Q1 2020 Earnings Call

For the purposes of the private Securities litigation Reform Act the 1995 actual results could differ materially from those projections in the forward-looking statements. You can refer to our 2019 10K for details regarding these risk and uncertainties are references to the first quarter 2020 actual results are reported on an adjusted non-gaap basis unless otherwise noted, please refer to our bank reconciliation schedules at the end of this presentation for the gaap to non-gaap adjustments. Now, we'll turn it over to our CEO Scott wine. Thanks Richard, good morning. And thank you for joining us off. I want to begin with sincere. Thank you to the players team for stepping up and leaning in as they always do to support our customers and dealers through the first few months of this covid-19 pandemic are people in our culture of Maine are most important strengths and their performance in the early days of this crisis is proving that out.

The abrupt shutdown of global commerce was certainly a shock to our business, but our aggressive plan for response has positioned us to navigate and win through this lockdown and the recession to come.

Our long-term commitment to being a customer-centric highly efficient Growth Company is unwavering, but this crisis requires Focus. So we defined for priorities to guide us first and foremost. We are committed to our safety next we will ensure that Clara's is viable and then support our dealers with a goal of being their preferred partner. Finally. We will continue to be a good Steward for our shareholders and stakeholders.

When China locked down in early February 10th to sell assume the mantle of coronavirus are and his leadership focused and structured approach has been essential to our ability to stay abreast with and often ahead of a dynamic situation. What began as a major risk with suppliers quickly evolved into employee health and safety concerns and that issues with mandated dealer closures and various state regulations Dead Kennedys team meet daily to assess the environment and they're prompt actions and thorough execution has been immensely helpful.

Mike's Pizza

Similar ownership of our liquidity and cash management and expertly turned a potentially significant concern into a very manageable scenario.

He also quickly initiated our recession Playbook enabling us to execute cost down and restructuring activities with speed and precision both our retail flow management system and our overall agility were affected by the rapid demand shifts at the end of q1 and I am pleased with how each performed as we successfully reduced shipments and implemented floor plan support to protect our dealers.

This untimely shipment reduction in the lowest earnings and cash flow generation quarter of the Year coupled with uncertainty around Dealer operations in consumer demand, but quite a bit of pressure on our liquidity took the Outlook through extremely fast action on working capital Cost Cuts across the Enterprise and strong support from our bank group. We have reduced our liquidity concerns and are laser focused on a cash flow as in 2008. We are broadly and boldly reducing expenses, but protecting keep product and strategic Investments. We've already taken out over $120,000 of annualized operating expenses of the business mostly human capital related and overall effects will be cut nearly 25% in the second quarter alone.

Arlene Factory operations will reduce hours in line with demand.

Earlier this month. We announced the wind down of three of our smaller boat Brands Rancor striper and Larson FX and we will continue to evaluate our portfolio for businesses and brands with the limited path too strong profitable game.

We're protecting our strategic engineering Investments while accelerating our ongoing engineering efficiency projects.

Our protocols for dealing with all things covid-19 utilize the best information we can obtain from CDC local Health departments are retained medical experts and many other sources. He continued to work tirelessly to keep our employees and their families safe and we are complying with quarantine and cleaning protocols. We have had seven confirm covid-19 cases amongst are 14,000 employees and all had she fully recovered or recovering at home navigating this pandemic emphasizes are deep commitment to geared for good from climb and 509 donation to goggles for docks to our 220,000 duration of iPads and other devices to facilitate distant learning and our rural School communities. We are putting ESG into action even are autonomous partner Optimus ride found dead use our GM vehicles to fill a need for meal and grocery delivery in Arizona serving the community and possibly creating an alternative business model.

Overall first quarter North American retail sales were down 8% but the Salient point is how we got there. We were up 5% through mid-march then down 40% for the package which unfortunately overshadowed is the strong market share gains and positive retail that Indian Motorcycles delivered for the quarter ORV lost market share in the quarter but made numerous advances in marketing retail execution, which are contributing to mid-teens retail Improvement month-to-date in April with likely share gains as well.

We also work.

Strong demand for aftermarket parts, which should utilize our large and growing installed base to outperform vehicle sales in a down Market snow gain market share for the season. Although retail is down slow down the quarter in the year. And while the first quarter is relatively small for boats are pontoon segments delivered gains and market share and Retail.

Dealer inventory Rose 8% in the quarter as the sharp drop in retail occurred too late to fully offset with shipment reductions motorcycle inventory was up more in support of our strong demand for a new Challenger bike off. We're under under shipping rfm profiles upon dealer request and covering flooring cost through the end of May in addition to sharing our covid-19 learnings and best practices dealer closer wage or a huge problem in early April, but this is becoming more tractable as less than 15% of our RV and motorcycle dealers are now closed.

