Scott Wine - Chairman, Chief Executive Officer Mike Speetzen - Chief Financial Officer Richard Edwards - Head of Investor Relations.

Good morning and welcome to the Polaris Q2, 2019 Earnings Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Richard Edwards, Head of Investor Relations. Please go ahead..

Thank you, Chad, and good morning everyone. Thank you for joining us for our 2019 second quarter earnings call. A slide presentation is accessible at our website at www.ir.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 will 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 risk and uncertainties. All references to second quarter 2019 actual results and 2019 updated guidance are reported on an adjusted non-GAAP basis unless otherwise noted.

Please refer to our Regulation G reconciliation schedules at the end of this presentation for the GAAP to non-GAAP adjustments. Now, I’ll turn it over to our Chairman and CEO, Scott Wine.

Scott?.

Thanks Richard. Good morning and thank you for joining us. Our significant research and development investments figure prominently in our major product launches, but we also do a lot that flies under the radar.

An inspiring example of one of the less visible technology programs made news recently, when it was revealed that Polaris Defense MRZR on the deck of a navy warship, updated with Marine Corps Air Defense System brought down an Iranian drone in the Strait of Hormuz last week.

We work hard to be good corporate stewards and demonstrate our purpose, but nothing beats playing a role in protecting American service men and women.

As a rule, I will not use a positive descriptor to refer to results that include both retail sales and earnings per share down year-over-year, but I must commend our team for delivering respectable second quarter performance in a very tough environment.

Tariffs remain the single largest contributor to our lower earnings, but the aggressive and innovative mitigation efforts we are implementing reduced their impact.

Our manufacturing and supply chain execution is at the best it has ever been, which help us overcome headwinds and the significant upside from our strategic sourcing project is still to come.

The industry’s competitive climate, and by that I’m mostly referring to excessive promotions is unhealthy and unhelpful, but it is a game we know well and our growth in Side-by-Sides testifies to the effectiveness with which Chris Musso and his team manage the Off-Road Vehicle business in the quarter.

Parts, Garments and Accessories was very strong, highlighting the innovation and quality of our offerings. Our Flat Track Racing success continues in 2019 and in Q2 we finally made the FTR1200 available to the masses. Initial demand is in-line with the bikes performance often.

Poor weather hampered motorcycle ORV and especially Boat retail, yet Bennington is still up year-to-date and gained share in the second quarter. We continue to work diligently in resolution to our tariff issues, which I will address more thoroughly momentarily.

Second quarter North American retail sales were down 2%, lagging the overall Powersports industry which was up modestly. Even with our strong brands and industry leading products, we knew we were taking a calculated risk with our Q1 price increases, the biggest for Polaris and the industry in over a decade.

Not unexpectedly, the largest impact on volume and market share was in our lower price and lower margin used in value ATV segments. We chose to allocate more promotional dollars to our higher margin RANGER and RZR lines, where our product superiority is clearest and both perform better growing low single digits.

The North American Motorcycle industry remained weak in the quarter, as evidenced by Indian gaining market share despite retail declining nearly 10%. Slingshot struggled in the quarter, but under new leadership the team is making progress with the product, marketing and overall execution.

Boat retail was down slightly in Q2, but our most consequential brand Bennington grew and gained market share. North American dealer inventory was up 1% at the end of the quarter, positioning us well for our model year ‘20 product introductions and our factory authorized clearance sale.

We have institutionalized retail flow management across motorcycles and off-road vehicles and are managing the retail trends closely. Disciplined inventory management has always been our strength at Bennington and boat inventory is also in good shape.

The May 9 announcement that increased 301 List 3 tariffs to 25% was a blow to Polaris, not just in the increased cost, but also because it diminished the prospects for a near term comprehensive U.S. China trade agreement.

Fortunately, our team was prepared and their execution of aggressive counter measures and mitigation efforts, along with the lifting of the 232 steel and aluminum tariffs allowed us to offset the 2019 impact of the 301 List 3 increase.

An excellent example of our mitigation efforts is the $30 million of machine parts that we will move from China to U.S. suppliers, including our WSI subsidiaries. The risk of 301 List 4 going into effect remains, although the impact on Polaris would be limited as most of that final front would be direct to consumer goods.

