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Edited Transcript of PII earnings conference call or presentation 23-Apr-19 2:00pm GMT

Q1 2019 Polaris Industries Inc Earnings Call

Medina Apr 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Polaris Industries Inc earnings conference call or presentation Tuesday, April 23, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael T. Speetzen

Polaris Industries Inc. - Executive VP of Finance & CFO

* Richard Edwards

Polaris Industries Inc. - VP of IR

* Scott W. Wine

Polaris Industries Inc. - Chairman & CEO

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Conference Call Participants

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* Brandon Rolle

Northcoast Research Partners, LLC - Research Analyst

* Craig R. Kennison

Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst

* David James Beckel

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

* David Sutherland MacGregor

Longbow Research LLC - CEO and Senior Analyst

* Gregory R Badishkanian

Citigroup Inc, Research Division - MD and Senior Analyst

* Jaime M. Katz

Morningstar Inc., Research Division - Equity Analyst

* James Lloyd Hardiman

Wedbush Securities Inc., Research Division - MD of Equity Research

* Joseph Nicholas Altobello

Raymond James & Associates, Inc., Research Division - MD & Senior Analyst

* Michael Arlington Swartz

SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst

* Robin Margaret Farley

UBS Investment Bank, Research Division - MD and Research Analyst

* Scott Lewis Stember

CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst

* Timothy Andrew Conder

Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Polaris First Quarter 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, Vice President of Investor Relations. Please go ahead.

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Richard Edwards, Polaris Industries Inc. - VP of IR [2]

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Thank you, Andrew, and good morning, everyone. Thank you for joining us for our 2019 First Quarter Earnings Call. A slide presentation is accessible at our website, which has additional information for this morning's call.

Scott Wine, our Chairman and Chief Executive Officer; and Mike Speetzen, our Chief Financial Officer, will have remarks summarized in the quarter and our full year expectations, and then we will take some questions after their remarks.

During the call, we will be discussing various topics, which should be considered forward looking for the purposes of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements.

You can refer to our 2018 10-K for additional details regarding these risks and uncertainties. All references to first quarter 2019 actual results and 2019 updated guidance are reported on an adjusted non-GAAP basis unless otherwise noted.

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

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [3]

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Good morning, and thank you for joining us. Earlier this month, we hosted the NCAA final 4 in Minneapolis. Seeing Tony Bennett's UVA team win it all was thrilling, not simply because I'm a Virginian, but primarily because his program embodies the teamwork, diligence and leadership needed to succeed in this highly competitive environment.

Our Powersports industry is also very competitive. And in today's culture where it seems popular to malign capitalism, I am proud that Polaris stands as an example of the virtue of free markets and strong competition for consumers and stakeholders alike.

Yesterday, we published our 2019 corporate responsibility report. We call this program Geared for Good, and it describes our efforts to be a great company and corporate citizen.

For maintaining trails and teaching safe riding skills to you through extensive community and veteran support, the Polaris Foundation is an excellent purveyor of good deeds.

Our work to reduce energy usage and environmental impact is sound and continuously improving, while our workplace safety program yields top-tier results. We also invest heavily in the United States, spending over $200 million in the last 3 years, building new facilities that employ over 1,500 American workers.

Exemplary corporate stewardship is a winning strategy, and our employees win with us as our ESOP owns more than 5% of the company, and our earnings-based program is among the most extensive in the market.

Capitalism works and Polaris is proud to be a vocal component and benefactor of this proven system. I'm also proud of how the Polaris team performed in the first quarter.

Our sales and earnings outpaced expectations even as our RFM system alertly adjusted several thousand units out of our ship plan to protect dealer inventory.

I'm reluctant to blame weather for our weaker-than-expected ORV in motorcycle retail, but their sharp rebound in the final 2 weeks of March corresponded so closely with the improved weather that I must acknowledge it was a factor.

Ordinarily, I would be upset if our team did not utilize every tool to preserve a few basis points of market share. But considering our price increases and a few absurd promotions by our top competitors, the team wisely chose a measured response. Snow benefited from both weather and our industry-leading lineup of sled, growing more than 20% and gaining nearly 5 points of market share for the season.

We were encouraged by the start for our full year and in the Boat business, and it was a record first quarter for Steve Eastman's PG&A business. Ken Pucel and his team generated excellent momentum with the strategic-sourcing initiative and should drive many more quarters of accelerating savings.

We are still working to eliminate our significant tariff impact. But in the interim, we are making progress mitigating the associated costs.

First quarter North American retail sales were down 3%, and strong snow-build sales were insufficient to overcome a 10-plus percent decline in ATV retail.

Motorcycles were also weak but Indian again gained market share, although we did it heavyweight instead of midsized bikes this quarter. Side-by-side retail was down slightly, and we lost about a 0.5% percent of market share. But due to the retail cadence of the quarter and the product categories where we lost ground, we are okay with how the quarter played out.

Chris Musso took necessary price increases when our competitors did not. And even though we held promo close to flat year-over-year, our higher priced, higher margin, premium RANGER and RZR vehicles performed quite well. The losses in ORV retail and market share were almost entirely limited to value ATVs and use vehicles where price sensitivity is most prevalent.

