Q2 2023 Polaris Inc Earnings Call
Good day and welcome to the Polaris second quarter 2023 earnings conference call and webcast.
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I would now like to turn the conference over to J C. Weigelt Vice President of Investor Relations. Please go ahead.
Thank you Rocco and good morning, or afternoon, everyone I am J C. Weigelt Vice President of Investor Relations at players. Thank you for joining us for our 2023 second quarter earnings call. We will reference a slide presentation today, which is accessible on our website at IR got Polaris Dot Com joining me on the call today.
Mike <unk>, our Chief Executive Officer, and Bob Mack, Our Chief Financial Officer, both have prepared remarks, summarizing the second quarter as well as our 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 2022 10-K for additional details regarding risks and uncertainties.
All references to second quarter 2023, actual results and 2023 guidance.
For our continuing operations and are reported on an adjusted non-GAAP basis, unless otherwise noted please refer to our Reg G reconciliation schedules at the end of the presentation for the GAAP to non-GAAP adjustments now I will turn it over to Max Beatson go ahead, Mike. Thanks.
Thanks, Jaycee good morning, everyone and thank you for joining US today, we hope everyone is enjoying their summer in the great outdoors with friends and families.
The players some are certainly marks the peak of our riding season, and this year is especially exciting as we are welcoming our dealers back for our first in person summer dealer meeting since 2019.
In conjunction with this meeting will also host our capital markets day on July 31 in Nashville.
Today's call will focus on recapping the quarter and current state of the business and will save commentary on some of the longer term strategy on future initiatives for the capital market day event, which is less than a week away but.
For those who cannot make it the event will be webcast on our Investor Relations website.
Turning to the second quarter performance.
Sales grew 7% driven by positive volume and a higher net pricing North American retail was up 14% with on road up more than 50% due to strong demand and availability of our Indian motorcycle and slingshot products and off road. It was encouraging to see positive retail trends for both utility and recreation.
Our marine business did see some retail softness in the quarter.
I'm proud of the team's performance and the fact that we gained share in off road on road and marine during the quarter.
As we progress through the back half of the year, we expect to hold share in on road, while gaining more share in off road with a robust product lineup that includes recently launched and soon to be launched vehicles.
Margins were down modestly as we experienced near term headwinds, including higher interest foreign exchange and snow warranty costs were.
We also continued to experience production inefficiencies due to challenges with supplier delivery, mainly wire harnesses as well as tight labor markets in specific regions. Our team has been working hard to remediate these issues and while we have seen some progress in July on both fronts. We expect it to take some time to improve our efficiency to pre pandemic levels.
Adjusted EPS was flat relative to the prior year with higher interest expense and foreign exchange headwinds, partially offset higher volume price and lower share count.
Europe's progressing in line with what we told you on our January call retail has improved our product launches are on time and positive feedback from both dealers and customers and inventory remains near optimal levels, while both gross profit and EBITDA margins expanded over 60 basis points and 50 basis points, respectively. In the first half of the year.
Your margins have seen increasing pressure from labor warranty and litigation costs, which we expect to continue in the back half of the year.
With that being said our teams remain focused on the five year strategy, we laid out last year and margin expansion as a significant objective of that strategy to generate strong returns for our shareholders.
Bob will provide more color on guidance shortly but it's worth noting that with half of the year behind us we have narrowed many of our guidance ranges, we are raising our sales guidance, but increased costs incurred during during the year, thus far and anticipated in the second half has is narrowing our adjusted EPS guidance Accordingly.
It's been an exciting year of Polaris and many of you will get to feel the energy and drive that we have as an organization at our dealer meeting in capital markets Day next week, we were a passion on our sleeves and are driven to make pull are stronger than ever before.
Now, let me share some thoughts relative to customer trends, we're seeing.
The demand story in off road and on road improve during the second quarter, while marine saw more challenges, let me dive into off road in more detail.
Demand for utility vehicles remained strong and we expect this trend to continue as we progress through the year recreation improved during the quarter and we expect share gains to continue as momentum builds around our recent razor XP employers expedition launches <unk>.
Motions are working and our team is doing a great job of targeting these dollars to the right customers and geographies to drive quality leads and generate dealer traffic and.
And lastly July retail is off to a good start for the third quarter.
For on road Q2 retail was robust due to a combination of strong product line easy comps given a weak second quarter last year and improved availability. This is true across both Indian motorcycles and slingshot.
In Marine we did not see a recovery in retail during the second quarter as a reminder, the selling season kicked off later than anticipated this year due to weather.
Dealer seem a bit reluctant to take on additional inventory given the combination of healthy healthy inventory position higher flooring costs and soft retail.
Our team is responding appropriately we've adjusted production schedules and our controlling our variable cost in the near term to protect profit.
The bulk of the marine selling season ends in a few weeks and will assess dealer sentiment and inventory levels at that time as we prepare for the 2024 season, but for now the marine industry seems softer than our original expectations and this is reflected in our revised guidance.
Turning to what we've been hearing from dealers are dealers or one of the greatest sources of feedback and our biannual dealer survey provides great insights into how our dealers view working with Polaris as well as our outlook for power sports.
This survey touches on many facets, including dealer satisfaction sentiment quality and inventory to name a few.
We conducted the latest survey in mid April for off road with over 900 dealers responding.
The results were certainly encouraging and gives me great confidence that we were focused on the right areas and Polaris is poised poised to succeed.
Few highlights include we continue to rank number one in dealer satisfaction relative to other Oems.
Sentiment around inventory strengthened as the supply chain improved ever Ranger Northstar supply continues to be an area of opportunity.
Dealers expressed optimism about how promotions and product availability can positively impact retail and our quality scores improved across all product lines.