We continue to spend considerable time, energy and effort in our pursuit of just relief for the unintended impact of tariffs on our U.S. plants and U.S. business units.

We are making progress with the administration and Congress and although we have no assurances that relief will be granted, we are continuing to press our very strong case for fair resolution.

We have aggressively leveraged our tools and talent to strengthen the performance in our aftermarket business, so their second quarter progress was both expected and encouraging.

Our Powersports aftermarket brand portfolio which includes Klim, Kolpin, 509, Pro Armor and Trail Tech has consistently delivered strong growth for the past 18 months, and was up over 10% in the quarter.

Transamerican Auto Parts was flat in the period, with a 95 store strong 4 WP retail channel up 7% and e-commerce up 12%, demonstrating the effectiveness of improvements Craig Scanlon and his team are driving. The smaller wholesale channel was down 12% as we actively managed the portfolio towards more strategic, higher margin customers.

TAP is well positioned for accelerating profitable growth in the second half and beyond. Steve Eastman’s transformation of our PG&A and aftermarket business has been very impressive and very profitable, so it makes sense to invest more here to facilitate faster growth.

We commenced operations earlier this month at our new state of the art 500,000 square foot distribution center in Fernley, Nevada. It is our first distribution facility capable of supporting all of our businesses and brands and importantly, enables one to two day parcel shipments to the West Coast customers.

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

We are narrowing our full year total company sales growth guidance and now expect sales to increase in the 12% to 13% range for the year.

The North American Powersports industry is expected to remain positive in the low to mid-single digits percent range, driven by growth in the side-by-side market, while the Motorcycle market is expected to remain weak. We continue to expect Boat sales to contribute about 6% to the full year increase in sales versus 2018.

We are narrowing our full year adjusted earnings per share for 2019. We are raising the lower end of our previously issued guidance by an additional $0.05 to $6.10 per diluted share given our first half results primarily from our Boat segment. We’re maintaining the upper end of the range at $6.30 per diluted share.

The revised EPS range include the added costs related to the change in the 301 List 3 tariff rate from 10% to 25% on all components shipped after the effective date. We are holding the upper end of the range despite this added cost given the positive tariff mitigation efforts the team has realized.

The 301 List 3 tariff moving to 25% places an additional $30 million of cost pressure on 2019 earnings, and as Scott pointed out, we’ve been able to mitigate existing tariff exposure and are recognizing the benefit from the 232 tariff removal to essentially offset this added cost.

The $30 million of 301 List 3 at 25% annualizes out to $60 million to $70 million on a full year basis or an incremental $30 million to $40 million impact as we head into 2020.

Excluding the tariff costs, along with the negative currency and higher interest costs, our underlying operating earnings performances anticipate to improve 15% to 18% on a year-over-year basis, reflecting the continued progress we are making in business fundamentals.

For the second half of 2019 our revenue is evenly split between Q3 and Q4, mix however drives differences between the earnings within the quarters. Additionally we have higher R&D costs in Q3 versus Q4, given supplier validation costs related to the suppler chain transformation project.

This coupled with the fact that our dealer shows expenses in Q3 drives approximately 55% of our second half expected EPS guidance to be realized in the fourth quarter. Moving down the P&L, our previously issued guidance ranges remain unchanged as shown on this current slide; however, there are a couple points I want to highway.

First, adjusted gross profit margins while expected to be down on an absolute basis driven by tariffs and negative currency are up 80 to 110 basis points prior to the effects of those items driven by higher volume, mix, price and productivity.

We continue to see the competition promote aggressively in the second quarter, both in ORV and Motorcycles, and while we are spending more on promotions than originally anticipated, we are being selective as to where we spend our promotional dollars which is generating positive mix that offsets the additional promotional costs.

Gross profit margin expectations by segment also remain unchanged. We have provided the gross profit margin details by segment in the appendix of this presentation.

Secondly, adjusted operating expenses are expected to increase in the mid-teens percentage range in 2019, up 10 to 20 basis points as a percentage of sales, resulting from the addition of operating expenses from the Boat segment, the new multi-brand distribution center in Fernley, Nevada, higher variable compensation costs, the costs associated with the 65th Anniversary Celebration and Summer Dealer Meeting being held next week and lastly, the ongoing investment in research and development expenses.

