Q2 2024 Polaris Inc Earnings Call
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Good day and welcome to the <unk> second quarter 2024 earnings conference call and webcast.
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I would now like to turn the conference over to J C. Weigelt. Please go ahead.
Thank you Rocco and good morning, or afternoon to everyone I'm J C. Weigelt Vice President of Investor Relations at Polaris. Thank you for joining us for 2024 second quarter earnings call. We will reference a slide presentation today, which is accessible on our website at IR Polaris Dot com.
Turning me on the call today are Mike Peterson, our Chief Executive Officer, and Bob Mack, Our Chief Financial Officer, both have prepared remarks summarized in the second quarter as well as our expectations for the remainder of 2024, then we'll take your questions. During the call we will be discussing various topics, which should be considered forward looking for the purpose of the private securities litigation reform.
<unk> 1095, and actual results could differ materially from those protections in the forward looking statements.
Can refer to our 2023 10-K for additional details regarding risks and uncertainties all references to second quarter actual results and 2024 guidance are for our continuing operations and are reported on an adjusted non-GAAP basis, unless otherwise noted please refer to our Reg G reconciliation schedules at the end of the presentation.
<unk> for the GAAP to non-GAAP adjustments now I'll turn it over to Mike speeds go ahead, Mike. Thanks.
Thanks, Jason and good morning, everyone. Thanks for joining us today.
We saw an increasingly challenging environment in the second quarter, resulting in sales and adjusted EPS that came in below our expectations we.
We will take some time this morning to talk through those results provide an update on our annual guidance as well as discuss the outlook for our long term 2026 targets considering the current environment.
First I want to start with the second quarter results.
Sales were down 12% impacted by actions, we took in response to macroeconomic and industry headwinds. These headwinds included persistent inflation. In addition to a prolonged cycle with elevated interest rates, we've seen consumer confidence weekend, especially for larger discretionary repurchases and as a result, the industry is seeing lower retail.
Additionally, dealers are conservatively managing their inventory due to the higher flooring costs, driven by higher interest rates and are reducing orders accordingly.
As we said at the start of the year dealer inventory was our anchor and if we saw softer retail than we expected we would adjust shipments accordingly to help protect dealers.
We started that process in Q2 and have now adjusted our full year shipment outlook, given a lower outlook for retail.
As a result, we have revised our full year 2024 guidance down to reflect the current environment as well as the counter actions, we have taken to aggressively manage costs. While this is disappointing it reflects a more challenging retail environment than we or the industry expected.
As I've reiterated several times, we are committed to maintaining dealer inventory at healthy levels, which is why we adjusted shipments and supported inventory in the field with increased promotional activity we.
We have also implemented more flooring support for dealers to assist with the cost of inventory. They are currently carrying.
On a positive note we saw favorable results associated with our efforts to gain efficiencies within our manufacturing facilities, particularly with logistics and materials and we were able to further reduce manufacturing spend in response to lower volumes.
These savings, partially offset the negative effects of lower net price and the loss of manufacturing cost absorption in the quarter.
We also surgically reduced operating costs recently to rightsize, our cost structure to better match, the current demand environment and help streamline our business year.
Year to date, our actions have eliminated 8% of our salaried workforce and we have reduced certain discretionary spending areas such as travel.
It was intentional with the word surgical we took great efforts to make sure we were strategic and eliminating redundancies and preserving key R&D investments. We have seen this before and know that staying on the gas with innovation is key to emerging as a stronger company when the market stabilizes.
We estimate these actions equate to over $100 million and structural changes that will be an ongoing benefit and help offset a portion of the headwind associated with lower volumes.
Before I move on from this side, let me close by saying that we were crystal clear at the start of the year. If retailed played out below expectations, we would cut shipments to protect dealer inventory. Unfortunately retail has proven weaker than anyone expected and we acted to address the market dynamics, which has us bringing our full year guidance down Bob will cover our guidance in more detail later.
I want to spend some time today talking about the strategy, we laid out in early 2022 and the progress that we've made we continue to believe this strategy will help us generate profitable growth strengthen our position within the power sports industry and generate positive shareholder returns.
In fact, our focused strategy has guided choices from elevating the customer experience through innovation to improving our operations and more recently focusing on making our business more efficient.
It is also guided our actions to carefully manage dealer inventory in a way that supports the profitability of our dealers, while continuing to deliver the best customer experience.
Despite significant progress on these strategic priorities the timing to achieve our financial targets has become uncertain given the numerous external headwinds driving this downward part of the cycle.
At the time, we gave our five year financial targets in early 2022, we did not anticipate a power sports and marine downturn.
We remain committed to our financial objectives to grow sales mid single digits expand EBITDA margins to mid to high teens grow EPS double digits and deliver attractive ROIC in the mid twenties, what is in doubt as the timing of achieving these goals, we anticipate providing additional information around the timing of achieving these targets when we see more clarity in our.
End markets and a return to a more normalized environment.
We believe the work we are doing today will position us to have higher earnings power and even stronger cash generation when a recovery occurs.
I think it's important to cover some examples about how we are executing change to emerge stronger.
First we made some big decisions early on in my tenure as CEO to prune our portfolio of distractions outside of power sports, resulting in the divestiture of Jim Taylor Dunn and Transamerican auto parts.
As a result, we are more aligned and focused on power sports, which has enabled us to be more disciplined with capital allocation and investments ensuring we have a strong and aligned portfolio will continue to be a focus for us.
Ryder, Germany innovation is the key driver to winning customers and we have proven time and time again that we raise the bar with the products that we offer.
From the notable quality durability and design upgrades, we made recently to our razor Ranger and Indian motorcycle lineups to category defining products like our all electric Ranger XP kinetic the industry's only extreme duty.
Claris expedition.
We've worked hard to deliver these products with the highest quality standards in the industry with continued pre and post sales surveillance to enable the ongoing performance of our vehicles to enhance the customer experience. This includes leveraging industry, leading connected vehicles, they're a ride command plus platform we.
Don't believe anyone's come close to matching the level of innovation, we brought to the market over the last several years.
Turning to agile and efficient operations, we have doubled down on our efforts to increase efficiency within our manufacturing supply chain and logistics to support margin improvements. While some of these changes took longer than we would have liked we are now seeing the progress we need to enable us to improve efficiency and the earnings power of Polaris into the future.
Some examples of the actions we've taken are driving the near term shoring Nearshoring, specifically from Asia into North America for both our Mexico and U S operations.
Leveraging new dealer vehicle unloading capabilities to save on specialized equipment charges and improving our suppliers operational requirements such as on time ship and packaging standards.
Most importantly in our two largest plants lean model lines are identifying methods to significantly reduce line downtime and improved productivity.
The changes are resulting in dramatic improvements in manufacturing efficiency of 15% or more.
We are now achieving well north of 90% of our production schedules, which is a massive improvement on the performance from last year.