Our online presence is becoming more becoming a more significant factor in retail sales and customer engagement and we have taken significant steps to bolster virtual accessibility are fascinated launch of quick ride deliver, click deliver ride and our institution of appointments shopping are both popular with consumers and dealers and we will continue to leverage digital efforts to enhance our support for them.

We previously communicated that we pause our Global plant Network in March to assess our supply chain adjust to lower demand and Implement social distancing procedures under almost all circumstances. Our facility have met the Cecil requirements for essential business. So we have since ramped up operations everywhere except Monterey. We're pursuing every option to obtain the cc equivalent rulings that Polaris RZR suppliers need to reopen in Mexico. Fortunately our legal and government Affairs team is adapted making this argument in support of our Global Network that team was also instrumental in securing the substantial 301 list three tariff relief, which is finally come through we must now work for extensions. Our strategic sourcing program is adjusted to a new operating Rhythm but remains on track to delivering life savings throughout this year and Beyond I will now turn it over to our Chief Financial Officer Mike's Pizza who update you on our financial results in plans.

Thanks, Scott and good morning. It's Scott indicated. These are unprecedented times and we're diligently working to adapt our business to weather the storm. We aggressively activated our recession plan that I've referenced in Pasco and we stand ready to adapt as conditions change given the current environment. Most of my remarks will be targeted at our liquidity profile and what we anticipate in the coming months and quarters.

For the first quarter sales were down 6% versus the prior-year with the exception of motorcycles. All segments reported lower sales during the quarter driven by the covid-19 related economic slowdown life impacting our industry and business in the second half of March motorcycles growth was driven entirely by new products as the Indian Challenger continue to sell well and the new slingshot Auto Drive model in sales this quarter.

first-quarter earning

For sure on a gaap basis was a loss of $0.09 adjusted earnings-per-share was $0.22 down 80% for the quarter.

Adjusted gross margins were down 280 basis points year-over-year about half driven by volume margin loss and related under absorption at our factories and the remaining half due to cost actions taken to protect and support employees and dealers as a result of covid-19 operating expenses were up 6% in the quarter due to investments in research and development and enhance sales and marketing programs. We made before the covid-19 pandemic began to impact demand since that time all non-essential expenditures have have been either cancelled or postponed until we have better visibility into future demand.

Foreign exchange had a negative impact on the quarter versus 2019 with all currencies being impacted by the global pandemic in the first quarter foreign exchange had a negative impact on pre-tax profit of a group of eight million or ten cents per share.

Moving on to our balance sheet and liquidity profile for the quarter operating cash flow was a $71 million use of cash in q1 driven by negative income. I would also point out that our q1 cash profile is typically low given we pay out our profit share slash bonus program in q1. We had been in the market repurchasing shares given the significant share price reduction, but ceased that activity when the environment long as you would expect we were spending a significant amount of our time on during our cash position and debt capacity levels to enable adequate liquidity to sustain the company through the crisis.

Our total debt levels finish the quarter just under two point two billion cash on hand at quarter in was $424 Million. We have taken a number of actions to further solidify our cash and credit availability including drawing down our additional cash under our revolving credit facility substantial reductions to operating expenses and postponed Capital expenditures that do not impact safety or quality or critical and strategic product programs suspended our share repurchase program optimized working capital needs by quickly adjusting our build plans resulting in material and component purchase reductions and final Thursday April 9th. We executed the accordion feature under our credit agreement and entered into an incremental three hundred million 364-day unsecured Term Loan facility.

Following these actions along with limited shipments to date as of April 23rd. We had cash-on-hand of 475 million and 250 million available under a revolving line of credit off that outstanding as of April 23rd stands at 2.35 billion.

Given the actions taken and the measure Scott spoke to earlier. We expect to generate positive free cash flow in the second quarter and feel confident in our financial position and that we have adequate liquidity to manage through this crisis. However, we are only a few weeks into the second quarter in Ascot noted. This is a very fluid situation. It's hard to predict how the restart will go in May and June as a result. We intend to be very prudent with capital until we return to more a more predictable environment, but just to be clear even as we model downside scenarios for Q2 given the covid-19 and current economic landscape. We do not anticipate any concerns with liquidity. We are however managing to certain leverage covenants with our lenders if needed we believe we can work out additional flexibility with our long-term financing partners.

we know that some of the

Our competitors have suspended or reduced their dividends. We do not think that is necessary at this stage. We understand the importance of the dividend to a considerable set of our investors and want to make the optimal decision for all stakeholders off at our board meeting later this week. We were proposing to the board that we delay the decision on declaring the second quarter dividend until late may this will allow more time to assess our performance through the end of April and much of my life to get even more Comfort around Financial covenants and still allow us to pay the dividend on the same timing in mid-june. We believe this is a measured Improvement approach in this environment and will enable us to make the best possible decision.

