PII - NYSE

Hello, and welcome to the Polaris Q4 and Full-Year 2023 Earnings Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions]. I would now like to hand the call to J.C. Weigelt. Please go ahead.

Thank you, MJ, and good morning or afternoon, everyone. I'm J.C. Weigelt, Vice President of Investor Relations at Polaris. Thank you for joining us for our 2023 fourth quarter and full-year earnings call. We will reference a slide presentation today, which is accessible on our website at ir.polaris.com. Joining me on the call today are Mike Speetzen, our Chief Executive Officer; and Bob Mack, our Chief Financial Officer. Both have prepared remarks summarized in the fourth quarter and full-year as well as our expectations for 2024. Then we'll take your questions. During the call, we will be discussing various topics, which should be considered forward-looking for the purpose of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. You can refer to our 2022 10-K for additional details regarding risks and uncertainties. All references to the fourth quarter and full-year 2023 actual results and 2024 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 Mike Speetzen. Go ahead, Mike.

Thanks, J.C. Good morning, everyone, and thank you for joining us today. After what could only be categorized as a turbulent year, we ended 2023 with share gains across all three of our segments. While there was plenty that went right and aligned to the execution of our longer-term strategy, we faced several challenges, particularly in the fourth quarter as costs continue to run higher than we anticipated, which drove a miss to our margin and EPS guidance. While our performance was below expectations, there was much that went right in 2023. It started with us delivering on our commitment to bring industry-leading innovation to our customers. In Off-Road, we introduced two brand new category defining vehicles this year, the Polaris XPEDITION and the RANGER XD 1500. Together with the launch of the completely redesigned R

