Polaris Inc.
Q2 2018 Earnings Call Transcript

Published: 25 Jul 2018

[Operator:]

Good morning, and welcome to the Polaris 2018 Second Quarter Earnings Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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.

[Richard Edwards:]

Thank you, Carrie, and thank you, everyone, for joining us for our 2018 second quarter earnings conference call this morning. A slide presentation is accessible at our website at www.ir.polaris.com, which has additional information for this morning's call. Today, you will be hearing remarks from Scott Wine, our Chairman and Chief Executive Officer; and Mike Speetzen, our Chief Financial Officer. During the call, we will be discussing various topics which should be considered forward-looking for the 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 2017 10-K for a more detailed discussion of these risks and uncertainties. Additionally, all references to second quarter 2018 actual results and 2018 updated guidance are reported on an adjusted non-GAAP basis unless otherwise noted. Please refer to our Reg G reconciliation schedules at the end of this presentation for the GAAP to non-GAAP adjustments. Now, I'll turn it over to our CEO, Scott Wine. Scott?

[Scott W. Wine:]

Thank you, Richard. Good morning, and thank you for joining us. Later today, we will kick off our annual strategy review with the Polaris Board of Directors, and they will see in detail why I am so optimistic about our future. From expanded product leadership to continued success with our racing circuit, we have a team and a business that is built to win. We have navigated some difficult terrain in the past, and with tariff and commodity pressures, the path ahead appears challenging as well. But I like our chances to build on the strong momentum we created in the second quarter and position Polaris for sustained profitable growth. The benefits of lower taxes and decreased regulation are aiding the economy and giving confidence to our core powersports customers. They visited Polaris' dealerships more frequently throughout the second quarter, and with our improved lead management tools, conversion rates were higher as demand for our industry-leading vehicles and accessories drove strong sales and earnings to close out the first half of 2018. Our 6% North American retail growth for the quarter marked consecutive quarters of share gains in Off-Road Vehicles, while Indian continued its impressive growth trend of gaining market share every quarter since its launch in 2013. This strong sales performance demonstrates not only the appeal of our Side-by-Side and Indian Motorcycle lineup, but also the effectiveness of our sales and marketing initiatives, and the capability of our dealer network. I was in Elkhart, Indiana earlier this month to welcome our Boat Holdings employees to the Polaris family, and we are excited to extend their leadership position in powersports with the number one pontoon boat company in the world. With positive momentum in the business, it is frustrating that the increasing impact of tariffs and rising commodity prices are eating into our margins and our outlook. But I am proud of our team's ability to offset the current impact. Our capability to do so, should they escalate further, is less predictable. But our team is working diligently to develop countermeasures for this contingency. The 6% increase in second quarter North American retail sales was broad-based, with both ORV and Indian growing in every region of the United States. Slingshot retail was down low single digits, but the recent conversion of Florida to autocycle and the implementation of a more aggressive down game (03

[Michael T. Speetzen:]

