Polaris Inc (PII) 2017 Q4 法說會逐字稿

Good morning. My name is Mariana, and I will be your conference operator today. At this time, I would like to welcome everyone to the Polaris Q4 and Full Year 2017 Earnings Conference Call. (Operator Instructions)

I would now like to turn the call over to Richard Edwards, Head of Investor Relations. You may begin your conference.

Thank you, and good morning, and thank you for joining us for our 2017 fourth quarter and full year earnings conference call. A slide presentation is accessible at our website at www.polaris.com/irhome, which has additional information for this morning's call.

Today, you will be hearing prepared comments 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, including 2018 guidance, 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 2016 10-K for a more detailed discussion of these risks and uncertainties.

Throughout the presentation today, all references to fourth quarter and full year 2017 actual results and 2018 guidance are reported on an adjusted non-GAAP basis, unless otherwise noted. Adjusted refers to GAAP results, excluding TAP integration expenses, the impact associated with the Victory wind-down, restructuring and realignment cost, and the impact of the tax reform bill.

We have provided a reconciliation of the adjusted non-GAAP to GAAP results, which is shown on Slide 3 through 5 of this presentation.

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

Thanks, Richard. Good morning, and thank you for joining us.

With the Super Bowl in town this week and Polaris employees and vehicles supporting many of the related activities around the city, I feel even more inclined than usual to start this morning with a football analogy. To no one's surprise, the Patriots are back in the Super Bowl as Bill Belichick and his talented coaching staff, and arguably the best quarterback of all time, have turned that team into a high-performing dynasty.

While there is no circumstances where I would compare myself with Coach Belichick, it is fair to say that Polaris and the Patriots share some important traits. The Patriots have a simple mantra, do your job. That stresses hard work and personal accountability at every level of the organization, values that are equally fundamental to our culture at Polaris.

Similarly, in an intensely competitive NFL environment that the Patriots seem to always find a way to win, which is a hallmark of our Polaris team. Unlike the NFL, there is no trophy for first place in powersports. But much like a football dynasty, we are building a company that is capable of winning the right way, every day, always.

The Patriots are renowned for being great in the fourth quarter. Unfortunately, that's where our analogy ends because we were not. With slower than anticipated ramp up of model year '18 vehicle production, subpar snowfall across much of North America, and weaker-than-expected RZR demand, overall North American retail sales were below expectations. We were able to escalate shipments throughout the quarter, supporting sales and earnings that were in line with full year and quarterly projections.

Just as they have done all year, Indian Motorcycles outperformed the industry in the fourth quarter, with nearly 17% North American retail growth supporting full year growth of more than 15%.

The strength of Polaris' portfolio was clearly evident in 2017 as our international and adjacent markets businesses were each up well over 10% and our large and growing PG&A aftermarket business was up 7% on a pro forma basis.

Transamerican Auto Parts had a good first year with Polaris, posting solid results, while adding 10 new stores and driving strenuous and successful integration activity.

Our accelerated investment in research and development, and safety and quality, paid dividends in 2017, but our work is far from complete. The strong reception and performance of our all-new RANGER XP 1000 highlights the enormous progress we have made and provides insight into how good our next generation of off-road vehicles will be for our customers, dealers and investors.

Higher quality and lower warranty cost are an important elements of our margin improvement efforts. And along with positive mix, they contributed to overall full year gross profit margin expansion, but we are in the early chapters of our margin story.

From closing and moving plants to realigning and streamlining our organization to be more customer-centric, we did not shy away from tough decisions or hard work last year, and we expect these actions to deliver savings in 2018 and beyond.

The 1% decline in fourth quarter retail sales was unexpected and disappointing, but not indicative of a trend as the result was primarily driven by a double-digit decline in snowmobile sales. Key issues in snow were our year-over-year decrease in noncurrent sled inventory available-for-sale and lack of snow cover across broad portions of Central and Western North America where our retail is typically strongest. While we lost snowmobile market share in the quarter, we are better positioned to recover sales and market share in the first quarter in 2018.

Although overall, Off-Road Vehicle retail was up for the year, it was down just under 1% for the fourth quarter. We saw a reduction in RZR sales driven by both tepid demand and limited product availability following exceptionally strong factory-authorized clearance sale. We fully implemented our new RZR price ladder and a tighter promotion scheduled during the quarter, and we saw better acceptance as the quarter progressed.

RANGER sales were up for the quarter, which would have offset the RZR weakness, but we could not meet demand as the production for our new Ranger XP 1000 product ramped up too late in the quarter. Indian retail remained strong to finish the year, and Slingshot returned to growth, albeit against a weak prior year comparable.

Overall, North American dealer inventory was up 1% for the year, predominantly because of higher-than-expected sled inventory. Motorcycle inventory was also up in support of higher sales. ORV dealer inventory was down 6% as we are still working to fully meet profile requirements for the rollout of RFM for side-by-sides. We expect order lead times to improve and inventory to be near optimal levels by the second quarter.

As most of you likely saw, we recently announced the appointment of Lucy Clark Dougherty as our new General Counsel. Lucy has incredibly relevant experience from her 8 years with General Motors, but more importantly, has a track record of leading with high integrity and succeeding in complex environments throughout her career. Lucy started yesterday, and I'm looking forward to benefiting from her advice and counsel for many years to come.

Mike Donoughe also joined Polaris last week, taking over our critically important Chief Technology Officer role. Mike has extensive engineering and operations experience from his 20-plus years with Chrysler and Mercedes Benz and is well versed in Advanced Technology from his roles with Tesla and Bright Automotive. Mike is a very strong leader in addition to being a great engineer. So my expectations are high as he takes over our incredibly deep and capable engineering organization.

I'm excited to have Lucy and Mike on our team and very pleased overall with how the Polaris leadership team has evolved and developed.

We've also very purposely evolved our strategy statement to assert where we expect Polaris to be in 5 years and more accurately describe how we achieve -- expect to achieve success. Our vision did not change, since we still strive to fuel passion and enrich lives, but we refined our strategic purpose to more clearly state our commitment to becoming a customer-centric, highly-efficient growth company. With this goal in mind, we updated our strategic objectives to include 2 new goals we must accomplish: leveraging our investment and focus on safety and quality to create a competitive advantage; and channeling our lean VIP and sourcing initiatives to become a true productivity powerhouse.