Thanks, Mike, and good morning or afternoon to everyone on the call today. Fourth quarter results were driven by lower factory shipments, lower net price, higher finance interest impacting both sales and margins. We made the decision during the quarter to scale back Off-Road vehicle shipments given a choppy retail environment. Promotions were in line with our plans, but continue to be higher year-over-year. Manufacturing costs remain elevated. And as Mike mentioned, we booked a sizable warranty expense during the quarter in our On-Road segment. Similar to the third quarter, we continued to see higher product liability costs relative to a year ago as COVID delayed cases progressed through the court system. PG&A continued its pace of record -- of breaking records with growth of 14% in the quarter and gross profit margin expansion of over 300 basis points. Our PG&A business continues to be a competitive advantage for us with the most recent addition of an offering in marine. Today, sales of PG&A products, which includes accessories installed at the factory, make up approximately 20% of total sales with very attractive profitability. Looking at 2024, we expect PG&A to continue to be a positive contributor with growth and margin expansion. In our Off-Road business, revenue increased 3%, driven by double-digit growth in utility, snow, and commercial-related product lines, somewhat offset by a 20% decline in recreational products. We continue to see increased demand for our premium vehicles, including the Polaris XPEDITION NorthStar Edition, which helped our crossover category gain almost 10 points of share during the quarter. RANGER XD 1500 had minimal impact on retail during the quarter, given we began shipping in November. Utility saw mid-teens retail growth, which was a bit higher than previous quarters. We saw strong traction with our agricultural customer base, which tend to have a demonstrated need for the product. Unfortunately, overall snow retailer has been softer than expected given the late arrival of snow across much of North America and uncharacteristically high temperatures in the Midwest. Season-to-date, we have gained modest share. As we conclude the season, we expect lower shipping volumes for the upcoming season, given elevated inventory at dealers as the industry grapples with the lack of snow. Margins in the quarter were pressured by higher promotional levels, finance interest and mix as we sold fewer razors and more snowmobiles, which typically have a larger lower margin profile. We expect a somewhat challenging first quarter on a year-over-year basis, driven by the lack of snowmobile shipments in the quarter and the channel refill on ORV that occurred in 2023. Recall that in 2023, we shipped a large volume of sleds late in the snow season, and we're also finishing up on some channel refill to get dealer inventory to a healthier place. We do expect share gains to continue given our strong product portfolio as well as new products launching later this year. We are also planning for margins to expand as we realize manufacturing efficiencies at our two largest clients. So while it might be a challenging start in 2024, we believe we have the momentum to continue to improve our share position and operational efficiencies, setting us up to emerge stronger as we enter the back half of our five year strategy. Switching to On-Road. I want to start off with a highlight and that is Indian motorcycle markets first year of profitability in 2023. Like Doherty and the team have done a great job building Indian Motorcycles into the number two motorcycle brand globally, we look forward to its continued success. Sales during the quarter were down 24% as the motorcycle market continued to be challenged given the difficult macro backdrop and high interest rates impacting monthly payments for consumers. We were also up for the full year against a difficult comparison to 2022 when we were refilling the dealer network with bikes given supply constraints. Indian Motorcycles lost modest market share during the quarter driven by competitive pressure in the heavyweight space, which was somewhat offset by continued strength in midsize. On-Road gross profit was down 323 basis points due to the previously mentioned warranty expense booked in the quarter. Gross profit margin for Indian Motorcycles was up nearly 600 basis points marking the sixth straight quarter expanding margin over 250 basis points, helping them achieve profitability this year. In Marine, sales were down 41% as the industry continues to deal with elevated dealer inventory levels and higher interest rates impacting the consumer's decision to purchase. We made the decision earlier in the year to curtail shipments given the trends we were seeing, which resulted in lower volumes in the fourth quarter. Gross profit margin was down 368 basis points given top line pressures. However, our team continues to actively manage the variable components of their cost structure to protect profits. With the season concluded Bennington, Godfrey and Hurricane all took share in 2023. We are excited about the future of our Marine business as they continue to refresh their portfolio as well as add new dealers to the network. With boat show season upon us, the early read is that dealers continue to feel they are high on inventory and retail seems to be trending flat slightly down versus 2023. Quickly reviewing our full-year performance by segment. Retail ended up being more challenging. Segment sales were at or above our guidance, and we gained share in each segment with a strong offering of competitive products. Operationally, we have walked through the challenges in Off-Road. And again, it was great to see On-Road and specifically Indian motorcycles be profitable this year. Moving to our financial position. We concluded the year with significant year-over-year growth in operating and adjusted free cash flow. During the year, we used this cash to support CapEx investments and returned $326 million to shareholders in the form of dividends and share repurchases. We are in a strong financial position, ending the year with a net leverage ratio of 1.6x, which is in the middle of our 1x to 2x range we like to manage the business. During the quarter, we completed our inaugural investment-grade public senior notes offering by issuing long five year bonds. This brings our mix of variable to fixed rate debt to 68% fixed and 32% variable. We repurchased 1.6 million shares in 2023 and remained well ahead of our target to repurchase 10% of our outstanding basic shares before the end of 2026. We believe that we are well set up for a variety of scenarios in the broader market with our balance sheet and believe we can replicate last year's cash generation from a dollar perspective in 2024. Now let's move to guidance and expectations for 2024. We are initiating guidance today calling for 2024 sales to be down in a difficult retail environment, coupled with a reduction in shipping volumes as we lap dealer inventory fill in RV and marine and the timing of snow shipments which favored 2023. Most of these headwinds are expected to be realized in the first quarter. I think it is worth repeating what Mike said on dealer inventory, and then our goal of strong discipline around dealer inventory this year is based off a declining industry retail environment. If retail estimates or our opinion on competitive positioning of inventory changes, we will update our levels of dealer inventory. Promotions and finance interest are expected to remain elevated as we progress through the year, which also adds pressure to our top line and margin. By segment, sales within Off-Road are expected to be down mid-single digits, driven by a tough comp in the first quarter and lower shipment volumes of snow and some models within ORV. These headwinds are expected to be somewhat offset by retail and channel fill of new products such as the RANGER XD and products scheduled to launch in 2024. We expect Off-Road to take share in 2024, given its strong competitive portfolio. On-Road sales are expected to be flat year-over-year as we continue to see a soft market given higher interest rates. Our expectation is that On-Road gained share with some very exciting products launching later this year. Marine sales are expected to be down mid-teens percent as we work to reduce inventory in the channel in the midst of a challenging industry. We believe Bennington's new S&SV lineup give us a great opportunity to continue taking share in the pontoon market. Our margin guidance calls for expanding both gross profit and EBITDA margins. As you can see with our guidance, the expansion happens at the gross profit level with savings and efficiencies expected to be realized in materials, logistics and at our plants. In total, we are targeting over $150 million in operational savings with an even larger funnel of opportunity. Within the plants, we see costs coming down with a renewed focus on lean manufacturing practices as well as being more efficient with the production of our new vehicles. We also expect savings from the capital investments we made in Monterrey, Vietnam and [indiscernible], which include new paint systems and back shop vertical integration. Operating expense dollars are expected to be up 1% to 2% relative to 2023, driven by wage inflation and returned to target payouts on incentive compensation being mostly offset by cost reduction actions across the business. We have planned for product liability costs to remain at a similar level to 2023 as we continue to work through case backlogs. Additionally, a headwind to gross profit and EPS, but not EBITDA is that depreciation is up approximately 15% relative to 2023 due to tooling associated with the launch of new products introduced last year. A couple of other items to note include: modestly higher year-over-year interest expense. This impacts our dealer floor planning, finance interest costs as well as debt costs. We have planned for three rate cuts in the second half. We are planning a higher tax rate as we do not expect the same amount of R&D credits as well as the benefit of some other onetime items that helped lower the rate in 2023. Foreign currencies remain volatile and are expected to once again be a headwind. We have planned for the Canadian dollar at 0.72, the euro at 1.07 and the peso at 17.5. We believe we are well hedged [indiscernible] changes in the Canadian dollar at peso below these rates. Accounting for all of these items, we are guiding to adjusted EPS between $7.75 and $8.25, which is a decline of 10% to 15% relative to 2023. For the first quarter, a few things to note. As I mentioned, we have a meaningful headwind to sales due to the trend in snow shipments last year as well as channel refill in ORV and marine. Given such headwinds, we expect sales to be down approximately 20% in the first quarter. Higher promotions year-over-year at a similar run rate to the fourth quarter. We continue to experience headwinds from net pricing, finance interest and stable [indiscernible] efficient operational costs that we incurred during the fourth quarter. And lastly, FX and interest expense continued to be unfavorable year-over-year. So putting this together for the first quarter, we have a number of headwinds, predominantly the sales headwinds and pressure on margins that are expected to result in breakeven adjusted EPS. We expect to see closer to flat sales year-over-year in the remaining three quarters of 2024 with share gains from new products offsetting a slower industry. These sales volumes, coupled with meaningful margin expansion as we go through the year and realize the savings and efficiencies from our efforts to fix our plants will yield year-over-year margin expansion. We expect another year of strong cash flow generation as the team continues to drive working capital down. It is also encouraging to see the early progress we've made in our plants from building the new vehicles more efficiently to reinvigorating lean processes. Before Polaris, my career was with the industrial sector, and I am encouraged by the renewed focus I see on lean at our plants. I know we still have work to do, but the opportunity is great. Our teams are aligned on our plan, and we look forward to reporting out on the progress through the year. With that, I'll hand it back over to Mike to wrap up the call. Go ahead, Mike.