Thanks, Scott, and good morning. As Scott mentioned, our performance accelerated in the second quarter with sales growth and market share gains generating improved earnings. Second quarter sales were up 10% on a GAAP basis and 11% on an adjusted basis versus prior year. The growth in sales was primarily driven by continued strong ORV, Adjacent Markets, International and PG&A demand. Second quarter earnings per share on a GAAP basis was $1.43. Adjusted earnings per share was $1.77, which excludes, among other items, $0.07 of acquisition intangible amortization that has been adjusted beginning in Q2 2018 and is consistent with our prior communications. We have adjusted the prior period EPS to exclude the intangible amortization for consistency. The improved earnings per share performance was driven by a combination of strong sales growth, operating expense leverage, and a lower tax rate, offset by the absorption of tariff costs primarily related to the 232 steel and aluminum tariffs, and we also continue to experience higher commodity and logistics costs. While we have implemented logistics surcharges for many of our products, the majority of the impact will begin in Q3 as we have a contractual requirement with our dealers that pace the implementation timing. Tariffs, logistics and commodities become an increasing headwind in the second half of the year. More on that in a few minutes when I cover the guidance update. Moving on to our second quarter segment performance. ORV/Snowmobile segment sales were up 17% in Q2, driven by improved ORV demand for side-by-sides worldwide, and availability and sale of new models accelerated during the quarter. As Scott highlighted, we gained market share again for both side-by-sides and ATVs during the quarter, which continues to reflect the improvement in our quality, innovation and dealer relations, and supports the increase in dealer inventory levels. It's also worth noting that promotional spend per unit is down, and we continue to see an improvement in our average selling prices year-over-year. Motorcycle sales were down on a GAAP and adjusted basis, primarily due to a weak overall North American motorcycle market, which was down mid-single digits percent in the quarter. Indian Motorcycles continued to gain market share despite a weak market. Our average selling prices declined 6%, reflecting the strength of our Scout midsize bikes relative to the more challenged heavyweight segment of the Indian lineup. The average selling price was also impacted by lower Slingshot shipments given weak retail trends. We continue to experience strong demand outside North America with our International Motorcycle wholegood sales increasing 9% in the quarter. Global Adjacent Markets sales increased 17% in the second quarter, primarily driven by growth in our Commercial, Government, and Defense businesses. Our Government and Defense business was especially strong, and Goupil continues to benefit from its relationship with the Scandinavian delivery company, PICNIC. Aftermarket sales were up 1%, with TAP sales up a similar amount and our other Aftermarket brands increasing 8% on a combined basis. TAP continues to realize growth in its four-wheel part stores and online sales. However, sales of its proprietary brands were below expectations given the limited number of accessories developed to date for new Jeep Wrangler platform. Our International business continued its strong performance with sales up 7%, 3% when you remove the favorable impact from currency. Sales growth remains strong in the EMEA region, which realized 11% growth in the quarter. Latin America and Asia Pacific were both slightly lower than the prior year. From a product standpoint, ORV and Motorcycles continued to outperform, driven by innovative products and strong brands. We gained market share again in ORV, extending our leading share position, while Indian Motorcycles remains the fastest growing brand outside North America. And finally, our Parts, Garments, and Accessories sales increased 11% during the quarter, driven primarily by our accessories business. All regions, categories and business segments grew their PG&A-related sales during the quarter. Now, let me move on to our full year guidance. We have a number of moving parts in our guidance update. Specifically, we've reflected the following major changes

[Scott W. Wine:]

Thanks, Mike. It was a good first half for 2018 for Polaris. We grew, gained market share, enhanced our capabilities, and developed positive momentum, which we are working hard to build upon in the third quarter. The current strength of the economy and the corresponding willingness of our customer base to take advantage of new vehicles and great values benefits our dealers and all aspects of our business. There are certainly risks in our marketplace, but at present, we see no signs of diminishing consumer confidence. As I detailed earlier, we see the multifaceted influences of the escalating and protracted trade war as the biggest risk to Polaris and the economy. We applaud the desired end game, but we need to be achieved quickly and foresee some pain in the interim if not. We have seen solid growth in our International business for well over a year now and remain encouraged by the prospects for sustaining this trend. Indian Motorcycles continue to grow in Europe, Asia, and Australia, and our Off-Road Vehicle business remains strong as well. I cannot succinctly describe the work-in-progress that our strategic sourcing team is driving, but the tools they are learning and capabilities we are building are providing a clear path to significant productivity growth. The savings will take time to achieve, but we will ultimately have fewer and better supplier partners who can deliver greater value and improve our supply chain and manufacturing operations. There are only a few months left of key seasonality for being on the water, but we are excited about our future with Boat Holdings. We look forward to working with their team to accelerate and enhance their innovation-led growth. We are executing well and embarking on a bold strategy that we will discuss and approve with our board later this afternoon to ensure that the future of Polaris remains bright. This is a team that embraces challenges, enjoys hard work, and wins with integrity. The road ahead will not be easy, but I like our chances. With that, I'll turn it over to Carrie to open the line for questions.

[Operator:]

We will now begin the question-and-answer session. The first question will come from James Hardiman of Wedbush Securities. Please go ahead.

[James Hardiman:]

Hey, good morning. Thanks for taking my call. All of the math you were helping us out with, Mike, is extremely helpful, but maybe just with the – my particular question, we started out with sort of $40 million of tariffs and commodities. It sounds like it's, correct me if I'm wrong, $33 million since the last time we spoke. I guess my question is, A, is that right? And then, B, how much of that number is being offset by pricing? And how exactly does that – how exactly are you going to implement that pricing as we move into the late third quarter?