Moving onto sales expectations by segment, ORV/Snowmobiles sales are now expected to be up mid to high-single digits. Our range has expanded from previous guidance with the mix of Side-by-Side products expected to be more favorable than previously anticipated, as well as stronger international and PG&A sales.

Motorcycle sales are now expected to be up low to mid-teens percent.

We expanded the range from prior guidance given the weak market and a modest adjustment in the number of FTR 1200 bikes expected to ship in 2019, as we cautiously ramp production to ensure we met high expectations around quality; both global adjacent markets and after market segment sales expectations remain unchanged at up mid-single digits percent.

International and PG&A sales which were included in the respective segments are both performing better than anticipated, therefore we now expect international sales to increase mid-single digits percent and PG&A sales to increase in the mid to high single digits percent range for the full year. And Boat sales expectations remain largely unchanged.

Operating cash flow finished at $203 million through the first half of 2019, up 23% over the same time last year, driven by lower working capital requirements. Cash flow is expected to improve approximately 20% to 30% for the full year compared to last year, unchanged from our previous expectations.

Our bank leverage ratio defined as total debt to EBITDA stands at approximately 2.46 times, well below our bank covenant requirements and we will continue to focus on debt reductions for the remainder of 2019. With that, I’ll turn it back over to Scott for some final thoughts. .

Thanks Mike. I’m encouraged by the way our Polaris team battled through the first half, driving quality and productivity improvements that will pay dividends in the months and years ahead. The Powersports Industry has been resilient and growing year-to-date and we’re excited to launch our model year ‘20 product introductions to extend our reach.

Over the weekend we had a pre-launch event with our closest partners and social media influencers and received outstanding feedback, reinforcing our conviction that these new products will raise the bar in their respective segments.

Our innovations are not limited to vehicles, and we will continue to leverage technology to improve customer experience across the business.

As we began our second year in the Boat business we like the market share gains and growth at Bennington and we use our Boat dealer shows over the next few weeks to showcase plans for growth across all of our marine brands.

International, global adjacent markets and Parts, Garments and Accessories are all performing well, highlighting the disparity between North American unit volume and overall corporate revenue and demonstrating the positive impact of our diversification.

The Motorcycle industry remains challenging with promotions more than products putting pressure on our Indian business. With FTR 1200 production accelerating in the second half and our portfolio continuing to expand, we like our opportunity to gain market share. Our strategic sourcing initiative continues to yield positive results.

Wave 1 is moving to implementation with savings now projected to exceed our aggressive targets. Wave 2 kicked-off in May and we remain confident that this strategic sourcing project will be the largest productivity boost the company has ever executed.

We’re excited to welcome thousands of players, dealers from around the world to our 65th Anniversary Dealer Show here next week. We plan to demonstrate clearly why we are so confident in our ability to lead the industry and drive profitable growth for many years to come. With that, we’ll open the line for questions. Thank you. .

Thank you. [Operator Instructions]. Our first question will come from Jaime Katz of Morningstar. Please go ahead. .

Hi, good morning guys. .

Good morning, Jaime. .

I’m curious about aftermarket parts. It looks like for the second half of the year you guys are anticipating sales that rise maybe at a high single digit pace, which is faster than that segment has risen for you over the last few years since you’ve owned it.

So is there something coming out in that segment that is giving you confidence that you can accomplish that run rate?.

Yeah Jaime, as I indicated in my remarks, we had really strong growth in our retail segment, up 7%; our e-com segment up 12% in the quarter and you know Craig Scanlon and the team have really put a lot of fundamental improvements in the business, so we feel good about that.

And then our Powersports portfolio as I indicated has also been continuing to grow strongly.

So I think as we reduce some of the headwinds we’ve seen in our wholesale business, and they start to get their arms around that, we just feel better about the way that business is executed in the second quarter, what we’re expecting, kind of the trends as we move into the second half of the year. .

Okay and then there wasn’t too much discussion about dealer floor space, but I’m curious as you have – if you guys have been able to capitalize maybe on incremental floor space as Arctic Cat has incrementally weekend over the last year or so and whether or not dealers are more receptive to taking more of your product? Thanks. .

Thanks Jaime. Good question, but you know I’d tell you, with RFM we have our profile set with our dealers, it’s working extremely well. We do see as we introduce new products, as we’re about to do.