Taking into account our deep, passionate and talented team, 4 strategic business units poised for growth, and a clear strategy, we have accordingly revised our long-term financial targets and expect to deliver 5-year compound annual growth rates that exceed 5% for sales and 15% for net income. That, we believe, will qualify Polaris as a highly efficient growth company.

Solid execution will almost always beat great strategy, but we plan to get both right in the years ahead. As we set new targets, we're revising and resourcing detailed action plans to accelerate profitable growth. Our corporate priorities for 2018 are aligned with our strategic objectives and will build on our current initiatives.

I'm impressed with the team and the tools we now have in our safety and quality organization. And this year, under the experienced leadership of [Todd Gross], we will focus on accelerating the customer and bottom line benefits they are creating. We will also continue driving our plans to become the most preferred partner for our customers and dealers. Our ability to understand and respond to customer desires is rapidly improving. And in the future, we expect to win with innovative products and pioneering services.

Productivity is arguably the most important financial metric for any country, company or enterprise, and we believe it is essential to our long-term success. We will expand margins and leverage our assets and SG&A spend more efficiently, providing more funds to accelerate growth.

In addition, our expansive VIP projects will become a world-class supply chain company. As we are undertaking a major multi-year sourcing engagement that is designed to reduce our nearly $2 billion of bill-of-material spend by well over $200 million annually by the end of our strategic planning period. This is very hard work worth doing, and then required for us to achieve our 15% compound annual earnings growth.

With that, I'll turn it over to our CFO, Mike Speetzen, who will update you on our financial results and plans for 2018.

Thanks, Scott, and good morning, everyone. I'm going to spend some time walking through Q4 and full year 2017 performance in more detail, and then, cover our 2018 guidance.

Fourth quarter sales were up 18% on a GAAP basis and up 17% on an adjusted basis versus the prior year. Transamerican Auto Parts added $83 million of sales during the quarter, which more than offset the $25 million of lost revenue from the wind down of the Victory business.

Organic sales, which adjusts for TAP and Victory, represented the majority of the growth for the quarter, including strong sales growth in ORV whole goods, Indian Motorcycles, Global Adjacent Markets, PG&A and international. Additionally, the company's average selling prices increased for the quarter, driven primarily by lower promotional costs incurred during the quarter as planned.

Fourth quarter earnings per share on a GAAP basis was $0.49. Adjusted earnings per share was $1.47 when adjusted for the wind down of Victory, TAP integration, restructuring and realignment costs and the write-down of deferred tax assets due to the passage of tax reform in December. Adjusted earnings per share was up 25%, driven by increased volume, lower promotional spend and operating expense leverage. These items outweighed negative product mix, higher incentive compensation expense and increased commodity costs.

For the full year 2017, sales were up 20% on a GAAP and adjusted basis versus the prior year. Transamerican Auto Parts added $685 million of sales for the full year 2017, which more than offset the $164 million of lost revenue from the wind down of Victory Motorcycles.

Organic sales, which adjusts for TAP and Victory, represented just under half of the growth for the year. All segments and regions delivered solid growth for the year on an adjusted basis and when excluding Victory from 2016.

The company's average selling prices contributed about 3% to the organic sales growth, with the remainder of the growth coming from volume.

Full year earnings per share on a GAAP basis was $2.69. Adjusted earnings per share was $4.85, which was in line with expectations.

The 39% increase in earnings per share was driven by a combination of increased volume, a meaningful improvement in gross margins and a lower tax rate. I would note that our tax rate for the full year was approximately 30%.

These items more than offset increased investment in research and development, higher incentive compensation expenses and higher interest expenses primarily related to the acquisition of Transamerican Auto Parts.

On a GAAP basis, gross margins declined 10 basis points to 24.4% for the full year of 2017, which includes $58 million of Victory wind-down costs and $26 million related to inventory step up, restructuring and realignment, and supply chain transformation costs.

On an adjusted basis, gross margin increased 120 basis points to 25.9% for the full year 2017, reflecting lower warranty expense, cost savings and positive product mix, somewhat offset by higher promotional costs and added costs from a combination of supply chain, commodity and natural disaster headwinds.

Now let me give some brief comments around each segment, beginning with ORV/Snow. My comments will be referencing adjusted numbers unless otherwise indicated.

ORV/Snowmobile segment sales were up 13% in Q4. All categories were up during the quarter despite continued competitive pressure in power -- in the powersports market. While promotional spending was down during the fourth quarter, full year promotional spending was up on a year-over-year basis as we continued to protect our brand through a competitive and promotional 2017.

Average selling price was up 4%, but it's important to note that although our average selling price increase, our product mix put downward pressure on our gross margins and ORV.

As Scott noted earlier, our retail unit sales of offered vehicles were down just under 1% and our retail sales of snowmobiles were down low double digits.

Given retail sales are a measurement of North America only, exclude PG&A and on our unit account basis, the impacts of higher international sales, higher PG&A sales and higher average selling prices are key drivers of the differences between retail sales and company sales.

I would also add that we accelerated shipments in Q4 to address shortages and demand requirements based on strong Q3 retail and continued strong dealer demand. Lastly, for the full year, ORV/Snowmobile segment sales were up 9%, driven by all categories of the business.

Motorcycle sales decreased 4% on a GAAP basis, but were up 26%, excluding Victory sales in Q4 of 2016. Both Indian and Slingshot sales were strong during the fourth quarter. Indian sales mirrored strong retail in Q4, while Slingshot sales improved against easier comparables as a recall-related stop ship limited Q4 2016 shipments.

Q4 Motorcycle sales increased at a slightly higher rate than retail sales, driven by higher average selling prices and timing of dealer inventory requirements and orders.

Lastly, adjusted full year motorcycle sales declined 18%, driven by the wind down of Victory Motorcycles. Full year adjusted sales grew 7% when Victory sales are excluded from 2016.

Global Adjacent Markets sales increased 19% in the fourth quarter, driven by strong growth in Aixam and Goupil as well as continued strong sales growth in our Government & Defense business during the quarter.

The mix of products sold in Q4 was positive to sales with the average selling price for adjacent markets increasing 14% for the quarter.

For the full year, Global Adjacent Market sales increased 16%, with all business lines growing. Aftermarket sales were up significantly as expected, primarily due to the addition of $83 million of TAP sales in Q4. Pro forma organic revenue for the Aftermarket business was up approximately 3% in Q4. TAP results were in line with expectations, and integration of the business is proceeding as planned.

Full year aftermarket sales were up significantly given the acquisition of TAP. Sales on a pro forma basis were up approximately 6% versus 2016.