Thanks, Bob. We launched incredible new products in 2023 that strengthened our competitive position, and we're not coming off the gas. There is much more to come in 2024, where we will once again demonstrate why we are the leader in power sports. Operationally, we must do better, and we will. Improved cost and quality remain a major focus for us. Our teams are poised to execute on the opportunities across our business to lower cost, improve quality and increase margins. Starting last quarter, our teams began working on many of these initiatives, and I'm confident that we have the focus, momentum and the best team to execute. While the environment is uncertain, our commitment to maintain an optimal level of dealer inventory is clear. We worked hard to ensure the profitability of our dealers is maximized and our ability to maintain a healthy competitive and appropriate level of inventory is an important part of that equation. Our focus and commitment here is unwavering. We remain committed to our capital deployment strategy, which is to invest in our operations, remain a dividend aristocrat and repurchase shares. With our free cash flow yield hovering around 12%, we continue to see our stock as an attractive investment. 2024 also marks the halfway point to our 2026 targets. And while the first couple of years added additional challenges, we believe there is a path to our 2026 targets. Executing in 2024 is critical to meet those targets, and my team and I are focused on what needs to get done over the next 12 months to ensure those long-term targets are met. While 2024 is not setting up to be a robust year from a retail standpoint, we will build on our leadership position within power sports with the most innovative products in the industry, unmatched customer experiences and stronger operational fundamentals. We have the best team in powersports and we know what needs to get done this year. We thank you for your continued support. And with that, I'll turn it over to MJ to open the line up for questions. MJ?

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions]. Today's first question comes from Fred Wightman with Wolfe Research. Please go ahead.

Hey guys. Good morning. Thanks for the question. Bob, you gave us some high level thoughts on sort of the sales and earnings outlook for the first quarter. And I know you guys have some moving pieces year-over-year just with snow and ORV restocking. But can you just give us some more detail on either the segment performance or sort of the margin performance that you guys are assuming there? And maybe how to think about that implied improvement for the remainder of the year?

Sure. So first of all, if you look at the drop for the year on revenue. I mean most of it, we're seeing it in the first quarter, and it's the two primary factors are snow and Off-Road, although both marine and motorcycles are dada [ph] on unit shipments also plus we have the continued high promo level from Q4, which is higher than what it was in Q1 of '23. OpEx is expected to be flat for the year. It will be relatively flat sequentially versus Q4. As I said on the call, we do -- we did -- we anticipate product liability accrual costs to be higher or to continue at their high level in 2024, and we expect them to be pretty consistent with what we saw in 2023 as we work through some of these older cases related to the pass razor recall as well as any other cases we have. So I mean, those are the big pieces for the quarter in terms of what's causing the challenge in Q1. It's really that this adjustment around getting dealer inventory, keeping dealer inventory at where we see the optimum level given what was a little bit slower retail in Q4 than we expected and what we think will be a fairly tepid retail picture in Q1. When you get into the rest of the year, the quarters start to look a lot more consistent and sales will be relatively flat with 2023 and the rest of the quarters. And you'll start to see the earnings improvement from the operational efficiency gains come through. If you think through how the math sort of works, what we see in Q1 is really the inventory we built in Q4. So we are seeing improvement in Q1 sequentially in terms of cost, it just gets matched by the fact that we're going to be so far down on volume that you'll see that the factory hours, the impact of not having those factory hours start to hurt. So you won't necessarily -- the margin improvement won't stand out, but it's there. And we have been working hard through the Q4 and into Q1 to make sure that we're going to continue to drive that performance through the year.

And remember, Fred, that Q1 is typically a pretty low quarter for us anyway. And for years, we've had the benefit of that snow business delivering late, which obviously is not optable for customers. So we've got that business in a much, much better spot. And as Bob mentioned, dealer inventory is now essentially at an optimal level. I look at it as -- it's essentially when our performance is kind of bottoming out. There's a number of factors coming together at one time. And when you look at Q2 and Q3 and Q4, you're not -- this isn't a heavy back-end loaded plan. It's essentially getting back to shipping to retail, we obviously have opportunity in front of us to get cost out through the remainder of the year. But this isn't something where we're not generating earnings in Q1 and making it all up in Q4. It's really us getting back to running the business on a more normal level basis, essentially starting in Q2. And the team came out of the gate strong in January. I can tell you, we are monitoring even more measures and metrics than we have before, specifically around the operations of the business. And I'm encouraged with what I've seen so far, and we're going to stay on top of it to make sure that the team executes.

