Good day, and welcome to the Polaris Second Quarter 2023 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded.

I would now like to turn the conference over to J.C. Weigelt, Vice President, Investor Relations. Please go ahead..

Thank you, Rocco, 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 second quarter 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 summarizing the first quarter as well as our expectations for 2023. Then we'll take your questions.

During the call, we will be discussing various topics, which should be considered forward-looking for the purpose of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements.

You can refer to our 2022 10-K for additional details regarding risks and uncertainties. All references to second quarter 2023 actual results and 2023 guidance 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 for the GAAP to non-GAAP adjustments. Now, I will turn it over to Mike Speetzen. Go ahead, Mike..

we continue to rank number one in dealer satisfaction relative to other OEMs. Sentiment around inventory strengthened as the supply chain improved. However, RANGER NorthStar supply continues to be an area of opportunity.

Dealers expressed optimism about how promotions and product availability can positively impact retail and our quality scores improved across all product lines. Lastly, the team and I regularly visit dealers.

Earlier in the year, some of us visited Marine dealers in the Southeast, which we talked about last quarter, and a month ago, we visited Off-Road dealers in the Mid-Atlantic region. The two biggest takeaways from our most recent visits are that dealers told us Polaris is winning the innovation race.

From the launch of the Pro, RZR Pro R and Turbo R, the RZR XP to the more recent Polaris XPEDITION. We believe that we are at the forefront of rider driven innovation and providing the best customer experience while expanding the market. Secondly, dealers noted their outlook on the year has improved relative to what they believed earlier in the year.

Pressure remains at the low to mid-end of the recreation market, but premium continues to perform well, and there's plenty of excitement around our new products. As we indicated at the start of this year, 2023 is an exciting year for product innovation and two of these launches are shipping now. The first is our completely redesigned RZR XP lineup.

The multi-terrain category is the largest segment in the sport side-by-side segment and the RZR XP has long been the best-selling sports side-by-side in the industry. In March, we launched the next generation of RZR XP with class-leading durability, comfort and performance that takes this lineup to the next level.

This product hits at the heart of the market, and we expect it to continue to be our top-selling RZR. Reception has been great, and many of you will get to see it in person for the first time at next week's meeting. The second product is the Polaris XPEDITION, which is hitting dealer floors during the summer.

Similar to how RZR and general pioneered new categories in the side-by-side market, we are on the path to do that yet again with this entirely new adventure side-by-side category, targeting consumers who are into over-landing and have a destination mine for camping, adventure and exploration. The Polaris XPEDITION has added comfort and capabilities.

Plus it touts the industry's largest fuel capacity of any factory side-by-side on the market with a 200-plus mile range, making it stand out against any other side-by-side in the market. Rider driven innovation is one of our core strategic tenants and we are not done yet. It's safe to say there's more yet to come this year.

Regarding dealer inventory, we continue to be in a much healthier position relative to last year and are diligently working to get new products and more Ranger NorthStar to dealers' floors. Relative to 2019, inventory is down about 25%. We view this level as near optimal and dealers seem to agree.

While we occasionally hear feedback from dealers that their overall inventory is too high, they also tell us their Polaris inventory is in a good place and their excess inventories coming from lower end OEMs they brought on during the pandemic to meet demand.

On some of our recent dealer visits, we heard that dealers are working hard to sell those lower-end OEM products and evaluating the need for such OEMs now that vehicle availability has improved across the industry. We value our relationships with our dealers and continue to work with them to enable our mutual success.

Switching to our Geared for Good strategy, around a variety of ESG metrics, I want to recognize our recently published 2022 corporate responsibility report. I love seeing this report and the compilation of stories illustrating our team's passion and commitment to be good stewards.

One of the highlights from this year's report was around our environmental goals. We celebrated exceeding our original three environmental goals that we set in 2017 and announced seven new 2035 environmental goals.

We continue to take a genuine approach to the strategy and are aligned on when needs to be done to meet these goals and our other Geared for Good initiatives. So here we are halfway through the year and thus far has played out very similar to how we initially expected in January.

Innovation is back at Polaris in a big way, and we believe it will continue to drive retail growth and share gains across our business. Although some challenges remain, we have been working hard to remediate supply chain and labor constraints with positive momentum experienced thus far in July.