The health of our credit arrangements for dealers and consumers also remains in a very solid position Financial Services income which is comprised of wholesale Finance income credit retail credit income taxes and miscellaneous income principally from the sale of extended service contracts was up 5% in the first quarter of 2020 retail Credit Income was up 28% and dealer wholesale financing income wage 4% during the quarter our long-term wholesale financing joint venture Polaris acceptance now in its twenty-third year of existence continues to supply ample credit to Dealers Choice for the first quarter of 2020. The wholesale portfolio was approximately 1.4 billion and increased over the first quarter of 2019 given the growth in the business last year, but a sequential decline from the fourth quarter of 2019 receivable balance.

Credit losses in the playoffs acceptance joint venture remained very reasonable averaging well less than 1% which is similar to what we experienced during the last recession in 2009. As we progress we would anticipate some dealer failures and credit losses. But at this time do not expect them to exceed the levels we experienced in 2009 which peaked at approximately one half of 1% at the height of that recession.

We believe the dealer support initiatives that Scott mentioned in his remarks will help our dealer Base weather the storm in the coming months and quarters and we believe our dealers are stronger and better equip now to handle this as compared to 2009 moving now to our retail Credit Finance programs with Sheffield synchrony and performance Finance during the first quarter of 2020 these three retail credit provides approximately 220 million of new credit contracts to customers in the United States, which represents about 31% of Polaris products sold to consumers in the us. The approval rate is similar to the first quarter a year ago, but given the pandemic impact on demand late in the first quarter, we would expect the level of consumer contracts written to decline in the second quarter.

Financial Services income was up primarily due to a change in retail financing programs with one of our retail providers which allowed the release of certain reserves maintained under the previous program into income excluding adjustment Financial Services income would have been lower than last year given lower retail sales. We continue to believe our retail credit relationships are stable.

Turning to our segment performance with the exception of motorcycles all segments experience lower sales during the quarter do too sharp downward pressure in the final two weeks of the quarter as the pandemic began to take hold on the country song gross profit margins across the segment were negatively impacted by under absorption of fixed costs along with the cost actions taken to protect our employees and dealers. These impacts were partially offset by Modest Mouse T. I would add that we have seen continued success and exemptions being granted which include the ability to recover past funds paid for terrorists are tariff exposure is come down as a result of this as well as a substantial anticipated full-year volume declined. We will not spend time during this call on terror projections and will provide additional color as we get more Comfort around the full year forecast.

You will recall that we would through our full-year sales and earnings guidance back in March given the dynamic nature of the covid-19 pandemic limiting our visibility to accurately estimate. The impact on a result of our current view is that the economic recovery will take more of a u-shape where demand in the second quarter will be the weakest estimated to be down in the twenty-five to thirty percent range. We anticipate the third quarter will improve over the second quarter and likely be down somewhere in the range of about half of the queue to your over here Decline. And finally we expect that the fourth quarter sales while still down year-over-year to be down much less than the third quarter year-over-year percentage decline. Obviously, there are a multitude of scenarios that could play out over the next few quarters and we are prepared to take the necessary steps took the results began to deviate from our current thinking with that. I'll turn it back over to Scott for some final thoughts. Thanks, Mike.

We did not anticipate the covid-19 pandemic or the significant stoppage of Commerce that became a key part of the virus defense, but we are fighting determinedly to right our ship and deliver on our four priorities. We will work tirelessly to keep our employees safe so they can support our dealers as well as the customers who use our products through some of the best social distancing. There is on Trails roads water and mountains Thursday. We have not found our last idea to reduce costs or create more efficient growth and we will leverage our team in our culture to win through this cycle our work to help our communities and others during this crisis will continue as are geared for good movement gains momentum. I will not extrapolate the first twenty seven days of April into the quarter much less remainder of the year, but are surprisingly positive or V8 offers confidence that our brand and our sport are resonating with consumers who are looking for an adventure or a new tool use on the farm. We will be there for them as they think outside with that. Yep.

Turn it over to Jason to open the line for questions.

Thank you. We will now begin the question-and-answer session to ask you a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys off your question, please press * then two. Please limit yourself to one question and one follow-up. If you have any further questions, you may re-enter the question queue. The first question is from Robert Lee from UBS, please go ahead.

Thank you.

I wanted to just clarify that your comment about the ORV retail you use the freezing mid-teens retail Improvement. Are you saying that actually for the three weeks of April? It's mid-teens increase your life. I just want to clarify that that's so surprisingly strong and then just for my follow-up question on tariffs, and I know you said you're sort of going to discuss that more later. But just if you could clarify home in in Scotts opening remarks his comments about terrorists. I know you've gotten you know, some smaller amounts of tariff relief from the past. Are you suggesting that there's something new right now in terms of that, you know, sort of much larger amount that you've still been paying just trying to clarify what those comments were. Thank you. Okay. Thanks Robin. Yeah to be honest. And I think I said in my prepared we were we are surprised as well about how well off road vehicle Steve menneto and his team are executing extremely well and what are finding is that you know our dealers when they get open our birth?

