Polaris Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2023

Key Takeaways

  • In Q2, sales grew 7% driven by volume and net pricing, with North American retail up 14%, on-road up over 50% due to strong Indian Motorcycle and Slingshot demand, off-road retail improving, and marine facing softness.
  • Adjusted margins declined modestly from higher interest, foreign exchange, warranty, labor and supplier delivery inefficiencies—notably wire harness constraints—but management expects to remedy these headwinds and expand margins under its five-year strategy.
  • Polaris raised full-year sales guidance to up 3–6%, lifted off-road guidance to high single digits, held on-road at low single digits, cut marine to down mid-teens, and narrowed adjusted EPS guidance to down 2% to up 3%.
  • Key new product launches include the redesigned RZR XP and the category-creating Polaris Expedition, both receiving positive dealer and customer feedback, with another ORV reveal slated at next week’s dealer meeting and Capital Markets Day.
  • Dealer inventory is near optimal levels (about 25% below 2019), dealer satisfaction remains high, market share gains continue across segments, and Polaris is advancing supply chain fixes alongside ambitious ESG initiatives.
AI Generated. May Contain Errors.
Earnings Conference Call
Polaris Q2 2023
00:00 / 00:00

There are 13 speakers on the call.

Operator

Good day, and welcome to the Polaris Second Quarter 2023 Earnings Conference Call and Webcast. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I would now like to turn the conference over to J.

Operator

C. Weigelt, Vice President, Investor Relations. Please go ahead.

Speaker 1

Thank you, Rocco, and good morning or afternoon, everyone. I am J. C. Weigelt, Vice President of Investor Relations at Polaris. Thank you for joining us for our 2023 Q2 earnings call.

Speaker 1

We will reference a slide presentation today, Which is accessible on our website at ir. Polaris.com. Joining me on the call today are Mike Steedzen, our Chief Executive Officer and Bob Mack, Our Chief Financial Officer. Both have prepared remarks summarizing the Q2 as well as our expectations for 2023. Then we'll take your questions.

Speaker 1

During the call, we will be discussing various topics, which should be considered forward looking for the purpose 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 2020 2 10 ks for additional details regarding risks and uncertainties. All references to Q2 2023 actual results And 2023 guidance are for our continuing operations and are reported on an adjusted non GAAP basis unless otherwise noted. Please refer to our Reg G reconciliation schedules at the end of the presentation for the GAAP to non GAAP adjustments.

Speaker 1

Now, I will turn it over to Mike Speetzen. Go ahead, Mike.

Speaker 2

Thanks, J. C. Good morning, everyone, and thank you for joining us today. We hope everyone is enjoying their summer And the great outdoors with friends and families. For us at Polaris, summer certainly marks the peak of our riding season and this year is especially exciting We're welcoming our dealers back for our 1st in person summer dealer meeting since 2019.

Speaker 2

In conjunction with this meeting, we'll also host our Capital Markets Day on July 31 in Nashville. Today's call will focus on recapping the quarter and current state of the business and will save commentary on some of the longer term Strategy and future initiatives for the Capital Market Day event, which is less than a week away. For those who cannot make it, the event will be webcast on our Investor Relations website. Turning to the Q2 performance. Sales grew 7%, driven by positive volume and higher net pricing.

Speaker 2

North American retail was up 14% with on road up more than 50% due to strong demand and availability of our Indian motorcycle and Slingshot products. In off road, it was encouraging to see positive retail trends for both utility and recreation. Our marine business did see some retail softness in the quarter. I'm proud of the team's performance and the fact that we gained share in off road, on road and marine during the quarter. As we progress through the back half of the year, we expect to hold share in on road, while gaining more share in off road with a robust product lineup That includes recently launched and soon to be launched vehicles.

Speaker 2

Margins were down modestly as we experienced near term headwinds, including higher interest, foreign exchange and snow warranty costs. We also continue to experience production inefficiencies due to challenges with supplier delivery, mainly wire harnesses, as well as tight labor markets in specific regions. Our team has been working hard to remediate these issues and while we have seen some progress in July on both fronts, We expect it to take some time to improve our efficiency to pre pandemic levels. Adjusted EPS was flat relative to the prior year The year is progressing in line with what we told you on our January call. Retail has improved, our product launches are on time and positive feedback from both dealers and customers and inventory remains near optimal levels.

Speaker 2

While both gross profit and EBITDA margins expanded over 60 basis points and 50 basis points, respectively in the first half of the year. Margins have seen increasing pressure from labor, warranty and litigation costs, which we expect to continue in the back half of the year. With that being said, our teams remain focused on the 5 year strategy we let out last year and margin expansion is a Significant objective of that strategy to generate strong returns for our shareholders. Bob will provide more color on guidance Shortly, but it's worth noting that with half of the year behind us, we have narrowed many of our guidance ranges. We are raising our sales guidance, but increased costs incurred During the year thus far and anticipated in the second half has us narrowing our adjusted EPS guidance accordingly.

Speaker 2

It's been an exciting year at Polaris and many of you will get to feel the energy and drive that we have as an organization at our dealer meeting and Capital Markets Day next week. We wear our passion on our sleeves and are driven to make Polaris stronger than ever before. Now let me share some thoughts relative to customer trends we're seeing. The demand story in off road and on road improved during the Q2, while marine saw more challenges. Let me dive into off road in more detail.

Speaker 2

Demand for our utility vehicles remains strong and we expect this trend to continue as we progress through the year. Recreation improved during the quarter and we expect share gains continue as momentum builds around our recent Razor XP and Polaris Expedition launches. Promotions are working and our team is doing a great job of These dollars to the right customers and geographies to drive quality leads and generate dealer traffic. And lastly, July retail is off to a good start for the Q3. For On Road, Q2 retail was robust due to a combination of strong product line, easy comps, given a weak second quarter last year and This is true across both Indian motorcycles and Slingshot.