From a calendar perspective, we had a very strong January, followed by a sharp slowdown in February and early March, then a significant recovery during the final 2 weeks of the quarter.

Customer demand remained strong until the final Sunday of the quarter, and the positive momentum has continued so far in April.

Properly placed and balanced dealer inventory underlies our strong start to April, which is also the second half of our spring sales event. Overall North American dealer inventory was down 1% with ORV up 6% and Snow and Motorcycles down 28% and 5%, respectively.

We regularly discuss quarterly retail performance on these calls, but I rarely note the overall North American market share lead is significant and has been for years. Our team, brands, vehicles and accessories, dealer network and obsession with winning the right way make this large market share lead possible. We are confident that our 65th anniversary-year product news will keep the trend going. As much as we like that market share chart, it only portrays units. And just like our retail performance, it does not directly correlate to our overall Polaris revenue. This issue is becoming more prevalent. With the addition of Boats, our international, adjacent markets, PG&A, TAP and aftermarket businesses now comprise approximately 50% of our total sales.

Thanks to our lineup of global businesses and their portfolio of great products, the Polaris brand is strong and getting stronger outside of North American Powersports.

Our projected full year tariff impact is unchanged but that fact is in sharp contrast to the significant countermeasures we've deployed, and the progress that the administration in China are making towards a favorable resolution.

As we expected, the 301 List 3 tariffs did not increase to 25%. But we've remained focused on achieving real relief, not just avoiding new tariffs. With the possibility of a U.S.-China agreement this quarter, we are actively evaluating the potential to reduce our 2019 impact.

The retaliatory tariffs from Europe are harmful as we ramp up shipments of our FTR 1200 bikes this quarter, bringing Poland -- our Poland plant online will help but is initially limited to Scout assembly.

From engineering and plant investments to technologies and even organization structures, our strategic purpose of being a customer-centric highly efficient growth company drives everything we do.

Customer centricity was behind our large investment in CRM, which is supporting better customer service and higher value lead management. RANGER Factory Choice has been a home run and our RANGER country tour will reach even more customers.

Productivity and efficiency are enabled by our improvements in safety and quality, and we expect further advances and value creation to come with evolution of RFM and our continued implementation of strategic-sourcing. The program's first wave covers almost $1 billion in spend and projected savings are at or above our initial estimates.

A growth mindset is part of our culture and that drives the innovation we see not just in vehicles but in processes, technology and even sales and marketing.

I'll now turn it over to our Chief Financial Officer, Mike Speetzen, who'll update you on our financial results and plans for 2019.

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Michael T. Speetzen, Polaris Industries Inc. - Executive VP of Finance & CFO [4]

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Thanks, Scott and good morning. For the first quarter sales were up 15% on a GAAP and adjusted basis versus the prior year as expected. During the quarter, sales growth in ORV/Snow was partially offset by lower sales in motorcycles and Global Adjacent Markets with most of our sales growth coming from the addition of the Boats business, which added $185 million of sales during the quarter.

Our average selling prices were up 7% driven by a combination of the favorable mix and price increases that were implemented in early 2019.

First quarter earnings per share on a GAAP basis was $0.78, adjusted earnings per share was $1.08, down 4% for the quarter, which exceeded our expectations driven by lower operating expenses and favorable foreign exchange rates.

Operating expenses were lower than anticipated during the quarter due primarily to the timing of research and development investments, which will now likely occur in the second half of 2019. However, this expense timing change will not impact any of our programs. Foreign exchange had a negative impact on the quarter versus 2018, driven by a strong dollar primarily against the euro and the Canadian dollar. The negative impact in Q1 was slightly lower than we originally anticipated, which also contributed to our earnings being better than expected.

As a reminder, we plan full year 2019 expecting foreign exchange to have a negative impact on pretax profit of approximately $30 million or $0.40 per share assuming an average euro to USD rate at $1.12 and the CAD to USD at $0.74.

As we've done in the past, we have adjusted our full year guidance based on the currency benefit realized in Q1, but we will hold the balance of the year's guidance at the original planned rates given the dynamic currency environment.

From a segment reporting perspective, ORV/Snowmobile segment sales were up 4% in the first quarter, primarily due to favorable mix, PG&A sales and increased prices.

ORV sales increased 4% with higher side-by-side sales offset by somewhat lower ATV sales. Average selling prices were up 11% for ORV during the quarter driven by a combination of favorable product mix as well as the price increases.

Snowmobile whole good sales were down for the quarter driven by timing of shipments versus last year. Motorcycle sales decreased 10% in the first quarter. Both Indian and Slingshot sales were down during the quarter given challenging weather, continued weak market trends and increased competitive promotional spending.

Global adjacent market sales and average selling prices decreased 7% in the first quarter, primarily due to the timing of government sales and negative product mix. Aftermarket sales were flat with last year, with TAP sales down 2% and our other aftermarket brands increasing significantly during the first quarter. TAP shortfall was driven by weakness in the wholesale and e-commerce channels, and while we are disappointed with the performance, we have seen progress on the actions initiated in the latter part of 2018. KLIM, Kolpin and 509 benefited from the favorable snow conditions in the quarter.