I really finding ways to serve their customers so through yesterday. We are up mid-teens percent year-over-year and off-road vehicles. That's what I said. That's exactly what I mean to say as for tariffs as you recall. We talked a lot about terrorists last year and and I and the October earnings call we talked about the fact that we believe that we would get substantial relief and what we are seeing now that has come through is that substantial relief that we expected for list 33016 301 list three. And again, that's all we'll say now will provide additional color but it's just I was just trying to confirm what we said in October has now finally come through Thursday and the other piece that I would emphasize on the Tariff exemption success is that we are recovering funds from past bills that we paid off.

And is is I've mentioned in the past where the process has been cumbersome. The one thing that the government has opened up is electronic funds transfer which is allows us to get at that cash much faster, Um, so it's a it's a net benefit obviously from a p&l standpoint, but given the, you know current environment just to have that added liquidity is a is a much-appreciated event. Wow, that's great. Thank you. And in terms of you mentioned you'll quantify that more. I assume, you know, we're not going to be won't wait till like Q2 results. Will that be something you put in a ten Q or an eight k or something when you are ready to quantify it in terms of tariffs know I would think you know Robin I think we're going to wait until we get to the second quarter earnings. It's it's my hope and we'll have to see how things play out that if things start stabilized we'd be in a position to at least start contemplating if we're going to get back into providing guidance for the back half. If we were to do that, we would certainly provide color around tariff impact.

Okay. Thank you.

The next question comes from Craig Kennison from Baird, please. Go ahead.

Good morning. Thank you for taking my question.

And Scott, what are you doing to support your dealer Network? And how does that stand out relative to what competitors are doing? And then secondly it could you frame the level of wage do you were failures in the last financial crisis and put that in the context of this crisis or a good question Craig, you know one of the things with with our home and as you know, we've made huge investments in that program it put us in a position to have better inventory balances going in despite the fact that it was up 8% It was targeted we knew exactly where it was off and we're Steven his team put together plans to talk, you know individually with each day dealer about how to mitigate inventory and and quite frankly now, it's they're asking for truckloads of product more often asking that's not to ship. So, you know, one of the things just managing dealer inventory. Well, like we always do Stephen his team were the first ones to provide flooring support and motorcycles did as well, but God

Making sure that you know dealers felt comfortable in these early days when things were locked down not having those interest expense and and we've covered though through the end of May. We really have shared all of our advice on how to navigate the various Cecil rulings to make sure that they can stay open and you know cancer cell in his team have shared all of our best practices with you know, covid-19 related protocols and procedures and and what not and you know, really the most important thing we can do is provide the advertising support. And again, we're we are not heavily promotional right now, but so that they could have accelerated retail and that that's really what's been working for us so far.

And my as far as a dealer closures as you recall, we were I mean I was new to the business at that point. We were really surprised at how few dealer closures we had. It was in a 1% range and we've not seen much as Mike indicated in his remarks. Our dealers are stronger. You know, we've we've taken out the weaker dealers over the years that they've either sell it out. So overall the strength of the dealer network is better and you know, what we see is our ability to move product from one dealer to another to alleviate pressure points is usually pretty good faith has been a really good partner with us as we work through this would you expect dealer inventory to be lower at the end of Q2?

well

Lord of what lower than

It's hard to say, I mean we've got as we mentioned in the call. We we got to get Monterey ramped up so we can start shipping again it we are the April retail was not get our forecast. I mean, we we had I mean, we've been through these crises before we saw down, you know Thirty or forty percent and that's what we anticipated. So again, we're not extrapolating if that's going to continue throughout the course. If it does it would put us in a position to have lower dealer inventory.

Thank you.

like four questions Craig

Next question next question comes from JoJo. Altabella from Raymond James, please. Go ahead guys. Good morning. Just wanted to follow up on the choice questions on like a retail from April obviously surprised us as well. Although Remax did say last night that both sales are up to so I guess not all big ticket purchases are created equal with that said, I mean, what do you guys have that too? I mean, how much is that is maybe comes up the man that was stemming from March. And is there any difference in geography off of that number?

I think what it there's a couple of things that we are attributing it to one is that as I said before Powersports customers don't hibernate and I think that even with these stay at home owners prevalent throughout the country people do want to get outside and you know, our dealers have found a way we were quick to launch the you know, Click by deliver a program so that they could could get access to the products. And remember most of the hotspots with covid-19 are not in what I would call Great off-road vehicle rural areas. So I believe that most of our customers and potential customers are in areas that haven't been as as hard hit so that's certainly up 1 month again just really want to give credit where credit is due to the work that Steve. Menneto right Croy spam Crush that that team is really doing a nice job of executing and I think that we're seeing the results of dead.