[Michael T. Speetzen:]

Yeah, there's a lot going on, James. You're right, the $40 million, we had about $7 million in the prior guidance, so there is $33 million of incremental. And as I indicated, we are seeing more in terms of logistics and commodity. So relative to that $15 million that we had built into the original guidance, we've essentially got another $50 million of headwind that's a combination of $33 million of tariff and then the balance coming from logistics and commodities. We are able to price for a portion of that. So, the net impact to the business relative to the last guidance that we had is that 60 basis points' worth of gross profit. That equates to about $29 million. So that gives you a pretty good sense of how much we're pricing for. A fair amount of that is really logistics surcharges that we're doing to offset, I think, what most companies are experiencing in terms of higher transportation costs. There are select areas where we are able to raise prices to offset some of the tariff impacts, but we're also being mindful of the competitive environment that we're in and sensitive to the position some of our competitors are in that are not going to be required to do the same thing.

[James Hardiman:]

That's really helpful. And then sort of related question. The ORV guide went up. Obviously, there are some surcharges related there. Should we think about it as sort of the units in terms of ORVs are pretty similar and the guide increase is more pricing? Just trying to sort of square those two things. I mean, basically, the retail momentum seems pretty similar to the first quarter, so just trying to square those two things.

[Scott W. Wine:]

Yeah, it's really not much of a change in North American retail. That's why I called out specifically PG&A and International are the two primary drivers. We've also got some of the Global Adjacent Market business that's increasing. So, from a margin standpoint, while the PG&A business is very attractive from a gross margin standpoint, International operates at a lower gross profit. So you average those out and it's still a pretty good drop rate as we think about the balance of the year and adding in effectively what's between $50 million and $70 million more of additional revenue outside of the Boat business. The drop rate on that is around 35%. So, it's still coming in at a pretty healthy rate.

[Operator:]

The next question comes from Jaime Katz of Morningstar. Please go ahead.

[Jaime M. Katz:]

Hey. Good morning, guys. Thanks for taking my questions.

[Scott W. Wine:]

Hi, Jaime.

[Jaime M. Katz:]

I'm curious a little bit more about Boat Holdings. I think you guys put the gross margin potential out there at mid-teens this year. And I'm wondering where you think that trajectory can go to over time, and whether that maybe puts that 2022 30% number that you laid out there at your Investor Day a little bit at risk.

[Scott W. Wine:]

Jaime, this is Scott. We knew what we were buying when we got into Boat Holdings, which is really good brands, really good distribution, and good product. But we also knew that they were coming in with a lower gross margin. We will be able to build upon that over time, and it's certainly going to be a bit of a headwind to our 2022 targets that are getting back to 30%. We're not, at this point, saying it's out of the realm of possibility. As I talked about in my prepared remarks, the work we're doing with strategic sourcing has enormous positive benefits to our business, and some of that will roll into Boat Holdings as well. So, we will move that up, but in the next several years towards the latter part of that three- to five-year range, we will have a bit of a drag from the margins of the Boat Holdings as we indicated for the second half of this year.

[Jaime M. Katz:]

And does the gross margin eventually get closer to 20%? Does it get – I mean, where do you see that trajectory going to?

[Scott W. Wine:]

We have not gotten through all of our synergy planning to understand how far we can go. It's important to remember that they operate with a very low operating expense ratio as well. So, we don't need them to perform at the same gross margin level for us to get the same operating profit benefit that Polaris enjoys. So we're going to work through that throughout the rest of the year, and we'll provide good 2019 guidance for Boat Holdings in a few months.

[Operator:]

The next question will come from Greg Badishkanian of Citi. Please go ahead.

[Gregory Robert Badishkanian:]

Great. Thanks. Yeah, in terms of the promotional environment that went – the promotion per unit went down for you, but you also had some pretty strong retail this quarter versus the flat industry growth. So, what are you seeing from your competitors and how do you see tariffs impacting the environment because you said you're not on a level playing field with some of your competitors?