Really helpful. And then Mike, just coming back to the industry retail outlook, I think you made a comment you're expecting that to be down modestly. Is there anything else you can share just in terms of performance across categories or the cadence of the year? I think you mentioned you were assuming a couple of interest rates as well. How does that shake out?

Yes. I mean I'd say a couple of things. I mean, one, obviously, the broader industry is going to behave as it will. And for us, it's our relative performance. And we did it this past year in terms of gaining share in all three segments. And I'm really confident given the new products that we came out with, obviously, late in the year and getting a full-year of that with XPEDITION and XD. The work the Marine team has done, not just in Bennington, but with Godfrey and Hurricane. And then in our On-Road segment. We've got some, as Bob teased, we've got some very intriguing news coming this year. And to add on top of that, the dealers obviously have become a lot more discerning in what they want to have in their dealerships and we know that they're pushing out a lot of those weaker brands, and that really benefits us because we continue to demonstrate that we are the leader, and there's a reason behind that. And I think that the dealers appreciate the adherence we have to making sure that the dealer inventory stayed at an appropriate level. So as Bob mentioned in his prepared remarks, we're going to make sure we're watching retail, and we're going to monitor our shipments. We're not going to get out ahead of our skis, and we're going to make sure that we have the right inventory at the right dealers, but we're not going to ignore trends. And if trends are better or worse, we're going to adjust our shipping plans accordingly.

And on the rate cut, Fred, we've got about 325 bp rate cuts built in, in the back half of the year in late Q3, Q4. It's bit all over the map right now as to what people think the Fed is actually going to do. So we planned relatively conservatively there. We'll see how the year develops.

Great. Thanks a lot.

Thank you. The next question is from Megan Alexander with Morgan Stanley. Please go ahead.

Yes, thanks for taking our question. Maybe if we could follow-up on the 1Q comments there. Is there any way you can maybe quantify the product liability accrual impact to the fourth quarter. I think that shows up in G&A and it seems like it was maybe a $35 million headwind just looking at your run rate prior. So maybe we could start there.

Yes. That's relatively accurate. I think most of our overspend in Q4 in G&A was the increase in the product liability accrual. And it's really just a confluence of -- we had a lot of cases going through the court system in Q3, Q4. We update our analysis on those accruals twice a year and both for incurred but not reported cases plus specific cases that we are aware of and where there's been discovery, and we have knowledge of kind of facts and sometimes rulings from pretrial motions. And so that that update to that accrual was larger than what we were anticipating larger than it's been historically, and it's really just driven by the quantity of cases that kind of got moved in the last couple of quarters and the impact they had on that analysis. So as you think about -- you think about 2024 and OpEx. We're going to -- we've kept a similar run rate for legal, not the fourth quarter run rate, but the full-year. And then our OpEx is basically flat, and it's a combination of the headwinds or the merit and cost of living type increases returning the bonus pool, we plan it at full payout, which obviously we don't have this year given that we missed our guidance and then the tailwinds. We've done some cost-cutting and work around efficiency in the organization as we head into the year. Obviously, we're being very judicious on hiring and things like that. But we didn't want to cut our focus on engineering and innovation given that really the challenge for 2024 is really just this first quarter revenue drop. So we continue to keep those investments in. Obviously, we'll look at all that if the year turns out to be material different than what we think it is today.

And Megan, I said it in my prepared remarks, but it merits reemphasizing it. The majority of these costs are associated with products that are back before 2018. And the thing to keep in mind is during COVID, the legal, the court system kind of essentially shut down and has just kind of gotten back into getting up to speed, so the pace and movement of these cases has been happening pretty quick. And as you can imagine, we're obviously trying to do the best that we can to stay on top of it. Bob mentioned that we've planned '24 at a very similar level to what we saw in '23. We're keeping a close eye on it. Obviously, I think it's not unique to us. The legal environment is pretty challenging right now and cost overall of settlements and trials and all that are much higher than they have been historically. So we do have product liability insurance. So we do have that benefit factored in as we think about financial guidance and how we want to handicap potential risk.

Okay, great. That's helpful. And then maybe the same question on promotions. What are you seeing today relative to the fourth quarter in terms of those promotional levels and in the context of inventory up 5% versus '19, I think your expectation was for it to be flat to slightly down. So how should we think about that promotional impact to the first quarter? And what's kind of your confidence level that this is all contained to the first quarter?