Lastly, the team and I regularly visit dealers earlier in the year some of US visited marine dealers in the South East, which we talked about last quarter and a month ago, we visited off road dealers in the mid Atlantic region.
The two biggest takeaways from our most recent visits are the dealers told US Polaris is winning the innovation race from the launch of the pro razor pro our interval or the razor XP to the more recent Polaris expedition. We believed that we were at the forefront of Ryder, driven innovation and providing the best customer experience, while expanding the market.
Secondly, dealers noted their outlook on the year has improved relative to what they believed earlier in the year pressure remains at the low to mid end of the recreation market a premium continues to perform well and theres plenty of excitement around our new products.
As we indicated at the start of this year 2023 is an exciting year for product innovation and two of these launches are shipping now.
The first is our completely redesigned razor XP lineup. The multi terrain category is the largest segment in the sports side by side segment and the razor XP has long been the best selling sports side by side in the industry in March we launched the next generation of razor XP with class, leading durability comfort and performance that takes this lineup to the next level.
This product hits at the heart of the market and we expect it to continue to be our top selling razor.
Reception has been great and many of you will get to see it in person for the first time at next week's meeting.
The second product is the Polaris expedition, which is hitting dealer floors and during the summer similar to how razor and general pioneered new categories in the side by side market. We're on the path to do that yet again with this entirely new adventure side by side category Targa.
Targeting consumers, who are into overland and have a destination mine for camping adventure in exploration. The Polaris expedition has added comfort and capabilities plus it touts the industry's largest fuel capacity of any factory side by side on the market with a 200 plus mile range, making it stand out against any other side by side in the market.
Ryder driven innovation with one of our core strategic tenants and we're not done yet it's safe to say there is more yet to come this year.
Regarding dealer inventory, we continue to be in a much healthier position relative to last year and are diligently working to get new products and more Ranger north stars to dealer spores.
Relative to 2019 inventory is down about 25%.
We view this level is near optimal and dealers seem to agree while we occasionally hear feedback from dealers that their overall inventories too high. They also tell us their players inventories in a good place and their excess inventories coming from lower end Oems. They brought on during the pandemic to meet demand.
On some of our recent dealer visits we heard that dealers are working hard to sell those lower end OEM products and evaluating the need for such Oems now that vehicle availability has improved across the industry.
We value our relationships with our dealers and continue to work with them to enable our mutual success.
Switching to our geared for good strategy around a variety of ESG metrics I want to recognize our recently published 2022 corporate responsibility report.
I Love seeing this report and the compilation of stories illustrating our team's passion and commitment to be good stewards. One of the highlights from this year's report was around our environmental goals, we celebrated exceeding our original three environmental goals that we set in 2017 and announced seven new 2035 environmental goals, we continue to take it.
Anyone approach to the strategy and are aligned to win needs to be done to meet these goals and our other geared for good initiatives.
So here, we are halfway through the year and thus far it has played out very similar to how we initially expected in January .
Innovation is backup players in a big way and we believe it will continue to drive retail growth and share gains across our business. Although some challenges remain we have been working hard to remediate supply chain and labor constraints with positive momentum momentum experienced thus far in July while uncertainty remains in the broader economy. We are executing on the matters, we can control I'll now.
I'll turn it over to Bob who will summarize our second quarter performance and provide additional detail for the balance of 2023, including guidance and expectations Bob.
Thanks, Mike and good morning, or afternoon to everyone on the call today.
Second quarter results were encouraging on many fronts, including top line growth, 7% share gains in off road on road and marine double digit retail growth and the introduction of the Polaris expedition.
EBITDA margin for the quarter was down almost 40 basis points, driven by continued high labor costs and finance interest.
We are also seeing some pressure from increased snow warranty expense and litigation costs.
Partially offsetting some of these headwinds with net pricing and lower cost premiums on items, such as logistics in the quarter.
And while margins were down a bit in the quarter. They remained ahead of the same period in the prior year on a year to date basis, and we continue to expect margin expansion for the full year.
International sales continue to perform well posting growth of 6% P. G&A grew 12% driven by parts healthy accessory attachment rates and strong ecommerce growth.
In our off road business revenue increased 9% driven primarily by side by side sales to both dealers and commercial partners.
Oh, RV retail was up 14% and market share was up in the quarter.
While we continue to see good demand in the utility space. It was great to see the same demand metrics improve across the recreation segment, which includes razor general and our new Claris expedition.
With regard to expected share gains in the back half of the year. We are now shipping both the new razor XP and the Polaris expedition, both have received positive feedback from our dealer network and many sites, we're taking preorders for the players expedition.
We are excited to share with you more product news at the dealer meeting in capital markets Day next week.
We expect these efforts to help us continue to gain share as we remain the innovation leader in power sports.
Margins in the quarter were pressured by increased promotions finance interest snow warranty costs and unfavorable mix as we shipped more snowmobiles versus prior year, which typically have a lower margin associated with them.
It remains an exciting time in our off road business and we expect the positive retail momentum we saw in Q2 to extend into the back half of the year.
We have never let up on innovation and history shows that innovation can lead to share gains as well as growing the market and we believe we are positioned to do so in the second half of the year.
Switching to on road, our fourth straight quarter of share gains was driven by our strong product portfolio and healthy inventory.
North American Indian motorcycle retail was up over 40% bolstering market share gains with share now over 13%.
Our European brands exit manga appeal, both had strong quarters with double digit growth in sales and gross profit.
Bite meaningful FX headwinds.
<unk> gross profit margin was up 480 basis points, driven by favorable product mix and higher volumes.
We had another strong quarter in Indian motorcycles and slingshot.