Now let me turn to our 2018 guidance. We expect total company sales to be up in the range of 3% to 5% from the full year 2018 -- for the full year 2018, on an adjusted basis. 2018 sales growth includes the following assumptions: the overall power sports market is expected to be flat to up slightly, with off-road vehicles up, motorcycles flat to down, and snow down for the year. We expect Indian Motorcycles to grow faster than the market, and to continue to gain share in 2018 and ORV market share is projected to be stable in a market that remains highly competitive. We expect RANGER and GENERAL momentum to continue into 2018, and I think it goes without saying that we're not satisfied with flat share in off-road vehicles and have stretched plans to be better than this.

Adjusted earnings per share for 2018 are expected to be in a range of $6 to $6.20, up 24% to 28% compared to the full year 2017 adjusted EPS of $4.85. Adjusted net income is expected to grow 27% to 31%, with adjusted earnings before tax growing 15% to 19%.

We intend to report on an adjusted basis in 2018 given we will continue to have minor Victory wind-down costs, TAP integration cost as well as one-time costs associated with the supply chain transformation projects Scott referenced earlier.

Our 2018 earnings per share guidance assumes the following: we anticipate that adjusted gross margins will continue to improve, increasing 40 to 60 basis points to approximately 26.3% to 26.5%. I'll provide more detail around gross margins in a later slide. Adjusted operating expenses are expected to be up slightly in 2018, but down 40 to 60 basis points as a percent of sales. It's important to note that our operating expense guidance includes a roughly 10% increase in engineering investment to support innovation and new product development. 2018 operating expense guidance reflects our efforts to better leverage our general and administrative costs as we grow the business.

Income from financial services is expected to be flat to down slightly, primarily driven by the mix of income between Polaris acceptance, retail credit and our growing extended service contract business. The income tax rate is now expected to be approximately 23% for the full year 2018 due to the impact of the recently passed U.S. tax reform bill. The income tax rate reduction versus the 2017 rate of 30% represents a 7-point drop, yielding approximately $35 million of tax expense benefit and $0.55 of earnings per share benefit to 2018.

Although the stated corporate federal income tax rate is 21%, we have to adjust for state taxes, higher international taxes, the negative impact of the lost 162(m) deduction and the favorable impact of R&D tax credits. These net to a 2-point increase to the stated rate. Our team continues to work through the details as we fully implement the various provisions of the new legislation.

Share count is expected to increase approximately 2%. Although share count is increasing slightly, we anticipate repurchasing approximately 2 million shares to partially offset additional dilution given a higher stock price and option exercises. We have approximately 6.4 million shares remaining under the board's current authorization.

Lastly, foreign exchange impacts are currently expected to be minimal in 2018 to both sales and earnings. We have planned 2018 using the average rates realized during 2017. We planned 2018 assuming the euro to U.S. dollar at $1.13 and the Canadian dollar to U.S. dollar at $0.77. I would also point out that from a transactional perspective, we have hedged approximately 60-plus-percent of our exposure to Canada, Mexico and Australia.

As was the case in 2017, our 2018 guidance assumes that our earnings growth is more heavily weighted toward the second half of 2018 as the increase in R&D spend, which is anticipated to be spread equally over the 4 quarters, has a disproportionately negative impact on the first quarter, given Q1 is historically our [smallest] sales and earnings quarter of the year. Q1 EPS growth will be about half of the expected annual EPS growth of 24% to 28%.

Sales expectations for our segments are as follows: ORV/Snowmobile sales are expected to be up low- to mid-single digits, with snow about flat and ORV and PG&A sales up. Motorcycle sales are anticipated to be up high-single digits percent, with both Indian and Slingshot growing in 2018.

Global Adjacent Market sales are expected to be up mid-single-digit percent, with growth expected in all businesses. And the Aftermarket segment sales are expected to be up high-single digits percent.

As a reminder, we anniversary-ed the TAP acquisition in November of 2017. Therefore, we will have comparable quarterly and year-over-year Aftermarket segment sales as we report in 2018.

Lastly, both international and total PG&A sales, which are included in the respective segments, are expected to increase in the mid-single-digit percent range for 2018.

Adjusted gross margins are expected to continue to show improvement over 2017, increasing in the 40 to 60 basis point range. The improvement is driven by a further reduction in warranty costs along with ongoing VIP savings similar to levels achieved in 2017.

We have made considerable investments in safety and quality, and as a result, we anticipate our warranty cost to be down as a percent of sales versus 2017.

Although we continue to make good progress on driving productivity, we do anticipate a couple of headwinds in 2018. We experienced rising commodity prices in the fourth quarter of 2017 and expect those commodity pressures to continue into 2018.

Product mix is expected to put pressure on gross margins in 2018 as we realize faster growth in some of our lower margin businesses.

Aggregate and per unit promotional costs are expected to be down year-over-year. Somewhat offsetting these lower promotional costs are the ORV pricing adjustments highlighted last year. Taken together, pricing and promotional costs are anticipated to be about neutral to adjusted gross margins in 2018.

On a segment reporting basis, 2018 gross margins are expected to perform as follows: ORV/Snow segments' gross margins are expected to be similar to 2017 levels, driven by negative mix and commodity impacts, offset by cost reduction and lower warranty; Motorcycle adjacent markets and Aftermarket gross margins are expected to increase year-over-year given improved volume and cost actions.

Our operating cash flow performance was up 1% for the full year 2017, finishing at $580 million. We anticipate 2018 operating cash flow to be down approximately 10% from 2017 due to higher incentive compensation payments and higher working capital to support the growth in the business.

I would note that while working capital is increasing, we continue to push efficiency as evidenced by improved factory inventory turns in 2017 that we project will continue into 2018.

Capital expenditures are expected to grow significantly in 2018 versus 2017, driven by additional tooling required to support new product development as well as other critical infrastructure investments in our business, such as a new multi-brand distribution center to support our growing PG&A and Aftermarket businesses as well as critical system investments.

We ended 2017 with a debt-to-capital ratio of 49%, reflecting substantial debt reduction. We aggressively deleveraged in 2017 and anticipate continued progress in this area into 2018. Our capital deployment framework remains consistent. Having a lower tax rate enables a larger pool of capital deployed within this framework.

It's important to note that our ROIC on an adjusted basis continues to improve, and we anticipate improvement into the high teens in 2018, driven by a combination of productivity and improved asset efficiency.