Well, I mean, a couple of things. We ended up doing probably a bit more in the fourth quarter, as I mentioned, given some of the competitive dynamics around noncurrent inventory. As best we can, we can tell that, that is coming down relative to where it has been. But if you look at the first quarter of '24 versus first quarter of '23, our dealer inventory was probably 40 days lower than optimal. So there was very little promo in the channel. We were all still trying to get ourselves caught up in the first quarter. And so when you do that year-over-year comparison, it's pretty substantial. Look, it's really going to come down to the amount of discipline that we and others are going to have around dealer inventory, making sure that there isn't noncurrent inventory sitting on the floor in excess as well as just making sure that we're watching retail and making the adjustments to the shipments. And we know we've made that commitment. We've heard others now starting to voice that, which is encouraging. And I think that's going to be an important dynamic to make sure that promo remains in a relatively contained fashion. Our team has done a lot over the past few years in terms of the investments we've made in our CRM systems so that as we go out with offers, obviously, you'll have blanket offers that are around financing that we know are pretty successful and obviously hit a certain tier bracket of credit rating. But a lot of our other offers go through and are much more targeted to customers that have been in the Polaris family for a while, and we know it's time to upgrade. We're really trying to do that so that we end up with a much more efficient use of that money than just doing a blanket offer.

Okay, got it. Thanks, Mike.

Thank you. The next question is from Craig Kennison with Baird. Please go ahead.

Thanks for taking my questions. Really goes to the 2026 plan. For investors to believe it, I think they need to believe in significant margin expansion, which frankly is harder to believe, given some of the operational challenges that you faced in 2023. I guess how would you frame the potential to achieve that 2026 margin plan? And what are some of the key drivers to achieving it and maybe your confidence level in some of those drivers as well? Thank you.

Yes, I think I feel pretty good about everything. The margin EBITDA margin is obviously the one we're contending with right now. And I'd say it's a couple of things, Craig. I mean it's obviously why we have pushed the team hard to work on the inefficiencies. If you go back in time, our factories were dealing with a fair amount of I don't want to say chaos, but there was a fair amount of inefficiency given what was happening from a supply chain standpoint. And during that time period, I'd tell you, we kind of lost our way. The lean focus making sure that we were managing down to the daily cost budgets in the plan, it was all focused on trying to get product out. If you remember the days of dealer inventory having an 80-day deficit relative to targets. I give the team a lot of credit for working hard to get the product out so that we could make sure that we were getting consumers the product that they needed. The issue really started this past year when we saw the supply chain becoming less and less of a factor yet the performance in the factory wasn't improving. And a lot of the things that happened during COVID really came back to work against us. Specific examples would be in our indirect versus direct labor. Typically, you have more direct labor than you do indirect and then some of our plants that balance got out of whack. And that's really driven by needing extra teams to go out and do rework and supplemental quality checks because you're moving product through essentially a secondary assembly line. Material flow. At one point, we had 1,000 tractor trailers with parts in them in Monterrey. And that is really a symptom of an inefficient material flow process. Now the good news is, yes, we have a lot of work in front of us, but we have a very skilled team. We've brought some new team members in, very steep and lean principles. We have engaged some external folks to come in who are more hands-on, not consultants to help us identify the issues. We've seen the progress starting the momentum shift in Q4 and we've tailored our internal review process, such that Bob and I are sitting down with the business unit presidents and their operational leaders on a pretty regular basis to review how we're doing making sure that we're keeping the cadence going and that this isn't short-term fixes. These are really fixing some of the more systematic things that we've got to get after. So I have a lot of confidence in that. And it's really going to be key for us to have the bending of the curve. That's why you see us targeting a positive EBITDA improvement versus '23. Because that will really start to build the momentum. And as you can imagine, a lot of the enhancements and the changes and the improvements we're making, they're not happening in day 1 in '24. And we've obviously factored that into our guidance. They start gaining momentum as we get into the second half. And what happens then is you really get that momentum of those cost improvements into '25 and then I'm not sitting here making a call, but if you can get some positive revenue momentum if the market is just either flat or up slightly, that puts this business in a much, much better position to leverage that growth and get that margin expansion. I think the rest of the pieces play out. I mean, our capital deployment, return on invested capital, those things I feel really good about. It's really going to be predicated on, one, our execution of the cost improvements internally. And then two, does the broader macro start to improve late in '24 and into '25?

Yes. I think one thing to keep in mind, too, Craig, is when we put these targets out, if you look at where we are for '24, we've got 1.5 point of headwind from FX and interest rates on the finance interest side. And so we would be mid-13s on a constant currency, constant interest basis. So we have made actual improvement from 2021. It's just we've had these headwinds. That's not an excuse. We said we've got to overcome those, but we are making some progress. And I think you'll see, if you look at where we're targeting for the year, that's coming with a pretty flat Q1. And so the Q2, Q3, Q4 will certainly be significantly better. I think you'll start to see what the real potential is and that we're closer to our targets maybe than it appears on a full-year basis. The other thing is the factory in Vietnam is just coming online for motorcycles right around now. Some of the Mexico facilities have started limited production, so just like Mike said about the exit rate on the improvements in the plants, also the exit rate on the new facilities as we leave '24 will be a lot better than it is at the start of '24 because they're just starting production in those, and it takes a while to ramp up to get the factories full.

Great, thank you.

Thanks.

Thank you. The next question comes from Joe Altobello with Raymond James. Please go ahead.

Thanks, hey guys. Good morning. My first question was on gross margin, the 70 to 100 basis points improvement you're looking for this year. You talked a lot about the FX and accrual headwind, the lower shipments and the net pricing. It sounds like in terms of good guys, if you will, most of that $150 million of cost savings will hit cost of goods. And it also sounds like you're expecting to recoup a lot of that $70 million of incremental manufacturing costs that you incurred in the second half of last year. Do I have that math right?