While there is still much more to do we are seeing much needed progress and targeted improvements, which gives me confidence that we will achieve the desired level of operational efficiencies.
Lastly, we continue to execute against our capital allocation objectives, and we remain on track to our targeted share buyback goal.
There are several headwinds that factored into our decision to push back the timing of our financial targets. For example interest rates along with stubborn inflation had a negative impact on consumer sentiment and discretionary spending.
The share of customer wallet for discretionary items today is less than it was prior to 2021.
Debt to income levels have reached a peak and consumers either maxed out our banks are hesitant to lend at these elevated levels.
All these factors have negatively impacted the industry retail environment and resulted in a need to lower inventory of dealerships.
Elevated interest rates are also impacting our dealers.
Interest on dealer inventory, coupled with weaker retail and broad macro concerns as many dealers looking to lower their inventory and costs, even though dealer inventories below pre pandemic levels dealers want to further reduce their inventory given the higher per unit interest costs.
Not surprisingly this mix of lower retail and higher inventory has also resulted in elevated promotions across the industry to entice buyers. This is made worse by the number of Oems dealing with heavy non current inventory in the channel driving additional promotional activity.
Consistent with last quarter <unk> is still one of the healthiest in terms of days sales outstanding and non current when looking at CDK data on the health of dealer inventory in the channel.
We believe these headwinds are temporary and the question is timing, which we are watching carefully.
I want to be clear, we're not abandoning the strategy we laid out for 2022, we remain committed to the journey and the financial targets, we laid out I've never been more confident in our company and we remain optimistic about the future.
Let me go back to the quarter and discuss recent North American retail trends, we're seeing within off road utility was flattish driven by a decline in ATV, which was offset by strength in ranger side by sides. We.
We expect ATV share to pick up in the back half of the year with the recent launch of our all new to up sportsman and believe Ranger will remain positive for the balance of the year.
Recreation remains soft, particularly within razor.
Razor has been weak we have seen continued strength in Polaris expedition, especially the Northstar addition vehicles. We believe we took over five points of share in the crossover category during the second quarter.
On road retail was driven by softness in the heavyweight segment, given recent competitive launches and industry weakness, we expect on road retail to modestly improve in the third quarter as we see the impact of the newly launched Indian Scout lineup.
In Marine we continue to see consumers pulling back on more expensive discretionary repurchases give.
Given more of the boat selling season is behind US now we await feedback from dealers during the fall ordering season to understand their outlook for 2025, but we do not see a meaningful improvement in marine for the remainder of 2024.
I do want to touch on innovation, one more time, because we've recently started shipping new products that we believe will positively impact our third quarter.
All new Indian Scout models began shipping late in the second quarter and should help offset some of the pressure we're seeing in heavy weight in the heavyweight side of the business.
And off road, we recently started shipping the new 2025 full size Rangers and the 2025 sportsman 572 ups built.
Built for both work and play boasting unmatched comfort strength and versatility in the two up space the.
The other product worth watching in off road is the 2025 razor XP lineup, we completely redesigned the product last year and are bringing trim level enhancements that this year as well as new features and lower pricing across all trim levels again. This should be proved that our foot remains on the accelerator when it comes to innovation, while providing customers with the.
<unk> and added value they are looking for.
I'm also excited for our off road dealer meeting that will be held next week in Las Vegas, where we will share more product news and talk to dealers about the state of the business and plans moving forward.
As noted earlier, we're working with dealers to decrease their inventory in this current environment and have decided to provide dealers with several months of free flooring to help offset the increased impact of foreign interest on their business. The decision will have a negative impact on margins, but we believe it's a worthwhile investment to help ensure our dealers are successful.
We aim to be dealers OEM of choice and believe in the long term collective success of players and our dealers.
Overall dealer inventory dropped 4% sequentially and we've updated our SIOP and production plans such that we were targeting a 15% to 20% reduction in dealer inventory versus last year, which is a more aggressive reduction than we had originally targeted for 2024 at the start of the year, while we recognize this action negatively impacts our full year outlook.
We believe this is a prudent decision that benefits the long term health of the channel and provides dealers a bit of relief from softer retail, while we await a cyclical recovery in consumer discretionary spending patterns.
I'll now turn it over to Bob who will summarize our second quarter performance and provide updated commentary around our guidance and expectations for 2024.
Thanks, Mike and good morning, or afternoon to everyone on the call today.
Second quarter sales declined 12% versus last year due to a client due to a decline in volumes and elevated promotions, partially offset by favorable.
The G&A continued to post strong results with 7% sales growth due to the greater volume of accessories on products like Polaris expedition and Ranger Northstar.
Gross profit dollars and margins were primarily pressured by lower net pricing related to a higher promotional environment, removing the impact from promotions, our progress against our target of realizing $150 million in operational savings more than offset the impact of lower volume on absorption.
Year to date, we have realized approximately $50 million in operational savings related to materials logistics and plant spend we continue to work towards the $150 million savings target, which would be expected to have a positive impact on the earnings power of Polaris once industry conditions normalize.
In off road sales were down 6%, mainly driven by volume declines in ATV and razor as well as a headwind from elevated promotions.
Share with an O R V was flat year over year with gains in side by sides, including Ranger and crossover.
Polaris expedition continues to provide a tailwind and crossover helping to drive five plus points of share gain in this category during the quarter we.
We saw heavy promotions in the channel on Atvs as Oems work to clear inventory leading share losses in this sub category during the quarter.
However, our data reflects almost a point of RV share gain on a dollar basis.
While we did see margin pressure in the quarter driven by the factors already mentioned I remain pleased with the progress we are making within our factories that are driving real changes to our cost structure. These improvements are helping to mitigate the impact from unabsorbed overhead from volume reductions.
As we look towards the third quarter, we expect shipment volumes to be down meaningfully given the decisions. We have made around prioritizing dealer health in inventory levels in this challenging environment.
Promotions are expected to remain elevated as the industry continues to use promotions to stimulate demand and clear non current inventory.
We expect further pressure on margins given these lower volumes and the impact on plant overhead absorption.
Switching to on road sales during the quarter were down 19% driven by lower shipments, particularly in the heavyweight segment.
Indian motorcycles lost market share during the quarter driven by weakness in the heavyweight category, We believe fundamental consumer retail was weaker than what the industry experienced in the quarter as industry retail was stimulated by competitive product launches.
We began shipping our new scout Indian motorcycle in June and expect our share position to improve in the back half of the year as these bikes arrive at dealerships.
During the third quarter, we continue to expect lower retail as the industry grapples with a consumer that seems to have cut back on larger discretionary purchases.
There continues to be a lot of excitement around the new Indian Scout models. However, this is expected to only somewhat offset industry pressure.
In Marine sales were down 40% as the industry continued to deal with the elevated dealer inventory levels and higher interest rates impacting the consumers decision to purchase our.