Moving the profitability of these businesses is a key component of our five year plan to expand company EBITDA margin to mid high mid to high teens.
For the first half of the year on road gross profit margins are up over 400 basis points.
Moving to our Marine segment results were lower than we were expecting as the industry never fully recovered from a softer start to the selling season.
While we believe the pontoon industry was down mid single digits in the quarter, we have confidence that we gained some modest share in bennington.
Dealers are telling us that consumers are hesitant to purchase boats due to continued concerns around the economy and higher interest rates.
Plus given healthy inventory levels dealers are cautious about increasing inventory given higher prices and floorplan interest rates.
Gross profit margin was up 130 basis points with higher net pricing and we are actively managing our variable cost to protect profits.
As the primary selling season concludes in less than a month, we are closely watching inventory levels and talking to dealers to get a pulse on what is ahead for 2024.
We are not expecting any material turned around in the back half of the year. Thus results are likely going to to be pressured.
While an inflection point is hard to peg, we are continuing to invest in innovation and expect to emerge from this current slowdown with a stronger portfolio boats.
Moving to our financial position, we continue to see our balance sheet is a competitive advantage cash generation in the first half was strong relative to previous years and our net leverage ratio continues to be in a healthy spot at one five times.
We repurchased almost 1 million shares during the first half of the year and are well ahead of our target to repurchase 10% of our outstanding shares before the end of 2026.
We believe we are set up well for a variety of scenarios in the broader market with our balance sheet and cash generation capabilities in 2023.
Now, let us move to guidance and our current expectations for 2023.
Given how the first half of the year ended and our assumptions for the remainder of the year, we are adjusting guidance, where it makes sense.
Regarding sales given what we saw in the first half of the year. We feel it is prudent to raise our sales guidance for flat to up 5% to up 3% to 6%.
This increase is driven by the strong performance in off road and on road in the first half of the year as well as narrowing the range with half the year behind us.
We expect off road to be the biggest contributor to our results in the second half of the year. Following the new products. We have launched therefore, we are raising our off road guidance for the year from low to mid single digits to up high single digits.
We are holding on road sales guidance at this time to up low single digits, and we are lowering marine sales guidance given what we have seen thus far this year and expectations for the back half of the year.
Marine sales guidance is now down mid teens from flat sales for the year as we look to match dealer inventory levels at retail.
Share gains are expected to continue in the back half to half of the year, given healthier inventory levels and new product launches.
We also believe retail for the industry improved in off road, and thus, our raising our assumption to cough or modestly higher retail for the industry in 2023.
So given our share gains and updated retail assumptions, we have greater confidence in our ability to outpace industry retail growth this year.
Our international and P. G&A businesses are expected to be strong contributors to growth this year.
Offsetting some of these sales drivers are promotions in the downward downward revision in our expectations for the marine industry.
For gross profit margins, we are holding guidance at 10 to 40 basis points expansion.
Though there are number of moving pieces and timing impacts in aggregate.
This is still where we believe we will land for the year we.
We have positive momentum with net price and logistics, but there are headwinds such as finance interest expense and warranty costs all of which we expect to linger in the second half of the year.
While improving over 2022 operationally our plants continue to suffer from elevated production costs associated with component shortages and increased labor costs.
A typical startup inefficiencies associated with launching major new products are also a temporary headwind, particularly in Q3 as we start shipping Polaris expedition, and a second new category defining or V product.
On EBITDA margins, we are seeing elevated operating expenses that were not accounted for in our guidance.
This is primarily driven by product liability litigation and settlement costs as courts continue to catch up on case backlogs and delays driven by Covid closures and higher demand creation spend to import to support the improved retail share outlook.
You can also see this in our revised outlook for operating expenses.
On the flip side, we expect higher income from financial services, given that improved retail outlook there.
Therefore, we are lowering the top end of our EBITDA margin guidance by 10 basis points to 20 to 40 basis points.
We also narrowed the range for EPS from continuing operations to down 2% to up 3% from down 3% job, 3% with most of the potential drop through from margin expansion being consumed by a higher interest rate expense.
For the third quarter, a couple of things to note.
We expect retail to be flattish due to pressure in seasonality from on road and marine.
Last year, we had a very strong on road business in the third quarter as the supply chain recovered and we were able to ship product and fulfill pre sold orders.
Off road retail is expected to be up modestly sequentially and up double digits versus the prior year.
Margins are expected to be down modestly year over year as we navigate the build of new RV O. R. V vehicles, this quarter, which as I mentioned earlier causes some initial inefficiencies.
In addition, we have planned on.
Higher continued higher labor costs. These headwinds are partially offset by lower warranty costs as we lap recalls in the prior year period.
We have significant other cost headwinds from higher finance interest that interest and foreign exchange that we expect will persist through the remainder of the year.
Operating expenses will be higher in Q3 versus Q4 due to the cost of the dealer and supplier meetings. We are happy we have next week in Nashville, and the timing of launch expenses for expedition and other new products.
Overall, we continue to be on pace for a great year. Our teams remain focused on delivering strong results, which we have done consistently amid the puts and takes of the broader economy. We.
We are on track to meet our guidance halfway through the year and have raised our outlook for sales while narrowing other metrics, we strive to deliver on our commitments and are when we are doing just that with innovation market share gains and allocating capital to deliver strong returns.
I'm proud of what we've accomplished and look forward to what this team can do in the future.
With that I will turn it back over to Mike to summarize our call. Today go ahead, Mike. Thanks, Bob We're pleased with the first half of the year and believe it sets us up for a successful second half to gain share and modestly modestly expand margins, while we had estimated industry retail to be flattish. This year. The results. We saw in the second quarter point to a stronger environment.
Than we had originally expected and were cautiously optimistic on retail.