No, it's very helpful. And just if I could follow up with Mike with a sense for the operating expense number for the year. I think you mentioned to your cutting about 25% off. Is that going to continue for the rest of the year or maybe a capex number terms of how we think about cash flow this year? Yeah. So I think you know the way to think about ipex is, you know, we took a a pretty heavy reduction in Q2, you know, if you look back at the press releases around the timing of the furloughs so, you know Q2 is going to be a little bit more heavily weighted, you know, if you think about the full year versus last year's operating expenses will probably be down in the range of about 10% and I would tell you that it's it's probably a similar level of production relative to the the capital spending. It'll be in that, you know tend to 20% range.

Okay, great. Thank you guys.

The next question comes from right address from KeyBank, please. Go ahead.

Hey, good morning. So just to kind of follow up on the the comment begin around April, I guess what factors are you thinking about? You know, they give you hesitation to extrapolate those wage Trends me that something you're seeing in the consumer behavior. Um, you know, is it a catch-up demand is it stimulates their than just kind of what factors are you considering there?

I mean

Factors that may I mean there's been a big shock to the system. I I've I like to refer to it as a you know, we stopped Commerce and much of the country and it just I believe that it at some point that's got to have an impact on consumer demand. We have not seen that so that that's part of what's causing caution secondly is, you know, we're still battling supplier risk, you know, we got problems in Italy that we're working through problems in India were working through Mexico and increasing concern right now. So we need to make sure that we've got that now granted we've got off that we can down and we can now but that those are some of the things that cause us pause. But again, it's it's significantly better than we thought and and we're trying to manage through that month.

Got it, and and just kind of following up on that last comment around the suppliers. I mean, can you give us a sense of where retail inventories you know sit now especially on top of you know, a lot of the the the retail trends that you saw in April, um, just kind of where we at with that and are we starting are those lower inventories presumably starting to impact April sales trends.

No, we we do not have any concerns about dealer inventory or Factory in the story being too low right now like zero concerns, maybe maybe that could be a problem at the end of the quarter, but no, we've still got plenty of inventory in the network.

Understood. Thank you.

The next question comes from Gary Johnson from BMO Capital markets, please. Go ahead. Yeah, good morning everybody. I just wanted to follow up on on Joe's question about March and April May combine. The last two weeks of March 1st 3 three weeks in April what kind of number that would be and then my other question would be about adjusted gross margin down 280 basis points. Was there any sort of one-time acceleration of reserves or allowances and how does floor plan support affect your gross gross? Margin? Thank you well floor plan support.

It's not de minimis, but it's almost a Minimus so it doesn't really have much of an impact the the last two weeks of March and the first two weeks of April.

In any year would be a really down Trend because you know the last you know, March is usually really big and be any of April's not but because of March was down, you know down forties. I think what we said those last two weeks and granted it didn't start off. April was not gangbusters out the door because there was a large number of our dealers that that weren't open for retail, but it did accelerate rather quickly, but it was it was bad really two weeks. And then the first week of April wasn't very good and then it's centrally it's improved since then.

Hey Derek, from a from a margin standpoint a couple of things Scott's right the the floor plan support Financial interests that we cover for the dealers relative. The size of the company is not Material. It does hit the the gross. Margin. It's it's part of what we deem promo promo cost. And then as far as you know, if you look at our q1 decrement in versus last year, it was pretty substantial and my pardon me in my prepared remarks I talked about half of that is is the typical drop rate other half is, you know, as we started looking at promo code page where we had factories that were starting to have to shut down at cetera making sure that we had all that provision for as we look through the balance of the year, you know, assuming that sales profile and all the actions that we've taken, you know, we would expect our gross margin drop rate to look something more like dead.

Call it 35% from a full-year standpoint.

The next question comes from Tim Connor from Wells Fargo, please. Go ahead. Thank you gentlemen, first of all congrats on just getting on it and and serving what you can and and keeping things rolling on RVs. Can you just confirm where you stand with your map policies one, and then specifically the orb as in maybe any any other the product lines anyway to parse out what the oil patch is doing X covid-19. It's probably a very difficult question. And then lastly Scott Arthur or Mike whoever wants to take this part on the supplier risk, you mentioned Italy Mexico any color additional color you can and then can give us there when we expect those could be resolved in any color on China. Thanks.

You know map policy, you know, one of the Steven Adams got rich deep deep history with our Channel and understands wage only well, and so what he's brought to it is just a a look at map policy. We still believe and doing everything we can to protect.

Dealer profitability and give them the opportunities to to grow their their businesses. What we can't do with math is make it restrictive. And I think what Steve done is taken in Iraq, they've done a good job of looking at you know, what makes sense and where does it not make sense to have Maps? So there's just been slight adjustments to the policy, but no Grand architecture change at all.