Yes. I mean when we talked about $150 million of improvement, that's all going to hit in GP. It's really split between material, logistics and plants, materials and commodities would be the largest piece logistics the smallest and then the plant is in the range of getting at that $70 million that we talked about.

Okay. And the incremental manufacturing costs, you expect to recoup all of that?

Well, the way -- I guess the way I'd come at it, Joe, is to say we didn't get after enough of it in '23. And so the piece that we missed is definitely coming out in '24. We did get cost down in '23. We just didn't get it down near as much as we had targeted. And aside from the actions that we've been taking, there's also momentum around certain commodities already starting to come down sequentially, and that obviously takes some time to roll through inventory. So Bob and the team have this pretty well pegged out in terms of the buckets that need to happen, and that's what we're basically reviewing on a weekly, monthly basis.

Okay. And just one quick housekeeping question. The incremental impact from the snowmobile shipments in the ORV and marine restock in Q1 of last year. I think it combined for about $250 million of incremental revenue. Is that right?

Last year?

Yes, Q1.

No, you mean the impact on Q1? No, I'd say it's much higher than that, Joe. We said we'd be 20% down from last year.

And it's almost -- there's some impact in marine and motorcycle, but the bulk of it is snow and ORV.

And Joe, that's -- I made the comment on the question earlier around it's essentially the bottoming out of our performance because if you look at it, you're getting essentially the majority of the revenue decline is in the first quarter, and it's two things, well, three with promo. But it's that snowmobile fixing the business, so we don't have that hangover of late deliveries as well as the fact that we don't have the 40 days of DSO inventory opportunity in front of us. So once you get into Q2, you're kind of back into shipping to retail. So the stability with an industry that we're assuming is down slightly, but we're outperforming given our product set up. You get into a far more normalized set of quarters, Q2, Q3 and Q4.

Got it, okay. Thank you.

Thank you. The next question is from Tristan Thomas-Martin with BMO Capital Markets. Please go ahead.

Hey, good morning. Continuing on the margin thread. How are you thinking about segment margins, gross margins next year?

I mean, we'll see the bulk of the segment gross margin improvement will be in Off-Road because the two factories that have been underperforming are really our Monterrey and our two large factories. And so those are primarily focused on Off-Road. So you'll see the bulk of that in Off-Road. In On-Road, it's a pretty flat year. Indians continued to focus on margin. It will mostly depend on what the kind of heavyweight versus midsized mix looks like, and that will just depend on how the industry plays out. But obviously, heavyweights carry a little more gross margin than midsize. And then in marine, we'll -- they're continuing to do a really nice job of managing margins given lower shipments. And the great thing about that business is it's a pretty variable cost structure. So we've been able to get at the cost structure to help maintain overall EBITDA margins, even though gross margins were a little bit down. So I think you'll see where most of the improvement comes is in Off-Road.

Okay, thank you. And then just one more. Given the XD 1500 XPEDITION, the initial shipment, I think was pushed a little bit later than you thought. Is there a chance that '24 shipping for this new kind of unannounced product is actually higher than the incremental new product shipping in '23?

Yes. I mean it's tough to say. I mean, I think the opportunity we have with XD and XPEDITION given the positive reception, I suspect that that's going to be -- if you think about those are not completely, but highly incremental. In terms of new segments, we certainly will cannibalize some customers off of general for XPEDITION and the core Ranger business for XD. But given the bulk of that is incremental, it's probably going to outpace any other potential new products that we would have just given the size of those markets.

Yes, there'll be a little bit of we weren't shipping XPEDITIONS pretty well in Q4. There'll be a little -- there'll be some incremental on XPEDITION. But then as Mike said, most of XD will be incremental to the XD that shipped in 2023, which was pretty low.

Okay, thank you.

Thank you. The next question is from Sabahat Khan with RBC Capital Markets. Please go ahead.

Great, thanks. And good morning. Just I guess, maybe going back to the margin side, but more on the promotional angle, I'm obviously taking into account that you do have a bit of cost savings in this gross margin expectation. What kind of competitor promotional activity are you baking into this number? Sort of what did you underwrite in terms of your '24 guidance, could folks get a bit more aggressive to clean up inventory? And how would you respond to that in market? Thanks.

Yes. I think what we're expecting, as Mike said in his remarks, we saw some competitors had a fair amount of '23 model year carryover. Our inventory was cleaner. That really ramped up the promotional spend, and we had to respond, even though we had current inventory, we had to respond to not lose share to people buying '23 with a lot of [indiscernible] that was effective in Q4. That inventory is winding down. So we expect that '23 versus '24 dynamic to start to abate in Q1. But like we said, we do think Q1 first of all, we're lapping a kind of a low promo quarter because we had all the channel fill in Q1 of last year. So promos across the industry, we're the lowest point of 2023 in Q1. So we're lapping that with Q4, which was the most aggressive. As it plays through the year, I think as Mike said, we're -- many of our competitors in the industry are having the same message we are that we're going to try to keep dealer inventory at reasonable levels in retail and take some dealer inventory out through the course of the year. I think based on kind of what we've seen so far, it looks like people are all following a similar path to us that they'll be pretty conservative with shipments in the early part of the year, which should help the inventory be in a better position across the space as we get into the second quarter. So we're planning on promo being relatively in line with this year, and it's going to be highly dependent on what happens to dealer inventory.

