Polaris : Transcript

Corrected Transcript

23-Apr-2024

Polaris Inc. (PII)

Q1 2024 Earnings Call

CORPORATE PARTICIPANTS

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OTHER PARTICIPANTS

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MANAGEMENT DISCUSSION SECTION

Operator: Good day, and welcome to the Polaris First Quarter 2024 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded.

I'd now like to turn the conference over to J.C. Weigelt, Vice President, Investor Relations. Please go ahead.

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J.C. Weigelt

Vice President-Investor Relations, Polaris Inc.

Thank you, Rocco, and good morning or afternoon, everyone. I'm J.C. Weigelt, Vice President of Investor Relations at Polaris. Thank you for joining us for our 2024 first quarter earnings call. 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 Speetzen, our Chief Executive Officer and Bob Mack, our Chief Financial Officer. Both have prepared remarks summarizing the first quarter as well as our expectations for the remainder of 2024 then we'll take your questions.

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 2023 10-K for additional details regarding risks and

uncertainties. All references to the first quarter actual results and 2024 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.

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

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Michael Todd Speetzen

Chief Executive Officer & Director, Polaris Inc.

Thanks, J.C. Good morning, everyone, and thank you for joining us today. First quarter performance [indiscernible] (00:01:59) consistent with our expectations. You'll recall that headed into the year, we expected the first quarter to be one of the most challenging quarters given the difficult year-over-year comparisons and our plan to actively manage dealer inventory coupled with a more normalized production delivery of snowmobiles.

Q1 also saw us focused on continuing to execute the early stages to improve delivery, increase efficiencies, and drive down operating costs in our larger manufacturing facilities. Sales in the first quarter were down 20%, which was in line with our expectations, and adjusted EPS came in above our expectations given better performance on cost management. While we're pleased with our financial performance, we did experience the worst snowmobile season we've seen in 13 years, driven by a lack of snow across much of North America.

Overall, it was great to see our products take share in ORV, motorcycles, and Marine. Our new product innovation is resonating with customers, which will drive future share gains. That, coupled with our operational improvements, makes me very optimistic about the direction of the business.

North America retail was down 10%, driven by a weak snow season, but was up 3% when you exclude snow. Utility, off-road vehicles continue to lead the way with strong demand for our RANGER line-up. Recreation was down, while On Road was up for the quarter, driven by strength in North American markets, somewhat offset by international market weakness.

Within Marine, we believe retail was flat during the first quarter using our internal registration data as we await the March data from SSI. We continue to play offense when it comes to innovation. Our RZR XP, Polaris XPEDITION and RANGER XD products are dealers in garnering much attention for their attractive features, cutting-edge technology with Ride Command+ in industry-leading capabilities. And we recently added to this launch with the new model year full-size RANGER portfolio and the new Indian motorcycle Scout portfolio. Once again, we delivered industry-leading innovation, further reinforcing our position as the global leader in powersports.

Following through on our commitment to actively manage dealer inventory, we flexed inventory up in categories where we've seen consistent growth, such as Off Road, utility and new product models.

We also reduced shipments to help better manage dealer inventory in categories that have been underperforming, such as Off Road, recreation, and Marine. I'd also remind you that we've been doing this for several quarters. This approach is driven by our ability to adjust to trends we've seen materializing over multiple quarters, aided by our Retail Flow Management system, which is one of the most sophisticated dealer inventory tools in the industry, allowing us to quickly adapt our production and delivery system to current demand environment.

The system gives us near real-time access to our dealer inventory by region, by product, by dealer. We use this data in conjunction with conversations with our dealers to actively manage inventory to enable dealers to have the right inventory to efficiently run their business.

Adjusted gross profit margin was down 248 basis points, driven by elevated promotions that began last year as well as higher warranty costs. Partially offsetting these headwinds was the continued progress to improve our operations. This operational improvement enabled us to more than offset deleverage in the quarter given the lower volumes. We're targeting $150 million of operational savings this year, and while it's still early in the year, our progress thus far aligns with this objective.

During the first quarter, we saw meaningful savings on material costs and logistics and our Huntsville manufacturing facility made tremendous strides in reducing indirect labor and rework costs and achieve significant improvements in execution against their build schedule.

We are also seeing significant improvements in Monterrey, where the production line that created significant issues for us in delivering XPEDITION and RANGER XD in the second half of 2023 is now operating at the targeted output rate and we're seeing significant improvements in efficiency starting to materialize within the facility more broadly.