We tend to get more floor space to make sure that they can showcase and they increase their profiles a little bit, but I wouldn’t say that there’s been a tremendous increase because of the shift in that competitor. .

Next question Chad. .

Certainly. Next question comes from James Hardiman with Wedbush. Please go ahead. .

Hey, good morning. So ORV retail was down a little bit in the second quarter, but the guidance for that segment was actually raised at a high end. Maybe walk us through how that works, what was incrementally more positive. You touched on a little bit of it, but maybe walk us through that that bridge. .

Yeah, you know James, as I pointed out we actually pulled shipments down, unit shipments down in the second quarter, pretty much in line with retail again, you know a testament to how RFM works and adjust on a real-time basis.

Really what we are benefiting from is as we indicated from a retail standpoint, Side-by-Side sales are growing, ATV is contracting and that gives us a boost from an ASP standpoint, but you also have to consider you know there is international revenue.

It wasn’t much of a factor in Q2, but as we look out for the balance of the year, international growth will help ORV as will PG&A and so those really fed into the revision in terms of the mix expectations, the growth coming from PG&A, which obviously the accessories that go with our Side-by-Sides are a big component of that..

Got it! And then sort of a two-part tariff question here. So the $30 million of 301 List 3, you’ve got some exemptions I think you pointed out, but I’m assuming that none of those exemption were on the List 3 stuff since that window just opened up a few weeks ago.

And so if you are successful with exemptions, does that – you know is there still a potential for $30 million of upside as we work our way through that.

And then, if at all possible and I’m not going to ask you for guidance for 2020, but just how do I think about 2020 in terms of the incremental tariff piece that we’ve gotten over the last few months, obviously for ‘19 there was $30 million and you are able to offset that.

Should I think about that being offset in 2020 as well or were there some timing effects that will still make the incremental piece for 2020, if everything stays where it is right now, go up?.

That’s a long two-part question. It’s a complex topic, but you actually summarized it accurately. There are no exemptions for List 3 301 yet. There might be and really it’s unlikely that we are going to get significant relief from exempts like part by part exemptions. That’s why we are working so hard to get overall relief from this 301 List 3 tariffs.

As Mike indicated, we’ve really done a nice job of offsetting it with mitigation efforts this year. Ken and his team have worked every single angle to – and then with the benefit of the 232 Steel & Aluminum we did not increase it, but Mike said in his prepared remarks that the increase is up.

You know the flow through to next year would be an incremental $30 million to $40 million. I don’t think we’re going to provide tariff guidance beyond that..

Yeah, you know James, the only piece that would be incremental to that is obviously we still had some of the 232 impact this year and that obviously won’t reoccur next year and then we’re doing a lot of work around the retaliatory tariffs.

So my expectation is that if nothing else changes, meaning no tariffs are reduced, no tariffs are added, we’d be up a little bit as we head into 2020, which is going to primarily from this incremental 301 List 3, 25% less some favorability that will get out of 232 and the retaliatory starting to be reduced as we ramp motorcycle production in Europe..

Got it..

Thank you. Our next question comes from Scott Stember with C.L. King. Please go ahead..

Good morning, and thanks for taking my questions..

Good morning, Scott..

Can we maybe talk about retail a little bit, ORV in the release you talked about, I guess for you its wondering why the industry was up and some competing products in the market that weren’t there before. Maybe just talk about the areas where you were going up against that.

I imagine that it was more in the value in the youth side, but maybe just give us a little color on that?.

Yes. Really, I think that the new products that we haven’t been up against before is really the Honda entering with the talent more than anything else, but most of our retail challenges if you will, as we talked about in our prepared remarks.

We’re really in the value-ATV, the youth products and somewhat in the trail RZR segment where we haven’t refreshed the product in quite some time, and we chose with our price increases not to put as much promo on some of those lower-margin product lines and we actually saw that hurt volume and market share, but you know we have a real product advantage with RANGER and RZR right now, we chose to capitalize on that, and I think it allows us to manage the quarter reasonably well.

I will tell you that, you know we’ve got a very good plan as we roll Boats with new products and our factory authorized clearance sale, and I expect us to continue to execute our retail and share play, improving and better in the second half..

You know Scott, in a way I would add to Scott's comments is keep the word discipline in mind when you think about how we're going at promotion. There's some competitors out there that aren't being disciplined. We are going to be smart about it as I said in my prepared remarks.