Our Boat segment reported sales of $185 million for the quarter, slightly ahead of expectations and up 12% on a pro forma basis compared to Q1 of 2018.

Boat show traffic during the quarter was strong which tends to be a good leading indicator of orders. The Larson acquisition has been completed and production has started ramping up at our Syracuse, Indiana facility where we currently manufacture our Rinker brand.

Our international sales were down 4% on a reported basis but up approximately 3%, excluding the unfavorable impact from foreign currency, driven by strength in our Indian Motorcycle business. Our parts, garments and accessory sales increased 8% during the quarter. Growth was driven by ORV/Snow Parts and Accessories.

Now moving onto our full year guidance. Our total company sales guidance remains unchanged at $6.75 billion to $6.9 billion, reflecting an increase of 11% to 13% versus 2018.

We continue to expect the North American Powersports industry to be up low-single-digits percent for the year with growth in the Off-Road Vehicle market and a decline in the motorcycle market. We expect Boat sales to contribute about 6 percentage points to the growth and foreign exchange is anticipated to be a drag on growth of about 1%.

We're increasing our full year adjusted earnings per share guidance for 2019 by $0.05 on both the lower and upper end of the previously issued guidance and now expect net income to be in the range of $6.05 to $6.30 per diluted share, which reflects the benefit from better-than-anticipated foreign exchange rates during the first quarter and lower-than-anticipated interest expense given the latest signals that the Fed will not raise rates in 2019. While our earnings expectations remain lower on a year-over-year basis, I want to reinforce that before the impact of tariffs, currencies and interest rates, we continue to expect significant earnings growth from our operational perspective.

The allocation of our 2019 guidance between the first and second half of the year remains unchanged as well. We expect lower earnings in the first half on an absolute and as a proportion of the year given the impact of tariffs, FX as well as the continued ramp in R&D investments.

We anticipate second quarter sales growth will again benefit from the Boat's acquisition. Increasing in the mid-to-high teens with earnings per share expected down a similar percentage as Q1 on a year-over-year basis. Aside from foreign exchange and interest, there are no other changes to our guidance.

Let me reiterate a few key points. Adjusted gross profit margins are expected to be down on an absolute basis driven by tariffs and foreign exchange. Operationally, our margins are expected to improve in the range of 80 to 110 basis points driven by higher volume, mix, productivity and price.

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

Adjusted operating expenses are expected to increase in the mid-teens percentage range in 2019, up 10 to 20 basis points as a percentage of sales. The increase is related to the addition of operating expenses from the Boat businesses, added expenses related to the new multi-brand distribution center in Fernley, Nevada, higher variable compensation costs, the costs associated with the summer dealer meeting and ongoing investments in research and development. And lastly, interest expense will be up in the high 30% range versus 2018, given the debt taken on to finance the Boat's acquisition. This has slightly improved from our prior guidance given the assumptions that the Fed will not raise rates in 2019. Our sales expectations by segment remain unchanged, all of our segments are expected to grow sales driven by our strong brands and innovation. Operating cash flow finished down $38 million in Q1, driven primarily by higher factory inventory due to shipment timing between the first and second quarters as well as costs associated with the tariffs. Factory inventory is expected to improve as we move through the year, which is a substantial driver of the anticipated cash flow improvement of approximately 20% to 30%.

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

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [5]

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Thanks, Mike. Our spring sales event is playing out well, and with no apparent signs of either the U.S. economy or our consumer slowing down, we are reasonably positive about 2019. The Powersports industry is always competitive, which is good for customers and those of us that serve them. We like our competitive position and are much more comfortable now that we are back to playing offense. The ongoing weakness of North American motorcycle market is well documented and shows no sign of turning around soon. However, Indian has demonstrated its ability to grow and capture market share and with the advent of exciting new bikes like the FTR 1200, Steve Menneto and his team are nowhere near done. With the full year strategic sourcing work under our belt, we are much more optimistic about the savings and value creation our teams will deliver. I'm not quite as optimistic about tariffs but certainly, expect that the worst is behind us and that throughout 2019 the news will improve. We are working diligently to make sure that happens.

Andrew, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will come from Jaime Katz of Morningstar.

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Jaime M. Katz, Morningstar Inc., Research Division - Equity Analyst [2]

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I'm curious about TAP. I think the weakness that you guys are attributing to the segment this quarter, or this wholesale and e-commerce parts of the business, is what you attributed to the weakness last quarter. So can you talk about what steps you might be taking to remedy that? And then how fast that can be remedied given that the aftermarket segment, it looks like you still have mid-single-digit guidance for the year on the upside?

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [3]

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Yes. Jaime, we are certainly pleased with the non-TAP aspects of aftermarket. They are doing extremely well and have for the past 16 months or so. With the efforts that Craig Scanlon and the team are driving at TAP, we are reasonably comfortable that things are turning around. And Mike indicated in his prepared remarks that we have seen signs of that in the first quarter. On the e-commerce side, we did have a bit of an issue with Amazon Prime, where we actually didn't perform up to the program requirements, and so we were taken off that. The team has rectified that, put the standard work in place so that should be an issue that doesn't repeat itself. We also so went through with both of the websites that TAPs sells through, through a conversion of the system that operates them. And anybody that's gone through a conversion understands that you have to reprogram everything for the ad words to pick up and what not. And we did see a slowdown when we did it the first time with 4WD sites, and then with the 4WP site more recently. So we are very comfortable that the e-com piece is going to turn itself around, wholesale has been a different challenge. What we've tried to do there is make sure that we're not selling at the extremely -- to the extremely low margin customers that ultimately drive prices down in the overall marketplace. And Craig and team have done a good job of getting that turned around. And like I said, we are comfortable with the plans that they have in place and that we should see improvement from here.

