Q4 2022 Polaris Inc Earnings Call
Good day, and welcome to the Polaris fourth quarter and fiscal year 2022 earnings call and webcast.
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I'd now like to turn the conference over to J C. Weigelt Vice President of Investor Relations. Please go ahead.
You Betsy and good morning, or afternoon, everyone I'm J C Weigelt Vice President of Investor Relations at players. Thank you for joining us for 2022 fourth quarter and full year earnings call. We will reference a slide presentation today, which which is accessible on our website at IR Dot Polaris Dot com joining me on the call today are Mike speeds.
Our Chief Executive Officer, and Bob Mack, Our Chief Financial Officer, both have prepared remarks, summarizing the quarter and year as well as our initial expectations for 2023, 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 'twenty 'twenty. One 10-K for additional details regarding risks and uncertainties all references to fourth quarter and full year 2022 actual results and 2023 guidance are for our continuing operations and are reported on it.
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 the call over to Mike speeds go ahead, Mike. Thanks.
Thanks, J C. Good morning, everyone and thank you for joining US today, we delivered another record year for both sales and earnings from continuing operations, despite a difficult supply chain environment and lower retail versus our original expectations.
We also improved our cash position in 2022 and executed over $500 million of share repurchases I want to thank the entire Polaris team three relentless effort in a challenging environment. We delivered record results. Once again proving this is the best team in power sports.
During the year, we made progress on our five year strategy with a renewed focus on power sports and while we intentionally delayed several product launches in 2022 as the team focused on navigating the supply chain challenges and delivering orders to dealers and customers. We didnt stop investing in innovation with more than 365 million invested in R&D.
In 2022, we continue to make our mark on the industry with within the wide open side by side category with razor Pro-war and Turbo War.
And through the introduction of the industry's first connected technology with ride command plus.
With a focus on extending our industry leadership, we divested tap and redirected our resources time and focus on our core power sports customer decision that has had a positive impact on our EBITDA margin and returns.
While innovation is the foundation of everything we do our number one priority will always be the safety of our riders, we were making investments in product safety, while standing behind our vehicles and acting if needed.
This past year saw an increase in warranty expense in recall's, driven largely by legacy designs or supplier issues are investments in safety and quality over the years have supported what I believe to be one of the broadest post market surveillance programs in the industry, which is enabling us to aggressively monitor for and identify issues. We recognize these recalls.
Are frustrating for dealers and customers, but we are committed to correcting. These identified issues. This approach to monitoring our products even after they leave our factory floors combined with our ongoing investments in engineering testing supplier quality and manufacturing processes bolsters, our focus on providing our customers with safe high quality vehicles.
The last point I'll make is that we benchmarked our recalls per 1000 vehicles produced from 2016 through 2022 against automotive on road motorcycles and power Sports Polaris was in the top quartile in terms of the fewest number of vehicle vehicles impacted per 1000 produce.
We have and will continue to invest in and drive improved quality for safety of our riders.
As we look at the fourth quarter, specifically sales grew 21% to $2 4 billion excluding.
Excluding marine North American retail was down approximately 6% year over year with modest gross growth and off road utility and Indian motorcycle offset by slowing off road recreational market.
These trends are similar to what we saw in the third quarter and are expected to continue into 2023 wells.
While fourth quarter market share was down approximately 1.5 points year over year.
It was our best market share performing quarter of the year and we saw two consecutive quarters of sequential share growth in on road and or V. Part.
Pontoon retail declined overall with share loss concentrated in the low end of the market and we gained share in the high end of the market.
Both adjusted gross profit and EBITDA margins expanded nicely to drive year over year, adjusted EPS EPS growth of 57% despite increased headwinds from warranty costs interest expense and foreign exchange.
I'm proud of our record performance, especially considering the environment and the unanticipated headwinds that the team worked relentlessly to overcome.
Now, let me talk about the demand environment.
The demand story remains mixed.
Chris or V Q4, retail was down 4% year over year and down 1% sequentially, mainly driven by softness in the Rx space or a T V and range of products were up low to mid single digits sequentially and year over year remember.
Remember that utility space represents approximately 60% of our off road business, including sales to commercial customers, which do not factor into our retail metrics.
We continue to see and expect stable demand here as these customers use their vehicles for work out applications on a ranch farm job site or multi care homes. I'd also add that week recreation of retail in Q4 was partially driven by many raisers being on a recall related stop sale in December .
As anticipated the backlog of pre sold declined in the quarter as shipments improved we continue to see sales growth in our premium models, such as razor Pro-war Turbot and Ranger Northstar is they remain favorites with customers due to their competitive features and capabilities.
A few other points on demand include P. G N a attachment rates are at or near record levels, indicating that customers are upgrading their vehicles with higher margin accessories.
We continue to see a steady mix of customers new to Polaris, which is consistent with historical trends, while both short and long term repurchase rates remain elevated or within the historic range Interestingly five year repurchase rates were at all time highs and we're seeing these customers return and upgrade their vehicles to raise a pro our Ranger Northstar.
Or and even vehicles with ride command plus.
And on financing the metrics, we're seeing continue to point to a consumer in a healthy financial position FICO scores and improved approval rates are consistent with last year also credit availability has not meaningfully changed.
There continues to be strong consumer interest in the space measured by online activity versus pre pandemic metrics with off road organic online searches up approximately 30% versus 2019.
Indian motorcycles also saw strong web traffic leading to a record number of leads.
So by segment, let me wrap up our thoughts on demand.
And off road, there remains a delineation between utility and recreation.
Indicators are stable and utility well recreation of soft with more pronounced moderation as you move through models with less content.
We expect these trends to continue for the foreseeable future.
And on road, we had a strong Q4, the second quarter in a row of market share gains for Indian motorcycle with.
Our strong product lineup for 2023, we are optimistic that on road can continue seeing share gains in retail growth.
For marine demand at premium levels continues to be healthy inventory is the healthiest. It has been in a long time, so we're seeing customers shop around a bit longer boat show season has kicked off and thus far dealers are optimistic as we enter their busiest season of the year.
Turning to North American dealer inventory, we continue to move closer to a more normal operating environment with seasonality, even more present within our business versus recent history.