Our shipments in the quarter continued to decline with dealer inventory down approximately 18% versus a year ago and in line with 2018 levels, which we view as a viable baseline for the industry.
<unk> data through May reflected a decline in year over year retail and while we held share in pontoons, we ceded some share in deck boats.
Gross profit margin was down given the topline pressures driving less fixed cost absorption. We continue to be agile with variable cost, which is demonstrated with gross margins remaining above 20%. Despite the significant reductions in volume.
We are continuing to see a challenging environment across the industry during the third quarter as dealers work through current inventory levels and consumer purchases are hampered by elevated interest rates.
The next big data point will come early this fall when dealers begin to make ordering decisions as we head into the 2025 selling season.
Moving to our financial position, we are lowering our expectations for cash generation. This year due to our updated thoughts on our business performance.
With this update we have realigned capex and are driving working capital efficiencies to improve our use of cash during this period.
Given the change in volume expectations. It will take us time to flush through working capital as a result, we expect cash performance in the fourth quarter to be better than cash generation in the third quarter and.
We maintain our goal of offsetting dilution from stock based compensation programs. This year and we remain well ahead of our target of reducing the basic shares outstanding by 10%.
During the quarter, we used cash to continue our investments in innovation and key strategic capital projects and returned over 100 million to stockholders in the form of dividends and share repurchases.
We remain confident in our financial position and are driving our teams to improve working capital and this part of the economic cycle.
Now, let's move to guidance and expectations for 2024, we have lowered our financial targets for the year, given the soft retail trends across all product lines and a macroeconomic climate that has deteriorated relative to our expectations at the start of the year.
With these factors at play we have decided to right size shipments and increased our promotional efforts underscoring our ongoing commitment to prioritizing the health of our dealer partners heading into the second half of the year.
As a result of this decision will be lower shipping volumes, leading to lower absorption at our plants, which is expected to negatively impact our third quarter results more heavily than the fourth quarter.
These cuts are happening across each segment. However, they were more pronounced in off road given reductions already taken in on road and marine.
For sales, we now expect sales to be down 17% to 20% versus a year ago. In addition to lower volumes, we expect headwinds from promotional activity as well as finance interest both of which are expected to be larger than our original guidance.
As Mike noted the added finance interest is in part due to our decision to help dealers manage the elevated costs. They are seeing from carrying a higher value of inventory relative to the past few years.
As it relates to our decision to curtail shipments further you can see our initial plan to manage inventory on top of our current revised plan recall that we started going down this path last year with marine and razor due to what we were seeing in the channel as well as trends in retail.
We began this year with certain assumptions on retail based off current trends and macroeconomic forecasts within this plan at the beginning of the year, we were targeting a reduction of approximately 10% in shipments versus 2023 to help dealers look where their inventory levels.
Fast forward to today, and we have seen interest rates stay higher for a longer along with elevated inflation rate inflationary pressures, which have impacted consumer discretionary purchase patterns on larger ticket items.
This is coupled with the feedback from our dealers on how flooring cost I've quickly ramped up and are now one of the dealers largest expenses.
Based on this we have made the decision to step in and hold the value proposition with our dealers by supporting them with additional flooring aid as well as reducing our shipments further in the back half of the year versus our original plan.
We now expect to end the year shipping to levels that can drive dealer inventories down 15% to 20% versus last year, helping to put our dealers and ourselves on a better footing going into 2025.
Moving to EPS, we are now expecting adjusted EPS to be down over 50% and in the range of $3 50 to $4 imports.
Importantly, the magnitude of the volume drop we are dealing with has an oversized impact on margins due to lower absorption of overhead at our plants and other fixed costs.
The various items impacting sales such as volumes additional promotions and unfavorable mix represent a $5 EPS headwind.
From a manufacturing perspective.
We are seeing approximately 50 cents of net headwind with negative absorption accounting for $1 90 of the EPS takedown and overshadowing $1.40 of EPS tailwind from the great work. Our teams are doing on the targeted operational efficiencies to mitigate these pressures.
The bright side is that these operational efficiencies are expected to positively impact the earnings power of Polaris in a normal operating and macro environment.
Additionally, within Opex, we have cut spending in noncritical areas and completed a head count reduction earlier in July.
We believe these actions were necessary as we rightsize the organization for the current environment.
As noted before these cuts do not impact our investments in growth and innovation, which remain integral to our long term strategy.
From an EPS and net income perspective. It is important to note that the percentage reduction is significantly more than the percentage reduction of revenue gross profit and EBITDA due to the relatively fixed nature of depreciation and debt interest.
For the third quarter, a few things to note.
Given how our plan looks today. The result of cutting shipments is expected to have a more meaningful impact on third quarter results versus fourth quarter.
Retail is expected to remain down although we expect to gain modest share with innovation.
Before I turn it back to Mike I want to emphasize that many of these headwinds are not typically seen in a normal operating environment or an industry that has historically grown low to mid single digits. We would expect volume in plant absorption tailwind in an environment, where we are growing at or near historical levels and shipping to retail.
Our business typically makes up mixes up with the introduction of new innovation and technology as well as the progression to side by sides from Atvs.
Current promotional levels are elevated for many reasons associated with the macroeconomic factors and specific a specific industry dynamics.
Over time, we see an opportunity for these to come down, which we believe would benefit margins additions.
Additionally, the operational efficiency gains we are making are still expected to have a positive impact on earnings.
So while the current environment is challenging we have a positive outlook on the future of power sports and Polaris. We believe the decisions. We're making today are in the best interest of all our stakeholders, including customers dealers employees and our stockholders.
We intend on emerging stronger with a robust pipeline of innovation leaner operations and a healthy level of cash with the ultimate goal of delivering shrunk stockholder returns.
That I will turn it back over to Mike to wrap up the call go ahead Mike.
Thanks, Bob we're expecting the same macro issues that impacted our second quarter performance to persist throughout the year, resulting in subdued consumer demand for power sports and a cautious dealer network.
For the second half of the year, we will continue to draw dealer inventory down through a combination of lower shipments as well as seed the market with strategic promotions to help dealers move inventory.
I'm confident in our strategy and believe that we're on the right path to ensure Polaris is global leadership in power sports, while generating strong shareholder returns, we're working hard to navigate these current trends, while remaining vigilant to emerge stronger than ever when retail demand returns a recent customer metrics point to continued interest in the category with elevated.
Levels of search and organic traffic to our site.
People are shopping for Polaris, and we will be well positioned when those shoppers feel more confident to become buyers inner.
Innovation remains a top priority and we've begun to see real transformational efficiencies within our operations. So while the journey might take longer than originally anticipated to realize the financial targets, we laid out our determination and passion our unwavering to grow this business mid single digits expand EBITDA margin to mid to high teens improve ROIC C to the mid twenties.
And grow EPS by double digits.