While uncertainty remains in the broader economy, we are executing on the matters we can control. I'll now turn it over to Bob, who will summarize our second quarter performance and provide additional detail for the balance of 2023, including guidance and expectations.

Bob?.

Thanks, Mike, and good morning or afternoon to everyone on the call today. Second quarter results were encouraging on many fronts, including top line growth of 7%, share gains in Off-Road, On-Road, and Marine, double-digit retail growth and the introduction of the Polaris XPEDITION.

EBITDA margin for the quarter was down almost 40 basis points, driven by continued high labor costs and finance interest. We are also seeing some pressure from increased snow warranty expense and litigation costs. Partially offsetting some of these headwinds was net pricing and lower cost premiums on items such as logistics in the quarter.

And while margins were down a bit in the quarter, they remained ahead of the same period in the prior year on a year-to-date basis, and we continue to expect margin expansion for the full year. International sales continue to perform well, posting growth of 6%.

PG&A grew 12% driven by parts, healthy accessory attachment rates and strong e-commerce growth. In our Off-Road business, revenue increased 9%, driven primarily by side-by-side sales to both dealers and commercial partners. ORV retail was up 14% and market share was up in the quarter.

While we continue to see good demand in the utility space, it was great to see those same demand metrics improve across the Recreation segment, which includes RZR, General and our new Polaris XPEDITION. With regard to expected share gains in the back half of the year, we are now shipping both the new RZR XP and the Polaris XPEDITION.

Both have received positive feedback from our dealer network and many sites were taking preorders for the Polaris XPEDITION. Plus, we are excited to share with you more product news at the dealer meeting and Capital Markets Day next week. We expect these efforts to help us continue to gain share as we remain the innovation leader in powersports.

Margins in the quarter were pressured by increased promotions, finance interest, snow warranty costs and unfavorable mix as we shipped more snowmobiles versus prior year, which typically have a lower margin associated with them.

It remains an exciting time in our Off-Road business and we expect the positive retail momentum we saw in Q2 to extend into the back half of the year. We have never let up on innovation and history shows that innovation can lead to share gains as well as growing the market and we believe we are positioned to do so in the second half of the year.

Switching to On-Road, our fourth straight quarter of share gains was driven by our strong product portfolio and healthy inventory. North American Indian Motorcycle retail was up over 40% bolstering market share gains with share now over 13%.

Our European brands, Aixam and Goupil, both had strong quarters with double-digit growth in sales and gross profit despite meaningful FX headwinds. On-Road gross profit margin was up 480 basis points, driven by favorable product mix and higher volumes.

We had another strong quarter in Indian Motorcycles and Slingshot Improving the profitability of these businesses is a key component of our five-year plan to expand company EBITDA margin to mid to high teens. For the first half of the year, On-Road gross profit margins are up over 400 basis points. Moving to our Marine segment.

Results were lower than we were expecting as the industry never fully recovered from a softer start to the selling season. While we believe the pontoon industry was down mid-single-digits in the quarter, we have confidence that we gained some modest share in Bennington.

Dealers are telling us that consumers are hesitant to purchase boats due to continued concerns around the economy and higher interest rates; plus, given healthy inventory levels, dealers are cautious about increasing inventory given higher prices and floor plan interest rates.

Gross profit margin was up 130 basis points with higher net pricing, and we are actively managing our variable costs to protect profits. As the primary selling season concludes in less than a month, we are closely watching inventory levels and talking to dealers to get a pulse on what is ahead for 2024.

We are not expecting any material turnaround in the back half of the year; thus results are likely going to be pressured. While an inflection point is hard to peg, we are continuing to invest in innovation and expect to emerge from this current slowdown with a stronger portfolio of boats. Moving to our financial position.

We continue to see our balance sheet as a competitive advantage. Cash generation in the first half was strong relative to previous years, and our net leverage ratio continues to be in a healthy spot at 1.5 times.

We repurchased almost 1 million shares during the first half of the year and are well ahead of our target to repurchase 10% of our outstanding shares before the end of 2026. We believe we are set up well for a variety of scenarios in the broader market with our balance sheet and cash generation capabilities in 2023.