Speaker 2

In marine, we did not see a recovery in retail during the Q2. As a reminder, the selling season kicked off later than anticipated this year due to weather. Dealers seem a bit reluctant to take on additional inventory given Combination of a healthy inventory position, higher flooring costs and soft retail. Our team is responding appropriately. We've adjusted production schedules and are controlling our variable costs in the near term to protect profit.

Speaker 2

The bulk of the marine selling season ends in a few weeks We'll assess dealer sentiment and inventory levels at that time as we prepare for the 2024 season. But for now, the marine industry seems softer than our original And this is reflected in our revised guidance. Turning to what we've been hearing from dealers. Our dealers are one of the greatest sources of feedback and our biannual dealer survey provides great insights into how our dealers view working with Polaris as well as their outlook for powersports. This survey touches on many facets, including dealer satisfaction, sentiment, quality and inventory to name a few.

Speaker 2

We conducted the latest survey in mid April for off road with over 900 dealers responding. The results were certainly encouraging give me great confidence that we are focused on the right areas and Polaris is poised to succeed. A few highlights include, We continue to rank number 1 in dealer satisfaction relative to other OEMs. Sentiment around inventory strengthened as the supply chain improved. However, Ranger Northstar supply Continues to be an area of opportunity.

Speaker 2

Dealers expressed optimism about how promotions and product availability can positively impact retail And our quality scores improved across all product lines. Lastly, the team and I regularly visit dealers. Earlier in the year, some of us visited marine dealers in the Southeast, which we talked about last quarter. And a month ago, we visited off road dealers in the Mid Atlantic region. The 2 biggest takeaways from our most recent visits are that dealers told us Polaris is winning the innovation race.

Speaker 2

From the launch Of the Pro, Razor Pro R and Turbo R, the Razor XP to the more recent Polaris Expedition, we believe that we are at the forefront of rider driven innovation and providing the Best customer experience while expanding the market. Secondly, dealers noted their outlook on the year has improved relative to what they believed earlier in the year. Pressure remains at the low to mid end of the recreation market, but premium continues to perform well and there's plenty of excitement around our new products. As we indicated at the start of this year, 2023 is an exciting year for product innovation and 2 of these launches are shipping now. The first is our completely redesigned RZR XP lineup, the multi terrain category is the largest segment in the sports side by side segment and the RZR XP has long been the best selling sports side by side in the industry.

Speaker 2

In March, we launched the next generation of Razer XP with class leading durability, comfort and performance that takes this lineup to the next level. This product hits at the heart of the market and we expect it to continue to be our top selling razor. Reception has been great and many of you will get to see it in person for the first time at next The second product is the Polaris Expedition, which is hitting dealers' floors during the summer. Similar to how Razor and General pioneered new categories in the side by side market, we are on the path to do that yet again with this entirely new adventure side by side category. Targeting consumers who are into overlanding and have a destination in mind for camping, adventure and exploration, the Polaris Expedition has added comfort and capabilities, Plus it touts the industry's largest fuel capacity of any factory side by side on the market with a 200 plus mile range, making it stand out against any other side by side in the market.

Speaker 2

Rider driven innovation is one of our core strategic tenants and we are not done yet. It's safe to say there's more yet to come this year. Regarding dealer inventory, we continue to be in a much healthier position relative to last year and are diligently working to get new products and more Ranger North Stars to dealers' floors. Relative to 2019, inventory is down about 25%. We view this level as near optimal and dealers seem to agree.

Speaker 2

While we occasionally hear feedback from dealers that their overall inventory is too high, they also tell us their Polaris inventory is in a good place Hard to sell those lower end OEM products and evaluating the need for such OEMs now that vehicle availability has improved across the industry. We value our relationships with our dealers and continue to work with them to enable our mutual success. Switching to our Geared for Good strategy around a variety of ESG I want to recognize our recently published 2022 Corporate Responsibility Report. I love seeing this report The compilation of stories illustrating our team's passion and commitment to be good stewards. One of the highlights from this year's report was around our environmental goals.

Speaker 2

We celebrated exceeding our original three environmental goals that we set in 2017 and announced 7 new 2,035 environmental goals. We continue to take a genuine approach to the strategy and are aligned at what needs to be done to meet these goals and our other geared for good initiatives. So here we are halfway through the year and thus far it has played out very similar to how we initially expected in January. Innovation is back at Polaris in a big way We believe it will continue to drive retail growth and share gains across our business. Although some challenges remain, we have been working hard to remediate supply chain and labor constraints with positive momentum experienced thus far in July.

Speaker 2

While uncertainty remains in the broader economy, we are executing on the matters we can control. I'll now turn it over to Bob, who will summarize our Q2 performance and provide additional detail for the balance of 2023, including guidance and expectations. Bob?

Speaker 3

Thanks, Mike, and good morning or afternoon to everyone on the call today. 2nd quarter results were encouraging on many fronts, including top line growth of 7 percent, share gains in off road, on road and marine, double digit retail growth and the introduction of the Polaris Expedition. EBITDA margin for the quarter was down almost 40 basis points, driven by continued high labor costs and finance interest. We are also seeing some pressure from increased snow warranty expense and litigation costs. Partially offsetting some of these headwinds was net pricing and lower cost premiums on items such as logistics in the quarter.

Speaker 3

And while margins were down a bit in the quarter, they remained ahead of the same period in the prior year on a year to date basis, And we continue to expect margin expansion for the full year. International sales continue to perform well, posting growth of 6%. PG and A grew 12%, driven by parts, healthy accessory attachment rates and strong e commerce growth. In our off road business, revenue increased 9%, driven primarily by side by side sales to both dealers and commercial partners. ORV Retail was up 14% and market share was up in the quarter.

Speaker 3

While we continue to see good demand in the utility space, It was great to see those same demand metrics improve across the Recreation segment, which includes RZR General and our new Polaris Expedition. With regard to expected share gains in the back half of the year, we are now shipping both the new RZR XP and the Polaris Expedition. Both have received positive feedback from our dealer network and many sites were taking preorders for the Polaris Expedition. Plus, we are excited to share with you more product news the dealer meeting and Capital Markets Day next week. We expect these efforts to help us continue to gain share as we remain the innovation leader in powersports.