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Jaime M. Katz, Morningstar Inc., Research Division - Equity Analyst [4]

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Okay. And then can you guys just comment on the Motorcycle segment and Slingshot? I think it would be helpful because -- to think about Indian maybe a little bit separately because when we look at the gross margin of the whole segment, my suspicion is that Slingshot is dragging that down pretty materially. So is there a way to help us think about Indian's margin profile independently of Slingshot as that is more likely going to be what carries that segment longer term?

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Michael T. Speetzen, Polaris Industries Inc. - Executive VP of Finance & CFO [5]

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Yes. I think, Jaime, there certainly is a difference. And I think given that Slingshot is still early in its introduction, there is opportunity to improve that. Right now I would tell you that between the 2 segments, there is not a dramatic difference. Slingshot has taken a bit of a dip down because we're heavier on the promotional side right now as we continue to move through some of the non-current inventory. But at this point, there's not a huge structural difference between the 2.

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Operator [6]

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The next question comes from Greg Badishkanian of Citi.

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Gregory R Badishkanian, Citigroup Inc, Research Division - MD and Senior Analyst [7]

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Could you talk about the promotional environment and how that changed throughout the first quarter into April? Because obviously, you mentioned that there were some absurd promotions from competitors and has that leveled off? And you also mentioned that the value segment was primarily impacted. So will you have a competitive response in that particular segment with maybe additional promotions and discounting to counter that?

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [8]

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Yes. I mean I think the call out on what I, and I did use the word absurd, I'll admit that, was really related to some of the issues we saw in the southwest earlier in the quarter and then in the midsize bike segment for motorcycles. And we just -- we've never reacted to some of these incredibly high -- when they'd happened in the past, and we didn't this time. And we think the programs we have in place, and it's -- as I indicated, the second half of March and early April, or actually April has gone quite well. So we're comfortable with the way the programs are working. We did -- we've been able to hold price very, very well. We are going to make sure that we are competitive on the value ATV side of the thing of the board and with youths. I mean just their lower price, the total price is lower, so therefore, taking -- there is not as much margin there, so we have to be a little bit careful. But Chris Musso and the team are reacting and as well as Steve on the midsized bike program, we tried a few things in the latter part of March and early April and our promotion activity is working. So we were the least promotional in side-by-sides in the quarter. And as you know we're not willing to -- not afraid to be promotional where we need to be. And I think Chris and the team are dialing that in right as we head into the second quarter.

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Gregory R Badishkanian, Citigroup Inc, Research Division - MD and Senior Analyst [9]

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And just you maintained Indian market share, Harley appears to have been much more promotional in 2019 historically. So how does that backdrop feel in terms of the promotions from your competitors, primarily, Harley on the motorcycles side?

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [10]

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Well, it's interesting, I thought they were the brand that was never going to be promotional but now that we are dealing with it, we've been at this game for a long, long time. I mean we know how to deal with the Powersports industry promotional, so we know how to do it. And as soon as -- and really what mostly happened was in the midsize segment. We gained market share in heavyweights. So it was mostly in promotional and midsize -- and I tell you as soon as we saw what was happening, Steve Menneto and the team adjusted how they were approaching it, and we know how to turn it around. So we're comfortable playing this game, and we believe that we can expand margins in motorcycles over time even as others in the industry decide to be much more promotional.

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Operator [11]

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The next question comes from James Hardiman of Wedbush.

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James Lloyd Hardiman, Wedbush Securities Inc., Research Division - MD of Equity Research [12]

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So I wanted to talk about the ORV market share a little bit. Down a little bit although on, I don't want to say meaningless product or meaningless categories. But Scott, obviously you don't take that lightly, I think you talked about, sort of, regaining share during the balance of the year. I guess my question is, do you see that happening as soon as the second quarter? Or is it more about once we get the model year 20 products on the ground then you'll be able to retake share?

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [13]

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No. We feel really good about our competitive position right now. I mean it's -- and again, it was just that was a -- the calendarization with weather and the way things played out was a little bit -- but we are feeling -- we are very encouraged by what we're seeing in April. And Steve, I mean Chris Musso and his team have really got, I mean just great products. And I talked about the model year -- the new model-year coming out with the 65th anniversary that we are very encouraged about. But we don't feel like we're playing with one hand tied behind our back at all right now, from a product standpoint. And as I mentioned, the work we're doing with CRM and lead management, we're getting much better leads into our dealerships. So yes, we're comfortable about our share position, and how we will -- how market share will play out in second quarter.