Youre seeing firsthand why we've been so bullish on innovation with razor XP employers expedition launches and we look forward to sharing more with you next week. It is certainly exciting to see these products come to life and we're eager to get them in the hands of the best dealers and customers in power sports.
While operationally the business is running smoother than the past couple of years, there remain opportunities to address efficiencies within the supply chain and our manufacturing facilities.
We're focused on expanding margins and meeting all of our five year targets next week's capital market day is going to be a great opportunity for us to update you on the progress to these targets, while laying out what still needs to be done in order to deliver strong returns for shareholders.
Thank you for your continued support and we look forward to seeing many of you in person in Nashville next week with that I'll turn it over to Rocco to open the lineup for questions Rocco.
Thank you.
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Today's first question comes from Craig Kennison with Baird. Please go ahead.
Oh, Hey, good morning, Thanks for taking my question I wanted to follow up on your Q3 retail guidance of sequentially flat.
The math, we do internally suggests that's going to be a very significantly positive number on a year over year basis, Bob I think you said something like up maybe low double digits, but we would get even a stronger number based on how we do that just wondering if you can put a finer point on what your expectations are on it.
Year over year basis for Q3 retail and what is driving that.
Yeah, Craig Thanks for the question you know, it's you know the.
The comps year over year, we got a lot of dynamics that happened both in 'twenty, two and 'twenty one in terms of product availability. So you know when I look at 22 are from.
From Q2 to Q3, our retail had actually dropped sequentially. So there's an element of the compares are when you hold flat. This year in terms of 2023 Q2 to Q3, we continue to baseline back against 2019, and I would say, we're going to be relatively flattish relative to our 2019 and.
The third quarter.
And it's really being driven by our off road vehicles and you know one it's the continued strength, we're seeing in the utility market.
Recreation, although weak you know relative to where it had been is still performing slightly better than we had expected and then I'll remind you we've got two new products.
And you know we've hinted pretty strongly I get another one to come in that's going to be a you know obviously, helping us as we get into the third and then into the fourth quarter from a retail perspective, because those are entering new market segments.
Got it thank you Mike.
Yeah.
And our next question today comes from James Hardiman with Citi. Please go ahead.
Hey, good morning.
So.
Had a question on margins I wanted to dig into and then a question on the inventory.
A lot of moving pieces on margins.
Maybe if you could quantify.
A couple of the things that you called out did you said production inefficiencies.
I'm watching a lot during the prepared remarks.
Any quantification of how big you think that impact too.
It doesn't sound like you think those are going to go away during the back half, but just trying to get a feel for sort of maybe what the opportunity to use once those clear up and then similar question on the Opex side, you called out labor warranty litigation costs any quantification there would be great.
Sure.
Hey, James It's Bob.
So a couple of things I think on the on the cost side you know.
There's positives and negatives right, we're seeing great progress on some of the ocean freight are items and we're seeing some stability on the on the labor side in terms of just people and being able to retain recruit and retain people that's improved over.
The last several weeks, where the where the challenge lies really is just getting the plants you know back to there their more normal operating cadence as you know as we come out of Covid and and as the rework starts to diminish we'd still do have some some part shortages.
With some some key suppliers. So we're not 100% out of the woods. There I think that feels like it's getting better sequentially month over month and quarter over quarter, but there's there's work to do to just get the the inefficiencies out of the out of the plants some of the excess labor some of the excess warehousing.
You know that's a that's accumulated through the through the course of Covid. So you know in terms of dollars.
You know I think as you as you look at the second half of the year.
It's.
You know in the 40 plus million dollar range in terms of a headwind.
On the Opex side, you know not as not as big of an issue are the legal costs really are <unk>. It's not so much that theyre different relative to last year, it's more of a as we thought about laying out guidance.
We've got more cases coming through in the in the year in terms of things that kind of hitting the court dockets that we had anticipated when the year started that's not necessarily a bad thing. It's just the kind of natural unwinding of the CT systems being closed during COVID-19.
You know, we we feel good about about where we are in terms of.
Stability going forward.
On the product liability and so this is really just a catch up of things that were sort of stuck in the system during COVID-19.
James and I will just give you a little color I mean, you know I mentioned it in my prepared remarks around wiring harnesses.
When you look at and we you know we had the same discussion with some of our dealers that we were out meeting with about a month ago.
When you look at the quarter it looks pretty good we got the units out but the reality of how we got them out are still doesn't have the level of finish that we've exhibited in the past or rework is down from where it's been in the last couple of years, but it's still up significantly from where it was before the pandemic disrupted the supply chain and for us.
The wire harness issue is pretty significant from the standpoint of you can't really started vehicle until you have that that wire harness set up and ready to go.
Now the good news is that we've been working with our supplier that's caused the disruption we've seen significant sequential improvement they continue to get better.
Every day and so we anticipate that headwind starting to dissipate. The issue is is we've still got to get caught up and so we're working with the supplier to make sure that they are building an adequate level of safety stock.
But what that does is it creates a lot of inefficiency from a labor standpoint, and we're working to make sure that we're spending what we need to to get the vehicles out because the demand level is there the dealers need the vehicles the customers want them and you know as we indicated it should start to get better sequentially, but relative to what we originally thought for the year, it's still going to be higher in the <unk>.
It can have.
That is really great color.
And then I guess secondly, here as we think about inventories and ultimately shipments were about to lap a period from a year ago, where there was significant replenishment.
You know based on the numbers you gave us I think it was $350 million in the third quarter and another maybe $2 50 in <unk>.
I feel like the answer to that question for some time hasn't been sort of some of the new white space product that you haven't been a lot of talk about but maybe now you are I guess the question is.