Now, let us move to guidance on our current expectations for 2023. Given how the first half of the year ended and our assumptions for the remainder of the year, we are adjusting guidance where it makes sense.

Regarding sales, given what we saw in the first half of the year, we feel it is prudent to raise our sales guidance from flat to up 5% to up 3% to 6%. This increase is driven by the strong performance in Off-Road and On-Road in the first half of the year as well as narrowing the range with half the year behind us.

We expect Off-Road to be the biggest contributor to our results in the second half of the year following the new products we have launched. Therefore, we are raising our Off-Road guidance for the year from low to mid-single-digits to up high single-digits.

We are holding On-Road sales guidance at this time to up low single-digits, and we are lowering marine sales guidance, given what we have seen thus far this year and expectations for the back half of the year. Marine sales guidance is now down mid-teens from flat sales for the year, as we look to match dealer inventory levels and retail.

Share gains are expected to continue in the back half of the year given healthier inventory levels and new product launches. We also believe retail for the industry improved in Off-Road and thus are raising our assumption to call for modestly higher retail for the industry in 2023.

But given our share gains and updated retail assumptions, we have greater confidence in our ability to outpace industry retail growth this year. Our international and PG&A businesses are expected to be strong contributors to growth this year.

Offsetting some of these sales drivers are promotions and the downward revision in our expectations for the marine industry. Gross profit margins, we are holding guidance at 10 to 40 basis points expansion. Although there are a number of moving pieces and timing impacts in aggregate, this is still where we believe we will land for the year.

We have positive momentum with net price and logistics, but there are headwinds such as finance interest expense and warranty costs, all of which we expect to linger in the second half of the year.

While improving over 2022, operationally, our plants continue to suffer from elevated production costs associated with component shortages and increased labor costs.

Typical start-up inefficiencies associated with launching major new products are also a temporary headwind and particularly in Q3 as we start shipping Polaris XPEDITION and a second new category-defining ORV product. On EBITDA margins, we are seeing elevated operating expenses that were not accounted for in our guidance.

This is primarily driven by product liability litigation and settlement costs as courts continue to catch up on case backlogs and delays driven by COVID closures and higher demand creation spend to support the improved retail and share outlook. You can also see this in our revised outlook for operating expenses.

On the flip side, we expect higher income from financial services, given that improved retail outlook. Therefore, we are lowering the top end of our EBITDA margin guidance by 10 basis points to 20 to 40 basis points.

We also narrowed the range for EPS from continuing operations to down 2% to up 3% from down 3% to up 3%, with most of the potential drop-through from margin expansion being consumed by a higher interest rate expense.

For the third quarter, a couple of things to note, we expect retail to be flattish due to pressure and seasonality from On-Road and Marine. Recall last year, we had a very strong On-road business in the third quarter as the supply chain recovered and we were able to ship product and fulfill pre-sold orders.

Off-Road retail is expected to be up modestly sequentially and up double-digits versus the prior year. Margins are expected to be down modestly year-over-year, as we navigate the build of new ORV vehicles this quarter, which, as I mentioned earlier, causes some initial inefficiencies.

In addition, we have planned on higher -- continued higher labor costs. These headwinds are partially offset by lower warranty costs as we lap recalls in the prior year period. We have significant other cost headwinds from higher finance interest, debt interest and foreign exchange that we expect will persist through the remainder of the year.

Operating expenses will be higher in Q3 versus Q4 due to the cost of the dealer and supplier meetings we have next week in Nashville and the timing of launch expenses for Expedition and other new products. Overall, we continue to be on pace for a great year.

Our teams remain focused on delivering strong results, which we have done consistently amid the puts and takes of the broader economy. We are on track to meet our guidance halfway through the year and have raised our outlook for sales while narrowing other metrics.

We strive to deliver on our commitments, and we are doing just that with innovation, market share gains and allocating capital to deliver strong returns. I'm proud of what we have accomplished and look forward to what this team can do in the future. With that, I will turn it back over to Mike to summarize our call today. Go ahead, Mike..

Thanks Bob. We're pleased with the first half of the year and believe it sets us up for a successful second half to gain share and modestly expand margins.