We are doing the work around each program to make sure that it's got the right financial profile and we are protecting where we need to protect. .

Got in. And that last question about retail, I know there’s been a lot made about whether and how much of it impacted you know the quarter, whether it was April, May or June.

Maybe just give us an indication of how it impacted your businesses maybe by lining boats, ORV, the motorcycles and maybe just by month as well, just let us know how much weather really impacted June in particular? Thanks. .

You know that is not – we don't have refined data on that and if we did, we probably wouldn't share it. I will tell you that throughout – April was better weather, but May and June, both were difficult.

It's probably hardest on Boats, second hardest on Motorcycles and then you know least hard on off-road vehicles, but it's certainly not helpful to any of our product lines when it's raining and I think the Midwest really had the most impact of wetness in the second quarter. .

And you know Scott we did see – you know I've seen a lot of the reports came out around Boats. We did see a pick up at the end of June and the early part of July when weather did improve. So you know we know that that was definitely a factor. .

Yeah, thanks.

Next question?.

That comes from David Tamberrino with Goldman Sachs. Please go ahead. .

Yeah. Great! I just want to dive more into the mitigation actions that you've taken so far. I think you called out about $20 million of benefit for this year. What have you done? What else are you looking to put in place and how much of this incremental you know tariffs are incremental $40 million year-over-year in to 2020 as where we currently stand.

Do you think you could mitigate from some of your incremental actions from here?.

Well, you know obviously the number we gave you is what we think we won't be able to mitigate, because that’s you know how we calculate impact, but I will tell you that as Ken likes to say, we haven't had our next best good idea and the work that they are doing, whether it's changing country of origin which has been quite helpful to us as I indicated, you know moving of some of the machine part sourcing we've done from China traditionally to some of our U.S.

suppliers including our own WSI subsidiary. You know we've got bonded warehouses to make sure we're not paying tariffs when we shouldn't pay tariffs.

Really it is a unrelenting focus on reducing that impacted and I think Lucy and I spent a lot of time in Washington trying to get the release we should, so we're not spending so much non-value added time trying to work around the tariffs and the impact on the company, but really proud of the way the team has been able to navigate the impact thus far.

.

Okay, and then just lastly from an inventory perspective, you know ended the quarter up a little bit year-over-year.

Do you feel as if there's any particular product where you have a little bit too much excess inventory at the dealers right now and you need to pull back for 3Q or do you think you're in a good position ahead of your product launches?.

We feel good. You know we took the opportunity when we saw retail softening in Q1 to make sure that as we loaded up Q2 knowing that we have model year changeover, factory authorized clearance, new products coming out that you know we were making sure we were disciplined.

We put a comment on the chart that we’re at 95% of our RFPM profiles, so we’re making sure that we have enough room you know if things were to move from where we've got them projected right now. .

Got it. That’s helpful, thank you guys. .

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

Thanks, two questions. One is, I knew your commentary about the tariffs impact, the $34 million - $40 million into 2020. I just wanted to clarify, was that after any offsets from the 232 it won't recur next year and if not, can you just remind us the dollar amount to 232 that won't recur next year. Thanks. .

Yeah, so Robin the 30 to 40 is just purely the List 3 at 25%, so that's an annual value of 60 to 70, but its incremental 30 to 40. The 232 tariff and the retaliatory going away, we did not quantify those. You know they are in the $10 million to $20 million range to give you a rough order of magnitude. .

Okay, great. No, that's helpful thanks. And then onto just some on the increase in order with your shipment guidance, I know you mention the higher mix of Side-by-Sides, obviously the ASP would be higher. Next, was there also an increase in that shipment rates or was it only the ASP mix. .

Well, there was a little bit of an increase in the shipment, because we're making that shift change. From an overall standpoint, from a unit there wasn't anything material, but when you look at you know the value of those units that we've got going in from Side-by-Side standpoint, there's a big price ASP advantage.

Unfortunately a fair amount of that’s getting eaten up by the incremental promotion that we've had to put in place, but again we're making sure that we're evaluating each of those decisions independently. .

Okay, great.

And if I could just throw one last one in there, I was just looking at your European sales and I think your comments were talking about the growth of international in the second half and you know other than Powersports, or at least one other than Powersports comments in Europe being weaker than I expected, so I wondering if you could just give us your take on kind of European retail demand overall.