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Michael T. Speetzen, Polaris Industries Inc. - Executive VP of Finance & CFO [14]

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And James, what I would add to that is the share loss in Q1 was -- we never like to see the loss but it was relatively small. The key for us is in the categories where we make significantly higher margins, where it is the premier products like the Turbo S, the RANGER XP 1000, Northstar, in those categories, we either held or gained share, and so we've got to address some of the lower end of the spectrum but in the areas where it matters most for us, we're pretty proud of the accomplishments, and we think we can continue to hold and gain momentum as we go through the year.

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James Lloyd Hardiman, Wedbush Securities Inc., Research Division - MD of Equity Research [15]

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That's helpful. And then maybe along those lines with some of the premium products, well maybe this wasn't the reason but it was a really good margin quarter at least versus the way that the Street was modeling it, not as much of that flowed through to the full year guide. Mike, you talked about this a little bit in the prepared remarks but maybe walk us through that one more time, sounds like R&D was moved from 1Q to the second half, I didn't know if there was anything beyond that maybe some G&A expenses. And then, I guess, the last question would just be, if FX rates were to stay where they are now, what kind of a benefit would we be looking at for the full year?

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Michael T. Speetzen, Polaris Industries Inc. - Executive VP of Finance & CFO [16]

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Yes. So we took the year up by $0.05, roughly $0.03 of that was from foreign exchange and the other 2 was interest rate. So if you figure things held consistent with the first quarter, you're talking about roughly $0.03 a quarter. From an operating expense standpoint, yes, I mean primarily R&D, we shifted the timing around that. Now that's not just program related, we also have R&D expenditures that's related to the recertification of suppliers as we go through the Gibson projects. And then we also have some other strategic investments. And I think the team rightfully so was careful as we went through the first quarter, just given the uncertainty of coming out at the end of last year, given the stock market volatility. And then some of the weather issues that we had. The point I would also make, we did have a good margin quarter. But when you look at the impact that FX had, and that tariffs had on our first quarter, our earnings would have been well north of 20% up year-over-year. And so I think it just really speaks to the underlying earnings part of the business. And when you think about the fact that we really are not registering any of the Gibson savings yet, that's going to be latter in the year. I'm pretty confident about the earnings power that we've got, and that once these tariffs are cleared away or at least minimized and the teams continue to work the counter actions that -- we've got significant margin expansion opportunities.

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Operator [17]

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The next question comes from Robin Farley of UBS.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [18]

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I was going to ask along similar lines about the side-by-side market share. And you mentioned that it's in the maybe the lower margin products. Is that something that we'll see if the dealer shows some new product in those categories? Or are you really not necessarily concerned about your market share in those product categories, I guess in other words, how should we think about your market shares. In other words, is market share not the goal here ultimately, if your growth is -- if your interest is [lower then]?

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [19]

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Robin, to be clear, we care a lot about market share. I mean that -- the chart that I put into the deck this time that shows the historical trend, demonstrates that we pay really close attention to it, and we're quite good at maintaining and sustaining and improving market share. The -- what we talked about in ORV was really that the value ATVs not as much on the side-by-side where we had tissue, we are -- as you know, we really started the sport performance market with the RZR 800 a decade ago, and we have not done a complete refresh of that product in quite some time. And I think as our competitors introduce products in that market, we are seeing more share loss at that lower end 50-inch segment than we are in other places. It's not that we don't care about it, we just don't have a new product there. As you know, we don't talk about what products that we're bringing to market. But we're very comfortable with our current lineup of products to gain market share as I told James, and with what we are bringing to market later this year, we think it will just give us more opportunity to expand off-road vehicle market share.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [20]

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Okay. No, great, that's helpful. And then just for my follow-up question, just motorcycle shipment guidance for the year is unchanged, and up mid-teens but Q1 was down 10%, I know part of that was just the comps last year, right? The Q1 had the highest motorcycle shipment change last year. Was there anything else about the timing of our motorcycle shipments because it looks like it'll then be up significantly for the rest of the year?

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Michael T. Speetzen, Polaris Industries Inc. - Executive VP of Finance & CFO [21]

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Yes, I think, Robin, the other thing to keep in mind is the numbers that we're talking about, it's the law of small numbers. So the number of units, the absolute unit move was not substantial but on the base, we're talking about it, it's overamplified. At this point we don't have a significant change other than the timing, similar to what we had with our ORV businesses, all of them reacted to the demand signals, as Scott referenced earlier. The good news being that we've seen retail momentum continue into April. So we're pretty confident about the full year guidance that we've got.

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Operator [22]

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The next question comes from Scott Stember of CL King.

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Scott Lewis Stember, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [23]

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Maybe just talk about Boats. We see that the shipments it looks like up 12% pro forma. Maybe just talk about how retail performed during the quarter just from your perspective at least? And how that has continued over into April?

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [24]

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Yes, well, retail performance in the first quarter was down slightly just because of weather, just like some of our other -- motorcycle was kind of similar. People just don't buy it when there's snow on the ground, and that's somewhat similar for boat retail. As Mike mentioned, we're -- the traffic at the boat shows was very good for us. I talked to Bob this morning, and the trends that we're seeing as we start the second quarter are favorable. So we feel good about our lineup. We talked about repositioning Bennington a little bit. We were, let's say our lineup did not include some of the lower priced smaller boats, the Pontoons that were doing quite well last year, and so we feel good about the lineup we have and the way the year is starting out for us in boats. And we ramped up production of the Larson brand and that's going well. So overall I think we're encouraged as we head into the second quarter about where boats are. I mean the acquisition is playing out at or above our expectations.