Speaker 3

Margins in the quarter were pressured by increased promotions, finance interest, snow warranty costs and unfavorable mix as we shipped more snowmobiles versus prior year, which typically have a lower margin associated with them. It remains an exciting time in our off road business and we expect the positive retail We saw in Q2 to extend into the back half of the year. We have never let up on innovation and history shows that innovation can lead to share gains as well as growing the market, and we believe we are positioned to do so in the second half of the year. Switching to On Road, our 4th straight quarter of share gains was driven by our strong product portfolio and healthy inventory. North American Indian Motorcycle retail was up over 40%, bolstering market share gains with share now over 13%.

Speaker 3

Our European brands, Exim and GUPIL, Both had strong quarters with double digit growth in sales and gross profit despite meaningful FX headwinds. On Road gross profit margin was up 480 basis points driven by favorable product mix and higher volumes. We had another strong quarter in Indian Motorcycles and Slingshot. Improving the profitability of these businesses is a key component of our 5 year plan to expand company EBITDA margin to mid to high teens. For the first half of the year, On Road gross profit margins are up over 400 basis points.

Speaker 3

Moving to our Marine segment, results were lower than we were expecting as the industry never fully recovered from a softer start to the selling season. While we believe the pontoon industry was down mid single digits in the quarter, we have confidence that we gained some modest share in Bennington. Dealers are telling us that consumers are hesitant to purchase boats due to continued concerns around the economy and higher interest rates. Plus, given healthy inventory levels, Dealers are cautious about increasing inventory given higher prices and floorplan interest rates. Gross profit margin was up 130 basis points with higher net pricing and we are actively managing our variable costs to protect profits.

Speaker 3

As the primary selling season concludes in less than a month, We are closely watching inventory levels and talking to dealers to get a pulse on what is ahead for 2024. We are not expecting any material turnaround in the back half of the year, Thus results are likely going to be pressured. While an inflection point is hard to peg, we are continuing to invest in innovation and continue to see our balance sheet as a competitive advantage. Cash generation in the first half was strong relative to previous years and our net leverage ratio continues We repurchased almost 1,000,000 shares during the first half of the year and are well ahead of our target to repurchase 10% of our standing shares before the end of 2026. We believe we are set up well for a variety of scenarios in the broader market with our balance sheet and cash generation capabilities in 2023.

Speaker 3

Now let us move to guidance and our current expectations for 2023. Given how the first half of the year ended and our assumptions for the remainder of the year, we are adjusting guidance where it makes sense. Regarding sales, given what we saw in the first half of the year, we feel it is prudent to raise our sales guidance from flat to up 5% to up 3% 6%. This increase is driven by the strong performance in off road and on road in the first half of the year, as well as narrowing the range with half the year behind us. We expect off road to be the biggest contributor to our results in the second half of the year following the new products we have Therefore, we are raising our off road guidance for the year from low to mid single digits to up high single digits.

Speaker 3

We are holding on road sales guidance at this time to up low single digits and we are lowering marine sales guidance given what we have seen thus This year and expectations for the back half of the year. Marine sales guidance is now down mid teens from flat sales for the year as we look to match dealer inventory levels and retail. Share gains are expected to continue in the back half of the year given to call for modestly higher retail for the industry in 2023. So given our share gains and updated retail assumptions, We have greater confidence in our ability to outpace industry retail growth this year. Our international and PG and A businesses are expected to be strong contributors to growth this year.

Speaker 3

Offsetting some of these sales drivers are promotions and the downward revision in our expectations for the marine industry. For gross profit margins, we are holding guidance at 10 to 40 basis points expansion. Although there are a number of moving pieces and timing impacts, in aggregate, This is still where we believe we will land for the year. We have positive momentum with net price and logistics, but there are headwinds such finance interest expense and warranty costs, all of which we expect to linger in the second half of the year. While improving over 2022, Operationally, our plants continue to suffer from elevated production costs associated with component shortages and increased labor costs.

Speaker 3

The typical start up inefficiencies associated with launching major new products are also a temporary headwind, particularly in Q3, As we start shipping Polaris Expedition and a second new category defining ORV product. On EBITDA margins, we are seeing elevated operating expenses that were not accounted for in our guidance. This is primarily driven by product liability litigation and settlement costs As courts continue to catch up on case backlogs and delays driven by COVID closures and higher demand creation spend to support the improved retail and share outlook. You can also see this in our revised outlook for operating expenses. On the flip side, we expect higher income from Financial Services given that improved retail outlook.

Speaker 3

Therefore, we are lowering the top end of our EBITDA margin guidance by 10 basis points to 20 basis points to 40 basis points. We also narrowed the range for EPS from continuing operations to down 2% to up 3% from down 3% to up 3%, with most of the potential drop through from margin expansion being consumed by a higher interest rate expense. For the Q3, a couple of things to note. We expect retail to be flattish due to pressure and seasonality from on road and marine. Recall last year we had a very strong on road business in the Q3 as the supply chain recovered and we were able to ship product and fulfill presold orders.

Speaker 3

Off road retail is expected to be up modestly sequentially and up double digits versus the prior year. Margins are expected to be down modestly year over year as we navigate the build of new ORV vehicles this quarter, which as I mentioned earlier causes some initial inefficiencies. In addition, we have planned on continued higher labor costs. These headwinds are partially offset by lower warranty costs as we lap recalls in the prior year period. We have Operating expenses will be higher in Q3 versus Q4 due to the cost of the dealer and supplier meetings we have next week in Nashville And the timing of launch expenses for Expedition and other new products.

Speaker 3

Overall, we continue to be on pace for a great year. Our teams remain focused on delivering strong results, which we have done consistently amid the puts and takes of the broader economy. We are on track to meet our guidance halfway through the year and have raised our outlook for sales while narrowing other metrics. We strive to deliver on our commitments and We are doing just that with innovation, market share gains and allocating capital to deliver strong returns. I am proud of what we have accomplished and look forward to With that, I will turn it back over to Mike to summarize our call today.