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

Thanks, Mike. In closing, I'm pleased to be able to discuss the year ahead with the backdrop of an improving global economy. We expect moderate tailwinds for the overall powersports industry, with the Off-Road Vehicle segment outperforming the Motorcycle market that is still somewhat subdued.

Competition for customers should remain intense in 2018, with innovation and promotional spend driving the market as much as the economy. Within this challenging environment, Indian will continue to grow and gain market share and Off-Road Vehicles will improve with an outstanding RZR playbook and best-in-class RANGER and GENERAL utility vehicles.

As Mike described, tax reform will have a significant direct impact on Polaris, but the potential benefit of having more money in the pockets of our customers is also encouraging. We will monitor and analyze consumer behavior in the coming months and adjust our plans once we understand whether this economic theory will actually translate into reality.

I'm impressed with the progress both in terms of capability and results of our safety and quality organization, but we still have more work to do with our regulators to resolve open issues, and we anticipate progress and further announcements in the coming months.

Being great at safety and quality is a prerequisite for consistent substantial productivity improvements, which we fully intend to realize. Our efforts will not be short term or short sighted and the work we kick off in 2018 will generate the high returns on invested capital that we are used to delivering.

The Polaris team worked diligently last year to position us for a better future, making bold decisions and taking aggressive actions. Count on us, every Polaris employee around the world, to do our job and find a way to win in 2018.

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

(Operator Instructions) Your first question comes from the line of Joseph Spak with RBC Capital Markets.

I was wondering, just, if we could start with the revised midterm outlook, maybe some of the underlying drivers of that 5% growth. And then, just a housekeeping, on the 15% earnings growth. Is that off of a -- is, I guess, the tax benefit incorporated in that? Or is that sort of on an apples-to-apples basis?

Well, Joe, the 5% sales growth is just as I talked about in my prepared remarks, the fourth foundational business units we have are all well positioned for growth. And I think that is, well, with the work that the off-road vehicle guys are doing, with motorcycle adjacent markets and PG&A aftermarket, we feel really good about the growth prospects. The work we have to do is on productivity and margin expansion. And I think as we looked at the plans, if you take what Ken's done with VIP to date, we start to bring down the warranty cost to acceptable levels, and then, drive this major supply chain strategic sourcing initiative, we feel pretty good about being able to drive 15% earnings growth. Remember, I want to clarify, this is 5-year compound annual earnings growth. We're not saying we're going to hit it every single year because you know how the global economy can be. But if you look over the 5-year period, we feel comfortable that 5% top line, 15% bottom line, CAGRs is pretty respectable.

And Joe, it does include the tax change because we're baselining off of 2017. As Scott indicated, even though you're looking at the CAGR through that period, it still suggests we've got to have earnings growth that's in that kind of mid-teens area, even with the tax help.

So I guess, just maybe, again, to follow up on that, Scott. I mean, would you say the Polaris overall strategy is shifting a little bit more towards cost leadership, versus, maybe, trying to differ -- not to say the innovation is going to stop, but like -- but the future of the company is really much more on being able to deliver a more cost-effective product to sort of get that margin higher?

No. I think what I said was what I meant. We expect to do both. We are -- we're significantly investing our research and development spend this year. A lot of our capital expenditures that are higher is for tooling, as Mike indicated. So we are investing heavily in both technology and innovation. That said, we believe that the future of this company has to be on that we are a highly efficient growth company. So we are not going to go after what I'll call profitless growth. We are going to require that all the growth we go after is capable of delivering the returns that we find acceptable, and we probably -- that will make us more disciplined going forward.

Your next question comes from Craig Kennison with Baird.

I just wanted to follow up on the tax policy. Like how do you see investing that tax windfall when you think about the various constituencies that want to cut, whether it's consumers, dealers, employees or shareholders, all of whom would like some piece of that?

Yes. I think a couple of things, Craig. I would point out that when you look at the compensation philosophy of Polaris, a substantial portion of our employees, all the way down through the organization share in the profit of the company every year to the tune of this past year will be North of $80 million that we will put into the pockets of employees. In addition, we have an extensive employee stock ownership program, which is about the fifth largest shareholder in the company. So our employees have benefited directly from the increased valuation of the company as a result of the tax policy change in the implied earnings improvement and value in the stock. I'd say from a capital deployment, I mean, I made the points at the end, what it does is it gives us more cash to put back into the machine. And if you look at 2018, we're going to be investing at a record level, whether it's in engineering or it's in the capital expenditures that we have in the business that are all oriented around how do we accelerate the growth in the company.

Your next question comes from Gerrick Johnson with BMO Capital Markets.

So your Global Adjacent business, (inaudible) topline over the last 2 years has been your best performing segment. Can you talk about the polydemic trends you're seeing across your Global Adjacencies?

Yes, Gerrick. Bob Mack and his team are really doing a nice job with each of those businesses. We did a little bit of restructuring with Jim last year. So we've consolidated that with (inaudible). But certainly, we are seeing, and especially with our Goupil business in Europe, the demand for our electric vehicle will be small. Intercity delivery vehicles is quite strong, and we're starting to see more of a shift for that here in the U.S. as well. So we feel like that the trends are positive, the investments we've made in those businesses to make the vehicles better is positive. And we've -- we're playing more probably in autonomous activities with both the military and the Taylor-Dunn platform than anywhere else in the company. So not only is it delivering good top line performance, but really good growth prospects from an innovation and technology perspective.

Your next question comes from Drew Lipke with Stevens.

If I could just touch on the 2018 guidance and the ORV outlook a little bit. Your oil and gas markets are improving. Your ag market have stabilized. International remains strong. You have the potential benefit to tax reform that you're not including in your guidance, but the ORV industry, overall, appears to be strong and your guidance points to kind of low- to mid-single digit growth. You talked about holding market share flat. I'm curious why are you not expecting to see a bigger pick up in the industry here in '18 given the tailwinds that we have going into the year?

Well, part of it, Drew, is simply the comparisons that you get. And some of the people that have been growing the fastest in the industry are going to have much tougher compares, which means the required growth rates going forward are going to be more difficult to achieve from an industry perspective. We feel exceptionally good about our utility vehicle and the ability to drive growth and outperformance, but it's going to be a battle on the RZR side. So we're not expecting too much growth for us there, and then, we think the competition is going to have a more difficult time with harder compares. We'd like, as Mike said, we'd like to think that there was upside there, maybe because of tax reform or perhaps, how well some of our new vehicles are received, but we're not willing to bake that into our guidance at this point.