I'm confident in this team and the great work, we've already begun will set us up to emerge stronger with greater earnings power and cash generation capability, while also maintaining maintaining our leadership in power sports. We thank you for your continued support and with that I'll turn it over to Rocco to open up the line for questions.
Thank you Sir.
Like to ask a question. Please press Star then one at this time.
A question that's already been addressed I'd like to remove yourself from queue. Please press Star then two.
Once again, ladies and gentlemen that started with one of you and I have a question.
And today's first question comes from Joe <unk> with Raymond James. Please go ahead.
Hey, guys. Good morning first.
First question on the outlook of a 20% reduction in shipments this year, what's sort of retail.
Is that.
Is that baking in and what product segment, you think require the greatest Scott.
Yeah. The obviously, we're anticipating the retail environment to be weaker than we anticipated I don't know that we're going to get into a lot of specifics, but safe to say, it's down from where we had thought the industry was going to be the reduction by segment is somewhat proportional to the segments our proportion of <unk>.
Tariffs are obviously, meaning off road is the lion's share of the reduction and within that category. There's a lot of dynamics. Obviously, the rec space is more heavily impacted you heard from my prepared remarks that the utility side, specifically around Ranger his held up although lower than we expected it is still generating.
Positive retail.
Performance.
So obviously the cuts had been a little bit deeper on the rec side and we obviously.
As a proportion of what we expect retail to be in the second half we went a little bit heavier at some of our higher ASP E vehicles.
Obviously, we will provide some relief to dealers having to carry that inventory and the cost associated with that.
Yeah, Joe I mean it.
We started this effort last year with marine and razor.
Speaker Change: So if you look at the full if you look at marine versus last year. You know the cuts are a little more significant versus our plan, we had expected marine to be down so we'd already factored some of that and the same thing with razor. So.
Like Mike said, if you look at it relative to our original expectations is pretty proportionate across all the categories.
Got it very helpful and just to follow up on that as we turn the page on 24 and think about 25, which I think you're probably happy to do if we look at slide 13, how much of the EPS guidance cut is sort of one time ish in nature and how much of that would you expect to come back next year.
Yeah, I mean, I'll, let Bob kind of get into some of the puts and takes but you know I mean first and foremost we're getting our bearings around you know the dynamics that emerged through Q2 so.
Having a position on twenty-five where we're a little ways away from that end and as you know so much of this is going to hinge on.
What the retail environment is and obviously if were to a more stable retail environment, where we're back to shipping in line with retail.
Theres positive dynamics because of the reset that we took this year, where we're under shipping retail as well as you know the snow season, and how that ultimately works out.
And then obviously, we put the brakes on a lot of cost and we've been very successful within the operations, we talked about 150 million at the beginning of the year. Obviously, we're now targeting a significantly more than that given how slow the operations or <unk>.
Or how low the volumes coming in so you start to get into a position to be able to annualize the structural improvements that we've made and only benefited from partially this year.
Yeah, So Joe if you're looking at slide 13, you know the way I would think about it I mean, we're not going to get into giving guidance for 2020 five yet, but we've got a long way to go here in 'twenty four but you.
Yes.
The main drivers are the volume and mix and its about two thirds volume a third mix.
If we were shipping to if retail is flat and we were shipping to retail you know some of that would come back because obviously, we took the big cuts this year.
The lower volume you know that would come back depending on where retail goes.
Speaker Change: The the elevated promotions, it's really hard to say what promos going to look like in 2025. So you know I don't think.
Much to say there flooring interest you know the goal of the flooring is to help the dealers as the as the inventory winds itself down so how much of that would carry forward will depend on where inventory goes and where rates go and then you know when you look at it as Mike said, you know we were targeting and targeting 150.
This is a bridge versus our initial guidance. So the initial guidance assumed the 150 and so this is incremental additional.
Additional plant material labor and overhead spend savings.
And so you know that should carry forward and you know we're continuing to make good progress there we feel good about.
How the factories are operating obviously, the it's not enough to overcome the the dollars 90, a plant absorption hit but you know I think a really good effort by the team to offset that.
And then as you think about Opex you know about half of this will come back because it's primarily related to the company's various bonus programs, which obviously will be significantly lower this year given the performance. So some of that will come back, but we'll have some carryover from the head count reductions and other things there is some temporary.
You know stuff in their travel and I think normal things you do when when times get tough and then one thing just to keep in mind for Q3 Q3, as our dealer meeting in it. So Q3 Opex was a little higher than Q4 because of the dealer meeting I think Joe what I would want to just come back to because it's really at the base of your we reacted aggressively.
Speaker Change: In Q2, when you think about the volume that we're pulling out for the year, we pulled about 25% out in the second quarter that was the chart that Bob went through.
That's right behind the guidance chart.
And we also you know, although we took the time to do it right. We went aggressively after our cost structure and yeah. There are certain pieces that it'll be more short term, but the the point I drove with the team as we've got a really a focus on right sizing this business.
And then as Bob indicated you know not only do we have line of sight to getting to the 150 and more given lower volumes, but I'm really encouraged with what I hear from our operations team in terms of you know, we really just have not been a truly lean environment inefficient environment and we've got you know significant opportunity and you can.
See just from the work we're doing we're already driving some of that efficiency, but obviously when volume comes back into the market and we're in a more positive that gives us the ability to really leverage our cost structure. So whether that's 'twenty five 'twenty six.
You know Theres a lot of other factors at play, but I feel really good about.
How we're sizing the cost structure and our ability to finally get after the margin improvements that we've talked about for so long.
Very helpful guys. Thank you.
Thank you thanks, Joe.
And our next question today comes from Meghan Alexander with Morgan Stanley. Please go ahead.
Hey, good morning, Thanks for taking our question.
Just wanted to maybe follow up on Joe's first question a bit there. So retail overall I know it differs by segment, but retail overall it does look like it's it's down you know maybe high single digits. So far in the first half I don't want to necessarily put words in your mouth, but just based on your comments. It seems like maybe it's some things expected to get a little bit.
Better in the second half from a share perspective, maybe some things stay the same but I guess, there's still reason to believe retail could could maybe be down a.
Speaker Change: High single digits, which would be you know high single digits worse than your original expectation. So in the context of the kind of 10% additional cut to shipments is is it really just the change in your retail expectations or is there some implied additional destocking I just wanted to make sure I'm understanding the change and maybe it's just that.
Speaker Change: It's kind of it depends on the segment that maybe if you could just help us a little bit to understand that that would be yeah, I mean, yeah.
I mean, you're you're you know it's it's you know each segment has very different dynamics, but the way to think about it is when we came into the year.
I made these comments in my prepared remarks.
We were expecting to bring dealer inventory down kind of low double digits and now we're talking about 15% to 20%.
Which you know basically signals that in addition to the retail reduction that we're seeing we are taking a more aggressive position.
