTR rollout went in the quarter? And how you expect that to roll or play out for the rest of the year?

Scott Wine -- Chairman and Chief Executive Officer

Good question Scott. We are we remain extremely excited about the potential of FTR. Not our best execution in two ways. One we were because of our focus on quality we were late in delivering that and really missed the good part of the season. And then I we actually underestimated demand for our highest end race replica bikes. So we had a kind of a mix problem that wasn't quite as good as we thought. So or there was a greater demand for the race replica than there was for our base models and so we've had to adjust them to that mix. We remain very encouraged about the bike. The reviews have been very very good. So it has played out below our expectations this year. We understand why and we feel good about prospects for FTR and Challenger as we head into 2020.

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

And Scott I made a couple of points and if you look back at Slide 14 in our deck you can see we had 23% growth internationally and that was largely driven by the introduction of the FTR. So even given the facts that Scott laid out you can see it drove substantial growth and we also saw PG&A growth in motorcycles which a portion of that comes along with the fact that we had gotten accessories out earlier for FTR than a typical motorcycle launch.

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

Got it. That's very helpful. And staying within motorcycles Scott maybe just talk about Slingshot. I know we're a couple of years we're two or three years into some slower times or demand for that product. How are some of the newer models for 2020 doing? And what are your thoughts about the offering going forward into 2020 and beyond?

Scott Wine -- Chairman and Chief Executive Officer

Yes. Scott I will tell you that our execution of Slingshot has not been our best effort. That's stating the obvious I think. That said I think Steve Menneto and Chris Sergeant who now leads that business for us have really done a very very good deep dive into what that customer segment is like and what it takes to succeed. And if you got to the Dealer Show you might have noticed there was a little black tent inside the show where every dealer got one ticket to come in and see what the model year '21 product is going to look like. And after they saw that not a single dealer actually one dealer decided they didn't want to continue with this. But everybody is excited about it. That will launch early next year and we're really encouraged with these refinements that we've got a better hit on the market than we had with the current efforts. So we're encouraged about it. It's not a slam dunk but we believe that the repositioning of the product and the brand marketing and messaging will make 2020 a better year for Slingshot.

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

And just real quick on TAP it's good to see the retail sales popping back up. Could you just remind us how much of TAP sales are retail versus wholesale?

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

Yes. The TAP sales are call it roughly 40% to 50% through the various channels that they've got. And we suspect that some of the wholesale reduction is actually coming back through our retail channels. We continue to be a little bit more discerning about the customers that we're doing business with. And as I said in my prepared remarks the fact that we're starting to make traction in some of the key areas is a testament that the effort Craig and his team are executing on we still have ways to go but it is a positive sign.

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

Got it. That's all I have. Thank you. Thanks.

Operator

Our next question comes from Michael Swartz from SunTrust. Please go ahead with your question.

Michael Arlington Swartz -- SunTrust Robinson Humphrey Inc. -- Analyst

Hey. Good morning, guys. Mike I apologize if I missed this if you've said this in the call but could you quantify the savings from strategic sourcing that you started seeing in the quarter? And I guess how should be thinking about that going into 2020 and beyond?

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

Yes. No we didn't but in past calls the comments I've made is that while we're seeing

savings in 2019 the investment we're making around validation costs is offsetting that. And obviously we're getting the early stage savings. Where we start to actually pick up momentum is I think we talked about at the dealer meeting Investor Day is we get into next year because then that's when we start to get kind of a more of a run rate level of savings at least for the first wave and then obviously we will be looking for a little bit of the Wave two to start kicking in.

So yes we talked about $200 million coming from the program but that obviously happens over time. I think Scott hit the right points which is the fact that they're coming through they're on plan. The teams are executing it's very encouraging and we think it's going to play a big part in getting our margins up over the next three to four years.

Michael Arlington Swartz -- SunTrust Robinson Humphrey Inc. -- Analyst

Okay great. And then second question maybe related with Boats and motorcycle. I guess coming out of July you had maintained your expectations or even increased around motorcycle I believe at that time and now we're lowering expectations here today. I guess what did you see during the quarter? Maybe what were you hoping for during the quarter planning for during the quarter that maybe didn't come through or come to fruition?

Scott Wine -- Chairman and Chief Executive Officer

Both in the U.S. and in Europe we saw weaker market conditions than we expected. We had we just had based on what we saw from the second quarter we thought going into the third quarter we would see a sequentially improving result and we saw just the opposite. So with that we had to adjust down our outlook.