I think, Drew, along those lines, part of it with oil and ag, I mean, the point I'd make on ag is our ag markets were actually down in the fourth quarter, slightly. Oil was up, but it was up kind of low-single digits. So we're watching those. We really haven't seen anything that tells us that there's been a substantial shift in buying power -- patterns. And then, to Scott's point on tax, I think everybody is still trying to figure out exactly how it's going to manifest itself. We know that our consumer demographic is probably going to pick up $1,500, $2,000 in tax savings on average, depending on which state they're in, but we're not sure if that's going to come through in lower withholdings or they're going to come back through a tax rebate that occurs in early 2019. So that's why we steered clear of trying to be a little bit too optimistic there.

Okay. And then, with the margin outlook being flat on that kind of low- to mid-single digit sales growth, I mean, can you elaborate on the mix headwind that you're seeing? And how should we think about incremental margins in relation to the long-term guidance and the 15% net income growth that you guys laid out?

Yes. I think the mix is really within the Off-Road Vehicle business, specifically between RANGER and RZR. And I, essentially, hinted at it in my script that we anticipate RANGER and GENERAL to continue to grow at a pretty healthy clip. So there is a margin differential. Even though we still make quite a bit of money on RANGER and GENERAL, it's just not anywhere near as much as what we make on the RZR platform. The other thing we're dealing with in that business, promotional cost and pricing are about a net push. Commodity headwinds will continue to be a bit of a pressure on us. And so we're doing everything we can in terms of the VIP actions as well as pulling the warranty down, but essentially it's all a net push for 2018.

Your next question comes from Tim Conder with Wells Fargo Securities.

Gentlemen, you've touched a little on the RZR here. So again, just to summarize your commentary there. It sounds like maybe you got a little bit of the Factory Authorized Clearance pulled forward some demand. And then, you're anticipating already seeing some increased competitive situations on RZR here over the year. Is that a sort of a correct synopsis?

Yes. That's fair, Craig (sic) [Timothy]. As you know, we had that space to ourselves for many years, and that was a fun place to be. What we're finding is that now that there's a competitive entrant in the market, it's actually making us better. It's making us better on how we interact with our dealers. It's making us better how we deal with product design, but that doesn't mean as we get better that we're able to pivot overnight. So it's a very much a competitive battle there. What I will tell you is the opportunity for us is really on some of the newer product segments because on a head-to-head basis, we're doing extremely well on share. So we just need to make sure that as we introduce new products, it's got the right opportunity to make sure we're competing across the board, and not allowing people as we used to do to have a space in the market or a segment of the market to themselves. I'm very, very optimistic on what Chris Musso and Craig Scanlon, you couldn't have 2 guys that understand not only the Off-Road Vehicle market, but really the RZR segment more than they do. So I don't expect us to be bashful about how we compete. But also, don't expect us in our guidance to think that we're going to be able to, all of a sudden, start to outperform until we get our full spectrum of new vehicles in the market.

Okay. And then, Harley, on their call earlier, talked about the Australia market as a whole, being challenged in Q4 from the motorcycle perspective. Can you just talk about Australia broadly? And then, to the $200 million savings that you guys are looking at on supply chain, how do you expect that sort of time line over the 5 years to be skewed? I mean, $200 million sounds like the CAGR. And Scott, you alluded to earlier that, hey, it's a CAGR on your net income growth and revenue growth. But how do you see that $200 million in particular on the supply chain sort of ramping?

All right. I'll let Mike take the $200 million question, but I will tell you that Australia was a record -- Mike Dougherty and his international team did well everywhere, but specifically well in Australia. It's a transition there from ATVs to RANGERs. It was quite good for us. Indian Motorcycles continues to do well there. So not sure what's happening for other people, but Australia was really good for us.

Yes. Tim, on the couple of hundred million from a supply chain standpoint, as Scott indicated, we've got some external help that we're ramping up through the course of 2018. There'll be a little bit of a benefit as we get towards the back end, but we're really going to start to gain momentum in 2019 and 2020 is when we'll be through enough of the successive waves that we'll be able to start really building enough volume and pace behind the savings that we'll be driving. So yes, that's a bit of why we're not seeing as much margin improvement in 2018 as we would like. And we're obviously going to see if we can push to do things faster. But as you can imagine, it's a pretty extensive project, and at this point, we want to make sure we're being diligent and do it the right way.

(Operator Instructions) Your next question comes from Michael Swartz with SunTrust.

Maybe, Scott, you could help us understand. I think you talked about retail -- North America retail was a little bit softer than you had expected and down 1%. I think you're coming off of an up 13% in the third quarter. So I guess, I'm just trying to better understand how much of that deceleration is maybe due to the -- some of the factory clearance program or initiative you had in the third quarter, and how much of that has to do with -- I think you talked about some production delays during the fourth quarter?

Yes. I mean, I definitely do not want to start making excuses for our fourth quarter retail performance. But I guess, since you asked the question, I'll start to provide a little bit of context to it. Yes, certainly, the 13% growth in the third quarter, pulled it a little bit in, but we were positive on ORV retail for the quarter until the 29th day of December. I mean, really, it was the timing of the last couple of days where we didn't get the year-over-year push, so otherwise ORV would have been positive, but for that last little bit, maybe we weren't as clinical as we should have been in forecasting, recognizing that the end of the quarter was going to be on a holiday more so than normal. So that certainly didn't help. The fires in California weren't helpful. The price change -- I mean, we were decidedly lower in promotional cost across the RZR platform. And we talked about that at the dealer show, and we actually executed that. And I will tell you that the first month of that was not ideal. We had to work with our dealers and train them. And as I said in my remarks, that got better throughout the quarter and gives us confidence as we exited the year that it was the right thing to do, and we'll be fine. We're executing with lower promo, which is what we have to do going forward. So that contributed as well. And as you -- as we indicated, and you followed up, we did not ramp up production of RZRs or RANGERs, especially the XP 1000, through the -- as efficiently as we wanted too. And again, this is all part of our quality initiative, to make sure that we're handling everything right, so we're catching more things and it's slowing us down a little bit, but that ramped up later in the quarter, just not fast enough to catch up with retail for both RZRs and RANGERs. But again, had we shipped RANGERs on schedule throughout the quarter, we would have been positive for the year or for the quarter. That's a whole hell of a lot of excuses, but that's kind of what happened.

Your next question comes from David MacGregor with Longbow Research.