Great. And then I guess just one on just kind of the overall industry dynamics. One of the questions we've been getting with the industry softness over the last, call it, three to four months, could '24 be sort of a step backwards towards industry volumes pre-pandemic? Is there some sort of a broad industry normalization happening in units and/or margins. Just want to get, I guess, from your vantage point, you did call out that most of the weakness this year is going to be in Q1 and then normalization. How do you view sort of overall industry volumes, what do you consider to be normal for your unit volumes as well as margins? Just any perspective on what you're hearing from dealers and seeing out there?

Well, I mean, like I said in my prepared remarks, we anticipate the industry is going to be down and for some reason, I think there's been a view that the industry got some massive uptick as it related to what happened with COVID. And essentially, if you go back in time, really, what happened was we had a year where just a ton, not just assuming the industry everything was sold off of dealers' floors and then we've spent the last few years just trying to get caught up. So with industry being down a little bit next year, we think that the volumes are still hovering at or below where they've been historically. And from my standpoint, it's really two things that are going to have to get resolved. I think the uncertainty around the economy as it relates to our discretionary products, the rec products, marine, things like that as well as interest rates. I mean, look people -- even though the financing isn't -- the impact of the interest rates isn't some significant monthly impact to their payment, people just generally don't want to finance at the top of the market. And so we do think that you can see it every time the Fed talks about or hints at what they're going to do with interest rates, you see things start to shift. And I think once the rates do start to move, I think that is going to be positive for the industry, people want to be in. We're not seeing some surge of used vehicles where people are just saying, "Hey, we want out." One of the interesting facts that we've seen, we've talked about it in prior calls, we track repurchase rates. Everything from customers who bought some three months ago to people who were in the market a year ago, five years ago, 10 years ago. And those repurchase rates actually got stagnant during the pandemic surge because new people coming into the category were willing to pay a lot for vehicles. And what we've seen is since that fever has kind of lowered the repurchase rates pretty much across every category we track had actually started ticking back up. And I think that's good for the industry because we know that people are out there. They've got aging product. We've got a ton of new product and innovation out in the marketplace. And I think we just need to see some things settle out during '24, and I'm optimistic as we get out of '24, the setup is much better heading into '25, both for us as a company as well as potentially for the industry.

Great. And maybe if I could sneak in one on the marine side. One of the marine firms that has a year-end in June is pointing to pretty significant revenue decreases -- well above kind of what you're planning here for '24. I guess just maybe if you could talk about where you're playing in Marine in terms of is it a bit of an expectation that would those rate cut expectations, maybe the marine business picks up in the back half of the year? Just how are you thinking about that business over the course of '24 and the comfort level with the mid-teens down guide?

Well, I mean, look, it's tough to always know. But we took a pretty firm stance through the course of '23, working with Ben Duke and his team as we saw the retail environment slowing feedback from dealers around dealer inventory levels and the interest costs associated with those. And it's why we made a series of cuts to our marine production through the course of the year. And so as we head into to '24, we're still being very cognizant of that. The first and second quarter are really going to be key as dealers get a sense of what the boating season looks like, how much inventory they want to take a position on. The dealers are obviously taking a far more aggressive stance because the OEMs essentially have all caught up. I can't think of the last time we've had a supply chain issue within our Bennington, Hurricane or Godfrey businesses. And so they know the manufacturing system can move pretty quickly. And so we've taken a conservative approach to what we think is going to happen this year. And if things end up a little bit better, we can react. And obviously, as we demonstrated in '23 if things don't play out as anticipated, we'll make those reductions to make sure we keep dealer inventory in check. Bob made that point. One good thing about our boat business in a downturn is they can react quickly, and we actually were able to improve the EBITDA margins in that segment despite having lower-than-anticipated volumes.

The other benefit we're seeing in Marine, Mike talked about it a little bit, but as the marine market has been challenged, dealers during COVID, when they couldn't get the boats, they want it picked up a lot of side brands, smaller brands, niche products and as they focused on their floor plan interest and the cost of carrying inventory, they pushed a lot of those brands out, which has created some more space for us. We've also been pretty successful upgrading dealers and adding dealers, which is something particularly in Bennington we have been able to do in a long time because we had the inventory. So to supply a new dealer. So both of those things, I think are helping us a little bit offset some of the weakness.

And I mean, go back and look at the data, I mean, last year, we pulled revenue down in our Marine business over 20% and then we've got a guidance that says we'll be down another mid-teens in '24. So we're responding appropriately to the category, and it's going to be important to see what happens. And hopefully, we're going to have good boating.

Great, thanks very much for all that color.

Thank you. The next question comes from Robin Farley with UBS. Please go ahead.