Thanks. .

Well, you know motorcycle industry in Europe is significantly better, stronger than it is here. So we feel encouraged by, especially as we're launching the FTR, as we you know always indicated that that really is a bike targeted as much as Europe as anything.

But with our second half product offerings, you know we believe that that'll be as attractive as in Europe as it is here. So we think the market is better than the overall European economy. The Powersports market and motorcycle market is better than the overall European economy and we're encouraged by that..

You know and Robin, you saw that we raised our guidance for international from low to mid-single digits and that's not just a motorcycle driven movement. .

Okay great, thanks very much. .

The next question comes from Greg Badishkanian with Citi; please go ahead. .

Great! You know in terms of the west spring, do you think that’s loss sales or would you expect to get some of that loss sales back?.

We think it varies by industry. With motorcycles and boats it tends to be – you're going to lose the vast majority of it. They lose the riding season or the boating season and are less likely to purchase. Off road vehicles, we think it tends to have less of an impact.

You know people have thought about those purchases a little bit longer and you know we’ll still continue to – we've seen that recover a little bit better, but we think we lost some of it. .

Okay, alright. And then just to clarify in terms of the intense promotion in the value segment, that’s been pretty consistent, but it’s still aggressive now you know as we’ve seen in June and July, right. .

Yeah, I'm not sure that we’ve really seen a notable change recently. They are down from what we saw at the beginning of the year, but you know it's been pretty consistent. .

Okay, and just finally the upcoming 65th year celebration, the product launches [Technical Difficulty]. .

Yeah Greg, you're breaking up, we can't hear you. Maybe if you can get back in the queue..

Okay, thank you..

Go ahead, go ahead. No, we can hear you now. [Cross Talk]..

Sorry about that. Could you see a step up in terms of new products that are coming out in terms of innovation or would you expect that to be pretty similar, you know new products is the last year or two, or can we see a step up this year when we come out to this year. .

You know as I've – Greg, I mean we don't talk about what we're going to launch, but we are spending more money, so therefore you naturally expect if we're going to get a good return, that’s we’d get more and better products and I think that's consistent with what you'll see. .

Perfect! Thanks guys..

Thanks. Next question..

Yeah, and that’s from Joseph Spak with RBC; please go ahead. .

Thanks guys. Maybe just turning to Boats, I was wondering if you could talk a little bit about your inventory situation there, given the weather in some of your comments you just mentioned about you know being tougher to sort of pick up sales and is there an opportunity over time to do something more, you know RFM like with that business. .

You know we – they already – you know the Vogel [ph] family just had a really good operating model. I'll just remind you, when we bought the business it had returns on invested capital of over 100, so they really understand this idea of flow. The weather impact, you know there's nothing you can do.

You've got a ship-in before the season, so I think you know Boat inventory was up high single digits, but it's already depleted in July. I think we’re feeling better about that. We did cut shipments in the second quarter and retail has picked up in July.

So we’re feeling really good about where Boat inventory is overall, and as I said, we are having our dealer shows this week in the next couple of weeks for the Boat brands and I think they are going to be pleased with the innovation that the Polaris and Boat teams to work together to bring to the market..

Okay. And then just on Motorcycles, you know nice sales increase with the FTR which looks great by the way.

So you had sales up like $25 million year-over-year, but the gross profit up only $2 million, and I know there’s a lot of stuff going on with you know tariffs and promotions, etcetera, but was there also some element of start-up or launch costs with that FTR that sort of gets a little bit better as you move to the back half?.

Yeah I mean, there’s always that aspect Joe, but I will tell you that when I look at second quarter for motorcycles alone, there was 300 basis points of drag created from tariffs. Because what you have to remember is motorcycles is dealing with two tariffs.

They are dealing with all this inbound stuff that we have on 301, but they are also dealing with a very hefty retaliatory tariffs. Now, we’ve got the scale [ph] production up and running, it’s going incredibly well. We’re working on getting FTR up and running.

So we think we’ll be in a good spot to be able to mitigate that next year if those tariffs are still in place. We’ll still have a drag on heavyweight, it’s much less and it doesn’t make sense for us to move production over there at this point. [Cross Talk].

Thank you. .

Yeah..