[Michael T. Speetzen:]

Yeah, from a promo standpoint, Greg, I mean, we do quite a bit of work around what we're doing and what our competitors are doing. And in the side-by-side space, we were obviously not the most promotional. And we think that the underlying demand characteristics of the market, assuming that there isn't some sort of a disruption to the economy in North America, favors the fact that we can continue to grow and we can grow competitively. I think Scott alluded to the fact that our competitors are all set up differently from a supply chain standpoint. One of our probably the toughest competitors we're dealing with right isn't dealing with some of the issues that we are, is inbound tariffs. And it's reflective of the fact that we are not assuming we can offset all of the tariffs from a pricing standpoint. So, when I answered James' questions earlier about we are being select on where we can offset the tariffs with pricing, that is playing into our thought process as we work through that.

[Gregory Robert Badishkanian:]

Okay. And just on the promotional topic, Harley talked about some promotions that drove retail sales for the Motorcycle category. What are you seeing in the Motorcycle category from a promotional perspective? Did that impact you? And are you planning some things for the upcoming – the rest of the year?

[Scott W. Wine:]

Yeah. Greg, obviously, we are not – we weren't surprised that it finally happened, but the people that said that they would never use promotions as a tool started using promotions really aggressively as a tool, and it surprisingly didn't help their retail results very much. So, we're paying attention to it. We've been managing our promotions in line with kind of how we expected the year to play out. We have built a brand and products that when – because of innovation and the way we're different. And I think what you'll see from Steve Menneto and the team as we go throughout the rest of this year is us continue to build on that focus of innovation, great new bikes coming out, but not dramatically. I mean, our brand is too strong for us to get into a knock-down, drag-out fight on promotions, and we won't do that.

[Michael T. Speetzen:]

The other thing, Greg, that I would add is even though we talked about heavyweight struggling, the midsize growth from a retail standpoint was substantial. And although the ASP was down for motorcycles, and that's really just driven by the mix between heavyweight and midsize, the ASP for our midsize bikes actually was up. And so I think that just demonstrates that this isn't just about competing on promo. It's about competing on having a great product and really going after the right end of the market.

[Gregory Robert Badishkanian:]

Thank you.

[Richard Edwards:]

Next question.

[Operator:]

The next question will come from Robin Farley of UBS. Please go ahead.

[Robin M. Farley:]

Great. Thanks. Just want to think about your expectations for Off-Road for the year, because I think your retail performance in Q2 was very much in line with expectations and you had kind of preannounced some of the mid-single digit. But maybe the industry coming in flat for Q2, I wonder if you could talk a little bit about that given the improvement that you're seeing in the ag markets and oil regions. And then your expectation for the year, I guess, assumes industry growth will be better than it was in Q2. If you could comment on that. Thanks.

[Scott W. Wine:]

Yeah, Robin, we were quite pleased with the way both the entire calendarization of Q2, how it played out for us. I mean, Off-Road Vehicles, after having a difficult April, really performed well in May and June. The third quarter is really the year-over-year comp challenge that we have last year when we were up so strong with our strong factory authorized clearance sale. But the momentum that we have in Off-Road Vehicles is really strong, and we don't believe that it's going to be impacted by a weaker overall market. I think there's really just a couple of us that are doing well right now, and we like the lineup of product we have. We like our dealer engagement. We like our very targeted and effective promotional tools. And as I said in my remarks, our ability to generate leads that are much more effective and impactful is really beneficial to us. So, I think Chris and his team are feeling good about the third quarter. It's a challenge to get back to positive retail, but that – it's not required for us, but that's what they're shooting to do, but we don't expect that. And then we'll get back to growth in the fourth quarter.

[Michael T. Speetzen:]

Robin, I just want to clarify. In my prepared remarks, we basically said we don't see much of a change in the powersports market in North America, essentially flat to up slightly. The real question mark for us is around motorcycles. And, obviously, we've pulled down our motorcycle shipments. In the second quarter, while ag was strong, which is about 6% increase year-over-year coming off of Q1 when it was flat, the oil and gas regions, it didn't fall back to flat or negative, but they were only up about 1%. So we're still dealing with that stabilizing effect in the market. And as we look out over the balance of the year, the favorability that we built into our guidance that I referenced earlier is really coming from outside the U.S., and it's also coming through more of the PG&A Accessory and parts sales.

[Robin M. Farley:]

Okay. Great. Thanks very much.

[Michael T. Speetzen:]

Yeah.

[Richard Edwards:]

Next question.

[Operator:]

The next question will come from Tim Conder of Wells Fargo Securities. Please go ahead. Tim, your line is open if you wish to ask a question.