Speaker 3

Go ahead, Mike.

Speaker 2

Thanks, Bob. We're pleased with the first half of the year and believe it sets us up for a successful second half to gain share and modestly expand margins. While we had estimated industry retail to be flattish this year, the results we saw in the 2nd quarter point to a stronger environment And we had originally expected and we're cautiously optimistic on retail. You're seeing firsthand why we've been so bullish on innovation with Razor and Polaris Expedition launches and we look forward to sharing more with you next week. It is certainly exciting to see these products come to life and we're eager to get them in the hands of the best dealers Customers in power sports.

Speaker 2

While operationally the business is running smoother than the past couple of years, there remain opportunities to address efficiencies Within the supply chain and our manufacturing facilities. We're focused on expanding margins and meeting all of our 5 year targets. Next week's Capital Market Day is going to be a great opportunity for us to update you on the progress to these targets, while laying out what still needs to be done in order to deliver strong returns We thank you for your continued support, and we look forward to seeing many of you in person in Nashville next week. With that, I'll turn it over to Rocco to open the line

Operator

Today's first question comes from Craig Kennison with Baird. Please go ahead.

Speaker 4

Hey, good morning. Thanks for taking my question. I wanted to follow-up on your Q3 retail guidance of sequentially flat. The math we do internally suggests that's going to be a Very significantly positive number on a year over year basis. Bob, I think you said something like up maybe low double digits, But we would get even a stronger number based on how we do that.

Speaker 4

Just wondering if you can put a finer point on what your expectations are on a year over year basis For Q3 retail and what is driving that?

Speaker 2

Yes, Craig, thanks for the Jim, it's the comps year over year, we got a lot of dynamics that happen both in 'twenty two and 'twenty one in terms of product availability. So when I look at '22, from Q2 to Q3, our retail had actually dropped sequentially. So there's an element of the compares when you hold flat this year in terms of 2023, Q2 to Q3. We continue to baseline back against 2019, And I would say we're going to be relatively flattish relative to 2019 in Q3. And it's really being Driven by our off road vehicles and one, it's the continued strength we're seeing in the utility market.

Speaker 2

Recreation, although weak Relative to where it had been, it's still performing slightly better than we had expected. And then I'll remind you, we've got 2 new products And we've hinted pretty strongly at yet another one to come and that's going to be obviously helping us as we get into the 3rd and then into the 4th quarter from A retail perspective because those are entering new market segments.

Speaker 4

Got it. Thank you, Mike.

Speaker 5

Yes.

Operator

And our next question today comes from James Hardiman at Citi. Please go ahead.

Speaker 2

Hey, good morning.

Speaker 6

So I had a question on margins I wanted Dig into and then a question on inventory. A lot of moving pieces on margins. Maybe if you could quantify A couple of the things that you called out. I think you said production inefficiencies, a lot during the prepared remarks. Any quantification of how big you think that impact is?

Speaker 6

It doesn't sound like you think those are going to go away during the back half, but Trying to get a feel for sort of maybe what the opportunity is once those clear up. And then a similar question on the OpEx You called out labor warranty litigation costs. Any quantification there would be great.

Speaker 5

Hey, James, it's Bob.

Speaker 3

So a couple of things. I think on the cost side, There's positives and negatives, right? We're seeing great progress on some of the ocean freight items And we're seeing some stability on the labor side in terms of just people and being able to retain recruit and retain people that's improved The last several weeks, where the challenge lies really is just getting the plants back to They're more normal operating cadence as we come out of COVID and as the rework starts to diminish. We still do have Some part shortages with some key suppliers. So we're not 100% out of the woods there.

Speaker 3

I think that feels like it's Getting better sequentially month over month and quarter over quarter. But there's work to do to just get the inefficiencies Out of the plants, some of the excess labor, some of the excess warehousing that's accumulated through the course of COVID. In terms of dollars, I think as you look at the second half of the year, it's In the $40 plus 1,000,000 range in terms of a headwind. On the OpEx side, not as big of an issue. The legal costs really are it's not so much that they're different relative to last year.

Speaker 3

It's more of a As we thought about laying out guidance, we had a we've got more cases coming through in the year in terms of things Kind of hitting the court dockets than we had anticipated when the year started. That's not necessarily a bad thing. It's just the kind of natural unwinding of the court Systems being closed during COVID. We feel good about where we are in terms of stability going forward On product liability, so this is really just a catch up of things that were sort of stuck in the system during COVID.

Speaker 2

Yes, James, and I'll just give you a little color. I mean, I mentioned it in my prepared remarks around wiring harnesses. When you look at and we had the same discussion with some of our dealers that we were out meeting with about a month ago. When you look at the quarter, looks pretty good. We got the units out, but the reality of how we got them out still doesn't have the level of finesse that we've exhibited in the past.

Speaker 2

Our rework is down from where it's been the last couple of years, but it's still up significantly from where it was before the pandemic disrupted the supply chain. And for us, the wire harness issue is pretty significant from the standpoint of you can't really start a vehicle until you have that wire harness Set up and ready to go. Now the good news is that we've been working with our supplier that's caused the disruption. We've seen significant sequential improvement. They continue to get better every day.

Speaker 2

And so we anticipate that headwind starting to dissipate. The issue is, is we've still got to get caught up. And so we're working with the supplier to make sure that they're building an adequate level of safety stock. But what that does is that creates a lot of inefficiency from a labor standpoint and we're working to make sure that we're spending what we need to get the vehicles out Because the demand level is there, the dealers need the vehicles, the customers want them. And as we indicated, it should start to get better Sequentially, but relative to what we originally thought for the year, it's still going to be higher in the second half.

Speaker 2

That is really great color.