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Scott Lewis Stember, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [25]

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All right. And just the last question, going back to the question you just had about the -- earlier about a TAP and losing, I guess, your Prime status with Amazon. Could you just talk about, did you get that back after you made the necessary changes?

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [26]

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Yes, we did. And importantly, I believe the team has made the sustainable process improvements that will allow us to make sure that we keep it in place.

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Operator [27]

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The next question comes from David Beckel of Bernstein.

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David James Beckel, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [28]

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Most of mine have been asked and answered. But I did want to circle back on the Chinese tariffs. Correct me if I'm wrong, it sounds like you're reasonably confident there will be a resolution to your -- before too long. But in the off instance in which case, there isn't a satisfactory resolution and maybe things stay status quo as they are today, do you have plans in place in the near term to rectify your financial position with respect to those tariffs?

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [29]

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Well, I mean I -- we've been at this now for about a year, and we are working incredibly hard on the administrative side of things, trying to make sure that everybody understands the disparate impact we have on the mitigation side of things to ensure that if they are in place, they hit us. What we are -- the conversations we have had, and what we read suggest that there is a desire at the very senior levels of both the U.S. and China for an agreement to be in place. I think that is necessary for many reasons, not the least of which that it's beneficial to Polaris, but we believe that to happen. If there is not a resolution and I believe the schedule has it that could be late May, early June, sometime this quarter that such an agreement would be in place. If it doesn't happen, we will revert back to our very extensive efforts to make sure that we would be in line to get relief and at the same time, continue our very aggressive mitigation efforts. So we've got this about as well dialed in as it can be for something that's been so harmful to us. But as I said in my remarks and I believe this to be true, there is a lot better chance of upside in tariffs from here.

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David James Beckel, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [30]

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And just to follow up on that, in an extreme case, would you be -- how extensive would it be to sort of reposition your supply chain from China to another source market?

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [31]

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It's really, really hard.

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Operator [32]

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The next question comes from Michael Swartz of SunTrust.

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst [33]

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Mike, just wanted to ask you a question on FX. Obviously, it was a benefit to the quarter versus your expectations. But I think you said within your guidance, you're maintaining the expectations that you set out from the beginning of the year. So if I just look at it today, what would the benefit be if FX ended at today's rates?

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Michael T. Speetzen, Polaris Industries Inc. - Executive VP of Finance & CFO [34]

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Yes, so Mike what we did is we built in the first quarter favorability, which was the $0.03 I mentioned earlier. We've got the Canadian dollar at $0.74 and the euro at $1.12. If you look at the rates where they are today, they're pretty close to that, which is why we basically held guidance in terms of Q2, 3 and 4. And as I indicated in one of the responses I had earlier, if rates held consistent with what we saw in Q1, it's probably a $0.03 to $0.04 benefit as we move forward relative to our guidance.

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst [35]

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Okay, good. That's great. And then just with the decision, I guess RFM to kind of check some of the shipments in the first quarter was based on weather and slower retail, is that to say that as we see better or improved retail, improved weather, et cetera, in the second quarter that most of those shipments should show up in the second quarter? Or is that something that will play out through the remainder of the year?

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [36]

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Well, remember, as we go into the second quarter, we're looking at a lot of factors. The RFM system, we don't really get to decide. The system tells us what to do, and we react to it, and we choose not to ignore it because we have really done a lot of work with our profiles to understand what products our dealers need to have in order to optimize retail performance for us and their profitability. So the system tells us to do that, and we react to it. We did it with motorcycle, we did it with off road vehicles in the first quarter. So as demand picks up, we'll certainly ship more. But we are also mindful in the second quarter is that we're heading into the new model-year stuff. So we need to make sure that we manage inventory appropriately, that we've got the right stock in place, whether it's for the factory-authorized clearance sale or to make room for the new products, so we're managing a lot of things throughout the second quarter, and I feel very comfortable with the way the team has positioned that. And it's worth noting the work that Ken and his supply chain and factory teams have done have put us in a position so our delivery times and schedules are about as good as they've ever been. So that enables us to react quickly to what's going on in the marketplace.

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Operator [37]

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The next question comes from Joe Altobello of Raymond James.

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Joseph Nicholas Altobello, Raymond James & Associates, Inc., Research Division - MD & Senior Analyst [38]

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So wanted to circle back on motorcycles for a second. Obviously, first quarter down a bit, you guys kept your guidance, in terms of sales for the full year intact. You did mentioned that you're going to experience tariffs, obviously, as you ship those bikes into Europe. So how should we think about the profitability of that segment? I mean you've talked about gross margin being down in percentage. But would we expect to see on an absolute basis profitability for that business up this year?

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Michael T. Speetzen, Polaris Industries Inc. - Executive VP of Finance & CFO [39]

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Well, Joe, the impact of that inbound tariff is pretty substantial. So I think the motorcycle business is going to be challenged this year. I mean the good news is that we've got the Poland facility up and running and producing Scouts. And then obviously, we'll be migrating the FTR production there that supports the European volume. And so we think we'll be well-positioned as we get out of 2019 and head into 2020.