In summary, it was encouraging to see results that were largely in line to slightly above our original expectations, recognizing there were a number of headwinds we had entering the year. As we proceed through the remaining three quarters of the year, we're expecting further share gains given the significant innovation we've introduced over the past few years and we remain committed to actively manage dealer inventory and drive efficiencies within the business. I'm incredibly proud of our team's execution in the first quarter and want to thank them for their continued dedication and focus.

Turning to more detail on retail. Broadly speaking, retail trends remain consistent with what we've seen over the past year with the exception being snowmobiles. Recreation, off-road vehicles were down for the sixth straight quarter. As we've shared previously, we view the purchase of these vehicles as more discretionary and more sensitive to economic conditions such as elevated interest rates.

Our utility portfolio, consisting of RANGER side-by-sides and ATVs continue to see strength as reflected in our mid-single digit increase in retail. As a reminder, this category is far less discretionary and plays an important part in work applications for ranchers, farmers, owners of multiple acres of land as well as commercial settings and makes up approximately 65% of our Off Road segment sales.

As expected, promotions were elevated across the industry during [audio gap] (00:07:20) a higher promotional environment to continue through 2024. This impacts each of our segments as the industry grapples with elevated interest rates. For Polaris and the industry, this impact is more noticeable within the Marine and Off Road recreational categories where we've seen weak retail for several quarters, resulting in elevated inventory.

Hearing from dealers, they continue to view all powersports inventory is too high and are actively looking for opportunities to manage inventory with strategies ranging from reducing the number of OEMs they carry to adding additional promotional dollars from their own wallet as well as taking fewer shipments from OEMs. Every dealer is dealing with their own unique version of these industry issues. And while we can't influence other OEMs, we do believe that in total, we are doing our part to assist dealers. We're reducing shipments in product segments most challenged and adding promotional dollars where necessary to assist them with moving product.

Given the current trends in rec and utility and the weak snow season, we have adjusted our manufacturing outlook for these lines for the remainder of the year. We've made some meaningful cuts in snow for the upcoming season, given the elevated inventory that is in the channel today.

We've also reduced RZR side-by-side production as recreation retail has been down, and we do not see a near- term improvement given elevated interest rates impacting consumer purchasing decisions and the likelihood that rates stay higher longer than originally anticipated. We've also decreased production of Slingshots, which have a higher mix of consumers who finance their vehicles. While it's early in the retail season, the Marine environment is largely playing out as anticipated.

In utility, we've made the decision to increase production of our RANGER side-by-sides given multiple quarters of strong retail growth and healthy dealer inventory turns. Polaris continues to operate in a disciplined manner regarding our dealer inventory to ensure we have the right inventory in the field to maintain our competitive position while not burdening dealers with excess flooring cost. Our goal is to remain agile while being the partner of choice with our dealer to ensure a healthy relationship today and into the future.

Moving to one of my favorite topics, innovation. We've had a busy couple of months with the launch of our new Indian Scout platform, the new 2025 snowmobile lineup, and the 2025 lineup of full-size RANGERs. The Scout platform was first launched by Polaris 10 years ago and has quickly grown to become the best-selling platform in the Indian motorcycle lineup. We're excited to carry on the tradition of this historically important bike with this new launch. Not only does the bike have a completely new engine, but also added highly sought-after tech features to enhance the rider experience.

[ph] Scout's an entry point to the (00:09:59) brand with more than 90% of Scout owners being new to Indian motorcycle and also serves as a pipeline for growth into the other parts of our lineup. We've seen roughly 70% of our mid-sized riders move up to the heavyweight cruisers or our bagger and touring lineup with their next motorcycle purchase, further reinforcing the importance of Scout and the role it plays to drive further share gains.

We also announced and started shipping [audio gap] (00:10:26) lineup of model year 2025 full-size RANGER side-by-sides. These new RANGERs have rider-inspired design enhancements and upgraded transmission and additional factory-installed accessories. The new lineup makes the best-selling vehicle in the market even better. RANGER is the number one side-by-side in the market and as the utility market continues to grow, we're excited to bring more innovation to our core utility customers.

Wrapping up my comments on the quarter, we executed well in what we knew was going to be a challenging environment. We gained share with a strong product portfolio, made even stronger with our recent new product launches. We're working in partnership with our dealers to ensure they have the right mix and quantity of inventory to effectively manage their business, and we continue to execute our plan to drive $150 million in operating savings in 2024, consistent with our long-term path to drive EBITDA margin expansion.

I'll now turn it over to Bob, who will summarize our first quarter performance and provide updated commentary around our guidance and expectations for 2024. Bob?