The other questions that the global supply chain, you know when this thing started in China we were hyperventilating. But ultimately we managed through that and then it moved we had problems with suppliers in California. And then it was suppliers in New York. And then it was fires in Italy Italy is coming back reasonably. Well even India which was completely locked down for a bit very scary. Thought I'd give it a couple of weeks and they get more comfortable with how to address it and that's starting to come get better management. And right now the the concern is Mexico, but like we've seen it all of these countries, we expect that they will come around in their their thought processes and we'll be able to to get back to operating but but we're not there yet.

The next question comes from Greg. That is Connie from Wolf research, please go ahead great. Thank you. Two quick ones here. First one is off. Just you know, April ORV up mid-teens. How much of that do you think is driven by the industry being, you know, strengthening versus market share gains. And then just as you look out for the rest of the year, you're you operate and just about all the power sports categories who's best which one is best position vs. Worst position as we move out throughout the week for retail perspective, you know, we've done done some research and we believe it is mostly industry. But also some market share gains and off-road vehicles. That's what we believe. I think that side by side still continue to be the best opportunity for growth, you know motorcycles.

It's still negative for the month, but they've had.

Sequential Improvement throughout the throughout the month. So they're getting less worse. If you will boats the demand for both has been reasonably good. But again, we were trying to to bring down dealership in Tori there. So it's going to take a lot to bring that back but you know good weather and you know and and better, you know consumer sentiment as it relates to getting outside could certainly help that off.

Thank you.

The next question comes from Dan cardamone from wedbush, please. Go ahead.

I think that's me James. So going back to getting from down 40 in the back half of March 2018. Maybe you've answered this. If so, I apologize as we sit here today. I think he gave us 85% of your dealers are now open where and when did that number bottom out? And do you have any visibility on when that 85 can get back to a hundred?

I don't recall. It was sometime in April when it bottomed out, you know, they're the first ten days of April. I don't know exactly you know what the date was and I don't remember what the number was it was off. It never got to like down 50 or anything like that, but it was just and we again it's almost hand-to-hand combat in each state going through the cica ruling and and just making sure that we understand it our dealers understand it and and can navigate through. That was the other question.

The other question the other question was where it goes from here, but just just to clarify on that last point. You think the Improvement in April is more about dealer Thursday. We're already open seeing accelerating sales rather than just more dealers being open for sure and it was yeah it was and I mean if you think about it the dealers that are

Most aggressive are the ones that probably were the ones that found a way to be open sooner. I mean it just kind of feeds itself goes there. I mean the network is doing a really good job of managing the protocols creating a safe environment using the opportunities to schedule appointments. I mean, they're they're really doing a nice job.

Got it. And then help me Bridge the up mid-teens or the up in April overall with Mike's comments about expectation is for QQ demand to be weakest. And I think you said down twenty-five to thirty percent range. You may have answered. This was was the latter assumption made before you took off strong April was I'm just trying to bridge those two. Yeah. So James a couple of things one, you know, Scott did mention that, you know, the April performance is is better than what we were expecting. Um, you know, the the twenty-five to thirty percent is is really, you know, driven by two things one. It was are expected demand profile. And then the second is our capability to actually ship in with the factories having been shut down as Scott mentioned, you know, we've got the factories coming back online obviously Monterey is not back up and running in that represents a pretty substantial part of our wage.

ability to meet demand

And so, you know, we really patterned it after that as well as where we wanted to see dealer inventory be as we got to the end of the second quarter and you know, obviously leading into the the model your change over. So I you know as we indicated that's that's why we pulled guidance is that you know, this is an evolving environment. We want to see how April plays continues to play out and what the implications are for, you know, May and June and we're working daily with Steve manetta and his team to assess that but you know, it's not as easy as just pulling a trigger. We've got a supply chain. That's still trying to get up and running. We've still got a plan that work. That's still trying to get completely up and running.

But just to be clear those two numbers are not connected to one another in other words, you know, May and June would need to be down. I don't know forty or fifty percent to get to that page down twenty-five to Thirty. That's not how you're thinking about it right now, correct? Yeah, I mean just just keep in mind retail versus wholesale. We're trying to also manage the the dealer rep Tori. You got mixed involved. You've got the the promo actions involved. I mean, it's again, it's it's why we pulled guidance because you know, we're we're going to a bit of a volatile environment. Just trying to make sure we're changing through it.