Or or V. Specifically, we looked at data from 2016 through 2019 to get a sense of the average seasonality with North American dealer inventory in retail before the disruption that occurred over the past couple of years.
The data shows we typically see our highest dealer inventory levels and lowest retail levels in Q1, which makes sense as customers typically come in looking for units before the spring and summer riding season.
I think this is an important context to know as we enter a more normal seasonal operating environment and to better understand the inventory build ahead of the heavier retail season in the summer.
As for the current dealer inventory, we continue to make progress towards our new optimal level. In fact, most of our products are close to these optimal levels, except for our ranger side by side portfolio, especially the high end Northstar additions, where we continue to see strong demand.
Total company dealer inventory was up 116% from 2021 to 2022, but remains well below 2019 levels. We currently see the value of refilling dealer inventory at approximately $150 million, which is below the 400 million. We discussed on the October call due to progress we've made with its shipments in the fourth quarter.
We expect to reach this optimal level and inventory sometime in the first half of 2023.
So today, given our return to more normal operating environment and traditional seasonality. Our operations are focused on building inventory into the channel where needed to ensure strong retail season, allowing dealers to sell products and not worry about availability.
In summary, our <unk> ratio in 2022 was high with revenue coming in at the high end of our guidance and EPS exceeding guidance by 10 cents.
Despite headwinds in the supply chain and increased pressure from interest rates and foreign exchange.
I'll now turn it over to Bob who will summarize our fourth quarter and full year performance as well as 2023 guidance and expectations Bob.
Thanks, Mike and good morning, or afternoon to everyone on the call today.
Q4 was another record quarter for us with contributions from volume price and mix up to higher priced vehicles.
International sales grew 7% year over year, overcoming a nine percentage point drag from currency adjusted EBITDA margin expanded 272 basis points overcoming increase warranty marketing and G&A expenses.
Below operating profit interest expense continued to tick up given higher rates in Q4, we executed $400 million in three year floating to fixed swaps at an all in rate of approximately 5% starting in February 2023.
This will allow us to maintain our fixed to floating debt ratio near our 50 50 target for 2023.
Additionally, we were opportunistic with share buybacks repurchasing one 2 million shares in the quarter.
Adjusted EPS from continuing operations was $3 46 up 57%, marking a new quarterly record for Polaris.
For the full year I want to call out a few things first we did what we said we would do and grew both sales and EPS by 15%.
Price and favorable mix of higher content vehicles helped drive these results.
We were also opportunistic with share repurchases by repurchasing over 500 million in shares.
The year was not without its challenges and I am incredibly proud of our team who delivered these results despite ongoing supply chain challenges rising inflation and additional warranty costs.
Turning to our segment results for Q4, let's start with off road sales rose, 19% relative to last year to $1 9 billion.
Whole goods increased 22% and P. G&A was up 8% adjusted.
Adjusted gross profit margins were up an impressive 503 basis points.
Similar to Q3 sales growth and margin expansion were driven by price and mix, which more than offset higher warranty expenses and commodity costs.
Looking at retail performance or but he was down about 4% in North America with declines in recreation somewhat offset by growth in utility within.
Within utility there was better performance in Ranger versus Atvs.
We believe the industry was down low single digits, that's pointing to modest share loss in the quarter.
Some of our share loss was due to holds on recalled products. We would expect to gain back that share as we worked through the recall and the sales hold lifts, which should occur in the first quarter.
Sequentially, we were able to gain share with higher shipments and healthier dealer inventory Q4 also marked our highest quarterly or b share performance in 2022.
We continue to see positive trends in our utility segment as well as robust double digit growth in our commercial government and defense business.
Snow was negatively impacted by a rework associated with two recalls were fixes have now been communicated to dealers.
With healthier inventory across our off road portfolio as well as new innovations, we look to gain market share in 2023.
Switching to on road now sales of $302 million or up 29% versus last year with whole goods up 35%, while P. G&A was flat.
That our on road segment includes the ex Amiga appeal businesses in France, along with our most global business Indian motorcycles. Thus you see a strong mix of international revenue, which saw meaningful pressure from FX.
On road shipments in the quarter were the second highest of all year as we are settling into a more normal supply chain environment. This helped Indian motorcycles gained share for the second quarter in a row.
Gross profit margin was up 358 basis points to 17, 1% as the team continues to execute well on its path to profitability.
Driving this expansion in the quarter was volume and mix towards heavyweight motorcycles and price.
Moving to our Marine segment sales of $245 million were up 36% driven by price and mix.
Inventory is the healthiest it has been all year across all three brands, we still have some work to do in entry and high end models, but a healthier supply chain has given us a path to quickly make progress as we work hard to set up dealers for a successful boat show season.
North American pontoon retail was down low thirties, as we continued to prioritize high end boats.
With the recent improvements in dealer inventory, we expect to return to a more normal mix of entry mid and high end boats in 2020, three which should lead to share gains.
Gross profit margin was up 209 basis points based on mix and price along with improving supply chain stability.
Reviewing the full year segment data actual results were in line with our expectations with a little outperformance in margin from the on road group.
The performance last year sets us up for a strong 2023 highlighted by expected share gains and an abundance of new innovative new products and technologies being launched.
Moving to our financial position, we continue to benefit from a healthy balance sheet with our leverage ratio at one 6% 1.6 X and a strong cash position.
Free cash flow was up over 800% year over year with all of the growth coming in the second half of the year the.
The cash momentum is expected to continue with further growth anticipated in 2023.
As a dividend aristocrat, we concluded our 27th straight year of increasing our dividend.
We executed on our commitment to investing in our simplified portfolio with over 300 million spent on Capex and 4% of sales spent on R&D in 2022.
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.
Now, let us talk about our initial guidance for 2023.
We expect sales to be flat to up 5% relative to 2022.
Drivers for performance include the following in order of expected impact.
Favorable mix from new products higher content vehicles and more P. G&A is important to note that the majority of our new products are expected to launch in the second half of the year and are and be priced above like products currently in our portfolio.
Second as volume, we expect retail to modestly outperform the industry in off road.
Our commercial business is also expected to have a strong year, but those units do not count towards our retail share performance.
On road is expected to have a strong year with a very competitive lineup of bikes.
We believe marine will be in a stronger competitive position with healthy inventory across its entire lineup as well as some new boats across all three brands.