Because we need to make sure that we've got this business positioned to play a lot more offense and defense as we move forward I.
I will tell you that as we look at our second half retail versus first half, we do not have any <unk>.
Surely in improvements built in we have some very specific areas around we know Ah <unk>.
Mid size motorcycles will improve because of the launch of the new Scout, we know that the new ATV to up which is the first you know redesigned vehicle we've had in the market in a long time.
Something that customers have been looking for we have some small areas like that but we're not banking on you know some massive improvement we really are expecting that the.
The environment that we've been experiencing here in Q2 that you know really.
We had a tough April things got a little bit better in may a little bit better in June, but still ended up being well below and with those being peak seasonality times for US you Miss that window with boats and motorcycles you pretty much.
Set at that point as well as in some of our rec market. So.
We've tried to build that in in and calibrate we've communicated with dealers what those new profiles look like the team's still working through it I'm gonna be.
Not only at our dealer meeting next week, but we have a dealer council meeting the day before we will have some of our top dealers in there that represent the network.
And that'll give me firsthand.
Viewed how they're feeling about things the reaction to the to the new profiles, which overall I think has been on balance positive and we'll continue to adjust the business as we move forward based on how the macro environments playing out.
A couple of other timing things to keep in mind as you think about H one versus age to a first half of the year has really no snowmobile retail because we didn't have any snow normally I mean, most of the retails and kind of is it a lot of it in Q4.
But this year and some is in Q1 and we didn't really have any in Q1, and we're expecting a relatively more normal snow season sell there'll be snow retail.
In Q4 that wasn't there.
In the first half and then you know marine has been one of the most pressured segments and the reality is there's not a lot of marine retail in the second half so that that negative impact kind of slows down.
But to Mike's point, we're not expecting a herculean.
<unk> other than things, where we know, we've got new product or or some changes in the industry.
Got it that's helpful. And then maybe just a follow up maybe to you now.
Ask a more pointed question how do you view each end market each segment and offer it on marine kind of the channel inventory position today versus where you'd like to be at year end.
It seems like off road there is still the most work to do but definitely we would appreciate you confirming that and then I guess, how does that in the context of Bob Your comment on you know promos.
No idea next year is that more so a comment of not knowing if the channel will be cleaned up or more just about kind of the consumer willingness to purchase vehicles.
Yeah, maybe let me start there and work backwards I mean, you know one it does depend on what the macro is but it also depends on the competitive environment. I mean, one of the things that you know we were probably caught even more off guard than we expected in Q2 was the degree of which there was non current inventory still being pushed into the channel.
Do believe that a lot of that is getting resolved.
And was handled through Q2 hopefully we.
We do have CDK data that covers a significant portion of the market. We know that we are the healthiest by far from a current to non current.
As well as being either number one or number two in terms of the days sales outstanding at each of the dealers on a rolling six and 12 month.
There are competitive dynamics there.
We obviously don't have a direct influence on but I know that our dealers are putting a lot of pressure as many of you know because of the surveys and the discussions you've had although with a very the dealer network.
Think that sentiment is shared.
Uncertainty in the marketplace.
It's driving a reluctance to carry more inventory than they think they need to have and that's essentially what we're responding to I think your point around each of the segments is pretty accurate off road probably needed. The most correction, although we did make corrections to motorcycles and marine we'd been working on the marine.
Side in earnest since last year are reacting to the current environment and I think that the dealers have been appreciative of that motorcycles, it's weak industry, but some competitive dynamics there with some new products that came in off road is really you know obviously the lion's share of it given the magnitude of the business as well as.
You know with the majority of our dealers its largest line that they've got and as a result, that's where we really needed to make the most moves but I'm going to come back around.
Said it last time I'll say it again this time, we monitor the data we know that we're the best in terms of the current to non current mix at the dealerships. We also know by each of our segments, where we stand in terms of the days sales outstanding on the floor and I can tell you we're either number one or number two in the majority of those segments that doesn't say that we haven't got work to do.
Clearly with the guidance change that we have we're working through that and I'm gonna be in front of dealers next week getting a firsthand view to how that's all going and being pursued.
Okay. Thanks, I'll pass it on thank you.
Thank you and our next question today comes from Fred Wightman with Wolfe Research. Please go ahead.
Hey, guys. Good morning, maybe just a follow up on the last question can you talk about the plans for the ORP leadership going forward, Mike I know the press release last week mentioned, you were going to take a little bit more of a hands on approach to that going forward, but can you just fill us in on maybe how you see that being managed longer term.
Yeah, I mean look we're you know we're in a challenging.
Environment and I think given that it's you know 75% of our revenue and pretty much all of our income it's probably not a bad thing for me to spend a little bit of time with our with that team. What I would tell you is I've got an incredibly strong corporate team are folks who have been with our company for a long time very talented.
That I can rely on a corporate level and then within the off road business. We've you know I've been staying very close over the past several months we've.
We've made a number of organizational changes to really simplify and streamline we have very very strong business leaders for or be snow commercial and government defense.
Who you don't have a lot of industry experience and so it'll give me an opportunity to work more closely with them.
And then we will decide down the road what that means in terms of ultimately are any organizational decisions that we need to make but in light of the current environment. We're in I think we all benefit for me being a little bit closer.
And like I said I'm excited to have the opportunity to be with the dealers next week meeting that I would normally have 10, but obviously play a larger role in a given the changes that we're contending with.
Yeah.
Okay. That's fair and then you guys also mentioned some planned cuts to hire a S. P product I think Bob also gave some color on the mix headwinds that are baked into that EPS reduction I'm wondering if you're seeing any signs of incremental pressure at sort of that higher end consumer or if it's really just a matter of dealers are kind of tapped out from a floor plan perspective, and just don't want to.
Higher dollar product on a unit per unit basis.
Yeah, I would say, it's a it's more the second comment.
Now.
We launched XT in expedition, and obviously you had a lot of channel fill and the retail spend retail has been good at the high end of those products there'll be a little slower at the lower end of those products. So you know northstar caps cap units tend to do really well and I think that's a trend we're seeing across most industries ride height high dollar cash buyers are still.
Buying and Theyre buying premium product.
And so really our decision was more around those.
Those premium products are also expensive.
For dealers to carry on floor plan and so.
That's a good place to go to correct inventory and so we chose to do that and you know, but we are seeing decent strength there and some of it is correcting the mix and just getting the mix to where the stuff that's really selling well as is what they have in inventory and some of the stuff that's been a little slower.
We cut back shipments on and pull out.
And as you can imagine it's a delicate balance I mean, what we don't want to do is over correct and put ourselves in a position, where we start seeding showroom floor and share and the fact that in the second quarter, we held our own from a share standpoint on a year to date basis, we've gained share in side by sides. When you think about some of the dynamics.
In that market, specifically around non current to current inventory and frankly, the significant discounts and financial promos that are that we're battling against.