Yes. I guess, a couple of quick ones. Just within the 5-year plan, what are you assuming for gross margins? Just kind of a destination level? And then, on the Indian, 17% retail, that's kind of in step with where you were last quarter, I think, plus 16%. Can you just parse that down for us, give us a sense of the composition of that growth? How much was maybe from new dealers, or from new products or any way you can sort of help us understand? It's an impressive number, but we're trying to just find a makeup on it.

Yes. So David, this is Mike. The 5-year plan, we've been pretty consistent talking about the gross margins getting back to the historical highs, which is just under, call it, just around 30%. And so as you model that out, you'll see that, that's consistent, and it means we've got to drive operating expense down as a percent of sales. We won't necessarily get down to where we were historically. TAP brings in a structurally higher business with the retail footprint, but you will see improvement from where we are today. As it relates to Indian, we stopped giving insight on the number of retail stores and the increase, but what I would tell you is, we really haven't seen a substantial change in the number of retail stores. So it's all been same-store sales increase. As we've talked about on prior calls, we're really committed to making sure that our dealers make money and adding more stores to the footprint could certainly drive some incremental retail, but it would somewhat be at the detriment of the existing store footprint, so we want to make sure that those retailers are doing well. And I think it's indicative of the strong product and brand that we have in Indian in terms of being able to continue to grow in a market that's been pretty challenged.

Your next question comes from James Hardiman with Wedbush Securities.

I wanted to make sure we're sort of putting the model year '18 availability issues that you had in the fourth quarter in proper context, I guess, particularly with RANGER 1000, because it seems like there's a lot of demand for that product. What exactly is going on there? Is it a safety issue? Is it a supply chain issue? Is it a manufacturing issue? And I guess, Scott, you made a comment, and I don't even know if it was connected to this, that you're going to be working with your regulators, with open quality issues, and that we might expect some progress and announcement in coming months. I guess, what were you talking about there? Was it related to the availability issues in the fourth quarter? And ultimately, what exactly is going on there?

Right. Well, those 2 statements are not related at all. We've had -- I'll address the latter one first. As you know, we've had a series of recalls over the past 2 years, and there's a lot of activity going on around RZRs. And obviously, our goal is to take all of the lessons learned and all of the improvements we've made, and close that chapter of our engagement with them. And what I'm talking about is our ability to do that, to make sure that we're very comfortable with what the product pictures have been and what else needs to be done and the regulators is comfortable with that and move beyond this. That is not within the purview of Polaris solely to determine. It requires us and a regulator coming to agreement, and that's what we're working to do right now. I would suspect that we can do that. It's a productive relationship, and I think it's a data-driven approach. And we -- as I said, in the next couple of months, we should be able to do that. That's what relates to the -- my comment on the regulators. On the quality side, we've been very forthcoming that we put significant resources and people and advancements and processes to enhance our quality systems. We did that faster than we could put all the improvements into our design and our supplier development activity. So that means that sometimes, we're going to catch things that we don't want to get in the field that we might not have caught in the past. In the fourth quarter, with RANGER 1000, it was actually a 4-wheel-drive component that wasn't up to our quality standard. And so we chose, rather than take any risk for our customers, that we would hold shipment until that product could be verified to be as good as it needed to be for our customers. That worked through and now we're ramping up and we're on good production schedule. But certainly, we were -- our days of supply and our days to sale for the RANGER 1000 are far below where we would have liked them to be in the fourth quarter.

Very helpful. And then, maybe a second question here. So we've talked a lot over the last year or so, more than a year, I suppose, about the $500 million of gross savings, $100 million on an annual basis. Maybe help us connect the dots between that and sort of what's assumed, not only for '18, but the next 5 years. It seems like a fairly small portion of that is actually hitting the bottom line or flowing through to the bottom line. I think you've done a pretty good job of explaining why that's the case in '18, but maybe help us think about why beyond '18, you're not seeing more of a flow through from that $100 million.

Yes, James. I think there's a couple of different things that are playing out. I think, one, the last couple of years have been a challenge for us from a promotional standpoint. Certainly, as we started talking about gross profit, improvement plans, we were in a very different market environment. And so that has weighed on margins. I think as you look at '18, we're starting to see that become a net neutral. And obviously, if we can work to make that a pickup, we will. So I think you see that starting to abate. I think the other is, obviously, when we started talking about 500 basis points, we were in a very different world from a warranty standpoint. We finished last year, if you exclude TAP, we finished last year at about 3% of our revenue being in warranty expense. That's down from what we had in '16, which was just over 4%, and we anticipate that'll continue to improve into '18. But as you start thinking about beyond '18, think about that warranty percent of sales going down to at least where we were historically, if not better as we continue to drive the quality enhancements. And then, the last part is, and it's connected to the earlier comment around the industry, we built Huntsville right as the market slowed. And so part of this is building the momentum into that factory footprint so that we can build the manufacturing leverage. We're obviously getting more of that in 2018. But I think as you think about the Off-Road Vehicle business, even growing at low-single digits into '19 and beyond, that's going to continue to give us better incremental margins.

Your next question comes from Robin Farley with UBS.

I wonder if you could give any color with the long-term guidance, on whether that includes any acquisitions? Or is that all from organic growth? I feel like maybe your previous long-term targets had kind of included an assumption of some kind about acquisition side. I don't know if that's still in your long-term guidance. And I was going to ask about also the margin. I know it's been asked in a couple of ways. I guess, is it fair to say that when you're looking for that margin improvement in your long-term guidance that you're assuming that there'll be enough cost saves to more than offset kind of product mix headwinds and things like -- in other words, you're factoring product mix and other headwinds still continue, but the cost saves, I guess, will start to come through more clearly or something after '18. So those are my questions.

Thanks, Robin. On the M&A front, you're right, the previous guidance did include the fact that we expected to get a couple of billion dollars over the time period in M&A activity. So we're not factoring that in. Although, it's fair to say those might be a couple of tuck-in, small acquisitions, that would be part of the revenue growth, but we don't need it. We believe, organically, we can get there. On the margin side, I'm going to let Mike answer the question, but I mean, I wish we could take a snapshot of the drawing that Ken has on his board in his office, walking through all the various things that have to happen for margin to fall through. I mean, this is not an exercise where we expect to work really hard and tread water on margins. It's got to fall through to the bottom line. And Mike and Ken have really got a good program to do that.