Price is expected to offset increased promotions with price being a stronger contributor in the first half of the year due to the carryover from 2022.
We view FX and finance interest as headwinds to sales growth in the magnitude of over 160 basis points.
These expectations contemplate flattish industry retail for the year, therefore, any deviation in the industry could positively or negatively impact results.
Another swing factor could be the timing of new products, which are expected to launch in the second half of the year.
By segment, we expect to off road sales to be up low to mid single digits and on road sales to grow low single digits, driven by retail and share gains.
With new products and healthier dealer inventory marine is expected to be relatively flat to last year with share gains from new products and healthier dealer inventory offset somewhat by a weaker industry.
For margins, we expect modest margin expansion at the adjusted gross profit and EBITDA line drivers.
Drivers include volume and mix, along with reduced cost premiums associated with inflation and a healthier supply chain.
Some headwinds to acknowledge include increased financing interest and FX.
We are currently forecasting an FX headwind of approximately 60 basis points to EBITDA, mainly due to recent movements in the Canadian dollar. We are also carefully watching the euro.
Adjusted EPS from continuing operations is expected to be down 3% to up 3% with book with most of the drop through from margin expansion being consumed by higher interest rate expense.
In fact, combining the headwind from FX and higher interest rate expense in 2023, we estimate the impact to be a drag of approximately $1 52 adjusted EPS.
Helping offset some of this headwind is a benefit in our share count given the work we did to repurchase shares in 2022.
You other items to note before I turn it back over to Mike <unk>.
Operating expenses are expected to tick up as a percentage of sales with the bulk of that being attributed to sales and marketing.
This increase is driven by a return to more normal advertising levels and in person dealer events.
We encourage you to model shares flat to Q4, so roughly $58 5 million.
Financial services income is expected to be up 40% with higher interest rates and increased dealer inventory driving more income from receivables.
Operating and free cash flow are expected to be up significantly versus 2022 as investment in working capital is not expected to be a drag.
Lastly, we are planning a meaningful investment in back shop capacity in Mexico to bring outsourced fabrication and injection molding activities back to historical levels.
That activity along with capacity expansion investments at several other facilities is going to drive capex higher year over year.
Mike will touch on this briefly but we are excited about the opportunity to invest in growth. While also taking more control of our supply chain.
Our capital deployment priorities in 'twenty two 'twenty three are as follows we intend to continue to invest in the business and our intention is to have our 28th straight year of increasing our dividend.
After that we look at balancing share repurchases and debt pay down with likely a bit of both this year.
At a minimum we look to offset dilution from our stock based compensation program.
If you recall part of our five year strategy is to reduce our base share count by at least 10% and with the repurchase activity concluded last year I can say we are ahead of our initial plans.
Therefore, we expect to be opportunistic with share repurchases, while also balancing debt pay down and making these decisions based off what we think is the best for the company given our return metrics and what we deem as a healthy financial position.
Lastly, as we think about the first quarter there are some moving parts worth mentioning.
We do expect retail ex marine to be flat to modestly up year over year.
Remember promotions are netted out of revenue and with those increasing there will be a headwind to both revenue and gross profit margin.
And then we expect year over year pressure from foreign exchange and interest expense.
Some items working in our favor our price and an unexpected reduction in cost premiums.
On a P S.
We have looked back at pre pandemic years regarding the cadence of earnings and we expect 2023 to have a more normal cadence of earnings was 16% to 17% of our full year EPS being realized in the first quarter. When we typically see a seasonally soft retail quarter.
Overall, we believe we are set up for a strong year, including share gains across our segments margin expansion and strong cash generation.
Although headwinds exist our team is focused on delivering these results as we continue to March towards our five year targets.
With that I will now turn it back to Mike for some additional thoughts on 2023.
Thanks, Bob we made a lot of progress on our long term strategy in 2022 and are well aligned to what needs to get done this year to meet our five year goals.
Starting with the strategy, we laid out at Investor Day last February nothing has changed this team is focused on executing the strategy. We consistently review progress towards strategic objectives as a team as well as with our board. We believe the six pillars of our strategy will drive growth improve margins and drive strong financial returns for investors.
Ryder, driven innovation and best customer experience will be on full display in 2023, as we have a very exciting year for new product introductions across all segments.
Consistent with the success, we saw in 2022 with the razor Pro-war and Turbo War I think you'll be impressed with our off road launches in 2023.
Claris off road will not only raise the bar for our industry, but will redefine product categories.
Both dealers and customers should be excited to see and experience what's to come.
Indian motorcycle has mud had much to be proud of in 2022 with the launch of the new F T. Our sport and Indian Challenge early in 2023 is set up to be an even better year with new bikes in accessories consistent with the innovation writers have come to expect from America's first motorcycle company.
In our marine business is gearing up to ship new products across all three brands from Godfrey's Mighty G to the Hurricane Sunday 2600, plus more to be announced in 2000 and twenty-three boat show season is upon us and I saw firsthand the level of excitement and energy around these already released products.
Yeah.
Our strategy isn't just about innovation last year, we invested significant money back into the company to ensure we are agile and efficient operations as well as capacity to support the innovation and.
In 2022, we expanded our P G and a distribution center in Ohio, adding capacity at our Monterrey, Mexico facility to support new off road products coming out in 2023.
Yeah.
And adding capacity in Elkhart, Indiana for our marine business to support the growth in our large boat cat segment.
As we look forward, we see a need for additional capacity in our off road business to support planned growth starting in 2023, we're investing in vertical integration as well as capacity expansion and a new location in Monterrey, Mexico invest.
The investments in construction are scheduled to start this year with the benefits being realized in early 2024, certainly an important step to support our five year strategy and align with our agile and efficient operations pillar.
Lastly, we're well on our way and on trajectory to achieve our five year financial objectives 2022 saw its drive growth expand margins improve returns and execute on our capital deployment plans. While 2023 is bound to have some challenges I expect another solid year of progress against our objectives.
Let me wrap up we did what we said we would do in 2022.
We expect demand signals to be mixed in 2023 as they have been for the past couple of quarters. We're closely watching a number of demand indicators and our plan is to remain agile in managing our manufacturing and shipment plans. So that we can swiftly respond to positive or negative trends.