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

We and Mike just going back. When we started out the year we had motorcycle at high-teens and we had adjusted that last go around into kind of the low double-digits to mid-teens. So we've been seeing the weakness and bringing it down. And then to Scott's point the third quarter kind of pushes down into that high-single digits.

Michael Arlington Swartz -- SunTrust Robinson Humphrey Inc. -- Analyst

Okay. Great. Thank you.

Scott Wine -- Chairman and Chief Executive Officer

Next question?

Operator

Our next question comes from Joe Altobello from Raymond James. Please go ahead with your question.

Joseph Nicholas Altobello -- Raymond James & Associates Inc. -- Analyst

First of all, Lucas [Phonetic] that -- thanks guys. Good morning. It's Joe.

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

Thank you.

Joseph Nicholas Altobello -- Raymond James & Associates Inc. -- Analyst

Quick question on tariffs and I know Mike you mentioned earlier that 2020 is still very unclear. But I think if I go through my notes you have said that the incremental impact from the List three going from 10% to 25% next year was about $30 million to $40 million. You could probably offset about half of that mitigation full year of the 232 tariff being lifted the more simple tariffs Europe going away etc. So I guess one if that's still case. And 2 if List three does go to 30% and again assuming no exemptions does that imply an incremental $20 million on top of the $30 million to $40 million next year?

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

Well the first part of your math is right. That's the comments that I made last quarter. And I think I've made comments before that talks about the List three being about 40% of our tariff exposure. So I think you can probably get yourself close from a math standpoint. The reason we are holding back from providing any kind of perspective for next year I mean I outlined some of the perspectives earlier but it really comes down to the success we anticipate from an exemption perspective. And those are aimed squarely at List 3 which is one of our biggest exposure list.

Joseph Nicholas Altobello -- Raymond James & Associates Inc. -- Analyst

Okay. Understood. And then maybe secondly in terms of new product launches you mentioned that the RZR products stated RANGER 1000 kind of shipped a little too early or actually a little too late this quarter to have an impact on numbers. So given the seasonality of those businesses when do you think we get more definitive evidence that they are translating into share gains? Could we see something like that in December? Or wait more into the March quarter?

Scott Wine -- Chairman and Chief Executive Officer

Yes. I think we're our expectations is we'll see some adoption in the fourth quarter but

primarily that's going to be a 2020 benefit. That's how we got it designed. But we will be immensely disappointed if we don't see those retail trends start to pick up throughout the fourth quarter.

Joseph Nicholas Altobello -- Raymond James & Associates Inc. -- Analyst

Got it. Okay. Thank you, guys.

Scott Wine -- Chairman and Chief Executive Officer

Okay. Next question.

Operator

Our next question comes from Gerrick Johnson from BMO. Please go ahead with your question.

Gerrick Luke Johnson -- BMO Capital Markets Equity Research -- Analyst

Hi. Good morning.I have two questions. First we're finding that the election cycle is a growing concern for dealers. Are you seeing any cautiousness in their willingness to stock 2020 to their prior plan? That's number one. And number two on Polaris Adventures is there any way you can quantify how it's affected the rest of your business? You have some nice superlative verbiage but are there any numbers we can put behind that to quantify it?

Scott Wine -- Chairman and Chief Executive Officer

So as far as stocking we've got profiles for all of our dealers. We've seen the preorders. We have to allocate our newer models and we're on allocation out into 2020 for the Pro XP and some of the new product offerings. So the demand seems very good. The sentiment with our dealers really is quite positive. I think they see the election outlook differently than most of America does. So I don't think there is concern right now. So that's reasonably good. We think our dealer is in a good place our dealers sentiment surveys are moving in the right direction. So that's generally positive. And the other question was around?

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

Polaris Adventures.

Scott Wine -- Chairman and Chief Executive Officer

Adventures that's just been a home run for us. And I will remind you I talked about the Polaris brand and how pleased we are with how that's rolling out. At the end of the day the single best sales and marketing tool we have is busts in seats. When people ride our products they want to spend more time in it. And the translation of those 100000 riders into sales it's in the low very low-single digits right now. But the incremental that's having impact on our brand and our business and bringing more people in is extremely positive. And our investment there is going to continue because it never fails when people ride the product that's the best indication to get them into the sport for a longer period of time and that means sales. So and it's a financially good deal for us. So we like that as well.