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [40]

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But it's not -- I mean, Mike, our guidance hasn't changed. We knew this was going to be the case. We'd always planned on the FTRs shipping from Spirit Lake over to Europe. So this was -- I was just reiterating the impact not stating something new.

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Joseph Nicholas Altobello, Raymond James & Associates, Inc., Research Division - MD & Senior Analyst [41]

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Okay. Understood. And then on cash flow a little bit lower than it was last year, obviously in the first quarter. Seems like it's very second-half weighted. I know you touched on this a little bit earlier but maybe give us what the drivers are for that change in cadence, and is this how we should think about your cash flow going forward very much second-half weighted?

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Michael T. Speetzen, Polaris Industries Inc. - Executive VP of Finance & CFO [42]

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Yes. I think some of it, Joe, is just the cadence of our inventory. I spoke to it a little bit in my opening remarks that our inventory was elevated, which is a direct reflection of what RFM does. So as we start to clear through that, and then the improvement actions that we've got within the business will continue to play out as we go through the year. The thing I'd point out is even though our inventory was elevated above what we expected it to be, given the RFM triggers, we're still improving on a turns basis year-over-year. And so the team is pushing hard on that. We continue to expect that to occur throughout the year and when you look at it relative to where our inventory position was last year, that's really where a lot of that cash flow improvement comes from.

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Operator [43]

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The next question comes from Craig Kennison of Robert W. Baird.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [44]

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Scott, just to build on your opening comments, Tony Bennett is from Wisconsin.

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [45]

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I figured you and James would like that.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [46]

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Absolutely. Well, my first question has to do with tax refunds. I know weather seemed to be a factor this quarter, but to what extent do you think delayed tax refunds which appeared to normalize later in the quarter, impacted demand?

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [47]

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I don't -- we didn't see any signs of that being a factor. It -- again, what -- I just hesitate to blame weather because we don't really take credit for weather when it's really good. So I don't like to blame weather when it's bad. But certainly that's what most closely correlated to the sharp improvement that we saw in the second half of March, and I don't think it was related to tax returns but maybe it helped a little bit.

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Michael T. Speetzen, Polaris Industries Inc. - Executive VP of Finance & CFO [48]

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Yes, I mean, Craig, we went often and looked at it and to Scott's point, we hate pointing at weather, something so uncountable. But we have done the analysis where we've looked at, whether it's a cold or a warm quarter. And there is a definite correlation specifically to our side-by-side business, where the colder, wet weather does tend to drive the demand. And then once that clears up, it seems to be pent-up demand that recovers in the coming month or 2. And as far as tax, we -- I had our tax team go out and look at a number of articles and the specifics. I just don't think the delay for the amount was enough to trigger when you think about the cost of our products.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [49]

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And then just a question on dealer engagement. I know Scott that's been a priority for you, what are you doing to drive better dealer engagement scores?

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [50]

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Our team took that to heart coming out of the whole recall situation, we saw an opportunity to do significantly better. And I mean I'm really proud not only -- not just on the off-road side but Chris and Steve are kind of partnering up. One of the most important things, well, first of all, delivery is always a big issue. So Ken and his team have improved delivery, and I think our RFM system is in place and they're helping that. The factory choice is really helping their margins. But the CRM system that we've invested heavily in, the quality of leads that we're giving to our dealers is up dramatically and that helps our retail. It -- they're more efficient with their sales personnel, so that's really encouraging. I think Chris was just down in the Southwest right now, well not probably. They are the largest dealer group that we sell to, and I mean they were very encouraged about the way our engagement with them is going and the opportunities that we have to grow together going forward. But it's a multi-faceted approach but it really starts with giving them the right products that allow them to deliver profitable growth. But some of the digital tools that we're working on is incredibly good. We repositioned the sales force so there is the efficiency of -- which we are dealing with them is better. So I think it's -- we're seeing -- we do more extensive surveys than you can imagine. And so we're seeing the scores improve, and we believe there is a good bit of room to go from here.

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Operator [51]

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The next question comes from Brandon Rolle of Northcoast Research Partners.

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Brandon Rolle, Northcoast Research Partners, LLC - Research Analyst [52]

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I was hoping if you could expand on the Boat segment margins. This was the third consecutive quarter where they declined more than 100 basis points. So kind of what's going on there? And how do you expect that to play out throughout the rest of the year?

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Michael T. Speetzen, Polaris Industries Inc. - Executive VP of Finance & CFO [53]

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Yes, we've got a number of initiatives underway. And some of that is just the volume levels that we had in Q1 and the mix of boats. But we feel comfortable that we'll be able to get those margins up as we've indicated close to 20%. And we have the right synergy activities and actions underway to make sure that we achieve that. There's definitely a little bit of pressure as we made sure that we had a full value line up within the Bennington portfolio. Given the fact that we've gained share in Q1 even though it is a low retail quarter, it's clearly -- those efforts are working. But we do have enough margin improvement opportunities on the legacy Rinker, Hurricane and Godfrey lines that we should be able to achieve our objectives.