[Richard Edwards:]

Let's move on.

[Operator:]

The next question then will come from Scott Stember of C.L. King. Please go ahead.

[Scott L. Stember:]

Good morning, gentlemen.

[Scott W. Wine:]

Good morning.

[Michael T. Speetzen:]

Good morning.

[Scott L. Stember:]

Can you maybe talk about – obviously, you have concerns about retaliatory moves, whether it be Canada or the EU. Have you seen any material slowdown in orders in either country or either area or cancelation in orders from dealers there?

[Michael T. Speetzen:]

No. I mean, we did accelerate a little bit of our motorcycle shipments in the second quarter. It wasn't material. The retaliatory impact that we have built in, that $33 million of additional tariff, is around $5 million. And that's largely on the motorcycle side. The real issue will be, as we move into next year, making sure that we're managing that, as Scott referenced earlier, in terms of location of manufacturer of the bikes and things like that. But at this point, we really haven't seen anything ripple through either the U.S. or outside of the U.S.

[Scott L. Stember:]

Okay. And just the last question. I know you've only owned the Boat business for a few weeks, but the retail sales data that came out for pontoons, in particular, were pretty choppy during the quarter. Can you maybe just talk about how Boat Holdings performed, the Bennington brand, and expectations going forward? Thanks.

[Scott W. Wine:]

Yeah. Remember, pontoons for Boat Holdings is both Bennington and Godfrey, and we're comfortable, very comfortable with how Bennington's performing, and Godfrey has really good potential and we like the business overall. We've seen it in almost every business we've ever acquired, Scott, is during the lead up to an acquisition, I wouldn't say there's a laser focus on execution that we've always wanted. And I wouldn't be surprised as we dive into exactly how the second quarter played out that it might not have been perfect execution as they were working on the transaction to sell the business. But their orders are strong, their execution is good, and we're feeling very good about what that business is going to deliver in the second half and going forward.

[Michael T. Speetzen:]

And, Scott, as you know and I think you alluded to in your comment around choppy, the data was even more incomplete than normal. We're still getting used to how the reporting goes as it relates to how we do it with MIC or ROHVA. But there was a fair amount of data that wasn't in and didn't represent the full picture. So we don't use that to justify the way, but we're trying to get our full arms around the entire data set.

[Scott L. Stember:]

Got it. Thank you.

[Michael T. Speetzen:]

Thanks.

[Richard Edwards:]

Next question.

[Operator:]

The next question will come from Craig Kennison of Baird. Please go ahead.

[Craig R. Kennison:]

Good morning. Thank you for taking my question. Scott or Mike, you clearly face commodity pressure from tariffs, but I'm curious how your consumers in the farm economy are doing in the midst of these trade negotiations. I know the administration announced a $12 billion subsidy yesterday, but I would think buyers in that market could defer spending as times get tough.

[Scott W. Wine:]

We certainly believe that the potential for the rising cost of tariffs to impact demand is real. But as I said in my remarks, we've not seen it in our industry and I think in the ag markets as well. Remember, it's not the same budgets, if you will, that they're using to buy a several-hundred-thousand-dollar farm implement machinery that they're using to buy their RANGER. It's just the overall economy, and our ag markets have not slowed down at all so far.

[Craig R. Kennison:]

And following up on slide 15 involving TAP, there's a comment regarding delayed production development at TAP. Could you just shed a little more light on that issue?

[Scott W. Wine:]

What we've found is that when the new Jeep model came out, we did not execute our engineering resources to bring the new accessories to market as fast as we would like, and we didn't bring in third party accessories to put through our channel. So, I just believe that it's a delayed development work, not a long-term trend. We'll catch up. We're catching up now as a matter of fact, but we were not as expeditious in developing those additional accessories as we would have liked to be.

[Craig R. Kennison:]

Thank you.

[Operator:]

The next question will come from David Beckel of Bernstein Research. Please go ahead. David, your line is open if you wish to ask a question.

[Richard Edwards:]

Okay. Let's move on.

[Operator:]

All righty. Our next question will come from Joe Altobello from Raymond James. Please go ahead.

[Joseph Nicholas Altobello:]

Thanks. Hey, guys. Good morning.

[Michael T. Speetzen:]

Hey, Joe.