Gerrick Luke Johnson -- BMO Capital Markets Equity Research -- Analyst

Okay, great guys. Thank you very much.

Operator

Our next question comes from Tim Conder from Wells Fargo Securities. Please go ahead with your question.

Timothy Andrew Conder -- Wells Fargo Securities LLC Research Division -- Analyst

Thank you. Gentlemen, thanks for all the color. Much appreciated. I would like to maybe just return again to the List four and then the List 3. And Scott very clear that hope is not a strategy but it also seems to be clear that you're expecting some type of resolution definitive color here before year end on the List three exemptions. Just a little more anything else you can add there. And then.

Scott Wine -- Chairman and Chief Executive Officer

No. That is exactly right Tim.

Timothy Andrew Conder -- Wells Fargo Securities LLC Research Division -- Analyst

Okay. Okay. And then List 4 gentlemen quantification there Mike if you could remind us. And then I know there's an exemption process rolling out on that also just update from that perspective. Then the second follow-up question would be how much are the share loss? You talked about the price increases how that hurt you and maybe the timing there wasn't good but you're anticipating new products. How much of the share loss was just due to the timing of the new products do you believe Scott?

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

Tim on the on List four or List 4A that is currently in place the impact for us is relatively small. That said there's an exclusion process that will open up at the end of October and we absolutely will be filing for exclusion on that as well. As it relates to share loss I go back to the comments that we had in our prepared remarks. It was not in the categories that our new products are in that as much as it was in the value categories as we've talked about in our prior call.

Timothy Andrew Conder -- Wells Fargo Securities LLC Research Division -- Analyst

Okay.

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

Thanks Tim.

Operator

Our next question comes from David MacGregor from Longbow. Please go ahead with your question.

David Sutherland MacGregor -- Longbow Research LLC -- Analyst

Yeah, good morning everyone. I wanted to just ask about side-by-side growth and I guess you had positive mix within ORVs. The ATV category is a fairly mature category at this point. How successful have you been in terms of getting people to mix up all of ATVs into side-by-sides? And as people make that step what's kind of your retention level as opposed to competitive element?

Scott Wine -- Chairman and Chief Executive Officer

Well I mean first I mean I'm with the company 11 years it's for 11 consecutive year we've moved people from ATVs into side-by-side. So I actually think the ATV market is about stable now. It's not going to continue to go down. I think you'll go down with up and down with economic. Not unlike snow. I mean I would say ATVs are kind of like the snow business right now and it's kind of a level that's going to sit play for a while and move up and down slightly. On side-by-side it's just a better solution for most people.

And I think we've been able to maintain this position where we're 3x larger than the nearest competitor and that's kind of a key focus for us not only to maintain that but to extend that and we do that with our product offerings. And once people get into the brand they tend to stay there. And that's one of the reasons why but more of the new entrants are entering into side-by-side as opposed to the old where they used to enter in ATVs and then move up. But that said we're not giving up on the ATV market. This year has been tough. We had to allocate with limited promo dollars to go around and we chose to put them more on side-by-sides. But I think in the future you'll look for us to be to continue to be competitive in ATVs. We like the market we like the customer and they are important to us.

David Sutherland MacGregor -- Longbow Research LLC -- Analyst

Are you able to break out what percentage of that side-by-side growth has come from ATV migration?

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

No.

David Sutherland MacGregor -- Longbow Research LLC -- Analyst

Okay. Second question is just I guess on steel prices I don't know to what extent you're able to talk at this point about the potential benefit to gross margins from lower steel prices. Maybe one way to think about it is to just to what extent did you benefit as steel prices to what extent I guess did you were you hurt by steel prices going up and you'd expect to reverse that all the way down?

Scott Wine -- Chairman and Chief Executive Officer

Yes. I think David some of that's built into the when we talked about the favorability next year coming from 232 going away as well as retaliatory. At 232 it really the impact was that it raised steel and aluminum prices and then we've seen those prices subsequently coming down. The benefit for us this year is somewhat paced because our team had done a really good job of getting out ahead of the impacts and doing some forward locks and hedging essentially. But as those start to wind down we would fully anticipate that that would come through and show up in commodity benefit for the company. We're not obviously at a point where we want to quantify that in isolation outside of all the other things that we've got going on in the business but we will provide perspective on that as well as other key components like logistics and tariffs when we give guidance in January.