Great, thanks. Most of my questions have been answered. Just wanted to circle back to your 2026 goals that that you're maintaining. And just to clarify, is that on the revenue side as well that you're kind of maintaining that and what do you think will be the biggest the drivers of that top line? I know you mentioned the idea about interest rates and economic uncertainty kind of clearing up, but it seems like it would take more than just kind of getting back to previous economic outlook. Is there I guess, I just want to clarify, is the revenue goal without any type of acquisition? Or is there something new in terms of product line that we don't know about yet that that we'll see between now and 2026 or just looking for kind of what those drivers might be? Thank you.

Yes. Obviously, we've done a lot of math around and Bob can talk to more detail about what -- to get to those numbers, what '25 and '26 really need to look like. It's not super sporting. I mean, obviously, we can't have another couple of years like we've had from a broader economic perspective. What gives me confidence is, I do think we're at the end of a -- what was probably, I think a record tightening cycle as well as coming out of an environment that I don't think anybody could have ever predicted in terms of COVID and get everybody back to work and just some of the other geopolitical things that were going on. And it's not to say that there won't be more issues in front of us. But I do think we're getting into a more stabilized environment. And when you couple that with what we've done, if I go back years ago, the knock on us was we were losing share. We didn't have the new products coming out. I mean we have fixed that, and we fixed it significantly. And we're not done, and the team's got more product coming out. We're obviously not going to spend time talking about that now. But rest assured, when I look at what happened starting back in that 2015-2016 time period from a share standpoint, it's great that we gained share last year. It's great that excluding youth, we gain more share than everybody else. But we still have a lot more that we're going to get back. And we're going to go after that. We are not building in acquisitions. Given where our stock is trading, I made some comments about our free cash flow yield, there is hard to imagine a better investment than Polaris stock right now from my perspective. And so I would be hard-pressed to be convinced that we need to go out and buy some other company to try and meet our revenue growth objective. I think for us, the biggest challenge is going to be around margins, and I talked about it earlier in terms to Craig's question. The things that we're doing and the things that are under our control, I feel confident that we're going to be able to get after them, and we're pushing the team hard. The team understands what's at stake and they're highly committed and driven and I wouldn't bet against them.

Great, thank you very much.

Thank you.

Thank you. The next question comes from David MacGregor with Longbow Research. Please go ahead.

Yes, hi everyone. Thanks for taking the questions. Mike, I wanted to ask you about tariffs, and there's a pretty good chance we'll end up with the Republic of White House. And last time around these tariffs were pretty disruptive to the P&L. Can you just talk about progress you've made in terms of reshoring or near-shoring back to the North American free trade zone. And are you able to put any numbers around that progress?

Yes. I mean it certainly isn't the topic that it used to be around here. I think we resigned ourselves that these things feel like they're probably going to be permanent. It knows what's going to happen here in '24. But we can't control any of that. I mean we have a great government relations team, and they're constantly advocating for us even though there aren't a ton of them, but the exemptions, making sure that those get renewed and those types of things and fleeting our case because we do think we're being incredibly disadvantaged -- as the global leader in powersports, the truly only U.S.-based company, and we're the only ones really paying tariffs seems a little wrong to say the least. The near-shoring opportunity is something we've continued to push. I would say we've made inroads, but there's still a lot more to do. And frankly, I think there's a lot more to do in terms of shoring -- not shoring but locating our sourcing within Mexico, given how large our footprint is so that we make sure that we've got continuity of supply, and we've got things being produced in the region as opposed to coming from continents away and being subjected to the vulnerabilities and the risk of the supply chain, then obviously, that does give us potential tariff benefit. But we haven't built in some substantial improvement. We know really well what those tariffs are and how to calculate them. And look, if we get some level of good news, that would be great. I'm not counting on it. I think even if there's a Republican in the White House, I think the pressure relative to China is still so great that it's going to take a while if those things go away for them to be acted on. So we're going to continue to do what we do and act like they're permanent and do it great for the business.

Great, thanks. Top of the hour. I will pass it on. Thank you.

Thank you.

Thank you. The next question is from Jaime Katz with Morningstar. Please go ahead.

Hi, good morning. Thank you for all the color you guys have offered this morning. Two quick ones. First, any update to what you're seeing with lending standards from your finance partners and then if you can share maybe how you guys are thinking about price versus mix in the ORV segment and how that trends over the next few quarters? That would be really helpful. Thanks.

Sure. I'll take the financing question first. Really been pretty consistent. Our pen rates have improved as we've seen smaller kind of niche lenders leave some of the markets, some of the credit unions and things have backed off some of their financing. So that usually plays well for us. Our pen rate is up about 100 basis points in the quarter and for the year. Approval rates have remained consistent and FICOs are up about eight points in Q4 versus the rest of the year. We don't see major trends there. I think what we have seen is lenders pushing a little bit harder on debt to income and borrower cash flow as opposed to just relying on kind of credit ratings and FICOs, but I think in terms of credit quality and availability, that hasn't really been the hindrance. The rate has been more of a driver in terms of people willingness to finance. Price promo, I think across the industry, you're going to see pricing itself, MSRPs to be relatively flat, I don't think anyone sees a great opportunity to take a bunch of price this year. And promo, we talked about being relatively flat other than the lapping kind of Q1 where we'll have higher levels in Q1 relative to what we had last year.

Thank you.