Good that you know, namely expedition and I think if you used another sort of game changing for the product.
That filled that gap hum of replenishment from a year ago or is that still going to ultimately create somewhat of a of a bad guy. If you think about the second half.
Yeah. So you know James if you think about the second half of the year versus a 22.
We kind of to your point, we had the channel refill last year in the second half, which was about $600 million.
The offset to that in 2023 is oh.
About 75% of it is the new products and that's the <unk>.
Expiration DXP, there's still you know sell it on the XP that we launched a few months ago, the new razor and then some other products that are you'll see next week at the dealer meeting and then there's also to keep in mind, there's about $100 million worth of snowmobiles.
Additional in second half of the year, primarily in Q3.
Versus 2022 if you remember 2022 we really struggled to get snowmobiles out in time for snow season, and we shipped a lot of stuff in Q1 of 'twenty three we don't intend to repeat that in 2020 three so snow will go out in a more normal cadence in Q3, Q4, and and so that's got a got an impact as well.
That's really helpful color. Thanks, guys.
Yep Yep Yep.
The next question today comes from those that skin with Keybanc capital markets. Please go ahead.
Hi, Thanks for taking my questions just one for me on the Marine side, obviously topline softer called out challenges.
You know in the Marine channel that you guys were able to expand gross margins. So if you can just talk about you know some of the levers you pull there and how you're thinking about margins on the marine side for the rest of the year that'd be helpful. Thanks.
Yeah.
Yeah, I think you know marine this year, we had good.
Not what we had expected, but but not a not really bad shipments in the first half of the year. We had good good solid mix a with some mix to the higher end boats, which helped us with margin expansion and then just you know some.
Some of the efforts we've had to continue to lean out the factories and bring some automation to the marine industry. Some of that you'll hear about at capital markets day.
You know to help help drive better margins in the first half of the year I think second half of the year.
With revenue being down margins are certainly will be challenged you know it is a very much a variable cost business labor is very flexible in elkhart. So we've adjusted our production schedules for what we think we're going to see in terms of retail and dealer inventory, obviously vote vote info.
Came out yesterday, so everybody is still digesting that but we did see some share gains on the Bennington side, which is important for us it's our biggest brand.
You know it's a it's it's tough to say, what it's going to look like in the back half of the year, but where we're preparing for it to be soft and as I said in my remarks, it's hard to kind of say exactly what that when that turns.
And what better sense as we get through our dealer meetings here in early August but.
Where we're prepared to take the necessary actions to try to protect margins in the second half.
Thank you.
Thank you and our next question today comes from Fred Wightman with Wolfe Research. Please go ahead.
Hey, guys. Good morning, you mentioned that dealer inventories are near optimal levels and you also alluded to some elevated products at your competitors, particularly in the.
The lower entry level side of the business. So can you sort of talk about how you think the RFS programmed holding up given all the moving pieces from a year over year perspective from a seasonality perspective, and then just the competitive dynamics.
Yeah, I mean, you know overall, Fred we spent time with the dealers that I referenced in my prepared remarks, and you know.
The feedback by and large was incredibly positive a number of the dealers remarked that they felt we were doing a better job than most of getting product into.
Into the channel and from an RPM standpoint, the signals that we're getting as they retail unit and being able to to move forward with getting our units shipped to replenish that is working well now I'll caveat that with you.
We're still struggling on the high end of the business, that's where we tend to have a higher power content in the vehicles, so any type of supplier disruption.
He's going to delay delivery and you can see that playing out.
Probably largely the largest one and you'll hear from the dealers as the the Northstar deliveries.
That Super premium segment has become a larger and larger portion of the Ranger business. So that has obviously larger and larger impact. So it's an area that we've got a heavy amount of focus on and the other thing that you have to keep in mind is even though you know our inventory is down pretty substantially from where it was in 2019. The asps on these vehicles is.
Up and so you know when you combine that with the higher interest rates you know the dealers are definitely feeling it from a flooring standpoint, and then it gets compounded where they have some of these lower end Oems that you know really induced truckload buys and things like that that you know the dealers are still trying to digest and that the issue is that the.
Low end of the market is where there's the softest level of customer volume.
And so you know we heard that they're doing a lot in terms of trying to you know move discounting and trying to do everything they can to move those units, but I think they are by and large pretty frustrated with the lack of sophistication at that end of the market and the higher interest rates in the low consumer demand is compounding that so you know we're focused on doing what we can to get.
The high end products into the hands of the dealers, we saw a pretty significant improvement in our ability to get Ranger North stars and that's going to continue to improve as we get through the back half of the year.
It makes sense and then just quickly on the cadence I know you guys were expecting sort of 40, 61st half back half it looks like it's maybe a little closer to 50 50 was there a pull forward or are you just more conservative on the back half like where was the biggest change.
Yeah, you know I wouldn't say there was so much of a pull forward.
In terms of of revenues and shipments.
You know with some of the <unk>.
Some of the mix was pretty favorable in the first half you know we did a better job of getting some of those higher end vehicles. Mike was just talking about out in the in the half and a net price promo was was decent so.
You know just a just a little bit better financial results in more than a pull forward.
Great. Thanks, a lot.
Yeah.
Thank you and our next question today comes from Joe <unk> with Raymond James. Please go ahead.
Guys. Good morning, I guess, the first question, maybe a little color on what drove the improvement in rectal RV demand in the quarter and maybe the also the math of the share gains that you guys saw at Indian.
Yeah, I mean on the Rec side, you know we saw strength continued strength in our general you know the crossover category. The high end of the razor category continues to be strong and our deliveries improved as we worked through some of the overhang from the recalls that we had.
Relative to the fuel tanks late last year and into the first part of this year as we got the rework completed on those so.