I'm pretty proud of the team being able to put ourselves in a position like that to say that we held our ground in side by sides actually gain share. Yeah. I mean, you can see it with expedition you know we talked about cross in crossover we gained five points of share in that that's driven by expedition. So the.
Certainly the high end of the expedition products, selling really well getting great reviews people are really enjoying the product and so we will continue to drive that leadership position, but we're gonna be careful to make sure the balances right to make sure the dealers.
Get the relief on their floor plans that are looking for.
Perfect. Thanks, a lot.
Thanks, Brad.
And our next question today comes from Craig Kennison with Baird. Please go ahead.
Hey, good morning, Thanks for taking my question, it's really a follow up Mike to the last comment you made but I know part of the cost of reducing inventory is that you could open the door up to competitors that want to show maybe less discipline in how they stock dealers I'm curious specifically how do you protect your flank for example, do you tie that.
Floorplan coverage promo to Reorders, just curious how you strike that balance.
Yeah, I mean, it's a good you know there there's always some level of exposure.
What I would tell you is I think there's a couple of things that kind of self regulate I mean, certainly in an environment like this the dealers are going to play a significant role in making sure that they're putting the appropriate pressure and I think without going into a lot of details you've heard that from some of our other competitors or they will literally discontinue aligned we've seen that in the.
Marine space, where dealers got stuck with a lot of inventory from short lines and they obviously put a focus on it in the near term to move it but they're no longer carrying those brands. So there is an element of that.
In our off road business, obviously, the Northstar program that we have which is essentially how we radar dealers and then they get rewarded in terms of everything from hold back to other incentives that they participate in that's going to play a key role our team has done a lot of work over the past several quarters the business reviews that we talked.
And the last meeting.
Where they're sitting down there talking through market share market share targets health of the dealers' business.
I think those are all going to serve us incredibly well and like I said, we're going to have an opportunity to be in front of dealers next week and hear firsthand.
How they're feeling and make sure that we're addressing those concerns as I said in my prepared remarks, we want to be the partner of choice.
And they should know that they have my commitment that we're gonna be working that you know I'm gonna be their firsthand.
And we're going to continue to work that through the balance of the year and into 'twenty five to make sure that we're demonstrating through action.
<unk> consistently with the words I just said.
Thanks, Mike and if I could sneak in another question just to get your comments on a different topic related to tariffs, but you know certainly that the political environment is really tough to read it just doesn't seem like there's an anti terror of candidate in the race right now so I'm wondering where you see the most policy risk understanding you really can't.
Respond to changes that haven't yet been formally made.
Yeah, I'm going to I'm going to act like a meta debate and I'm actually going to go back to the prior question for a second because I realize that I was talking I was talking specifically about all of the tactical things ultimately it comes down to some of the things I talked about in my my prepared remarks. It comes down to innovation of products, that's what it's going to protect our flank.
Couldn't be more impressed and proud of what the team has introduced over the past three years across every single one of our categories and we're not done we've got more coming out I was very clear we've cut cost in this business, but I can tell you. We are still spending over 4% of our revenue on R&D. We are going to continue to be the leader from an innovation Stan.
Point and so all those other pieces are interesting in terms of how we run the back into the business and partnering with the dealers. The innovation is really going to make sure that that.
It's where we keep our foothold in those dealerships. So I just wanted to come back to that as it relates to tariffs, it's anyone's guess.
We do know that some of the news that's come out recently theres nothing that impacts our business, we're obviously going to be watching it I think there is an awful lot of rhetoric right now around elections, and so we've got to put that in context of that's exactly what it is.
But we agree with you that you know the the sentiment is not shifting.
Certainly given some of the geopolitical dynamics that we're dealing with I made some comments upfront we're doing what we can to near shore, where we're pulling things out of China and moving that into either other parts of Asia or into Mexico or in North America.
Where we have.
Less constraints from a tariff inbound tariff and we've also reshuffling some things between plants that helps us.
Contend with that so we're.
Obviously planning for things did not get any better from where they are and we've been in that environment now for some time.
And then obviously if new.
Speaker Change: Tariffs come into place, we will have to to react to that we've got a great government relations function that stays on top of everything. So you know as soon as we know where things are headed we'll react accordingly.
Thanks, Mike.
Thank you thanks Craig.
And our next question today comes from David Macgregor with Longbow Research. Please go ahead.
Speaker Change: Hi, Good morning. This is Joe Nolan on for David.
You mentioned that there will be a more meaningful impact from lower shipments on <unk>, but you also have the benefit of shipping the new scouts continuing into the third quarter. So just wondering if there's any further detail you can provide on cadence there.
And then with the operational savings of $50 million year to date is it fair to assume it's fair to assume that we see a larger balance of that remaining benefit in the third quarter versus the fourth quarter as well.
Yeah. So I'll take the first part of the question. So yeah, we will have scout shipping in Q3, we did start shipping them in Q2.
So you know, but as Mike said that the cuts are a little bit weighted towards O. R. V. So you know just given the magnitude of that business relative to motorcycles.
That will that will sort of offset the benefit of scout Q3 is not going to be dramatically lower it's just it's going to be the lower of the of the next two quarters. Some of that is driven by snow shipments in Q4.
In terms of the margin, obviously, the RV being down hurts more than Scott Scott being up helps in terms of the cost savings.
We got $50 million through the first half, we're still targeting to get the $100 million that was embedded in the other 100 up to 150 that was embedded in the original guidance in the second half plus the additional overdrive that we talked about on slide 13.
Speaker Change: That will be a little more Q4 weighted than Q3 weighted just because all of those actions take time to flow through the system as we as we work through the factories.
In addition to the head count reductions we've had it from.
From an Opex standpoint, we've got significant head count reductions.
At the factories as we've gotten more efficient involved in direct labor and indirect labor and then obviously cuts related to the volume as well. So part of it's just that the efficiency improvements we've been working on and then some of it is just purely volume takeout, but that that impact will be a little bit more beneficial in Q4 than Q3, which is why Q3, we think it's going to be the.
Lower quarter.
Got it okay that makes sense, thanks I'll pass it on.
Thank you. Thank you.
And our next question comes from James Hardiman with Citi. Please go ahead.
J O apologies it looks like James has left the queue. Our next party as Alex.
Speaker Change: Bank of America. Please go ahead.
Hi, Thanks for taking my questions here, just had one any way to sort of contextualize, how sort of retail played out throughout the quarter is it fair to say you know may have decelerated through the quarter and then any significant deviation by segment that that is worth calling out and then is it fair to say that the guidance is.
Sort of assumed a run rate of retail continues but some upside and.
On road due to due to the incremental launch thank you.
Yeah. We Q2 was interesting April was was pretty weak.
And we've seen that before we've seen you know sometimes it's weather sometimes its just a late start to the season.