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Robert P. Mack

Chief Financial Officer, Executive Vice President-Finance & Corporate Development, Polaris Inc.

Thanks, Mike, and good morning or afternoon to everyone on the call today. First quarter sales were $1.7 billion, down 20% versus last year. The decline was expected due to several factors we called out when we spoke in January. These included late-season snowmobile shipments in Q1 2023 as a result of supply constraints, which did not repeat in Q1 2024; the lapping of ORV and marine channel fill in the first quarter of 2023; lower planned factory shipments to contend with elevated dealer inventory in off-road recreation and marine, and lower net price, given the high promotional environment versus Q1 of last year.

Therefore, there were not many surprises on the top line, although the snow season was weaker than we expected which, in the quarter, mostly impacted our snow whole good retail and related snow PG&A lines. Despite this, PG&A sales were up 3%, with strength in our factory-installed accessories in off-road. We continue to view our PG&A business as a driver for both sales and margin throughout the year.

Adjusted EBITDA margin was down 459 basis points due to many of the same factors impacting sales, such as volume and higher promotions. In addition, we are seeing slightly higher warranty costs in off-road and continue to experience higher finance interest associated with flooring interest support for our dealers. As expected, foreign exchange was also a headwind. Somewhat offsetting these headwinds was a positive contribution from operations, despite the deleverage from lower volume and controlled operating expense spending.

One unique item to note is that our tax rate in the quarter was 49.3%, which was more a function of lower net income year-over-year versus anything structural, and we still expect our full year tax rate to be between 21.5% and 22.5%. Adjusted EPS of $0.23 was above our initial expectations for the quarter.

In our Off Road business, revenue was down 16%, mainly driven by factors already discussed, such as the channel fill and the lapping of snow season shipments last year. We shipped close to 6,000 units of our new Polaris XPEDITION and RANGER XD combined during the quarter as we strive to meet customer demand for these category-defining vehicles.

Data shows we gained share on a unit and dollar basis during the quarter in ORV. On a dollar basis, which puts more weight on the premium side of the market versus the lower end and Youth, we gained more share in our nearly 50% of the ORV market. We believe this illustrates our strength as a premium OEM within the ORV market versus inflating market share with Youth and lower-tier products.

The lack of snow across most of North America impacted both our retail and industry retail. Primary impact to us is a change in expected selling of snowmobiles for next season, given current dealer inventory levels. I will cover this further in a moment. Margins in the quarter were pressured by volume, higher promotional levels and finance interest. Operational improvements within our plants were realized and are expected to contribute more dollars as the year progresses.

Thinking about the second quarter, we expect longer-term trends to continue within utility and recreation. Promotions are expected to remain elevated, and we believe our competitive position should only get stronger with the recent launch of our new RANGER portfolio, as well as continued interest in the products we launched last year. On margins, we expect meaningful gross margin expansion as we continue to make progress on our operational savings strategy.

Switching to On Road. Sales during the quarter were down 14%, driven by weakness in Slingshot and a soft international motorcycle market. Indian Motorcycles gained modest share during the quarter, driven by continued strength in the midsized category, which is an area of strength for us, especially with the launch of the new Scout.

On Road gross profit margin was up 41 basis points due to strength from our European businesses, Aixam and Goupil, somewhat offset by higher promotions in the heavyweight category. During the second quarter, we expect a modest benefit from the new Scout launch with offsetting pressure coming from Slingshot and continued promotions.

In Marine, sales were down 53% as the industry continues to deal with elevated dealer inventory levels and higher interest rates, impacting the consumer's decision to purchase. Our shipments in the quarter were in line with our expectations, given the trends we were seeing in the second half of 2023, which resulted in lower volumes in the first quarter and a reduction of dealer inventory versus first quarter 2023.

SSI data through February reflected a decline in year-over-year retail, although our internal data through March suggest our brands are going to be relatively flat year-over-year in the first quarter. As we head into the spring selling season and compare inventory levels to previous years, we feel that our position is much healthier than many of our competitors.

Gross profit margin was down 776 basis points, given top line pressures and less labor absorption at our plants. Our team continues to actively manage the variable components of our cost structure to help protect profits. We continue to see the industry challenge during the second quarter as dealers work through current inventory levels and consumer purchases are hampered by elevated interest rates.