Speaker 6

And then I guess Secondly, here as we think about inventories and ultimately shipments, we're about to lap a period from a year ago where there was Significant replenishment. Based on the numbers you gave us, I think it was $350,000,000 in the 3rd quarter and another Maybe 250 in 4Q. I feel like the answer to that question for some time has been sort of some of this new white space Products that you haven't been allowed to talk about, but maybe now you are. I guess the question is, could that, namely Expedition and I think you You used another sort of game changing ORV product. Could that fill that gap of replenishment from a year ago?

Speaker 6

Or is that still going to ultimately create somewhat of a bad guy as we think about the second half?

Speaker 3

Yes. So James, if you think about second half of the year versus 'twenty We kind of to your point, we had channel refill last year in the second half, which was about 600,000,000 The offset to that in 2023 is about 75% of it is new products and that's the Expedition, the XP, there's still sell in on the XP that we launched a few months ago, the new razor and then some other products that You'll see next week at the dealer meeting. And then there's also to keep in mind, there's about $100,000,000 worth of snowmobiles Additional in second half of the year, primarily in Q3 versus 2022. If you remember, 2022, We really struggled to get snowmobiles out in time for snow season and we shipped a lot of stuff in Q1 of 'twenty three. We don't intend to repeat that in 'twenty In 'twenty three, so snow will go out in a more normal cadence in Q3, Q4.

Speaker 3

And so that's got an impact as well.

Speaker 5

That's really helpful color. Thanks guys. Yes.

Operator

And our next question today comes from Noah Zatzkin with KeyBanc Capital Markets. Please go ahead.

Speaker 7

Hi, thanks for taking my questions. Just one for me on the marine side. Obviously, top line softer Called out challenges in the marine channel that you guys were able to expand gross margin. So if you could just talk about Some of the levers you pulled there and how you're thinking about margins on the marine side for the rest of the year, that would be helpful. Thanks.

Speaker 3

Yes, I think Marine this year we had good not what we had expected, but Not really bad shipments in the first half of the year. We had good solid mix with some mix to higher end boats, which helped us with margin expansion and then just some of the efforts we've had to continue to lean out the factories and bring some automation The marine industry, some of that you'll hear about at Capital Markets Day, to help drive better margins in the first half of the year. I think second half of the year, With revenue being down, margins certainly will be challenged. It is a very much a variable cost Business, labor is very flexible in Elkharte. And so we've adjusted our production schedules for what we think we're going to see in We did see some share gains on the Bennington side, which is important for us.

Speaker 3

It's our biggest brand. It's tough to say what it's going to look like in the back half of the year, but we're preparing for it to be soft. And as I said in my remarks, hard to kind of say exactly what that when that turns and I want better sense as we get through our dealer meetings here in early August. But We're prepared to take the necessary actions to try to protect margins in the second half.

Speaker 7

Thank you.

Operator

Thank you. And our next question today comes from Fred Wightman with Wolfe Research. Please go ahead.

Speaker 7

Hey, guys. Good morning. You mentioned that dealer inventories are near And you also alluded to some elevated products at your competitors, particularly in The lower entry level side of the business. So can you sort of talk about how you think the RFM program is holding up given all the moving pieces from a year over year perspective, from a seasonality Back to Dave and then just the competitive dynamics?

Speaker 2

Yes. I mean, overall, Fred, we spent time with the dealers that I referenced in my And the feedback by and large was incredibly positive. A number of the dealers remark that they felt we were doing a better job than most of getting product into the channel. And from an RFM standpoint, the signals We're getting as they retail a unit and being able to move forward with getting a unit shipped to replenish that is working well. Now I'll caveat that with We're still struggling on the high end of the business.

Speaker 2

That's where we tend to have a higher part content in the vehicles. So any type of supplier disruption It's going to delay delivery and you can see that playing out probably largely the largest one you'll hear from the dealers is the Northstar deliveries. That super premium segment has become a larger and larger portion of the Ranger business, so that has obviously larger and larger impact. So It's an area that we've got a heavy amount of focus on. The other thing that you have to keep in mind is even though our inventory is down pretty From where it was in 2019, the ASPs on these vehicles is up.

Speaker 2

And so when you combine that with the higher interest rates, The dealers are definitely feeling it from a flooring standpoint and then it gets compounded where they have some of these lower end OEMs that really induced Truckload buys and things like that, that the dealers are still trying to digest and the issue is that the low end of the market Is where there is the softest level of customer volume. And so we heard that they're doing a lot in terms of trying to move Discounting and trying to do everything they can to move those units, but I think they're by and large pretty frustrated with the lack at that end of the market and the higher interest rates and the low consumer demand is compounding that. We're focused on doing what we can to get the high end products into the hands of the dealers. We saw a pretty significant improvement in our ability to get And that's going to continue to improve as we get through the back half of the year.

Speaker 7

Makes sense. And then just quickly on the cadence. I know you guys were expecting sort forty-sixty first half, back half, it looks like it's maybe a little closer to fifty-fifty. Was there a pull forward? Are you just more conservative on the back half?

Speaker 7

Like where was the biggest change?

Speaker 3

Yes. I wouldn't say there was so much a pull forward in terms Revenues and shipments, some of the mix was pretty favorable in the first half. We did a better job Getting some of those higher end vehicles Mike was just talking about out in the half and net price Promo was decent. So, just a little bit better financial results more than a pull forward.

Speaker 8

Great. Thanks, Bob.

Operator

Thank you. And our next question today comes from Joe Altobello with Raymond James. Please go ahead.

Speaker 9

Thanks. Hey, guys. Good morning. I guess, first question, maybe a little color on what drove the improvement in rec ORV demand In the quarter, maybe also the massive share gains that you guys saw at Indian?

Speaker 2

Yes. I mean, on the REC side, we saw strength, Continued strength in our general, the crossover category. The high end of the razor category continues to be strong And our deliveries improved as we work through some of the overhang from the recalls that we had relative to the fuel tanks late last into the 1st part of this year as we got the rework completed on those. So I think we're not seeing a significant change at the low to mid Range of the market, I think it's the crossover category continue to hold up strong. And again, I think some of that is because those Vehicles are used for a multitude of things and that there's an element of that that crosses more into that utility space in terms of those vehicles being Handy around multi acre homeowner property.