And obviously, we were watching may intently in our retail improved in may and it.
Proved again in June, but obviously, well short of where we wanted it to be and that was really because the underlying industry worsened through the quarter. So obviously, we were playing a lot of offense in there to to improve retail I think it's a big part of why we ended up in the share position that we did.
But we certainly saw weakening and we obviously as we got into late May and into June. That's when we started looking at the production plan and some of the decisions we needed to make we were making real time adjustments to promo.
There was a pretty heavy correlation.
With the industry starting to turn down in Q2 to what was going on with consumer confidence consumer sentiment.
And so there were just a lot of factors I think it's also important to go back in time and realized that that was also when the reality around inflation was still persistent you remember we were getting north of 3% Prince with the fed having a targeted too.
And the reality around any kind of interest rate move expectation starting to dwindle.
The mantra of higher for longer are really starting to come back into a into view and I think the reality that customers were stretched from a balance sheet standpoint. So all those factors kind of came together through the course of Q2 and we are I think I give the team a lot of credit we reacted quickly to be.
But to get shipments out of the system and to start heading down the path of course corrections.
As we look into Q2, yeah, I mean, we talked about it earlier when we're answering the question I mean dynamics around snow create a second half difference to first half where there was really no snow retail midsize motorcycles being driven by our scout business that we didn't get those into market until late in June.
And then the ATV dynamics that I talked about in terms of some of the new products that we've got out those are really the largest factors that would create any difference between first half and second half retail.
Perfect. That's very helpful best of luck going forward.
Thank you thanks.
Thank you and our next question today comes from Noah <unk> with Keybanc capital markets. Please go ahead.
Hi, Thanks for taking my question, maybe one that's maybe hit on a bit less frequently but but just wondering if you could kind of speak to how retail's trending internationally.
And kind of provide any updates on kind of the state of channel inventories overseas.
Yeah, I'd say, a week inventories are probably in a little bit better position.
We haven't fully recovered from <unk>.
Some of the dynamics, we had with the broader business, but I would tell you that it's pretty weak.
Speaker Change: Nationally not you know not every country is exactly the same but.
We've seen a pretty much a I would say across the board not necessarily consistent but a fair number of dynamics.
The good part is that the international.
Component of our company is still.
Less than 15% so the vast majority of the correction that we've seen has really come out of North America, but we certainly have seen international half the downshift as well.
Very helpful and maybe one that's kind of slightly a housekeeping question, but on the dollar 40 and kind of the EPS walk versus the $150 million that you've kind of laid out how should we think about kind of the differences there in terms of maybe categories or buckets.
Yeah, the categories are pretty similar similar actually.
You know the the incremental dollar 40, which is kind of roughly $100 million under $5 million.
<unk> is really split pretty evenly between.
Cereal and logistics.
<unk> over plant overhead spend in direct labor, obviously, the direct labor you know on the in the first $150 million that was really driven on efficiencies and lean and the things. We're doing in this incremental it's more driven by volume and just taken out direct labor because you have less volume going through the factory.
Speaker Change: But we've made good progress on materials, and we think will I be able to own and logistics to be able to overdrive. Some there and then the plants have done a really nice job on overhead spending and controlling that as volumes have come down. So you know I would say that the first $150 million is more.
Efficiency related and the additional is probably got a little bit more volume impact built into it.
Just taking those costs out in line with the volume drop.
Thank you very helpful.
Sure.
Thank you and our next question is from James Hardiman with Citi. Please go ahead.
You bet Hey, good morning can you hear me.
Hey, guys hear me okay.
Awesome Yeah.
So.
So.
You may have already answered a portion of this I wanted to focus on or views just because.
Most important segment.
My brain can't keep up with all the moving parts with all the different segments to be honest.
Retail wasn't that bad right down 4% for the for the second quarter.
Maybe speak to the exit rate it would get meaningfully worse than should we be thinking about July if any better or any worse.
No R. R V business actually picked up a little bit of momentum through the quarter.
But I would tell you. It was it was short of our expectations and it was consistent with what the you know the comments, we made which was the rec side continue to see weakness.
We were encouraged with what we saw from expedition and we're encouraged with what we saw from Ranger.
You know, obviously ranger remaining positive through the quarter was a bright spot, but it was still below our expectations. So as we look into the back half I mean, it really is as simple as the things we laid out I mean, it's we kind of assume it's a little bit more of what we've seen.
With the exception of a.
A couple of products around snow and midsize motorcycles, and the new ATV launch, they're gonna move numbers.
Substantially, but theyre going to move numbers relative to how they performed in the first half.
Yeah, James I really go ahead.
As you think about the REIT retail I mean, it's a two part story right it's retail.
You know being down and down relative to our expectations with the coal industry being down but also it's this adjustment of dealer inventory is a big driver in the second half and you know when we were looking at taking dealer inventory down 10% for the full year and now we're going to take it down and you know an incremental.
Five to 10 10 points in the second half of the year that has a bigger impact on second half shipments.
Speaker Change: Got it.
A perfect segue to my second question, so for or should we be thinking about.
Speaker Change: Inventories also being down in that 15% to 20% range I know that was the whole company sort of target.
Is there any way to think about it.
Sounds like inventories are going to be down a lot more than whenever youre assuming for RV retail.
Is that accurate and is there any way if we zoom out to then think about those numbers versus pre pandemic right inventories are down X in retail is whenever it is versus that time, just wanted to make sure that as we exit this year. We're in a we're in a healthy place relative to history.
Yeah, I mean look we're already below pre pandemic, we will be at the lowest point that we've been I think probably since I've been with the company.
We are pulling inventory down further than what we expect retail to perform in that business.
And it's for the reasons you outlined we're making sure that we're getting this positioned you know I think if you talk to the dealers. They would say we like the plan we'd like them go faster. So we're obviously trying to to make sure we can try and adjust as best we can but.
We're reacting in a down market a lot faster than we reacted to that upmarket.
Cause we largely can control a significant number of the factors now that we've made a call on where we see the retail environment going but our goal is to get this thing back to a point where we.
We've got dealer inventory on a days sales outstanding perspective, obviously, I'm not going to give that number but we're going to have that at the lowest point it's been.
In a long time.
To make sure that dealers are healthy and we're in a position to play a lot more offense and defense moving forward.
Yeah, and I think this environment is an area, where our our F. M model versus most of the rest of the industry that just shifts in sort of takes orders in ships and truckloads, we hear the feedback from the dealers they like our model better it adjusts.
Once we get the profiles right. So you know really what you're seeing is.
And in discussion with the dealers resetting the profiles.
To get dealer inventory down to as Mike said, you know what would be the lowest levels. Excluding the pandemic, obviously in quite a while and then the impact of that on on what we think we can ship in the second half of the year, but that should allow us to exit the year with the profiles and the dealer inventory.