Moving to our financial position. We knew the first quarter was going to be a quarter with minimal EBITDA and cash generation, as is typically the case during the early part of the year with dealer holdback and employee bonus payments being made in Q1. Therefore, we had limited share repurchase activity in the first quarter as we prioritized maintaining our net leverage ratio in the range that we have previously communicated. For the full year, we expect to repurchase enough shares to offset dilution from stock-based compensation plans, and we remain well ahead of our 2026 target of reducing the basic shares outstanding by 10%.

During the quarter, [ph] we used CapEx (00:17:20) investments and returned $53 million to shareholders in the form of dividends and share repurchases. We remain confident in our financial position and our net debt-to- EBITDA ratio is expected to trend lower as we generate more EBITDA and cash as the year progresses. We continue to expect strong adjusted free cash flow this year and believe our capital deployment priorities are aligned with the strategy to build shareholder value.

Now, let's move to guidance and expectations for 2024. We are not changing our full year guidance for Polaris at this time, but are making a minor adjustment at the segment sales level, given the adjustments we have made within On Road to account for current trends. This updated outlook calls for On Road 2024 sales to be down mid- single digits versus our original guidance of flat year-over-year sales.

Recall, the On Road change is in response to weaker trends we are seeing in Slingshot, some additional pressure on motorcycles internationally. While both of these markets are being impacted by higher interest rates, we have seen a more pronounced impact on Slingshot retail, and thus have adjusted our production schedule downward. Promotions and finance interest are expected to remain at elevated levels, which continues to add pressure to our top line and margin.

We maintain our guidance for Off Road 2024 sales at down mid-single digits. Within Off Road, we are now expecting lower snow sales in the second half of the year, given dealer inventory levels coming out of this past season. Additionally, we have pulled back on recreation off-road vehicles vehicle volume, given retail and industry trends. These pullbacks have been offset by the added volume from continued strength we see in our utility off- road vehicles.

Regarding dealer inventory, we are actively addressing areas with elevated inventory, coupled with weaker retail trends, particularly in off-road recreation and marine by reducing shipments of those products to help minimize

flooring interest for our dealers. We are also actively managing the mix of products in those segments to align trim levels with consumer expectations.

We target building inventory with new products and in growth categories. One such growth area is utility, where dealers hold approximately 3 turns of RANGER inventory, which is comparable to pre-pandemic levels. Indian Motorcycles is also at similar turns versus pre-pandemic levels.

We have a strong discipline around dealer inventory and understand the frustration our dealers have with other OEMs overshipping the channel or lacking a sophisticated inventory management system. We strive to be a business partner of choice for our approximately 4,000 dealers globally and want to share in their success.

As previously communicated, our margin guidance calls for expanding both gross profit and EBITDA margins with most of the expansion resulting from savings and efficiencies at the gross profit level. In total, we are targeting over $150 million in operational savings with an even larger funnel of opportunity.

Foreign currencies remain volatile and are expected to continue to be a headwind. Given the recent strength of the dollar, we see additional downside pressure from FX. We now believe the negative impact on EBITDA for the year is about $30 million versus our original expectation of approximately $20 million.

For the second quarter, a few things to note. As I mentioned on the January call, we expect sales in the remaining three quarters of the year to be relatively flat year-over-year, including the second quarter. Our assumption is that industry retail is going to be down modestly for the year remains intact with Polaris gaining modest share through the year. Higher year-over-year promotions and finance interest continue to be headwinds. Operational synergies are expected to be larger and be reflected in margin expansion during the quarter. Lastly, FX and interest expense continue to be unfavorable year-over-year.

Before I turn it back to Mike, I want to emphasize how encouraging our recent operating review meetings have been. The energy level around lean and operational improvements is clear. While these improvements take time, we believe we have the right team in place for the journey and we expect to begin seeing results in margin expansion in the second quarter.

It's an exciting time to be at Polaris and witness the innovation we are launching and the passion from our team. We have a lot of opportunities to improve our market share position, margin profile and cash generation capabilities, all of which, I believe, can lead to increasing value for our shareholders.

With that, I will turn it back over to Mike to wrap up the call. Go ahead, Mike.

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Michael Todd Speetzen

Chief Executive Officer & Director, Polaris Inc.

Thanks, Bob. The macro environment remains uncertain. And given that, we expect to remain agile regarding both production and dealer inventory. We carried our North American market share gains from last year into the first quarter of 2024. Our expectation is that we'll continue to take share this year with industry-leading innovation, a healthy partnership with our dealers, and a strong value proposition to bring memorable experiences to our customers who enjoy working and playing outside.

Introducing new customers to powersports continues to be a focus for us, as they make up a strong portion of the business. During the first quarter, we saw similar patterns with approximately 70% of our customers being new to