Okay. I apologize. I bought the 25 to 30 with Adam and comment you're saying that that's a reported sort of wholesale assumption that you're making. Correct. Got it. Okay with you guys appreciate it. Yep. Next question comes from David MacGregor from a longbow research, please. Go ahead. Good morning. Everyone pretty impressive progress. I guess around the second quarter operating expense expectations down 25% How much of that comes back with the volume recovery versus how much of that is is a permanent structural cost reduction.

most of its permanent structural cost

I mean there was there was some some cutting of advertising and in managing the other operating expenses, but it was mostly a people cost actions in really looking at our business as we've you know, we've structured to be this customer-centric highly efficient company. And and what does it look like in this lower demand environment? And how do we do that? And I think the name of the business we've got a good now. Some of them are are short-term, you know furlough type things that won't repeat unless it's necessary. But you know, most of it was structural costs that will stay out of the business dead.

Good. Thank you very much listed for me.

Next question comes from Jamie Katz from Morningstar, please. Go ahead. Good morning. I have two quick questions first given the commentary on April it would seem we are not going to have a reiteration of oil patch demand falling off eminently like we did in one 15 there or have you seen any changes there?

You know, I

I think over the last couple of years of weakness the we've gotten to a level of of sales in those oil patch regions that up or down doesn't mean that much to us off and it was remember in in fifteen. It was the hiring of so many people to work on the rigs that were just ideal players customers that hasn't repeated itself because remember they got so much more efficient off before the price went down. They were very efficient and needed less labor and less people so there I mean, yes, it's going to go down but it's not going to it's going to go down from such a low base. It really won't matter much.

Excellent, and then for gross margin get cafe. Or for aftermarket parts at 7 and got squeezed pretty well. If there any steps you guys have taken off mitigate the margin degradation going forward. Thanks.

Yeah, I mean I I tell you that, you know, there were there were things that we had underway heading into the year that we will you know, likely spend some time talking about as we get later in the years to improve the margins. But you know at this point we're we're working through it. You know, I think as we look at Craig and and the team's performance at Trans American they actually are doing better than the wage broader Automotive segment, which tend to be some of the peer groups that they compete against so, you know, they're managing through the the retail Channel quite well and and you know, wholesale continues to be a bit of a change.

Next question comes from Joe's back from RBC, please. Go ahead.

Thanks. Good morning. Everyone. Like you did a lot of impressive and hard work here on liquidity in pretty short order. But I think one of the surprises at least us was you know, maybe home also got so quickly. So, you know, this may be a once-in-a-lifetime event, but real simple question is this caused you to change the way you think about capital structure liquidity and minimum cash and going forward. You know, it's it's a good question Joe. I I think you know, one of the things that we probably had not spent enough time in the business was just managing the the daily cash flow, you know, we have the benefit which is much different than a lot of companies with our wholesale Finance structure that we get paid relatively quickly after we ship and most countries have to focus on you know, managing the receivable side as well as the the payables the you know, the output side we we've been very fortunate to have such strong liquidity that we probably didn't have a game.

Tight a process that will definitely change as we go forward and the rigor and the you know, this cash War Room approach that that we put in place very quickly will continue as we go off. You know, I think from a a debt standpoint. I mean it was an optimal to be at the level that we were I think the strategy we had and continue to have which is to you know, rapidly deliver the company in a private towards that you know, we will certainly take a look at this once we get through just to make sure that you know as we look at leverage levels that we're comfortable with and pay down schedules and things like that that you know will will bush is probably as aggressive as we can be but you know, I think priority number one right now is just to ensure the short-term liquidity understand the longer-term profile make sure we sustained through Thursday and then you know, I think we'll do a lot of look backs to to Really assess how we run the company going forward.

Thanks, maybe a follow-up. I know first quarter typically.

Is a working capital use that happened again, but given the extraordinary events. Like how are you thinking about you know, the working capital sort of draw down or or off or rewind I guess over the balance of the year. Yeah, you know, it's um, it's been priority number one Focus really for us has been around dropping the inbound material, you know, as I mentioned most companies when you know, the Slowdown happens, they have a bow wave of payables, but they also have a bow wave of receivables and so from a cash position, they tend to be offsetting completely positive, you know, our company is structured differently, you know, our cash was collected in q1 on the materials that were paying for in Q2. And so the the, you know, the founding differences is Paramount to us. I give a lot of credit to the organization around being able to go back and rerun are psyops, which is where we link the demand planning back through the supply chain.

And rapidly shut down the inputs. We've seen it. We track our cash on a daily basis. Now we can watch how those inputs are coming down. You know, I would anticipate that our inventory relative to what we were expecting in Q2. And then for the balance of the year will be down and we're continuing to push that and that will you know, really help from a cash standpoint and be something that you know, the team has probably executed faster than I clearly was expecting.

Thank you very much.

Next question comes from Scott Stamper from CL King, please go ahead.

I'm not sure if you mentioned what was the promotional environment like it's so far in April for ORV versus what you saw in the the 40% decline in the back half of March.

It's more promotional in April.