I think you know, we're not seeing a significant change at the low to mid range of the market I think it's the crossover category continued to hold up strong.
And again I think you know some of that is because those vehicles are used for a multitude of things and that you know there's an element of that that crosses more into that utility space.
In terms of those vehicles being a handy around multi acre homeowner property.
And then obviously the high end of our categories pretty much across the board has been holding up strong.
Given employment levels remain favorable in income.
Income levels are strong.
Yeah on the Indian side, you know we saw really good so good growth in both heavyweight and mid size, but the mid size had had the greater growth.
Growth in the first half of the year and it's a mix of you know last year, we had the problems with black painted parts and and so that inhibited dealer inventory mid size tends to be more of a impulse purchase new buyer first time buyer and make good inventory in mid size and the dealers are the first half of the year and in the prime selling season and that helped with the <unk>.
Indian growth.
Got it that's helpful. And then maybe just a follow up.
In terms of.
The margin progression that you guys were talking about over the next several years.
Probably addressed this next week.
How do you see that ramp looking like is that more of a backend weighted margin improvement or is there some to come in 'twenty four.
I think there's some you know well we will talk about it next week, but you know where.
We continue to drive both short term and long term activities that will improve margins.
Got some some headwinds.
FX has moved quite a bit since we.
<unk> set those targets, but we're working to overcome that and we're not changing our targets.
But you know there's there's some near term operational things as we continue to work through just the inefficiencies in the factories and get get back on track and get that price cost ratio.
Correct, we had a good we're having a good year with our Indian and Slingshot and that was profitability improved improvements really helped total company profitability. So that's kind of the near term stuff and then we'll talk about some longer term things are around our factories in product design at capital markets day.
Joe you'd think about foreign exchange that hit us really hard so obviously assume foreign exchange kind of holds where it is today and as you get out over.
Over the next couple of years that impact gets more and more muted, but it's far more pronounced.
You know for the first half of the year was just shy of a point of of G. P impact. So you know like Bob said were working to overcome that its overshadowing some of the good work, we have and then clearly as we get our factories running more efficiently as the suppliers start to deliver at a stronger cadence will obviously be able to work a lot of that.
Cost out of the factory, so we're pretty optimistic about where we stand and we'll have more to show you next week.
Sounds good thanks, guys.
And our next question today comes from Robin Farley with UBS. Please go ahead.
Thank you. This is actually arpino for Robyn could we go back to July trends for a second you talked about retail strength in Q2 or two and having continued into July would that mean for RMB up so far year over year in July .
It seems you expect to be share gainer in the back half and full year RV and outpacing the street.
It seems you're guiding up slightly does that mean RV retail for full year.
Better than low single digits, I guess, what's the extent of that op guidance for RV on a full year basis.
Uh huh.
Yeah, I mean, I guess the way I would characterize it in July .
You know we've continued to see strength in RV, which would have us up not only versus last year, but up versus 19 for the Marine segment. Obviously, you know, we're continuing to see that'd be soft and on road is just at its normal.
Starting to slow down from a seasonality standpoint, so everything seems to be playing out pretty consistent you know I think the simple answer is yes, we expect off road to be up we expect to gain share the thing to keep in mind as we're adding in a several new products that are new either.
Placement strong replacement products like the razor XP or category defining like Claris expedition and the to be yet announced product that we've referenced a number of times. So that's obviously going to drive incremental retail and so that's what we see driving the strength in our off road segment.
Thank you.
And in terms of lower end OEM inventory at dealer that you talked about you know one of the key feedback from dealers and talk just seems to be the profitability of those units versus play how do you think about that competitively sort of longer term as we think about lora and Oh yeah.
Well I mean, I think they were able to get profitability because the low rim and guys were able to ship.
When we and the rest of the I'll call it mid to high end of the.
Segment, we're not and I would think that as you're talking to dealers because I know I heard this a month ago that margin dynamic is changing pretty significantly.
They're paying a lot of interest on those units theyre, moving really slow and they're having to do a lot of discounting so.
We're confident with where we're at you know it doesn't mean that we're done continuing to look at the value and entry side of our business. We know that it's important in terms of bringing customers.
And to the brand and we're pretty confident with the product lineup, we have and.
How competitive we are as we move forward.
Great Great. Thank you and I'm sorry, one more clarification question. If I may in terms of the production inefficiencies that you mentioned in off road.
Could you quantify the impact of that and how temporary that is in terms of impacting margin.
Yeah, I think I answered that we are it's about $40 million in the second half.
In the second half okay, not on a full year basis. Okay. Thank you.
Thank you and our.
Our next question today comes from Tristan Thomas Martin with BMO capital markets. Please go ahead.
Good morning.
Just the $40 million did you also said there was a one point of margin involved in the first half.
All that up it's about 75 million full year impact is that right or am I buying growth or like I said, there was a one point impact from FX in the first time, yeah, just one okay.
Got it. So then the 40 was how much of the margin impact in the first half of them got them.
Like light was about 40 million.
It's not a huge impact in the first half because we had assumed that that inefficiency was there. It was really the improvement that we're expecting into the back half that's not materializing at the same rate we had expected.
Which is largely driven by the fact that our rework levels continue to be high.
And as I mentioned, you know, we're seeing progress sequentially, primarily around that one supplier.
That I had mentioned, but you know that obviously, we have to continue to see that momentum and we will see improvements.
Sequentially, but it's just not going to be at the same level that we had anticipated when we came out with guidance earlier this year right. So just to be clear.
We are improving we have improved significantly versus 2022, we're just not seeing as much improvement in the back half of the year relative to where we thought we'd be when we did guidance.