David Sutherland MacGregor -- Longbow Research LLC -- Analyst

Thanks very much.

Scott Wine -- Chairman and Chief Executive Officer

Next question?

Operator

Our next question comes from Joseph Spak from RBC. Please go with your question.

Joseph Robert Spak -- RBC Capital Markets -- Analyst

Thanks. Good morning. Just wanted to turn back to Boats for a second and I think you explained sort of what's going on from a top line and retail inventory perspective. But like you had gross profit basically flat on a $15 million sales drop and even in the past you've talked about the variable cost nature of that business. But it seems like there's something else going on as well. Was it mix? Or were there some cost or synergy savings that sort of helped out the gross profit there?

Scott Wine -- Chairman and Chief Executive Officer

It was actually mix was unfavorable for us. So I think the efforts that the team drove and Mike talked about it are quite significant. Part of those are synergy savings and part of just a very effective way that they managed that business. And then we talked about their incredibly high returns on invested capital on the business we bought and they are continuing to I mean basically we just didn't need to screw that up. But we mixed down as we introduced more smaller lower-priced Boats for from a market share perspective where we actually seen some share losses the previous year. So mix was not helpful but the ongoing efforts to drive productivity and efficiency within the factories has been very beneficial. Mike do you want to add color?

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

The only other thing I'd add Joe is we do get rebates coming back from our engine

suppliers and sometimes those can move around between quarters. So we got a little bit of a benefit. But Scott said that the operational improvements that the team is focused on as well as just managing their cost space is a big part of what drove the performance as well.

Joseph Robert Spak -- RBC Capital Markets -- Analyst

Okay. And then secondly and Scott you mentioned ROIC in this the very strong ROIC level at the corporate level used to be a hallmark. And obviously what the some of the recall challenges and then tariffs that's been sliding. I guess with the if the world sort of stays as it is now with the SSI efforts is that enough to get at least the incremental ROIC back to sort of that very strong double-digit level? Or would you ultimately need some relief in tariffs just to sort of get back there as well?

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

Yes. So Joe I in my prepared remarks I talked about us just being shy of 16% which is 2x our cost to capital 2x the S&P 500 and higher than what our competitors average out at. We are down from where we've been historically. And I would say historically having ROIC at 30% would put you in a position not to invest in certain things. So that's probably not a great area to be. And certainly with the fact that we've got two recent acquisitions that have put about $1.5 billion worth of a combination of goodwill and intangible assets on the books and we're still earning out of that in the early periods. I think we're actually poised to continue forward with good progress. Now the tariffs had put a damper on that to some extent. So even if those were to remain in place and basically neutral as we go forward we would certainly expect barring another acquisition that we should be able to get to the high-teens if not the low 20s which again would put us in a incredibly attractive position relative to the cost to run this business as well as relative to our competitive set.

Joseph Robert Spak -- RBC Capital Markets -- Analyst

Very helpful. Thank you.

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

Next question.

Operator

Our next question comes from Mark Smith with Lake Street. Please go ahead with your question.

Mark Eric Smith -- Lake Street Capital Markets -- Analyst

Hi guys.Can you talk first off just a little bit about dealer inventory and your comfort with that being up as well as how the project is going with the focus on lowering Slingshot inventories so you can get that new product out?

Scott Wine -- Chairman and Chief Executive Officer

So dealer inventory was up overall 4%. As I said that was a the way you execute a backdrop like clearance sale is have enough older products in the category to sell. So that was more or less planned. And we're very comfortable with ORV inventories. Our mix as we head into the fourth quarter gives us the opportunity to drive continued side-by-side growth. The RFM process continues to work extremely well. I mean our ability to and then our model year introductions I mean just Mike talked about it but the way the factories are working we really were efficient in getting those products out there on time and so we are well-positioned with dealer end it's what we expected. Now we do need to deliver good retail in the fourth quarter and we're comfortable that we'll be able to do that. What was the other question I'm sorry?

Mark Eric Smith -- Lake Street Capital Markets -- Analyst

Just on slingshot how that inventory is going?

Scott Wine -- Chairman and Chief Executive Officer

Yes. No that has been again I said the team has taken a different approach understanding a better way to market and execute the ground game there. And we're seeing the traction there. Obviously with the planned introduction of a new product in model year not model year but calendar year '20 we've got to get that inventory down and we're comfortable with where we are heading into the end of the year.