[Joseph Nicholas Altobello:]

So, first question, I know earlier, Mike, you mentioned that the $40 million for this year could be much higher for next year. And I know it's early, but how should we think about that number for 2019, assuming nothing else changes from what we know today? I mean, could that number double for 2019, for example?

[Michael T. Speetzen:]

Yeah. Joe, I think we want to try and steer clear of trying to project out what it will be. I mean, what I would say is that the tariff impact in Q2 was relatively small. So, most of this is a second half impact. But there's a lot more to this in terms of we're working with the teams to understand the retaliatory impacts on the full year performance next year for Motorcycles, for example, and Boats. And then obviously, as I mentioned in my prepared comments, there's still a lot of question marks around 232 and 301 in terms of other potential lists of products that could fall victim to the tariffs. So, at this stage, we just want to steer clear of trying to put out guidance for that.

[Joseph Nicholas Altobello:]

Okay. I understand. Secondly, your second half guidance implies some nice improvements at least for Motorcycles and Adjacent Markets. So, help us understand why it's going to be up in the second half versus what we've seen in the first half. Thanks.

[Michael T. Speetzen:]

Yeah, I think with Adjacent Markets, it really has to do with program timing around our Defense and Government business. They've made a lot of terrific progress around widening the scope of sales, as well as winning some really key contracts. And then as it relates to the Motorcycle business, some of that is a pretty – a compare issue versus where we were at in the second half of last year, and not reflective of an underlying improvement in the demand environment.

[Joseph Nicholas Altobello:]

Got it. Okay. Thank you, guys.

[Michael T. Speetzen:]

Yeah.

[Operator:]

The next question comes from Kevin (sic) [David] (44

[David S. MacGregor:]

Yeah, hi. This is David MacGregor at Longbow. Just a couple questions. First of all, given the magnitude of the ORV selling in the quarter, can you talk about your plans for the Factory Authorized Clearance sale? Are you planning another three-month event? And anything you can say to shed some color on that would be helpful.

[Scott W. Wine:]

Yeah. No, we are planning a very similar Factory Authorized Clearance sale, except for the fact that it's going to be the most targeted efforts that we've had. I mean, as I talked about, our ability to generate leads is quite significant. And what Chris Musso and the team are doing is going to allow us to lower the overall promotional impact in the third quarter. But with the mix of products and with the execution, we believe we're going to be able to have a very effective Factory Authorized Clearance sale. There is less aged inventory in the channel. I mean, all the dealer inventory is up slightly. It's basically our newer product. So the availability of lower cost, especially in the ATV channel, is what provides a little bit of the headwinds going forward as we don't try to match up to a really difficult last year. But no, the program timing is going to be essentially the same, and I think our execution is just going to be better.

[David S. MacGregor:]

Okay. Second question, just on the Section 301, you talked about the possibility of moving more motorcycle manufacturing to Opole. I guess any comments you could provide on once you get past the point of trying to recover tariff damage from pricing and productivity, and you start focusing on redirecting your supply channels, what's the opportunity there for you?

[Scott W. Wine:]

Well, we built Opole because we felt it was important to serve our very large European customer base with local assembly. I mean, it's shorter lead times, they prefer to have a locally sourced product most of the time, and it's worked very effectively with our Off-Road Vehicle portfolio, with over 90% of our off-road vehicles sold in Europe are manufactured out of Opole. We had been looking at moving Motorcycles, actually planning to assemble our midsized bikes in Opole for quite some time. With the announcement that we're going to build a new bike coming up, that even raised the opportunity and the need, if you will, to have those shorter lead times and local production. So this was just a matter of us taking advantage of something we were going to do already. With both Scout and the new FTR bike that we'll be bringing out, we do feel like we're going to have a wonderful lineup for Europe. And we think with local assembly it'll only help us penetrate that market even further.

[David S. MacGregor:]

Thanks, Scott.

[Operator:]

The next question will come from Gerrick Johnson of BMO Capital. Please go ahead.

[Gerrick L. Johnson:]

Good morning. Mike, I had a little trouble keeping up with you there, but the guidance for amortization, $24 million for the full year, we've already recorded $12 million. So, does that include Boat Holdings or not include Boat Holdings?