Great. Thanks..

The next question comes from Gerrick Johnson with BMO Capital Markets. Please go ahead..

Good morning..

Good morning..

Hi, a couple of things on the balance sheet caught my eye.

Your new inventory up 22% and then warranty reserve up 25% year-over-year, so can you talk about those two lines, please?.

Yeah, so from an inventory standpoint the thing to keep in mind is number one, we added Boats, which adds over $50 million worth of inventory.

We’ve also got you know un-order of magnitude somewhere in the range of $30 million sitting in there that’s a bump up versus last year from tariffs, because if you remember, we really didn’t have a whole lot of tariffs in inventory at that point in time.

And then really we’ve got you know inventory build-up as we get ready for the new product launches. We’ll be you know obviously launching shortly after the 65th dealer show and making sure that we’re prepared for that. And then from a warranty standpoint, there’s a couple of things. The reserve is up.

We actually last year had a couple of reserves that we reversed, kind of holdovers from the legacy recall issues that we had as we got further into those; we were able to true up those reserves.

The other thing to keep in mind is we have about $8 million to $10 million worth of Boats warranty that’s been added year-over-year as we bring that business onboard and then we did in the third or in the second quarter, we did have several small recalls and service bulletins that you know added a little bit of cost, nothing material or significant..

Okay. Thank you, Mike..

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

Hey, good morning guys.

Just wanted to touch on the competitive environment again, and maybe just as a point of clarification, was the competitive environment in the second quarter in Off-Road Vehicle a little stiffer than may be what you would have expected going into the quarter?.

The competition wasn’t heavier, the promotions were significantly more. I mean what – Mike used the word discipline and that is a word that I wish our competitors would start to think about, because some -- and it’s true, not just in Off-road Vehicles, we saw it in motorcycles as well.

I mean, I think the most accurate term I can use for it is ridiculous.

And when you are putting you know literally thousands and thousands of dollars on vehicles that just, it’s not necessary and we were quite surprised by it, and as I said we were, we chose not to do anything at our - where we already had lower margins in our value and youth products. So that’s why we lost some volume and share there.

But I think as we grow into, you know we are going to be aggressive with factory-authorized clearance sale, we always are. I think we’re going to take that knowledge of what we learned in the second quarter and apply some of those learning’s to how we execute promotion in the third quarter and through factory authorized clearance.

And then really it’s an innovation game that wins and I think we feel really good about the model year 20 product launches. But no, I would tell you that the competitive promo from people that should know better was disappointing..

Okay, that’s helpful. And then Scott, maybe just quickly on Slingshot. I know it’s a smaller part of the business, but just given what you’ve seen in retail there. I mean, maybe just discuss your level of commitment.

It sounds like you are doing some things there to turn that around, but any color you can provide on maybe what you are doing, and again longer-term commitment to that?.

You know my commitment to any business is if I see a future of profitable growth, pretty simple, and now Mike’s got a whole bunch of other stuff that he’s going to look at, but my simple lens is through that view of, can we see a future and be confident of future profitable growth.

So with that lens we feel good about Slingshot both from the products that are in the portfolio, but really the execution that we’re learning. We do have a number of dealers that do really well with Slingshot.

The problem is, it’s just not enough of them, but we’re learning from those dealers and then applying those learning’s in other places and we’re seeing the results of that. Like I said, we’ve got new leadership in there.

They are really digging in and we do feel like we’ve got – and I’ve said all along, this is going to be a slog of the year for Slingshot, but as we move into 2020 we feel better about our ability to play in that segment. And so we’re very committed to it until something changes and tells us that we don’t see a future of profitable grow..

Alright, thanks a lot Scott..

The next question comes from Craig Kennison with Baird. Please go ahead..

Hey, good morning. Thanks for taking my questions.

Mike, you mentioned you are under shipping relative to the RFM profile, why would that be?.

Well, we are just trying to make sure that we leave enough room. You know it’s tough to get a solid projection around what’s going on with retail and what we saw coming out of the first quarter.

We intentionally did that just knowing that we were coming up against factor-authorized clearance and the model year changeover to make sure that we had flexibility and put the dealers in a really good spot with all the new products coming out..

Thank you. And then with respect to factory choice as we see it, that’s a different kind of innovation, it differentiates Polaris in a different dimension I guess, and also give dealers a crack at maybe better margins.