We expect overall power sports retail to be relatively flat this year, plus or minus a point or two as we settle into a more normal operating environment.
Polaris is expected to be an exciting year for product launches and new services as we accelerate writer driven innovation and the best customer experience.
There are meaningful headwinds to our financial results given recent foreign exchange moves and higher interest rates, we have done our best to help you model them given the information we know today, but realize both of these have been volatile as of late.
This environment requires us to remain agile to changing conditions, and we are well poised to do just that.
As I've said before and it remains true today, we know that winning in a competitive environment requires our entire organization to be focused on delivering with the best team in power sports I'm confident we will deliver on our commitment of being the global leader in power sports.
We're excited for 2023 and what it offers us our dealers our customers and our shareholders. We believe the decisions and investments, we're making today will not only set us up to deliver a strong year, but also generate strong growth and returns over the long term.
With that I'll turn it over to Betsy to open the lineup for questions.
We will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
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At this time, we will pause momentarily to assemble our roster.
The first question today comes from Craig Kennison with Baird. Please go ahead.
Hey, good morning, Thanks for taking my question I wanted to ask about the flattish retail forecast that is embedded in your guidance to me that suggests you hold or maybe gain a little share in an economy that does not enter a recession I'm just curious if you considered scenarios with it.
Deeper.
Economic downturn or pressure on your market share and what those downside scenarios might look like.
Okay. Thanks, Craig and I. Appreciate the question Yeah. We you know we've modeled a number of different scenarios and the result on operations I think the element to keep in mind is it's not predicated on a substantially better economy.
If you think about the areas, where we lost share in 2022 is predominantly concentrated around our Ranger product line are the utility space.
And when we look at the inventory levels for that business. They are still well below even the optimal levels in those optimal levels are well below where we were in 2019 in <unk>.
Given that we see that market holding up a you know, it's an opportunity for us as delivery improves to get back in and pull that share back and we essentially have seen that playing out over the last two quarters. So we know when we've got the availability that we're going to pull the share back and you know we're we're happy with the performance we had in Rec last.
Year, you know the pro our turbo or put us in a share gain position, which is great. Given some of the challenges we've had over the past and really it came down to availability within our Ranger ER product line and we've seen that steadily improving and we anticipate that'll continue.
Through 2023, so being able to get caught up on both the dealer inventory as well as just the continued solid demand that we have in that category is important.
The other element is we do have new products coming out it serve new segments and you know I think that's really important to think through because you know there will be a little bit of cannibalization that comes from these products, but we do think that they're going to appeal to a a different subset of the industry and we think that's going to put us into a really good spot.
You know the last thing I would point to is you know.
We've managed this business through some pretty a volatile and uncertain environments are just in the past several years and the teams got a really strong track record of being able to react and move the business in the right direction and we know what our our guideposts are relative to dealer inventory, we're gonna, let that plus the demand.
Data that's coming in from the dealers really be a guidepost for us. The other point I'd make is you know dealer inventory, obviously was up strong versus last year, a 22 versus 21, but the thing to consider and similar to the dynamic we saw in the third quarter a lot of that inventory went into the channel very late in the quarter we were.
Still dealing with some manufacturing disruption from suppliers as well as even some of the recalls and you know when you think about that dealer inventory number one a lot of that is clearing out in January as we were able to get into the hands of dealers and they're getting through the set up and delivering to customer demand, but also we're clearing Rick.
<unk> holds over the course of January and February and we know that those vehicles are in demand because we've had consumers at least put initial deposits on them that has shown up in the pre sold number. So you know we're watching January closely right now retail's outpacing anything we would be shipping into the channel. So we feel good about the dealer inventory levels.
Great. Thanks, Mike.
Yep.
The next question comes from Fred Wightman with Wolfe Research. Please go ahead.
Hey, guys I just wanted to if we think about the retail commentary you just gave and then look at the actual reported sales guidance, what sort of gets you to the low end versus the high end of the sales is it just sort of how long or are sticky that price and mix benefit is or is it retail what is sort of driving that.
Yeah, I mean, there's going to be an element of it that's the retail you know we've we factored in.
The level of promo that we think is appropriate given the industry conditions and a lot of that promo is really geared around interest rate buy downs, just knowing that you know the kind of the low to mid end of the markets are pretty sensitive to the interest rates. They typically finance and so we've we've built that in to allow us.
You know I don't know that we're necessarily anticipating any substantial price moves I think a lot of it is really going to be as we talked about earlier, we're gonna, let demand and dealer inventory kind of guide where we.
Shipped to the business and if we see pockets as we look through the scenarios and you know and frankly, it's why we widened the guidance range relative to what we normally do is to just recognize that there's a fair amount of uncertainty and when we talk about flattish retail as I mentioned in my prepared remarks, we're kind of running scenarios, where we're down you know a couple of them.
Points are up a couple of points in and using that to help guide where we need to go and then factoring in the fact that we do have new products coming in that serve new segments and we've got a you know we anticipate strong demand for those but but also making sure that we've got plenty of inventory in the channel for the dealers.
Makes sense and then just on that new product introduction, you gave us the earnings cadence, 16% to 17% in the first quarter, but also just the timing of these products. It sounds like in the back half of the year should we be looking to historical cadence for the quarters or should it be more back half weighted because of these products. How do you sort of want us to think about that.
Yeah, so it'll be a I think looking back at historical cadence is is the right direction to go.
A little bit more to the back half you know than historic just because of the the new products and the timing of those.
The other thing I think folks need to keep in mind around growth for next year as the commercial business. You know we have a very large business selling rangers to commercial accounts are folks like United rentals hurt rentals things like that and you know that business, one does or doesn't run through the dealers that sell direct so it doesn't show up in retail it doesn't count as road.
Our retail, but it's it's business that is a really strong right now given you know the infrastructure Bill and the chip Fab Bill. So those those markets are really strong we do really well in them and that business is up significantly.
For 2023 with relatively low risk in terms of Ah it happening regardless of sort of what happens in the general economy.
Because those projects are funded so that.
That gives us a little bit more stability and confidence in the growth on Ranger as we go into 'twenty three and for the last last point I'd make is from a sales standpoint, because again it doesn't show up in our retail as you know our R. P G and a business typically as the market starts to slow if people aren't buying new vehicles. They certainly are repairing and upgrading their vehicles.