[Michael T. Speetzen:]

That does not include – as I said in my prepared remarks, it's all for the prior acquisitions. The $0.10 for Boat Holdings is excluding, obviously, the intangible as well as any of the step-up in integration costs.

[Gerrick L. Johnson:]

So what's the amortization level there for Boat Holdings?

[Michael T. Speetzen:]

We're still working through the final purchase accounting. The full-year impact of our prior acquisitions is around $28 million. We think on a full-year basis when you add in Boat Holdings you're going to be very close to $50 million of amortization expense.

[Gerrick L. Johnson:]

Okay. All right. Got it. And also, when do TAP, Aixam, Taylor-Dunn, when do they start falling off?

[Michael T. Speetzen:]

Aixam will probably fall off within the next couple of years. TAP will be another five to seven years before that amortization rolls off.

[Gerrick L. Johnson:]

Okay. So not in our lifetime. Thank you.

[Richard Edwards:]

Next question.

[Operator:]

The next question will come from Joseph Spak of RBC Capital Markets. Please go ahead.

[Joseph Spak:]

Thanks. Good morning, everyone. Mike, thanks for all the helpful color on the tariffs. I just want to make sure we're on the same page. So, when you say specifically with 301, List 1, that pertains to the initial $34 billion that was identified?

[Michael T. Speetzen:]

Yes.

[Joseph Spak:]

Okay. Last quarter, ahead of that, you had done some work to sort of let us know the potential magnitude. And there's obviously been talk of a $200 billion number and a $500 billion number. Have you done any internal work to understand what that could potentially mean?

[Michael T. Speetzen:]

It is much more difficult. The facts behind it are, I would say, pretty nebulous. We've got a pretty good idea of at least the buckets that they're talking about and the team's working through it, but I'd prefer not to put a number out there at this stage as we're still working through that.

[Joseph Spak:]

Okay. Understood. And then maybe just to follow on, how easy or difficult is it to resource and maybe get some other suppliers qualified to get around some of these tariffs from different locales? And what type of timeframe are we talking about?

[Scott W. Wine:]

What we've said – and I tried to be clear – we are not going to take short-term actions to avoid these things unless it makes consistent sense with our long-term plans. The strategic sourcing work that Ken is leading is helping us look at our entire global supply base and how we can best source that. We are taking into account, as we go through that strategic realignment of our sourcing partners, where the best would be if some of these tariffs were to be in place. But you will not see us move a supplier from, say, China to Mexico – and gosh, what's going to happen with NAFTA – just to try to avoid these short-term problems. We are going to be very, very thoughtful and strategic about which suppliers we choose. And ultimately, I mean, I firmly believe that we are going to see a more fair and more free trade regime on the onside it (50

[Joseph Spak:]

Understood. Thanks.

[Richard Edwards:]

Next question.

[Operator:]

The next question will come from Tim Conder of Wells Fargo Securities. Please go ahead.

[Timothy Andrew Conder:]

Thank you. My apologies, simultaneously on two calls, and our apologies here. But first of all, thank you, Mike, again for all the details and the breakdown. It was very helpful. Just a couple things. Scott, and I apologize, just to follow on the Indian shift and the supply chain and all that, the timing of getting Indian up and running for Europe in Europe and Poland and the cost of that, I apologize if you gave that, but if not, if you could touch on that. And then, secondly, it sounds like you're kind of caught up to where you want to be because you were under-inventoried in the channel with ORVs, and you're kind of caught up here in the first half. I just wanted to clarify that and any color around that channel. But that sounds like what we've seen here in the first half, exactly what you guys had laid out.

[Scott W. Wine:]

Yeah, you pretty much got that right, Tim, on the Off-Road Vehicle side. We had been working – as RFM gets more fully implemented, we've got the profile set, and we were chasing those profiles for a while and I think we're feeling very good about how that is – throughout most of our North American network, where we are, we'll continue to manage it, but you should see a balancing out of inventory. Remember, at the end of the third quarter last year, we had depleted inventory very significantly. So I think the year-over-year increase in the third quarter might appear high, but it's just literally going to be a very low year-over-year compare that we're up against on the Off-Road Vehicle side. Because we had planned on doing the Opole production of Indian anyway, much of the work has been done. Ken and his team have been actively evaluating and understanding that, working closely with Mike Dougherty's team in Europe, and we'll be up and running in 2019 with the opportunity to serve our customers locally, probably not for the entire riding season, but certainly before too much of it is gone.