Yes. And I think along those lines, Robin, we've certainly taken into account what we think is happening in terms of the growth with motorcycles growing faster than off-road vehicles through that long-term planning horizon. And as Scott alluded to, we made some improvements over the past 1.5 years, from a motorcycle standpoint. We've increased PG&A and made some investments in terms of accessories and things like that. The next wave is a little bit more complicated and has to go in more deeply in terms of the design of the motorcycles, and we've been in the launch mode with that business. And so as we progress and mature here over the next couple of years, we'll have more opportunity to really build that in. I think you'll see that coming through even in 2018, our motorcycle margins will continue to improve, but we've still got a ways to go relative to getting to the goal of being at company average. But I think 2019, 2020 are going to be pretty big steps. Some of that will leverage off of the supply chain transformation project, but there'll be more extensive work that the motorcycle guys and Ken are working through the plans on right now.

Your next question comes from Scott Stember with CL King.

For the 2018 guidance, could you just tell us how much wiggle room there is in the event that you guys do have to get a little bit more aggressive than you probably wanted to be from a promotional standpoint, notably on the Off-Road Vehicle side?

Well, I mean, I think part of that, Scott, is why we give a range from a 3 to 5 or with Off-Road Vehicles, low- to mid-single digits. It's tough to quantify. I think I would come out at it from a different angle. I think the work that Craig and the team have done to make sure that we've got programs that work for the products and for the regions, and we've seen that. We've tested it. We're pretty confident that, that's going to work for us as we go forward.

And as you've heard us say, there's a lot of work that we're doing with our dealers to improve their velocity and their own profitability. And part of our research has shown that our promotion efforts and programs are exceptionally good even when we're not spending the most money. So we'll continue to test that and validate that. But as Mike said, we're really pleased with the work that Craig and Chris and the team have done to make sure that we're getting maximum benefit and most efficiency. And quite honestly, there's probably time for some price discipline in this industry and maybe we can be leaders in that.

Got it. Just one follow-up question on, Mike, you said, for the first quarter, the guidance, I guess, you would expect growth on the EPS side, I guess, half of that 24% to 28%, which was suggested a low double-digit growth to mid-teen growth. But again, if you adjust for the tax rate, that really doesn't suggest that there's a lot of core growth year-over-year. Is there something else going on from a cost perspective to look out for, for the first quarter? Or is there anything else going on?

No. I mean, I think there's a couple of things. One, it's predominantly an ORV quarter. And as we indicated, we think margins are flat year-over-year in that segment. And then, the second component is really around engineering. As I indicated in my prepared comments, we've been ramping engineering. We ramped it north of 20% this past year, and we're going to be up another 10%. And so the first quarter engineering versus first quarter of 2017 is going to be up substantially. And so that's going to weigh on any incremental volume that we're pulling through. So that, to your point, you get half of the desired full year EPS growth, even with the tax factored in.

Your next question comes from Jamie Katz with Morningstar.

I have a question on CapEx. You guys had mentioned that it would be significantly higher in the following year, in the upcoming year. So does that put it back to the 4.5% to 5% of sales that it averaged over the last couple of years before 2017? And will it remain sort of inflated as you invest in the business?

Yes. So Jaime, it's -- it'll be right around 5% of sales in 2018. I think it's tough. As we look forward, I mean, there's really 2 big discrete investments that we have in here. Obviously, with the ramp we've had in engineering, there's a lot of tooling that goes with that. And so 2018 is really seeing the impact of that tooling ramp. And then, the other is this West Coast multi-brand distribution center for our PG&A and Aftermarket business. So as we look into 2019, a couple of those things probably don't repeat at that level. So it'll probably come back down, but I would suspect we're still going to be in that, call it roughly 4%, 4.5% range.

Okay. And then, on the acquisition front, is there anything that -- obviously, you can't talk about what you're looking at, but do you feel comfortable with the spaces that you've been in that there might be more opportunity there? Or would you be looking maybe to alternative adjacencies ahead to sort of expand the portfolio?

Jaime, we've been really clear, and I think, consistent, in the fact that we don't have an acquisition strategy. We have a corporate strategy that we'll augment with acquisitions. And right now, it's the 4 business units that we have that we're really comfortable in. Bob Mack and his team in corp dev are doing a really good job of looking at opportunities. But there's plenty of growth, both organically and with M&A, if we choose to, in our 4 business units. We're not looking at getting outside of that.

Your next question comes from David Beckel with Bernstein Research.

I wanted to circle back on a question that James had asked about the savings, and I was hoping you could help comport the $200 million comment with prior comments from the Investor Day last year about $100 million savings over the next 5 years. Did the new comment supersede the prior? And are you, similarly, now continuing to expect about half of that to flow through to the bottom line?

Yes. So very good question. The work that Ken and his team and across the business were doing with value improvement is not stopping and we're not lowering our projections about savings opportunity. What we are seeing is that, sometimes, with product mix and with warranty cost, and with commodity cost that, that's getting eaten up more than we expected it to. The sourcing initiative is 100% additive to anything we've talked about from a benefit perspective. It doesn't mean that it's going to all now suddenly flow through to the bottom line, but we really have found, and this is a well-respected, many, many cycles of learning partner that we're working with here. And over the course of several years, because it does take that long to go through our entire spend, and it's a very thoughtful methodical process, we expect to get substantial savings, as we said, ramping up above $200 million by the out years. That's on an annual basis. That we expect to fully fall through. And what Ken's doing with VIP will kind of be the stuff that we'll have to manage the headwinds with.

Great. That's super helpful. I appreciate that. And sorry to throw a sort of strategic call in here at the end, but I was -- or a question, rather. I was wondering, given Harley's announcement that they'll be accelerating its electric bike, your prowess in electric, and then, also, obviously, your Indian presence, is that something you've looked into a viable sort of electric bike market in the U.S.? Is that something you've invested in? Or you think is a strong potential market for the industry as a whole?

We have very relevant experience in that market with our relationship with Brammo over the years. We have done a lot of really cool things ourselves in building concept bikes and whatnot. The strategic challenge, and it really applies to automotive as well, is how the hell you make money in this business? And to the extent that there's an opportunity to drive profitable growth and corporate productivity with electric vehicles, we will be all in. We don't see that in the short term.

We got about 4 more questions in the queue, so we're going to try to get through those, and then, we'll wrap it up. So next question.

Your next question comes from Greg Badishkanian with Citi.

So if you were to look at your -- just your retail inventory levels now, are you comfortable with those? And how much more do you have to build up to get to a more normalized sort of retail sales level?