So we know that you know that P. G and a business is going to tend to be more resilient and offsetting so you know I think in the past we've talked about you know the retail driven portion of our revenue as you know probably in the 40% to 50%. So there's a number of other factors that play out in terms of you know P. G N a the commercial the government as well as the <unk>.
International <unk>.
Growth in revenue performance secondary influence those numbers just outside of North American retail.
Great. Thanks, a lot.
Okay.
The next question comes from Joe Altra Bello with Raymond James. Please go ahead.
Guys. Good morning, I guess first question on margins, what's the margin drag that you guys are assuming from increased promo activity in 'twenty three if it does pricing offset that dollar for dollar or is it margin neutral.
So in our if you look at 'twenty three versus 22.
The pricing of the carryover pricing from 'twenty two into 'twenty, three really carries through the first half and that will largely offset the increased promo for the year. The other but the other piece of that drag is a dealer finance you know with with floor plans with dealer inventory being up floor.
And rates being up in the floor plan finance cost for us.
<unk> is a drag so but promo itself is mostly offset by the carryover price.
And Joe just you know keep in mind that when when we talk about the finance promo you know the way Bob's got this structure with our financial partners. We ended up pulling back some of that income below the line. So you know some of that GP margin headwind gets offset.
You know much lower in the financial statements.
Okay.
Could you guys quantify the expected headwind is it all getting to the point.
No it's less than that okay.
I guess second instead of a big picture.
Tell us what the industry was down 22, and maybe why that would get better in a tougher economy in 'twenty three.
Well you know you have to remember we're such a large portion of the industry and when you know you have a combination of us on a especially as we got towards the end of the year, a pretty substantial stop sale for our rack business and then you know struggling to get the.
Product out for the the utility business.
You know that puts a fair amount of pressure on the industry and as we look into 2023 and as I mentioned earlier you get a combination of you know us getting back on pace with Ranger knowing that the utility segment you know at least for the past couple of quarters as shown resilient demand and we anticipate that.
To continue for the factors that we outlined earlier and the new products that are going to come into the market. You know those are going to be enough at least from a player's perspective to obviously drive retail that you know as we said could be flat to up and that should create more stability in the industry well what I'll tell you is even with.
That expectation around retail, we're still down below where we were in 2019, both players as well as the the industry. So it's I would characterize it more as a stabilization are coming off of you know in 2020, when we saw outsized demand and then really you know continued challenges in 'twenty one 'twenty two as you know as an industry we were struck.
<unk> and obviously, we were disproportionately impacted by the supply chain challenges and we see that stabilizing as we get into 2023, and you know even with the choppy macro we think the opportunities specific to Polaris relative to the utility segment Ranger inventory levels as well as the new products coming on scene.
That gives us the opportunity for some growth.
Got it great. Thank you guys.
The next question comes from Robin Farley with UBS. Please go ahead.
Great. Thanks, a couple of little clarification, you mentioned retail in January you said sort of outpacing what you're shipping can you kind of put that into roughly like a retail year over year, how January pacing so far.
No I don't I don't know that that would provide a whole lot, but I you know I think the point is similar to what we experienced if you remember the call back in October we talked about the fact that you know dealer inventory had moved quite a bit coming off the third quarter, but we were watching you know specifically at that time, it was ranger and ATV.
Retail sales and they were you know two X over stripping what was sitting in the channel.
As well as what we were able to ship it and so similar to that dynamic maybe a little bit different and the fact that we did have late shipments are given some of the challenges we had on the utility side specific to ranger, but coupling that with the recall holds that we had on our razor business given some of the the fuel system.
A player driven quality issues that we're working to have resolved here in January and in February .
That puts us in a position that retail is going out strip, which just means that you know dealer inventory is going to come down a bit.
And calibrating, what we saw at the end of 2022.
Okay. Thanks, and can you quantify roughly what percent is.
Retail in Q4 was pre sold I think you'd think given out.
Or in prior quarters, So just wondering.
Q4.
Yeah, I'm I'm not going to give a specific number robin but it's it's down you know, it's kind of been down quarter over quarter, we did see strong pre sold though.
And some of that happens because the model year change to the model year change comes in people stopped preordering, because they want to wait and get the new model in for periods of time, we don't take preorders on on model New model years. So you know that dynamic ends up in Q4, but.
While it was down we are seeing strong, which we would have expected you know as dealer inventory refills. So it's not like people are buying it's just that there they can buy at the dealer, but on the products that are in high demand and some of the products that were on hold with the recalls we have seen strong pre sold as consumers get in line to.
To.
Get those products. So you know, it's still well above where it would have been historically, it's just not in the levels. It was during the pandemic, yeah and I you know Robin one of the dynamics and we watch it play out in India and as we got more stock on the floor, we would see cancellations in and the pre sold but all of those we're moving two fold.
<unk> buying bikes off a floor rather than waiting for a bite to show up in a month or two and we've essentially seen that dynamic playing out and as Bob indicated now, it's becoming a little bit better indicator around the demand, where we don't have dealer inventory levels at the adequate level or we have product that's on hold.
We've seen that playing out you know specifically around the high end razor as well as Ranger products right now.
Okay, Great now that makes sense, just one final clarification, if I could.
Market share numbers, Yeah, I guess I'm curious.
<unk> been talking about some OEM.
Imports from China.
Sure and I think initially those were not in sort of thing.
And the market share data that you can find those.
Are those.
<unk> is now in your market share numbers are not yet it's still kind of just the legacy.
Right.
No I mean, when we give market share data Robyn, we can only really give it for the folks that participate in Rover.
And are some of the Chinese manufacturers don't participate in the trade organization. So.
We don't get their reported data, but the other thing to keep in mind as you know that as you look at some of these the Chinese entrants.
Certainly, we don't dismiss any competitor ever but the bulk of the product. They have been selling you know, especially during the pandemic has been you know lower end products in a range that we don't participate in in a meaningful way. So you know to some degree it's probably grown the market more than it has changed the shared.
Dynamics, Yeah, and you know Robyn I mean, I'll reiterate what Bob said, we will not be dismissive of a competitor, but we do know I mean, we spent a lot of time are out meeting with dealers are Bob Steven Auto and I and you.