Okay got it and then just one more question can you maybe break out any marine retail trends youre seeing kind of the various price points.
Yeah.
You know through the first half of the year I would say the higher end products were really strong as marine went into the selling season and I haven't had a chance to go through the marine data. The Ssi data that came out yesterday and all in a tremendous amount of detail but.
What we saw so far in the kind of the.
End of May June time frame was that some of the smaller.
The boats were starting to come back stronger from a retail perspective are performed stronger from a retail perspective, which.
Which I think probably lend credence to the concern. We're hearing from dealers is that just the high finance rates given the longer tenors of both loans and the higher cost of boats relative to some of the other products. We sell that those finance rates are kind of biting more in marine.
It would drive consumers probably towards the smaller light sizes, just a cheaper boat less less to finance so.
That's the only dynamics, we've really seen that's changed a little bit in the last couple of months.
Yeah.
Okay. Thank you.
Yeah.
Thank you and our next question today comes from David Macgregor of Longbow Research. Please go ahead.
Yes, good morning, everyone. Mike I wanted to ask you about recreational or B and you noted the softer sales patterns in the load medium segment of the line.
The less consumer interest, which I would guess would be reflected in lead generation or are we just see credit constraints at work here.
No actually the lead generations are very strong both the organic and inorganic I think what's what but I think there's two things driving the hesitation. One one is starting to abate as the talk of the rhetoric around inflation probability starts to soften a bit.
I think you know it is a discretionary purchase and when people are hearing the word recession thrown around every 15 seconds.
Does cause a little bit of a pause so that's number one.
Number two is interest rates you know buyers at the low to mid range on that rec side.
Our heavy finances and the rates have moved up we are continuing to evaluate you know if you look at our promo spend a good portion of it is directed at buying rates down I would suspect we'll continue to be aggressive.
In that area.
I think there's probably more that we'll talk about at the dealer meeting next week, but that's the area, we see the greatest opportunity to help consumers get over the the bubble relative to the rates that you know just a year and a half ago that they were able to finance out there they're higher and.
You know, even though it's not a tremendous impact on the payment it's still a little bit of a shock when the buyer gets into the showroom floor. So you know I.
I think with hopefully what sounds like good news on the economic broader economic front I hope that starts to at least take some of the pressure and if we get a little bit of stability coming out of the fed where people feel less and less concerned about where the interest rates are headed.
Could work in our favor and we're certainly going to steer a promotion to make sure we're able to help consumers out.
Okay. Thanks for that and then second question for me just on promotions. How are you seeing consumers respond differently to promotions and see on road versus off road.
Is there a notable difference there.
No I don't think Theres a notice notable difference as Mike said, our I think promote promo starting to lean a little bit more towards Ah.
Finance promo and buying down rates.
Then the.
Rebate offers but I.
I don't think we're seeing a different consumer behavior on either side that I would say the one difference in on road and off road is that.
Trade ins play a bigger factor in on road and so you know you still encounter some people that are that are upside down and stuff that they bought during the pandemic you know.
Paying full retail plus dealer fees and things like that I would say those stories, though are a bit more.
You know there are one offs, they're not they're not a huge driver, but the trade ins has more of an impact in on road.
You know David what I'd say is our our behaviors continue to evolve you know, we're I think doing a better and better job of being far more directed at where we're spending money you know being we're doing tests to see if discounts versus buy down up rates works and we've spent a lot of money over the past several years and are you know.
Our M capability, and so we're able to pinpoint and target customers far greater than we used to so doing targeted offers where we have a consumer who has an upgraded their machine in a while.
Other than making a broad a promo offer to a category, where we're not gonna induce maybe somebody new to come in.
We're doing a lot more of that type of work. So I think we're using the money better as a percentage of MSRP.
Promos are still down relative to where they were historically, which I think is a good thing, especially given how much we're having to push towards supplementing high interest rates right now.
Got it thanks very much see you next week.
See you next week.
And our next question today comes from Jamie Katz with <unk>.
Morningstar. Please go ahead.
Hey, guys good morning.
Wanted to touch on something that we haven't talked about in a while which I guess.
The direction of the EV business sort of how is the adoption.
I'm not going what is the consumer interests and how do you see that product lineup evolving over time.
The receptivity is incredibly strong we started delivering the X P kinetic customer feedback as you know obviously, we've been staying very close to the customer given not only the that's a new product, but given the category that it's in our feedback has been incredibly strong.
Encourage you can go out and Theres a number of different independent reviews that were done that probably some of the best reviews, we've gotten.
We're in the process of evaluating opening up a second ordering window, we do know from talking with dealers that the consumer demand is very strong we knew that we were oversubscribed.
Oversubscribed, when we came out with the first allotment. So we anticipate that when we open up the second order window.
Probably not in the too distant future that we're going to see pretty strong demand.
I would I would anticipate that we're going to continue to focus in on this utility segment, it's proven to be the area that we need to focus in on.
So we will continue to evolve in that category are centered around the Ranger vehicle and you know obviously given our other product lineup you can kind of anticipate with where that means we're going to go with the next the next vehicles, we come out with.
Okay.
The other question I have is on snowmobiles and I guess Yamaha has recently announced that we'll be exiting the marketing and although it has a pretty small market share presence at this point in time is there any reason you guys wouldn't go after sort of their consumer base.
Incrementally a certain market share or is that something that could provide a little bit over the last year over the next year or two.
Yes, I mean, it will certainly provide a lift but you know we.
We're gonna be talking to our board about it just given the recent recency of the news.
They're such a tiny player in the market there are broader implications to one of the other competitors as well just given the relationship that they have so we'll continue to watch it there it's going to take a couple of years for them to phase out I'm, probably more excited about the direction that.