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Brandon Rolle, Northcoast Research Partners, LLC - Research Analyst [54]

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Okay, great. And then a quick follow-up. From speaking with dealers, it just seems like more people or more Slingshot dealers, at least, are starting to put in termination papers, they're trying to get out of the agreement. To kind of -- could you comment on what you're seeing there? And how that impacts how you think about Slingshot moving forward?

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [55]

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Yes. Obviously, we've got work to do on Slingshot, but I will tell you -- and part of that work is repositioning our dealer network. We don't have the right dealers. One of the exercises that Steve and team went through was they went to the top 25, and we do have more than 25 but the top-25 dealers that do really well with Slingshot, and we learned what they're doing, and we compared it to what's happening at the rest of the network, and we're trying to make sure that we go through that. Part of the terminations are likely to come because we are setting higher expectations, and we feel good about that. But it's not just we need improvements in our dealer network, we need improvements in the product, and I think I'm very disappointed in how that business has performed to date. But I'm also encouraged that we know what happened. We know how to fix it and our plans and actions are in place to put that business in a better position as we exit 2019 and start to accelerate to turnaround in 2020.

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Operator [56]

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The next question comes from David MacGregor of Longbow.

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David Sutherland MacGregor, Longbow Research LLC - CEO and Senior Analyst [57]

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Maybe it's kind of a dealer questions as well but with respect to Indian motorcycles, any growth in the U.S. dealer network? And what are your plans, if any, for the U.S. expansion? And this -- again, maybe what's changing in terms of yours and the competitors' dealer incentive?

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [58]

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Yes. No, we are -- we said last year that we were going to manage dealer expansions to make sure that we focus on dealer profitability. We wanted to ensure that our Indian dealers were solidly profitable before we add more to the network. We are comfortable where we are now. Steve is -- and his team have plans in place. That -- we've got new dealers signed up and we'll pass the 200 dealer mark sometime in the next few months. And then we think over time the U.S. is probably going to support about 300 dealers and we'll just methodically work our way there. It really is about growing profitable dealers and market share along the way, and we think with the bike lineup we have and that we are bringing to market, that that's possible.

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David Sutherland MacGregor, Longbow Research LLC - CEO and Senior Analyst [59]

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Scott, did you see anything in terms of change in yours or your competitors' dealer incentives? You talked earlier about promotional activity being elevated, I'm assuming you were referring to the consumer incentives but what about for the dealers?

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [60]

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I think the dealer incentives were probably more prevalent on the off road vehicle side as they were getting rid of some of our competitors' aged inventory. I -- the combination of, I think, most of the motorcycle -- the competitive motorcycle were probably driven by the manufacturer but -- and that was a combination that really drove the midsize promo so high was the combination of both financing, I mean really long favorable financing terms and then just cash incentives as well. But no, like I said in my remarks we're comfortable dealing with it. We know the game, and we feel like from a promotional standpoint we're as good as anybody in the industry.

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Operator [61]

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The next question comes from Tim Conder of Wells Fargo Securities.

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Timothy Andrew Conder, Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst [62]

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Just wanted to follow up on 2. One, Scott you guys have talked about some additional product coming this year on the Slingshot side and obviously in response to a prior question, what you're doing on the dealer network? How much longer if you -- will you give rope here? I mean maybe in some automatic and upgraded the dealer network, are we looking at 3-year type of period, I guess to evaluate sort of continuing or not with Slingshot? And then maybe a more difficult question to ask but if you had to put some type of parameters on it, combination of whatever potential type of trade deal and exemptions that you would be granted, how much do you see the China tariffs that can be mitigated through those avenues alone?

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [63]

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Well on the Slingshot side, I will say we have not put our best foot forward with that product yet. I'm really confident that the plans we have in place are going to give us -- give that business the best chances of success. Until we've done that, you can't really consider it. My requirement is we've got every return on invested capital metric you could want as we look at our businesses going forward. But my simple one is, is there a future of profitable growth or not? And I will tell you as I look at where we are with Slingshot, and what we're bringing to market for Slingshot, not necessarily this year but over the next couple of years, I'm very comfortable that there is a future of profitable growth for that business. If that proves not to be true, we will reconsider our investment. But right now, we are comfortable that there is a strong future of profitable growth there over time. What were the other questions?

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Timothy Andrew Conder, Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst [64]

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Trade deals...

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Scott W. Wine, Polaris Industries Inc. - Chairman & CEO [65]

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The trade, the strategic-sourcing program that we are engaged in is really, really good. And through it, we are evaluating all of our suppliers. And one of the things that I've required the team to do is where we have a China source, we've got to have an alternative source so we just make sure that we have that available. When I said it was hard earlier to switch out, I mean there are some certain parts that it's just -- it's difficult to move anywhere else. And remember to move our parts in some cases is very, very difficult from an engineering and validation standpoint but we're comfortable. I feel very good about where the negotiations are, and I feel very good about where our team has positioned us to deal with them as they currently exist, and if they were to extend into the future.

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Operator [66]

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

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Richard Edwards, Polaris Industries Inc. - VP of IR [67]

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Thank you and I want to thank everyone for your time this morning, and we look forward to talking to you again next quarter. Thanks again. Goodbye.

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Operator [68]

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