You know the the consistent dialogue from the dealers as the majority of the folks buying those are not necessarily customers for businesses like ours or our higher end competitors and we've also seen that the dynamic has changed quite a bit you know the issue was when none of us had availability and they were able to get product in <unk>. They were able to move it now there at all.
Point, where they are at a surplus and the dealers are really pushing back hard on how much inventories being pushed in the channels. So it's kind of it's come back into parity and I think as the availability of our products as well as the rest of what I'll call. The legacy higher end industry improves I think you'll see that dynamic at least coming back into parity that said were taken out.
Look at it to understand how we how if we and how we potentially compete against that particular end of the market and you know obviously, you don't want to necessarily take Polaris down into a super cheap value play, but we're going to continue to look at that and monitor it and react accordingly.
Okay, great. Thanks very much.
Yeah.
The next question comes from David Macgregor with Longbow Research. Please go ahead.
Yes, good morning, everyone.
Just a question on P. G&A you know what are the attachment rates are healthy.
With reduced dealer whole goods inventory targets in 2023, just not extended P. G&A or do you lean more aggressively into attachment sales with higher dealer in stocks.
You know certainly there they operate Pea G&A on a R. A M model somewhere do we do a whole goods. So obviously that'll tamped down any of the call. It in store traffic, but that said you know if if you're seeing fewer whole goods moved typically people are you know.
By an oil kits maintaining the vehicles because we know people are still writing a at the same rates that they have historically as well as if they're going to hold onto a vehicle for another year or two they are likely to devise some accessories and so there'll be some of that the attachment to the factory install we call. It a in terms of shipping a whole good with the <unk>.
Reis on it you know we.
You've seen that steadily increasing and so you know I anticipate that that will continue and even with you know a more muted who'll give a whole good growth rate, you're still going to see P. G. N a attachment rates inching up probably not at the same leaps and bounds. It had had over the last five years, but you know theres still a lot of accessories, you know we've got new.
<unk> that are coming out this year and there's more accessories available in those products than we've ever had historically on a new product launch. So the team's really got into a good cadence recognizing that it's a great way for the customer to be able to customize a vehicle, but it's also a great margin opportunity for both players and the dealer.
Got it got it.
And then second question on motorcycles and this is a category where I guess you know you've had some margin challenges over the years, but you've made a lot of progress in 2022 motorcycle origins.
He was talking about the drivers of the margin improvement other than the mix, which you referenced in your prepared remarks, but the games seem to be holding well here. So how should we think about the potential upside from here would it be assumed in your 2023 guidance with sales up low single digits raw material cost relief, Yeah. I mean, we've talked a lot about the fact that you know that the team is driving.
Our path to profitability plan and.
We're really happy with what we've seen the adherence to it without compromising the quality and the innovation I mean theres a lot of different factors. I mean, one is you know the scale of the business as you grow it you know you're obviously leveraging your overhead so.
There's a lot to be said there.
Would talk about things like the price and promo environment stabilizing you know one of our largest competitors was doing some pretty challenging things a few years back and with new leadership that has certainly stabilized and created a environment, where you know I think we're able to ensure.
Ensure that we get full pricing on our vehicles plus you know we were dealing with an environment, where scarcity was also driving a bit of a premium.
On top of that you know, we're leveraging into our engineering spend.
You know we had to essentially build up bikes from scratch all categories and you know with the introduction of the chief this past year that really filled out the platforms that we needed as a company and so you know as we move forward, we'll still be spending you know good money on engineering just not at the levels that we did when we were effectively creating a new business.
G&A has been a huge.
Focus for US as you know an opportunity if you look at us relative to some of our competitors were still.
Below are.
Where we should be but I'm really happy with the progress. The team has made over the past couple of years to drive that performance and then you know international has become a huge growth catalysts for US you know about 40% of our revenue and growth for Indian is coming out of markets outside of the U S and so.
You know that gives you a really good opportunity as you know those markets youre able to hold price and really get paid the premium that the bikes deserve so happy.
Happy with what we've seen you know the teams are working pretty much every opportunity they have and we expect that trajectory to continue.
Yeah. The only thing I would add is we've also continued to pursue localization in that business you know it is.
Unfortunately, the most impacted by FX given how global it is but you know we've continued to increase the level of bikes are we've assembled in our poll a.
As you know we started our assembly in Vietnam earlier this year. So earlier in 'twenty two so you know that.
That starts to benefit us as we move forward and we'll continue those efforts to make sure we're producing the Indian motorcycles were where they are being sold.
Alright, great. Thanks very much.
Sure.
Your next question comes from Jamie Katz with Morningstar. Please go ahead.
Thanks, Good morning, I'm wondering if you guys can you elaborate a little bit more on marine just mostly the trajectory of the improvement that you're hoping to achieve and I'm wondering if it's not.
Mostly remedy that stems from correcting that correction in the supply chain sort of estimating it.
And praise meant going forward.
The recent declines at retail and then is there any way to think about what the impact and switch coming onto the market might have had on the lower.
Price point and different market or demand sorry, yeah.
Yeah. So.
I'll take the last first we know that it has had an impact I mean, when when you come on with a new product. It certainly does.
When we look at the pontoon market the true pontoon market, which you know in theory, the switch doesn't necessarily quantified just given some of the stipulations.
You know the the legacy brands held up quite well and so we're obviously tracking.
Their performance and we spent time talking to some potential customers at the Minneapolis boat show and you know I think for the most part we feel like it's not necessarily pulling pontoon customers away, it's probably pulling pwc customers up into a larger version of the product, but we're.
We're going to continue to keep an eye on that you know when we look at the improvement that we're expecting marine I guess I'd characterize it. It's a tale of two sets of businesses. One is you know when we look at Godfrey Hurricane there's been a lot of work over the past several years to turn that business around those businesses around and the boats are absolutely gorgeous they've.
Done a spectacular job of improving profitability I'm you know I mentioned in my prepared remarks everything from the Mighty G.
Which we're seeing tremendous pickup on the electric version of that boat.
You know that's tapping into a whole new segment, both electric as well as consumers who are looking for a smaller more maneuverable pontoon all the way up to the Hurricane 2600, which is an absolutely stunning fiberglass boat.