Set up at a level that everyone's comfortable with and you know even if retail is is theres muted growth or no growth next year.
We ship into retail and we'll be in a good position.
Got it thanks, Bob Thanks, Mike.
You bet.
Thank you and our next question comes from Saba, Hong Kong with RBC capital markets. Please go ahead.
Great. Thanks, and good morning. So you showed a lot of color on sort of the puts and takes you're seeing maybe just more from a philosophical perspective, I guess how much.
Or do you think you've maybe baked into this we've seen a bunch of guidance cuts across the space.
Speaker Change: So obviously not a unique phenomenon, but just trying to get understanding of when you were having these discussions on the back of the back half of the year you know how much of a sort of a buffer do you think you've built and given sort of the uncertain macro backdrop and the consumer here. Thank you.
Well I mean, I guess I'll come at it a different way we tried to take a very realistic assessment of where we believe the market is headed.
We're going more deeply after dealer inventory, which gives us a little bit of room.
If we see a small amount of variation from a retail.
We've been very deliberate where we see a second half versus first half improvement that it's got to be clear and simple we've articulated that around snow midsize motorcycles and a T V.
And we've right sized our cost structure. So I mean look I'm not I'm not going to sit here and try and you know.
Provide a forecast of what's going to happen with interest rates and where the economy is headed.
We were trying to deal with the trends that we've seen.
We believe we've got the business in a good position but.
We're going to stay true to what I said at the beginning of the year, it's what guided us in Q2 to do the actions that we had that we're going to work tirelessly to make sure that we're protecting dealer inventory and we're going to continue to keep the gas on from an innovation standpoint.
Between the combination of those two which should put us in a really good position. Once this market stabilizes and starts to get back to a little bit of growth.
Okay, Great and then I guess on the some of the focused cost reduction initiatives. We undertook I guess is there sort of room to sort of add those back as the market returns or some of these changes when you think about it.
We can primarily operate without some of these costs is trying to understand and almost buffer there as to both sides given the evolving macro like you know can you add some back quickly if need be and or <unk>.
Optimize a bit further if needed. Thank you.
Speaker Change: Yeah. So you know the original guidance.
Included the $150 million of operating cost efficiency improvements in those.
Those.
We'll continue either in in the guidance original guidance in there in the pro.
The revised guidance.
Those would continue forward the 105 of of ops efficiency in the plants.
Some of that is permanent some of it is just a volume driven.
You know, where you have less labor less overhead spend because you're running less through the factory. So.
Some of that will will will will stay some will you.
We will not and then you know I talked about Opex, where.
There'll be the carryover from the restructuring, but then there will be a more.
More profit share next year, which will be a headwind.
Great. Thanks very much.
Thank you and our next question today comes from Robin Farley with UBS. Please go ahead.
Great. Thank you I wanted to go back to slide 13, just to think about because I think it would be helpful too.
Kind of.
Manage expectations a bit beyond just the next two quarters.
You talked in your opening remarks about your long term growth rate for the top line being kind of a low to mid single digits.
You're cutting 15% to 20% this year and maybe we get back to that long term rate next year I don't know, maybe that's too optimistic, but just a normalized here at some point.
Does that mean.
Look at some of the.
Expense drags here like the plant absorption that the reality is that like if you go back to 3% to 5% growth after that.
15% to 20% drop that that actually you won't get most of this background like in other words. These are not just sort of one time cost buckets or is that just sort of thinking about a reasonable expectation that.
If you're only getting back three to five points.
When you point to cut that a lot of this.
Finally next time I'm sure you don't necessarily get back is that is that reasonable to think that just to kind of keep expectations in check.
Well I think Robyn.
So you know if we got back to 3% to 5% growth that would be off of you know.
Speaker Change: Off of this year's retail that would assume that next year absent some other change in dealer inventory thinking.
We would be shipping flat too.
We'd be shipping to retail and so this year, we're shipping well below retail to pull dealer inventory down. So if we're shipping to retail and we have a 3% to 5% growth then yeah. A lot of this would come back you know in terms of the.
The volume mix and the absorption because we would be shipping at levels that were consistent with with prior years.
You know the piece that you know it's hard to guess is is where promo goes longer term.
Some of that as Mike said earlier is going to depend on.
You know what competitors do and just you know where where things go in the market.
So you know I think that that's.
It's not unreasonable to expect that the majority of those volume driven costs will come back.
If we are shipping at more historic levels that the challenge is we don't know what's going to happen and what the timing of that is really going to look like I mean, obviously the industry has grown at 3% to 5% historically.
We expect that to to return once things normalize that question as Mike said in his remarks as we don't we don't know when that happens, yes, I mean, I think robin what some of the points. We're trying to drive as we were targeting substantial operational improvements.
My eyes are a lot wider now relative to the opportunity that we have in our factories in.
In terms of really to be able to lever them as we get into a growth environment. So these cost reductions plus the volume leverage that we will get when the market returns.
Coupled with the fact that the you know the reductions that we made to our operating expenses you know I'll come back to the word surgical we were very specific.
I think you see evidence of that in the response I had around the off road business that we've taken a lot of complexity out of that organization and really tried to streamline and simplify things.
And we believe that when we get back to growth, we will be able to live with that cost structure.
That doesn't mean, you don't have small things you do here or there, but we've essentially reset the cost structure for this company as we move forward and I think that's going to put us in a spot to really demonstrate volume leverage and get back to showing a pretty steady.
Steady cadence of EBITDA improvement.
We get towards that mid to high teens EBITDA target that we've got.
Okay. Thanks, and then just a quick follow up.
In terms of promotional levels, obviously elevated.
Just as last year, but it seems like they're kind of similar to 2019 levels. So should we think about this level of promotions is actually.
A normal level going forward since it similar to pre pandemic I mean that wouldn't necessarily.
Revert to sort of.
You know what we saw during the pandemic right. It seems like this is the level of promotions that had been normal before the pandemic.
Yeah, I would say the promotion levels are getting closer to 19, they're not fully back to 19, but they're getting a lot closer or at least they they were on a percent of sales.
You know I think going forward.
I do think that as the industry, assuming the industry all adjust to operating at a lower level of dealer inventory, which had been the goal coming out of the pandemic I think that youll see promotions.
To moderate right now there's a lot of promo out there to clear 2023 models.
There are certain manufacturers that still have a lot of non current inventory some have cleared a lot out.
We believe we have the cleanest inventory I, you know I think as that stuff subsides and dealer inventory comes down is there an opportunity for less promotions sure do.
Do we know what's going to happen you know no because it's obviously a pretty dynamic environment and we're only one player in the industry. So.
But I think to your question I do think that they are relatively close on a percent of sales to 19.
Okay, great. Thank you.
Thank you ladies and gentlemen. This concludes today's question answer session and today's conference call.
Thank you all for attending today's presentation.
Now disconnect your lines and have a wonderful day.