[Timothy Andrew Conder:]

Okay. And then, Scott, on the inventory there, just to put the bookend on it, at the end of the calendar year, North American channel, given the very difficult comp, as you said, optically, third quarter might still appear a little elevate, but by year-end, just any targets that we should look for?

[Scott W. Wine:]

Well, the problem with year-end is you're going to have to continue to just look at the ex-Snow because Snow's going to be so much better this year. I think the total number is going to look pretty good. Off-Road Vehicles, it'll be up slightly. But again, that's just over the year-over-year compare. We feel like RFM is finally generating the dealer benefit that we've wanted to see. It's coming back in our surveys. So, we're going to continue to push that, and I think our ability to avoid elevated inventory is certainly better than it's ever been, and we'll make sure that we continue to leverage that throughout the year.

[Timothy Andrew Conder:]

Okay. Thank you, gentlemen.

[Richard Edwards:]

Next question?

[Operator:]

The next question will come from David Beckel of Bernstein Research. Please go ahead.

[David James Beckel:]

Hi. Thanks. And I, too, apologize for technical difficulties there. Just one question from me. I'm curious about the change in your outlook for the Motorcycle group. That market has been challenged for a very long time and actually appears as if the trend might be reversing if one quarter is significant in any way. But what are you seeing now that causes your outlook to change? Is it Indian-specific or is it just catching up to the trends that had been in place for quite some time?

[Michael T. Speetzen:]

Yeah, I think, David, it's more just the dynamics around the heavyweight market itself. And I think the point you were making is that things were a little bit better, I think they were on a relative basis. Obviously, our largest competitor was still down substantially. And when we look at our heavyweight performance, although not as strong as our midsize bikes, just a little bit more challenging than what we've seen. It's really reflective of that. It's also reflective of what we're seeing in our Slingshot business. So it shouldn't just be focused on the Indian brand. It really is a combination of the two.

[David James Beckel:]

Got it. Actually, if I could, one quick follow-up. I just want to confirm the action you're taking with respect to Indian in Europe. Are you mostly doing price hikes to offset the tariff or is it some combination of price hike and swallowing part of that in the margin?

[Scott W. Wine:]

Well, remember, with the calendarization and timing, we've shipped most of the 2018 European demand prior to the retaliatory tariffs being in place. So it's not a significant impact in 2018. For 2019, as we've said, our plan will be to ramp up, as we had always planned to do, assembly in Opole, which would therefore offset the need for it.

[David James Beckel:]

Okay. Perfect. Thank you.

[Richard Edwards:]

The last question?

[Operator:]

The last question will be a follow up from James Hardiman of Wedbush Securities. Please go ahead.

[James Hardiman:]

Hey. So, just a quick clarification, I'll take a stab at the inventory question. So, we've had sort of – in ORV specifically, we've had mid-single digit growth at retail the last couple of quarters, but more like high teens growth from a reported perspective. Obviously, those numbers are never apples-to-apples, but as I think about what you've contemplated in guidance, does that gap continue to be significant? Does it sort of get closer to parody? Or given that inventories are going to be coming down, would we expect to see wholesale less than retail in terms of growth rates in the back half?

[Michael T. Speetzen:]

Well, I think in the back half overall, James, I think you'll see closer alignment. But the difficult part about this is that we're also going to be shipping – as we trail out of the end of the year, we're going to be shipping into the channel and making sure that dealers have what they need in the first quarter. And assuming you're projecting retail growth into the next year, you're obviously going to be slightly outpacing. But I don't think you're going to see as big of a difference as you've seen in the first half as we've talked about a number of different times. I mean, our inventory position coming out of 2017 was well below where we wanted it to be. And the combination of getting all the profile stocked for RFM, as well as making up for some of the shortages we had that got a lot of press coverage in terms of RANGER and some of our high performance RZRs that we've corrected now through the first half, I think you'll see that dissipate and will be more aligned with what we're seeing in terms of demand signal for the current quarters as well as the next quarter.

[James Hardiman:]

Got it. Thank you.

[Michael T. Speetzen:]

Yeah.

[Richard Edwards:]

All right. We want to thank everyone for participating in this morning's call, and we look forward to talking to you again next quarter. Again, thank you, and good-bye.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.