Those are obviously going to drive significant market share performance, we saw market share gains in both of those businesses in 2022, and we expect that to continue where we really struggled was bennington.
With been moving into the leadership role of the entire Marine segment, he's really going to bring a lot of that same philosophy and approach to Bennington that was brought to pull hurricane and Godfrey backup to market share gains and we're pretty confident given what we've seen in terms of product plans our go to market strategies.
It will put bennington back in a really positive spot from a market share perspective part of the challenge. We had this past year was just being able to get boats into the channel. We added capacity Theres. Some automation moves that are being put in place and that should improve our ability to deliver and and put us back in a share gain position for that brand.
Yeah, I think the thing people, maybe miss on the boat business you know when we bought it in 2018 are you know Beddington, obviously, the crown Jewel and continues to be Beddington was also the bulk of the earnings and Godfrey Hurricane you know really in addition to kind of having dated boats had what I would call data and financials.
And so you know they weren't really big contributors to our marine profitability and now you know we have months in 'twenty, two where Godfrey hurricane made more money in a month and they made when we bought them in 2018, so Ben and the team have done a great job driving profitability improvements along with you know quality.
And design improvements in those businesses and as Mike said, you know now been springing that some of that same focus, particularly on the design side over to Bennington and I think we'll see see good good results there as well, but you know marine profitability has improved quite a bit since we acquired the business.
And we've got more.
Or activities underway to continue to drive that so it's been a really good story.
Okay, and then can I just clarify I think you guys had.
Said in the prepared remarks that you were going to start capitalizing on the expansion in Monterrey.
'twenty 'twenty four but should we assume that the sort of elevated capex guidance beyond 2023 for maybe another year before normalizing to pay for that expansion.
Yeah, I mean, the the reason that we made the statements. We've made is that you know, it's obviously a new location that the first wave of this just given the current backdrop from a broader economic standpoint is.
Really focused around in sourcing we're trying to bring some of the activities that we outsource during the you know the height of the frenzy to be able to get product out we're trying to bring some of that back in to bring it back into more parity. It's also a pretty substantial cost play and that's why we will be able to start to realize benefits sooner.
And then there'll be additional investments as we start building up the capability to produce a new whole goods to serve you know both that market as well as the broader north American market.
Yeah. So you should think that's helpful. You know that the exact timing of the Capex will depend on you know what when we decide.
To start start the investments as we look at just what the market does over the next year or so, but I think capex will will be elevated over historic levels. It was in 'twenty two it will be in 'twenty, three and I, you know and I think Mike and I have been pretty clear with everybody that we feel like the business was under invested in historically as part of the reason.
We went back to a more focused portfolio and we're putting our money into high return operational investments that either improve quality improve the product and drive better cost and you'll see us continue to do that.
Thanks.
The next question comes from James Hardiman with Citi. Please go ahead.
Yeah.
Hey, good morning, Thanks for taking my question here, what it could dig into the.
Inventory replenishment dynamic.
Continue a conversation we've had the last couple of quarters.
What was the what was the full year replacement benefit for 2022.
Easier to just take the 750 that you gave US a couple of quarters and subtract. The 150 that you gave us this time around and I guess, if so doesn't that suggest a pretty sizable headwind. This year as we lap that even with the 150 leftover.
Yeah, I mean, I think the the basic math has that as part of the equation I think you know the more challenging aspect is you know yeah 150 is whats mathematically left after you look at the end of the year, but you know as I pointed out earlier, we're already clearing through.
Some of that dealer inventory so.
You have to consider the fact that we had a fair number of our razors on hold.
Coming out of the end of the year and even into January and part of February .
And then a lot of Rangers that got delivered you know in the last week or two.
And as you know you know between transportation time and set up time, you know those things arent retailing until January or even in a tough February and so you know it's it's.
It's difficult because you know it's it kind of moves around I would suggest that 150 is probably understated because.
You cleared through in January and February the you know the recall holds as well as the backlog of our consumer deposits are for some of the higher end Rangers, but you know it's in it's in that ballpark, but you know as we look forward you know what.
One we still have opportunity to refill with Ranger and that demand is holding up so that 150, we said first half and it's really going to depend on how that demand profile plays out because we're still gonna be plan I expect a.
Catch up but we didn't have in the second half we have some new products coming on the scene that you know we feel pretty confident given the the redefining of the segments new areas of opportunity and growth coupled with all the factors I talked about before outside of just north American retail that drive growth in this business.
That's why we're pretty confident that are you know, we'll see revenue growth as well as you know lapping of pricing in some of the other dynamics that we have.
The other piece of that too in this you know with the commercial business keep in mind that the growth in the commercial business, which will be very strong in 'twenty three and has been it was in 'twenty, two as well that that business doesn't impact dealer inventory because it goes straight from the.
The factory to the customer and so you won't see that show up in dealer inventory, but but it does obviously sheldon revenue. So that's right in the majority of that business was already sitting in backlog. So you know, there's a high degree of confidence behind that.
But just to clarify I shouldnt be sort of kicking.
It sort of feels like the first half picked up really favorably because you've still got that 150.
It should sort of be an add on to your sales.
And in the back half of the year kind of feels like a 600 million dollar headwind Youre, telling me I Shouldnt think about it that way.
No I wouldn't to Mike's point, you know I think that a the timing of refilling. The $1 50 is going to depend on retail. It. It's it's all really ranger at this point. So we're mostly ranger. So you know as as we continue to have strong shipments in Ranger, we think will drive better share, which will make it harder.
To refill that inventory, so some of that or much of that could get pushed to the second half.
Some of the chunk of the commercial business. You know is second half loaded again, we feel really good about that and then we've got all the new product in the second half. So I don't I wouldn't view it as that headwinds is all in the second half and I think you know James when you were trying to do that math. You also have to consider you know we had retail declining in Q3 Q4 of last year.
If you assume retails you know flattish you know that that obviously needs to focus and into your calculus.
Got it one more quickie for me.
Pricing and mix it sounds like from your from your.
Anecdotal commentary that you still think there's a tailwind there.
I guess, how do we think about wholesale units versus wholesale dollars within the context of your guide are you getting a meaningful sort of ASP benefit as you sort of bridge those numbers.