Speaker 2

And then obviously, the high end of our categories pretty much across the board has been holding up strong, Given employment levels remain favorable and income levels are strong.

Speaker 3

Yes. On the Indian side, we saw really good growth in Both heavyweight and midsize, but midsize had the greater Growth in the first half of the year and it's a mix of last year we had the problems with black painted parts and so that Inhibited dealer inventory, midsize tends to be more of a impulse purchase, new buyer, first time buyer and we have good inventory in midsize in the dealers 1st half of the year in the prime selling season and that helped with the Indian growth.

Speaker 9

Got it. It's helpful. Maybe just a follow-up, in terms of The margin progression that you guys are talking about over the next several years, you'll probably address this next week, but How do you see that ramp looking like? Is that more of a back end weighted margin improvement or is there some to come

Speaker 3

I think there's some we will talk about it next week, but We continue to drive both short term and long term activities that will improve margins. We've got some headwinds. Obviously, FX has moved quite a bit since we set those targets, but we're working to overcome that and we're not changing our targets. But there's some near term operational things as we continue to work through just the inefficiencies in the factories and Get back on track and get that price cost ratio correct. We had a good we're having a good year with Indian and Slingshot and those Profitability improvements really help total company profitability.

Speaker 3

So that's kind of the near term stuff. And then we'll talk about some longer term things Around the factories and product design at Capital Markets Day.

Speaker 2

Yes. I mean, Joe, you think about foreign exchange, that hit us really hard. So obviously, I assume foreign James kind of holds where it is today and as you get out over the next couple of years that impact gets more and more muted, but it's far more pronounced. For the first half of the year, it was just shy of a point of GP impact. So like Bob said, we're working to overcome that.

Speaker 2

It's Overshadowing some of the good work we have and then clearly as we get our factories running more efficiently as the suppliers start to deliver At a stronger cadence, we'll obviously be able to work a lot of that cost out of the factory. So we're pretty optimistic about where we stand and we'll have more to show you next week.

Speaker 9

Sounds good. Thanks, guys.

Operator

And our next question today comes from Robin Farley with UBS. Please go ahead.

Speaker 10

Thank you.

Speaker 11

This is actually Artina for Robin. Could we go back to July trend for a second? You talked about Retail strength in Q2 or June having continued into July, would that be for RRP up so far year over year in July? And then it seems you expect to be share gainer in the back half and full year in ORV and outpace industry, which It seems you're guiding up slightly. Does that mean ORV Retail for full year is up better than low single digits?

Speaker 11

I guess what's the extent of that guidance for ROV on a full year basis? And then I have a quick follow-up.

Speaker 2

Yes. I mean, I guess The way I would characterize it in July, we've continued to see strength in ORV, which would have us up not only versus last year, but up versus 'nineteen. For the Marine segment, obviously, we're continuing to see that be Soft and on road is just at its normal, starting to slow down from a seasonality standpoint. So everything seems to be playing out pretty consistent. I think the simple answer is, yes, we expect off road to be up.

Speaker 2

We expect to gain share. The thing to keep in mind is, We're adding in several new products that are new either replacement, strong replacement products like the Razer XP Or category defining like Polaris Expedition and the to be yet announced product that we've referenced a number of times. So That's obviously going to drive incremental retail and so that's what we see driving the strength in our off road segment.

Speaker 11

Thank you. And in terms of lower end OEM inventory at dealer that you talked about, one of the key feedbacks from dealers we seems to be the profitability of those units versus Polaris. How do you think about that competitively sort of longer term as we think about lower end OEMs?

Speaker 2

Well, I mean, I think they were able to get profitability because the lower end guys were able to ship When we and the rest of the, I'll call it, mid- to high end of the segment, we're not. And I would think that as you're talking to dealers, because I know I heard this a month ago, that margin dynamic is changing pretty significantly. They're paying a lot of interest on those units. They're moving really slow and they're having to do a lot of discounting. We're confident with where we're at.

Speaker 2

It doesn't mean that we're done continuing to look at the value and entry side of our business. We know that it's important in terms of bringing customers into the brand, and we're pretty confident with the product lineup we have and How competitive we are as we move forward.

Speaker 11

Great, thank you. And I'm sorry, one more clarification question, if I may. In terms of the production Inefficiencies that you mentioned in off road, could you quantify the impact of that and how temporary that is in terms of impacting margin?

Speaker 3

Yes, I think I answered that. We it's about $40,000,000 in the second half.

Speaker 11

In the second half, okay, not on a full year basis. Okay, thank

Speaker 2

you. Thanks.

Operator

Thank you. And our next question today comes from Tristan Thomas Martin with BMO Capital Markets. Please go ahead.

Speaker 2

Hi, good morning.

Speaker 7

Just the $40,000,000 did you also say there was a one point of margin impact in the first half? So then if I add it up, it's about $75,000,000 Full year impact, is that right or Mike?

Speaker 3

Mike said there was a one point impact from FX in the first half.

Speaker 2

Yes, just under one.

Speaker 7

Got it. So then the 40% was how much is the margin impact in the first half then kind of like what was that 40%?

Speaker 2

It's not a huge impact in the first half because we'd assume that that inefficiency was there. It was really the improvement that we were expecting into the back half that's not materializing at the same rate we had expected, which is largely driven by the fact that our rework levels continue to be high. And as I mentioned, we're seeing progress sequentially, primarily around that one supplier that I had mentioned. But that obviously we have to continue to see that momentum and we'll see improvements sequentially, but it's just not going to be at the same level that we had anticipated When we came out with guidance earlier this year. Right.

Speaker 3

I mean, so just to be clear, we are improving we have improved significantly versus 2022. We're just not seeing as much improvement in the back half of the year relative to where we thought we'd be when we did guidance.