We're taking with our business, we had a great dealer meeting, where we talked a lot about the changes that we're making in the business renewed focus around quality and simplification the team's done a great job.
Of making sure that we're in a position to deliver the sledge to consumers ahead of the season, we put a pretty big incentive on the back of that to prove how serious we were about it and the team's living up to that.
Commitment and I'm really excited about what we have to offer so I think we're gonna be in a great spot regardless of with Yamaha does.
Great. Thank you.
Thank you and our next question today comes from the answer you Sue with BNP Paribas. Please go ahead.
Hi, guys. Thanks for the question you mentioned the inventories near optimal levels I guess I just wanted to clarify.
Are you thinking about that in terms of like absolute units or relative to the 2019.
The what I'm thinking is in the slide I think it's number six you show how historically a dealer inventory destock from Q3. So from here do we expect a similar historical destock or is it.
<unk> units are holding from here.
Well I mean overall, we're looking at unit, that's how we look at the dealer inventory measurement by by.
By category and by region.
You know that the tough part is dealer inventory in an aggregate level, there's a lot going on in there. So we've got a couple of areas, where you know the financing interest focus is probably going to be renewed as we move into the back half because the inventory is probably a little bit heavier than we'd like that said, we're still way below where we'd want to be on the <unk>.
Premium utility side, the North stars for example.
So we will continue to make sure. We're rebalancing that and then you know the inventory for the most part of follow a normal cyclical pattern with the exception of we've got these new vehicles coming in to the market. You know, we obviously started delivering here in Q2, but there's going to be heavy deliveries as we get into Q3 and Q4.
We do anticipate a good portion of that is going to retail obviously, but we're making sure that we're getting dealer stocked with those units given that they are new category defining.
Vehicles.
Okay very helpful. Thanks, and maybe just a follow up I think you mentioned versus 2019 retail you're expecting <unk> to be flat did I hear that correctly, because I think <unk> was down like 5% I guess, it's all RV, but down 5% versus 2019, so is it kind of underlying improve.
Uh huh.
Yeah, I mean, as we you know we look at our 2022 when we started the year, we thought it would be relatively flat to 'twenty. Two we think will be the key industry will be better than that and then we'll continue to take share 22 was down about 10% below 2019 and.
So assuming.
That all comes to play in the second half of the year, we think we.
For the year the industry will be relatively flat.
To 19, it will take some share.
Okay got it very helpful. Thanks.
The next question today comes from Brandon <unk> with D. A Davidson. Please go ahead.
Good morning, and thank you for taking my couple of questions.
Just briefly on the on road business clarification.
Did you say you expect to hold share in the back half of the year.
Yes, Okay, and obviously you guys gained some strong market share during <unk>, but what do you expect changes maybe in <unk> or is it just a function of the.
Better channel fill your year over year and two two.
Well I think it's better better channel fill.
We made a difference in Q2, but I mean, we're going to move into a more normal seasonality as we get into the back half and you know at this point you know, we're not expecting obviously internally, we're going to target to continue gaining share, but you know if you do the year over year comparisons the first half of last year for that business was the.
Most challenged given the black paint issue that we had and so we just don't see those dynamics necessarily playing out as much as we move into a into the back half.
Okay, Great and just following up on that just looking at the motorcycle industry as a whole I know, there's a view of the industries in secular decline do you see that based on the underlying demand you're seeing in the market right now or any concerns about that materializing.
No that's not necessarily what we're seeing I mean, I think you know there's obviously one particular player that has such a large market share that that moves things around but we continue to see a tremendous amount of excitement around the various platforms that we have and we're optimistic about what that means for the future of the business.
Okay, great well. Thank you so much.
Yep.
Our next question today comes from Scott <unk> number with Roth.
Please go ahead.
Good morning, and thanks for taking my questions.
Morning.
Mike in the past you've said that the P. G&A could be considered I guess the Canary in the coal mine. If there was anything to worry about maybe just talk about P. G&A by.
By maybe by segment and by price point, just trying to see.
How elastic things really are as you go down the food chain.
Yeah, I mean, you know the the P. G and a performance overall has continued to hold up I mean, you know the thing to keep in mind as you know we have increased the.
Content on our off road vehicles substantially and a good portion of that.
Is through what we call factory install meaning that the vehicles are coming out with more and more accessories on them.
Look at the razor XP you look at the players expedition you looked at the new vehicle that we'll be talking about next week number one theyre coming with higher and higher accessory offerings, and they're coming with more and more factory install options and so we continue to see that level are increasing.
You know overall, we continue to see the the P. G&A markers that we watch things like repair activity.
<unk> to holdup we.
We do know that the average miles that people are driving offer vehicles is down a little bit year over year, but that doesn't necessarily point to anything other than you know folks as people were going back to the office and spending more time in the office, probably aren't putting as many miles on them, but repair activity continues.
To hold up.
Parts sales remained strong and at this point, we don't see anything out there that has us overly concerned.
Alright, and last question just going back to the commentary about already in the production inefficiencies if I heard correct pretty much we're just saying that.
You are at this point for the back half of the year and probably the full year about $40 million lower than you originally expected of savings.
Savings right or or of a.
Of abatement compared to what you thought at the end of the first quarter is that correct.
Yeah, I mean, I think you know rough math.
That's a that's a good proxy to use.
We said it you started the year expecting.
Declines on a year over year basis in terms of the cost premiums in excess costs. We were paying we are seeing declines we're just not seeing them at the rate that we had originally forecasted and you know given that we had kind of slipped into the year. The impact is more noticeable in the second half than the first.
Got it.
That's all I have thank you.
Thanks Scott.
Thank you ladies and gentlemen. This concludes today's question and answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.