I think from an Off-Road Vehicle standpoint, Greg, I think, we're comfortable. Now there's always pockets where we may be a little bit higher or a little bit lower than we would desire to be, and that was really back to some of the comments in terms of why our shipments outpaced retail in the fourth quarter. We were trying to recharge the channel after a very successful Q3. I think it goes without saying that Snow is beyond our comfort level, and part of the margin impact in the fourth quarter was we put more promotional funds away to help us move those snowmobiles here as we wrap up the snow season over the next month into February. And so I think that's where we've got the big focus. Motorcycles, we feel good. It pretty much increased in line with what the retail sales growth and the RFM process is working very well there. So we feel good about the levels that those dealers are carrying.

Your next question comes from Joe Altobello with Raymond James.

I guess, I just had one question on the North America retail number. I know it's moved around by a few different factors. You had snow this quarter and RZR availability was fairly limitedly at least early in the quarter. But if you look at what happened in the quarter versus 3Q, you guys pulled back on promo and Off-Road Vehicle, the FAC ended, and you saw a pretty dramatic slowdown in North America retail. So what does that say about your customer, in terms of how savvy and how more aggressive they are in terms of seeking out and purchasing vehicles during those promotion times? And what does that say for the overall potential promotion level of the industry going forward?

Joe, I hate to ask you to do this, but if you go back into my prepared remarks, and what I said when I answered the question earlier, I think I nailed all of this stuff. I mean, there was a lot of moving pieces in the quarter. As the quarter played out, our pricing strategy, which was lower prices, lower promo in RZR, started to take hold, and we've done a lot of work around the country to make sure that that's working. I think if you want to draw a direct correlation between lower promo and that the fact that ORV turned negative, it's a -- it was a contributing factor, but by no means is it a trend that you should expect to extrapolate.

Joe, the only thing I would add is -- Joe, the one thing I would add to Scott's comment and it's evidenced with our RANGER and GENERAL business. New products win. And so even though we pulled back from a promo standpoint, as we indicated, the fourth quarter saw continued retail growth in those segments. And so I think that proves that if you've got the right product and new product in the market, that it has the level of success that we've seen with that one, you can drive the growth even with your promo spend being down.

Okay. So it's a coincidence, and you guys are convinced that it was really more of the other factors?

Yes. Absolutely.

Your next question comes from Eric Wold with B. Riley FBR.

Kind of 2 follow-up questions to a bunch that had been answered or asked already. I guess, one, on the goal of the $200 million cut in goods costs over the next -- over the coming years, I guess, is the -- when does the assumption that, that $200 million is met within kind of the 5-year target? And then, kind of, how much of that improvement is driving the 15% earnings compound annual growth rate? So if you get 0 instead of $200 million, kind of what would that percentage growth be to kind of get a level of magnitude?

As Scott indicated earlier, the $200 million folds into the existing set of goals that we've had. And if you do the math, I mean, we finished this past year at, call it, 25.9%, 26% gross profit, and we've got a target of getting ourselves up right around 30%, and there'll be some level of expense leveraging from an operating expense standpoint. So I think that'll give you a pretty good sense. Not all of the $300 million to $500 million of savings drops to the bottom line. We've obviously got to continue to invest in the business and spend money to generate the returns. But we anticipate as we gain momentum exiting 2018 that we'll see a substantial portion drop into the bottom line, which will give us the ability to leverage the margin up close to 30%.

Okay. And then, secondly, you obviously expect promotional spend to be lower this year versus last year. Can you give us some color on kind of the expected reduction kind of year-over-year? Is that something you kind of address dynamically throughout the year as kind of sales progress? Or is it something you kind of would reevaluate midway through the year, kind of to impact the second half of the year?

Yes. I mean, we -- I try and steer clear of giving you the pieces, because the reality is, the promo spend that we deduct against revenue is down in '18 versus '17. But as I indicated in my prepared remarks, some of that is offsetting price reductions we made in Off-Road Vehicle, not all of it, but it somewhat offsets. And then, to your point, we will modulate the promotional spend as we go through the year. That doesn't mean we necessarily have to spend more, but we will redirect it when we see certain programs working and other programs not, and that's where Craig and Chris and the Off-Road Vehicle team have demonstrated a pretty substantial strength in terms of being able to react quickly to stimulate demand or react to changing dynamics in the marketplace.

Your next question comes from Seth Woolf with Northcoast Research.

Just 2 really quick questions. Mike, I know you've talked about how the combination of price and promotion, which should be a neutral element to gross margin in 2018, but I was just wondering, is there anything -- any color you can share with us about what you have baked in since you've got a competitor that's bringing 30% more capacity to the market next month? And it would seem, in a market where you're getting low- to mid-single digit growth, that would -- it would create an environment that could become more promotional. And then, just Scott, quickly, it seems like NAFTA is in the news and a lot of the capacity industry-wide is in Mexico, in the recreational market. Is there anything you could -- nothing you can share about what's going to happen, but how -- what would your strategy be if something were to occur that made it prohibitively expensive to build the RZRs in Mexico?

I've talked to enough people in the administration to know that they're anything but stupid. And if you think about a drastic change to NAFTA, and what that would mean for the automotive industry and in many, many others, I think, our little RZR problem is small in comparison. So we're not putting a lot of thought into it. We'll deal with it. In fact, we believe it, even if it was implemented as they talked about, it would be manageable for us. But the thought of we could move most of the production to Huntsville, but that is not in our consideration set. And we have made no contingency plans to deal with that.

And I think, Seth, along those lines, our content in region that they measure it as [RVC], we're above the current NAFTA requirements, and we know that they're talking about raising those requirements. But the question becomes, are they going to start include things like engineering and IP? So we feel pretty comfortable that we'll be able to react. And if it means we've got to make some modifications to suppliers and things like that, the supply chain team is staying very close to it. Ken's got a team who is monitoring this thing, literally, by the hour. So we think we can react to it, and we don't anticipate that it's going to be some substantial shift in our business. As it relates to the promo, I wish I could give you more. I worry that if I start trying to go down into, hey, the per unit promo is down x, it's not going to be overly helpful. What I would say is that our promo is still a very large number. And so we feel confident that within that bucket, we should be able to use that money effectively to react. And quite frankly, at the end of the day, it comes -- even though there's capacity in the marketplace from a competitor, it's going to come down to how strong our product is against theirs. And so we'll see how things go as we go into 2018, but we feel very confident.

All right. I want to thank everyone, again, for participating in this morning's call, and we look forward to talking to you again in April, if not before. Thanks again, and goodbye.

This concludes today's conference call. You may now disconnect.