Speaker 7

Okay, Got it. And then just one more question. Can you maybe break out any marine retail trends you're seeing at kind of the various price points?

Speaker 5

Yes.

Speaker 3

Through the first half of the year, I would say the higher end products were really strong As Marine went into the selling season and I haven't had a chance to go through the Marine data, the SSI data that out yesterday and I'll give a tremendous amount of detail, but what we saw so far in the Kind of May June timeframe was that some of the smaller boats were starting to come back stronger from a retail perspective or perform stronger from a retail perspective, Which I think probably lends credence to the concern we're hearing from dealers is that just the high finance rates Given the longer tenors of boat loans and the higher cost of boats relative to some of the other products we sell that those finance rates are kind of biting more in marine, which would drive consumers probably towards the smaller linked sizes, just a Cheaper vote, less to finance. So, that's the only dynamic we've really seen that's changed a little bit in

Speaker 12

the last couple of months.

Speaker 9

Okay. Thank you.

Operator

Thank you. And our next question today comes from David MacGregor at Longbow Research. Please go ahead.

Speaker 7

Yes. Good morning, everyone. Mike, I wanted to ask you about recreational ORV and you noted the softer sales patterns in the low and Medium segment of the line. Is there less consumer interest, which I would guess would be reflected in lead generation or are we just seeing credit constraints at work here?

Speaker 2

No, actually the lead generation is very strong, both the organic and inorganic. I think what's I think there's 2 things driving the hesitation. 1 is starting to abate as the talk or the rhetoric around inflation probability Starts to soften, because I think it is a discretionary purchase and when people Hearing the word recession thrown around every 15 seconds, that does cause a little bit of a pause. So that's number 1. Number 2 is interest rates.

Speaker 2

Buyers at the low to mid range on that rec side are heavy financers and the rates have moved up. We are continuing to evaluate. If you look at our promo spend, a good portion of it is directed at buying rates down. I would suspect we'll continue to be aggressive in that area. I think there's probably more that we'll talk about at the dealer meeting next week.

Speaker 2

But that's the area we see, the greatest opportunity to help consumers get over the bubble relative to the rates that just A year and a half ago that they were able to finance that, they're higher. And even though it's not a tremendous impact on the payment, it's still a little bit of A shock when the buyer gets into the showroom floor. So I think with hopefully what sounds like good news on the economic Broader economic front, I hope that starts to at least take some of the pressure and if we get a little bit of stability coming out of the Fed where people feel less and less About where the interest rates are headed, that could work in our favor and we're certainly going to steer promotion to make sure we're able to help consumers out.

Speaker 7

Thanks for that. And the second question for me, just on promotions. How are you seeing consumers responding differently to promotions in, say, On road versus off road, is there a notable difference there?

Speaker 3

I don't think there's a notable difference. As Mike said, I think Promo is starting to lean a little bit more towards finance promo and buying down rates Then rebate offers, but I don't think we're seeing different consumer behavior on either side. I would say the one difference On road and off road is that trade ins play a bigger factor in on road. And so You still encounter some people that are upside down and stuff that they bought during the pandemic, paying full retail Plus dealer fees and things like that. I would say those stories though are a bit more they're one offs.

Speaker 3

They're not a huge driver, but the trade ins has more of an impact in on road.

Speaker 2

David, what I'd say is our behavior is continuing to evolve. We're, I think doing a better and better job of being far more directed at where we're spending money. We're doing tests to see if discounts versus buy down of rates Works and we've spent a lot of money over the past several years in our CRM capability and so we're able to pinpoint and target customers far greater than we used to. So doing targeted offers where we have a consumer who hasn't upgraded their In a while, rather than making a broad promo offer to a category where we're not going to induce maybe somebody new to come in, We're doing a lot more of that type of work. So I think we're using the money better as a percentage of MSRP.

Speaker 2

Promos are still down relative to where they were Historically, which I think is a good thing, especially given how much we're having to push towards supplementing high interest rates right now.

Speaker 7

Got it. Thanks very much. See you next week.

Speaker 2

See you next week.

Operator

And our next question today comes from Jamie Katz with Morningstar. Please go ahead.

Speaker 10

Hey, guys. Good morning. I just want to touch on something that we haven't talked about in a while, which I guess Is the direction of the EV business sort of how is the adoption of that going? What is the consumer interest? And how do you see that product lineup evolving over time?

Speaker 2

The receptivity is incredibly strong. We started delivering the XP Kinetic. Customer feedback has obviously, we've been staying very close to the customer, Given not only that that's a new product, but given the category that it's in, feedback has been I'd encourage you to go out and there's a number of different independent reviews that were done that probably are some of the best reviews we've gotten. We're in the process of evaluating opening up a second ordering window. We do know from talking with dealers that the Consumer demand is very strong.

Speaker 2

We knew that we were oversubscribed when we came out with the first allotment. So we anticipate that when we open up the second order window, Probably not in the too distant future that we're going to see pretty strong demand. I would anticipate that We're going to continue to focus in on this utility segment. It's proven to be the area that we need to focus in on. And so we'll continue to evolve in that category Centered around the Ranger vehicle and obviously given our other product lineup, you can kind of anticipate where that means we're going to go with The next vehicles we come out with.

Speaker 10

Okay. The other question I have is on snowmobiles. And I guess Yamaha has recently We announced that it will be exiting the marketing and although it has a pretty small market share presence at this point in time, is there any reason you guys wouldn't go after Their consumer base to incrementally bolster market share or is that something that could provide a little bit of lift over the next

Speaker 2

Yes, I mean, it will certainly provide a lift, but we're going to be talking to our Board about it just Given the recent recency of the news, they are such a tiny player in the market. There are broader implications 1 of the other competitors as well, just given the relationship that they have. So we'll continue to watch it. It's going to take a Couple of years for them to phase out. I'm probably more excited about the direction that we're taking with our business.