I mean we're

One of the things that were committed to is not chasing retail down with promotions. So we've Steven his team again. It done a really nice job of managing promotions. So we're competitive but you know, not God leading that way our brand messaging is really resonating and I think you see that in the advertising campaigns that we've gotten, you know, the way that we're we're partnering with our dealers is better. So it's taking less month promo, but the industry is has been a little bit more promotional in in April. Okay, and just last question on tap down I think about 10% in the month or in that vicinity. How is tapped performing so far in April and are there any moves that need to be made from a cost perspective they're dead. It would tabs taking a lot of cost moves and cracking the team if it really looked at holistically at had to step down the cost infrastructure. They're the big issue at Taft is most there almost a third of their wage.

all stores are in California and as you

No, that's about as locked down as tight as anything in the in the in the United States and that's been a bigger problem. As you know, they've got a big online presence and we're seeing that pick up so they are again steadily improving but I thought that that slowed down in California was was impactful to them.

Got it. That's all I have. Thanks. Thanks. Next question comes from Mark Smith from Lake Street Capital markets, please. Go ahead. I guys can you give us some insight in a boat dealer Trends versus kind of the 85% that you talked about. How many maybe you're open and close today and then any additional transit to see if I'm able to vote off? Yeah, we don't have his granular of data on boats. But what we do know is that while most off-road vehicle dealers did fit into the clear cisa eligibility to Thursday open that is not true for both. So it was a little bit more of a a difficult putt that said Minnesota and in many other states have recognized even Michigan recognize that that voting is a an important calls for people especially as the weather gets warmer and we are seeing it open up. So it was it was more

Many more closed early on but they are opening up at a pretty rapid Pace now.

Okay, and then can you give us any insight? And I'm not sure if you have it on maybe the impact of government checks come into consumers hands have had even if we look at it just within the PCM a segment.

You know peachy nice performing extremely well and you know Steve does a great job with that business we did here, you know, anecdotally that there were a lot of $1,200 deposit put down on vehicles. So I I I'm not sure that that's a big bow wave but certainly it it didn't hurt.

Thanks. Next question comes from Mike Swartz from SunTrust, please. Go ahead.

Hey, good morning, guys. I apologize if I missed this in your comments. But did you did you call out any any reasons why the ORV share was was down for the call back and maybe how to think about that and stuff recorder and Beyond?

I didn't quantify why I can tell you that it got sequentially less bad throughout the quarter. So a lot of the work that the team has done started to pay dividends and off.

It it was not across all categories. So I feel really comfortable that that Stephen his team have their pulse on that one and are are turning around as I mentioned them in April.

Okay, just a question quickly on on both as well. I think during the quarter you or Lisa weeks you announced shutting down a couple Brands how material were those Brands the revenue in Europe?

not

They were the revenue was very small and the prophet was none. So

I mean it it really doesn't it's it's they weren't material to the boat business actually.

Okay. Next question. Next question comes from Tim Condor from Wells Fargo, please go ahead.

My question on the oil patch as well. Let me just rephrase it. I guess on the oil patch the percentage of your revenues now Scott, you said that they've been reduced quite a bit just any any update as maybe the n d e r 19 or where that stands as a percent of revenues from the oil patch in North America or however you want to frame it for Orbeez Yeah, Tim. I you know, we I think it's a peek. It was about 15% off is now down more, you know in line around 13% That's you know, Scott had made the comment that you know, the the the revenue movements are probably less and less correlated with just oil know that was something that had driven outstripped demand back in you know, call it fourteen fifteen time frame now, I think you know those regions which you know, we don't track it specifically they tend to be more state-specific. They tend to just move with the broader, you know economics and certainly oil, you know has has reacted to the drop in demand in the supply levels that you know are are dead.

Greater than what the current demand is and you know, I think that's all tied back to what covid-19 has done to the broader, you know economic cycle. So it's it's tough to parse the two right now.

Okay. Okay. Great. Thank you John. Okay. Last question. Next question comes from Brett Anderson from KeyBank, please go ahead. Thanks for squeezing me back in I'm sorry, if you already mentioned this but are you planning any changes to your new product launch Cadence this year? And then the second question like how long did you give an operating expense number for the year? I know you kind of gave this some color on 2 q but did you give anything for the year? I think Mike said down 10 for the year. Yep, and we are not pushing out.

We are not planning to push out our product launch Cadence. I will remember a couple of years ago. We kind of went to a more around around the calendar launch. It wasn't all tied to that that summer launch right now. We are managing a few supplier risks. So can we launch on time based on our supplier and supply chain execution and you know, they will manage through that there doesn't appear to be anything that is going to get completely out of bounds, but there's you know, a couple of weeks here there that we're managing through right now.

Thank you. Okay want to thank everyone for participating in the call this morning, and we look forward to talking to you again next quarter. Thanks again and have a good day.

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

Dead dead dead.