How are your current factory choice options performing and how quickly can you roll that capability out to other products?.

You know it is performing exceptionally well and I appreciate you actually acknowledging that it’s really an innovation in and of itself. The work that our teams did over really a couple of years to put the capability within our supply chain and factories to bring that to market was quite impressive. The uptake has been exceptionally good.

The execution has been impressive. I think we are rolling out to more categories as we go into the model year ‘20 product line. You know Motorcycles is already done a version of it, but I think the learning’s that we are really gone into RANGER and start to apply that to other categories is quite exceptional.

So that, really we are making as many as we can to fulfill demand there, but we are going to continue to expand that category and you know we’re seeing the uptake, not only in how fast those retail, but the profitability that you mentioned for dealers is another real benefit there..

Thank you..

The next question is from Tim Conder with Wells Fargo Securities. Please go ahead..

Thank you, gentlemen, and congrats again to the team on the execution here in a difficult period. Just you know a couple of follow-ups here on Motorcycles; it has the outlook excluding FTR.

Has that changed here over the last 90 days?.

Yes, it has. That’s why we widened the range from low-to-mid teens. We obviously as I mentioned in my prepared remarks, we pulled back a little bit on the shipments of FTR, just you know given some of the focus around making sure we had the product absolutely, positively right.

But we have seen weakness in other areas and that’s why we’ve expanded the range. Scott spoke to it earlier. We have seen some very aggressive promotional activity in the marketplace from our largest competitor. We’re dealing with that as best we can, but we’re going to continue to be disciplined..

Okay. And then Mike, just to follow-up again and to clarify, the 232, in a couple of the earlier questions you said, I think it was about a $10 million to $25 million range from the 232 that you had not factored in for 2020.

Is that a gross number or is that just would be the incremental savings on 232 in 2020?.

Alright, so let me – I’m going to make sure I try and do this is clear as I can, because I have a feeling we’ll be talking about this after we get off the call. So, you know we’ve got the 301 List 3 go into 25%, that adds $30 million to $40 million in 2020. I think Robin had asked the question around 232 and the retaliatory.

My response to that was those are $10 million to $20 million of favorability, meaning as we’ve ramped up production in Poland, we obviously start to avoid some of those retaliatory tariffs and with the 232 tariff being canceled this year obviously as we roll into next year the fact that we had cost in 2019 will not recur and I commented that was $10 million to $20 million..

Okay, and that’s collective and comes in both those two items or….

Collective - total..

Okay, OK..

Total..

Okay. Thank you for the clarification..

You bet..

[Operator Instructions] The next question comes from Joe Altobello with Raymond James’ please go ahead..

Thanks. Hey guys, good morning. First question just wanted to clarify, the $60 million to $70 million of annualized increase from 301 List 3, I think you guys previous said that was $80 million.

So why did they come down by $10 million to $20 million?.

Well, I mean, I think some of it’s just getting more refinement. I will say, as unfortunately as this is to say, we’ve become very good at working through what these tariffs mean.

You know and Ken’s team has spent a lot of time studying the materials that we have coming in direct from China, as well as making sure that we understand the indirect, which has a lot more complexity to it, because that’s where we have suppliers in the North America, for example that are using parts from China and how does that flow through.

So it was more of a refinement, you know it moved around $10 million to $20 million. But that’s the key driver..

Okay, that’s helpful.

And secondly, if and when there is a new NAFTA, that gets through Congress, is there a major impact for you guys from that?.

You know, I’ll give our trade government affairs team a lot of credit. There won’t be hardly any change, its US MCA’s what they call it and that we don’t expect material change and how that impacts Polaris, but only because we were able to work with its US FTR to make sure that that was managed properly. So, I feel reasonably good about that.

Interestingly, we are trying to leverage votes for US MCA to help us get Tariff relief. So that could be a more helpful agreement than I had originally thought..

Great! Thank you, Scott..

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Richard Edwards for any closing remarks..

Thank you, and I want to thank everyone for participating this morning. We appreciate that and for those of you that will be attending our Analyst Investor meeting this coming Monday, we have some exciting products to show and demonstrate, so we look forward to seeing you there.

Again, thanks for participating this morning and we’ll talk to you next quarter. Goodbye..

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..