Speaker 2

We had a great dealer meeting where we talked a lot about the changes that we're making in the business, renewed focus around quality and simplification. The team has done a great job of making sure that we're in a position to deliver the sleds to consumers ahead of the season. We put a pretty big incentive on the back of that to prove how serious we were about it and the team is living up to that commitment. And I'm really Excited about what we have to offer. So I think we're going to be in a great spot regardless of what Yamaha does.

Speaker 10

Great. Thank you.

Operator

Thank you. And our next question today comes from Ziyun Siyu with BNP Paribas. Please go ahead.

Speaker 8

Hi, guys. Thanks for the question. You mentioned the inventory is near optimal levels. I guess I just want to clarify, are you thinking about that in terms of like absolute units or relative To the 2019, I guess, what I'm thinking is in the slide, I think it's number 6, you show how historically Dealer inventory destocks in Q3. So from here, do we expect a similar historical destock or is it units are holding from here?

Speaker 2

Well, I mean, overall, we're looking at unit. That's how we look at the dealer inventory measurement By category and by region. The tough part is dealer inventory on an aggregate level. There's a lot going on in there. We've got a couple of areas where the financing interest focus is probably going to be renewed as we move into the back half, because the inventory is probably a little bit heavier than we'd like.

Speaker 2

That said, we're still way below where we'd want to be on the premium utility side, the North Star's, for example. And so we'll continue to make sure we're rebalancing that. And then the inventory for the most part will follow a normal cyclical pattern with the exception of We've got these new vehicles coming into the market. We obviously start delivering here in Q2, but there's going to be heavy deliveries as we get into Q3 and Q4. We do anticipate a good portion of that's going to retail, obviously, but we're making sure that we're getting dealers stocked with those units, given that they are new category defining

Speaker 8

Vehicles. Okay, very helpful. Thanks. And maybe just a follow-up, I think you mentioned, versus 2019 retail, you're expecting 3Q to be flat. Did I hear that correctly?

Speaker 8

Because I think 2Q was down like 5%, I guess it's ORV, but down 5% 1st 2019, so is it kind of underlying improvement?

Speaker 3

Yes. I mean, as we look at 2022, when we started the year, we thought we'd be relatively flat to 'twenty two. We think we'll be I think the industry will be better than that and then we'll continue to take share. 22% was about 10% below 2019. And so assuming that all Comes to play in the second half of the year, we think for the year, the industry will be relatively flat to 'nineteen and we'll take some share.

Speaker 8

Okay, got it. Very helpful. Thanks.

Operator

And our next question today comes from Brandon Oley with D. A. Davidson. Please go ahead.

Speaker 12

Good morning. Thank you for taking my couple of questions. Just briefly on the On Road business clarification. Did you say you expect to hold share in the back half of the year?

Speaker 2

Yes.

Speaker 12

Okay. And obviously, you guys gained some strong market share during 2Q, but What do you expect changes maybe in 3Q and 4Q or is it just a function of the better channel fill year over year in 2Q?

Speaker 2

Well, I think it's better channel, Phil. Obviously, made a difference in Q2. But I mean, we're going to move into More than normal seasonality as we get into the back half. And at this point, we're not expecting obviously internally we're going to target to continue gaining share. But If you do the year over year comparisons, that first half of last year for that business was the most challenged, given the black paint Issue that we had and so we just don't see those dynamics necessarily playing out as much as we move into the back half.

Speaker 12

Okay, great. And just following up on that, just looking at the motorcycle industry as a whole, I know there's a view of the industry is in secular decline. Do you see that on the underlying demand you're seeing in the market right now or any concerns about that materializing?

Speaker 2

No, that's not necessarily what we're seeing. I mean, I think there's Obviously, one particular player that has such a large market share that that moves things around, but we continue to see a tremendous amount of excitement around the various platforms that we have and we're optimistic about what that means for the future of the business.

Speaker 12

Okay, great. Well, thank you so much.

Speaker 6

You bet.

Operator

And the next question today comes from Scott with ROTH MKM. Please go ahead.

Speaker 5

Good morning and thanks for taking my questions.

Speaker 8

Good morning.

Speaker 5

Mike, in the past you've said that PG and A could be considered, I guess, the canary in the coal mine, if there was anything to worry about. Maybe just talk about PG and A By maybe by segment and by price point, just trying to see how elastic things really are as you go down the food chain?

Speaker 2

Yes, I mean, the PG and A performance overall has continued to hold up. I mean, the thing to keep in mind is, we have increased the Content on our off road vehicles substantially and a good portion of that is through what we call factory install, meaning that the vehicles are coming out With more and more accessories on them, if you look at the RZR XP, you look at the Polaris Expedition, you look at the new vehicle that we'll be talking about next week, Number 1, they're coming with higher and higher accessory offerings and they're coming with more and more factory install options. And so we continue to see That level increasing. Overall, we continue to see the PG and A markers that we watch, things like repair activity Continue to hold up. We do know that the average miles that people are driving off road vehicles is down a little bit year over year, But that doesn't necessarily point to anything other than folks as people are going back to the office and spending more time in the office, Probably aren't putting as many miles on, but repair activity continues to hold up.

Speaker 2

Parts sales remain strong. And at this point, we don't see anything out there that Has us overly concerned.

Speaker 5

All right. And last question, just going back to the commentary about ORV and the production inefficiencies. If I heard correct, pretty much we're just saying that you are at this point for the back half of the year and probably the full year About $40,000,000 lower than you originally expected of savings, right, or Of abatement compared to what you thought at the end of the Q1, is that correct?

Speaker 3

Yes. I mean, I think rough math, So that's a good proxy to use. Like we said, we started the year expecting Declines on a year over year basis in terms of the cost premiums and excess costs we were paying, we are seeing declines. We're just not seeing them at the rate That we had originally forecasted and given that we had kind of sloped it into the year, the impact is more noticeable in the second half than the

Speaker 5

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

Operator

Thank you. And ladies and gentlemen, this concludes today's question and answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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