So there's not you know I mean, we expect pricing to be relatively flat you know theres been a fair amount of pricing taken in the industry over the last few years. So.
We're not a we're not going into the year with expectations of ongoing price increases.
The mix has moved much more towards multi passenger and a premium units.
And that continued into 'twenty two we expect it to continue in 'twenty three that's where the customer's going you know I think you've kind of got to look at this a bit like you know the SUV and truck market where.
Consumers have you know nobody buys it too, but it really a two door truck anymore right everybody buys a crew and providing fully optioned out and that's the same thing we see.
Across the product lines as a that move to premium and welding that that drives a lot of the ASP benefit.
Really helpful. Thanks, guys. Thanks James.
Your next question comes from Derrick Johnson.
Capital market. Please go ahead.
Hey, good morning or afternoon.
Two questions here first just to clarify on what happened in fourth quarter. You know you expected fourth quarter reach out it'll be positive. So you know we're down six I guess I.
I guess, where does that come from is that all the recalls what else.
Left retail like short of your expectations.
It was really it was a combination of of the recall holds a which we're obviously on a substantial number of razors.
And then really it was the timing around the shipments of the the utility vehicles into the channel. We had a couple of specific supplier issues that pushed our shipments much later in the fourth quarter than we would've liked.
The good news is those products are moving in in January . So you know customers are are not happy about it being late but at least they're getting their vehicles now.
From a unit standpoint, a little less impact from margins, but same same issue as snow you know we had a couple of recalls.
Because in the quarter and you know we're very conservative in terms of how we look at on the shipment side revenue you know so we don't recognize.
Nice revenue, but that's some of the a lot of those units.
The dealers can't retail them. They we had the the fixed out and it was pretty simple fix.
You know the dealers can't retail them until they can prove that fix has been done so that pushed them snow units that would've okay.
22 into early 'twenty three.
Okay got it and my second question here you, Bob maybe you can give us a bridge to the financial service.
Percent of flat retail and more cash buyers do how do we get up 40.
Yeah. So you know even on flat retailers, we're seeing you know two things promos, we're seeing continuing higher pen rates because.
You know as as promo comes back in the market a lot of our promo is focused on interest rate buy downs. So that makes the percentage of of the units that we are.
That lease that we sell a higher percentage get financed by our partners.
Helps drive that income and then the other pieces are our Floorplan financing and then just a higher floor plans higher rates our share of that.
With our JV partner, you know goes up as well.
Combination okay.
When you buy down when you buy down and offer promos that go against your financial services income or is that against gross margin.
Gross margin.
Okay. So it doesn't impact financial services.
No, but the higher the more that we finance them.
Rebate that we get from those partners impact financials, Yeah, we share and the return on their portfolio. So it will get money back, but it gets booked as financial services.
Okay.
Great. Thank you.
Yeah.
The next question comes from Shin Soo with BNP Paribas. Please go ahead.
Hey, guys. Thanks for the question I wanted to ask a little bit more about retail sale. I was just wondering is there any English should think about in terms of cadence.
Within the flat for the year.
One H versus too much different anything to think about maybe on a quarterly basis any color would be helpful.
No I mean, we expect a return to more normal seasonality. So you know I think we've we set out a couple of times, we think that you know in general as inventory improves consumers behavior will return back towards.
You know buying.
In time for the riding season. So you know spring into summer will be will be better and then they'll you know you'll especially for motorcycles I think that'll be close to normal boats is trending back towards its normal seasonality. You know we had a couple of years, where people were buying you know late in even in Q4 in the cold season to make sure that they.
Had their boats for the spring season, and I think as things return to normal people are kind of moving back towards that put a deposit on it and retail happens really in the spring when they pick the boat up so I.
I think you'll see that dynamic and Oh, and then I think on the share side. It's it's you know we're continuing to make progress.
Shipping Rangers and so you'll see that build through the year as we look to take share back in that market, you know, where we lost share primarily due to under shipping what our historic share levels have been.
Okay got it and then maybe just one quick one on pricing it sounds like maybe not so much of a benefit this coming year, but it's still holding.
I mean, it sounds like ASP.
Are obviously higher than 2019, a I know, there's some mix in there but.
I guess are you seeing any pushback on pricing it sounds like no. It sounds like the consumer continues to accept pricing increases is that fair or are you seeing any kind of.
Anything on that on the affordability equation.
Yes, I mean, theres certainly higher promo in 23 versus <unk> 22, and some of that is designed.
To counterbalance you know a particular units, where we feel like we got maybe a little.
Ahead of the curve on the on the price ratio relative to the competition, but that's all factored into our guidance and how we built the plan for the year you know that it really is a S. P driven and I think folks underestimate this change in mix them. Both on the mixed to crew and then the.
No because it's kind of a double benefit right. It's a mixed to crew, which are larger more expensive vehicles, and then a mix to the premium end of of the multi passenger vehicles and our increasing like factory install and things, where we get much higher P. G&A capture so that's really the bulk of the driver in the E. S. P.
Got it okay. That's very helpful. Thanks.
Okay.
The next question comes from Scott Berg with M.
<unk> partners. Please go ahead.
Good morning, and thanks for taking my questions as well.
Good morning.
Just one from me on P. G&A you guys are talking about how this would most likely be the most resilient part of your business in 'twenty, three but could you breakout how much of that business is.
I guess not attachment based and how much is break fix.
And more sustainable in a in a tougher economic environment.
Yeah, we don't we haven't historically given out those breakdowns on the business, but you.
You know what we have historically seen in and we saw it through the course of the pandemic.
You know when people Couldnt get units they were fixing their old units riding levels are staying high. So you know we've seen continued good good sales of kind of more of the maintenance parts and the other dynamic that happens when people can't get new units, whether it's availability or in the event of a downturn you know the.
The.
Their interest and willingness to pay for it by up New unit.
We see them come back and accessorize their older units. So we don't expect any reason why that trend would change but.
But we don't really break out of the P. G and AP This falls between.
And kind of repair and upgrade.
Got it. Thank you that's all I have.
Thanks, Mike.
This concludes our question answer session and concludes the conference call.
Thank you for attending today's presentation you may now disconnect.
Okay.
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