Mark Eric Smith -- Lake Street Capital Markets -- Analyst

Okay. And if I can get one more Canadian dollar we've just seen a little bit of strength here. Mike maybe a hypothetical $0.05 move in Canadian dollar how incremental would that be?

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

Well I mean it would be somewhat isolated obviously to the fact we just got a couple of months left in the year. I think we've talked in the past about $0.01 move in that will equate to about $5 million for the year. So there could be a little bit of a impact in the quarter. We're still tracking a little bit lower from a euro standpoint. As I mentioned in my prepared remarks we're at $1.12 in our guidance and forecasting. And I think this morning when I checked we're tracking at about $1.11. So at this point foreign exchange has largely played out as we anticipated. It has had some volatility and movement back and forth within the months. But at this point we just don't see anything moving dramatically outside of that range that will move the numbers meaningfully. But if they do we'll obviously provide color on that.

Mark Eric Smith -- Lake Street Capital Markets -- Analyst

Great. Thank you.

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

Last question is coming from Craig.

Operator

And our final question comes from Craig Kennison from Robert W. Baird. Please go ahead with your question.

Craig R. Kennison -- Robert W. Baird & Co. Incorporated Research Division -- Analyst

Hey, thanks for squeezing me in. First question just back on Slide seven for what percentage of the your tariff exposure have you eyed for exclusion?

Scott Wine -- Chairman and Chief Executive Officer

Well for the List 3 301 which is the big kahuna if you will we are about 95% exclusion request submitted. And that's just becomes a the final 5% that the diminishing rate of return for the time energy and effort to get those in. So with the essentially it's the vast majority of our burden there. And I don't think there's any chance that we get all of that relief but the fact that we get a good number there I think potentially a really good number there could be helpful.

Craig R. Kennison -- Robert W. Baird & Co. Incorporated Research Division -- Analyst

And Scott what's the notification process you received from the government?

Scott Wine -- Chairman and Chief Executive Officer

There is one notification process. It is the issuing of the Federal Register and it happens indiscriminately. We think there's a list coming out imminently but again it's a random process. And you just you literally you find out when it's on there. So you'll know when we know.

Craig R. Kennison -- Robert W. Baird & Co. Incorporated Research Division -- Analyst

My final question then on Factory Choice Scott is there any metric that frames your percentage of sales through Factory Choice today? And where that figure could be headed over time?

Scott Wine -- Chairman and Chief Executive Officer

I mean we keep track of it internally and it's been exceptionally good. It is as I have probably articulated before it's an incredibly complex process. I mean I'm so proud of what Ken and Chris Musso and the team have done to figure this out and make the capability exist. So it's been purposely constrained if you will but we're working through that and we think the demand continues to be exceptionally good and it really does provide a unique competitive advantage that we expect to for many years to come for that to be an increasingly important part of our sales.

Craig R. Kennison -- Robert W. Baird & Co. Incorporated Research Division -- Analyst

Thank you.

Richard Edwards -- Vice President Head of Investor Relations

Good. I want to thank everyone for participating this morning in the call and we look forward to talking to you again next quarter. Thanks again. Goodbye.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Richard Edwards -- Vice President Head of Investor Relations

Scott Wine -- Chairman and Chief Executive Officer

Michael Speetzen -- Executive Vice President Finance and Chief Financial Officer

Gregory R Badishkanian -- Citigroup Inc Research Division -- Analyst

Robin Margaret Farley -- UBS Investment Bank Research Division -- Analyst

Jaime M. Katz -- Morningstar Inc -- Analyst

James Lloyd Hardiman -- Wedbush Securities Inc. -- Analyst

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

Michael Arlington Swartz -- SunTrust Robinson Humphrey Inc. -- Analyst

Joseph Nicholas Altobello -- Raymond James & Associates Inc. -- Analyst

Gerrick Luke Johnson -- BMO Capital Markets Equity Research -- Analyst

Timothy Andrew Conder -- Wells Fargo Securities LLC Research Division -- Analyst

David Sutherland MacGregor -- Longbow Research LLC -- Analyst

Joseph Robert Spak -- RBC Capital Markets -- Analyst

Mark Eric Smith -- Lake Street Capital Markets -- Analyst

Craig R. Kennison -- Robert W. Baird & Co. Incorporated Research Division -- Analyst

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