While we had estimated industry retail to be flattish this year, the results we saw in the second quarter point to a stronger environment than we had originally expected, and we're cautiously optimistic on retail.

You're seeing firsthand why we've been so bullish on innovation with RZR XP and Polaris XPEDITION launches, and we look forward to sharing more with you next week. It is certainly exciting to see these products come to life, and we're eager to get them in the hands of the best dealers and customers in powersports.

While operationally, the business is running smoother than the past couple of years, there remain opportunities to address efficiencies within the supply chain and our manufacturing facilities. We're focused on expanding margins and meeting all of our five-year targets.

Next week's Capital Market Day is going to be a great opportunity for us to update you on the progress to these targets while laying out what still needs to be done in order to deliver strong returns for shareholders. We thank you for your continued support, and we look forward to seeing many of you in person in Nashville next week.

With that, I'll turn it over to Rocco to open the line up for questions, Rocco?.

Thank you. [Operator Instructions] Today's first question comes from Craig Kennison with Baird. Please go ahead..

Yes. Hi. Good morning. Thanks for taking my questions. I wanted to follow-up on your Q3 retail guidance of sequentially flat. The math we do internally suggests that's going to be a very significantly positive number on a year-over-year basis.

Bob, I think you said something like up maybe low-double-digits, but we would get even a stronger number based on how we do that.

Just wondering if you can put a finer point on what your expectations are on a year-over-year basis for Q3 retail? And what is driving that?.

Yes Craig, thanks for the question. It's the comps year-over-year, we got a lot of dynamics that happened both in 2022 and 2021 in terms of product availability. So, when I look at 2022 from Q2 to Q3, our retail had actually dropped sequentially. So there's an element of the compares when you hold flat this year in terms of 2023, Q2 to Q3.

We continue to baseline back against 2019. And I would say we're going to be relatively flattish relative to 2019 in the third quarter. And it's really being driven by our Off-road vehicles. And one, it's the continued strength we're seeing in the utility market.

Recreation, although weak relative to where it had been, is still performing slightly better than we had expected.

And then I'll remind you, we've got two new products, and we've hinted pretty strongly and yet another one to come, and that's going to be obviously helping us as we get into the third end and then into the fourth quarter from a retail perspective because those are entering new market segments..

Got it. Thank you, Mike..

Yes..

And our next question today comes from James Hardiman at Citi. Please go ahead..

Hey. Good morning. I had a question on margins. I wanted to dig into and then a question on inventories. A lot of moving pieces on margins. Maybe if you could quantify a couple of the things that you called out, I think you said production inefficiencies as a lot during the prepared remarks. Any quantification of how big you think that impact is.

Doesn't sound like you think those are going to go away during the back half but just trying to get a feel for sort of maybe what the opportunity is once those clear up and then a similar question on the OpEx side? You called out labor warranty litigation costs. Any quantification there would be great..

Hey James, it's Bob. So, a couple of things. I think on the cost side, there's positives and negatives, right? We're seeing great progress on some of the ocean freight items. And we're seeing some stability on the labor side in terms of just people and being able to retain recruitment retain people. That's improved the last several weeks.

Where the challenge lies really is just getting the plants back to their more normal operating cadence as we come out of COVID and as the rework starts to diminish. We still do have some part shortages with some key suppliers. So, we're not 100% out of the woods there.

I think that feels like it's getting better sequentially month-over-month and quarter-over-quarter. But there's work to do to just get the inefficiencies out of the plant, some of the excess labor, some of the excess warehousing that's accumulated through the course of COVID.

So in terms of dollars, I think as you look at the second half of the year, it's in the $40-plus million range in terms of the headwind. On the OpEx side, not as big of an issue. The legal costs really are it's not so much that they're different relative to last year.

It's more of as we thought about laying out guidance, we had -- we've got more cases coming through in the year in terms of things kind of hitting the court dockets that we had anticipated when the year started. That's not necessarily a bad thing. It's just the kind of natural unwinding of the court systems being closed during COVID.

We feel good about where we are in terms of stability going forward on product liability. So this is really just a catch-up of things that were, sort of, stuck in the system during COVID..

Yes, James, and I'll just give you a little color. I mean, I mentioned it in my prepared remarks around wiring harnesses. When you look at -- and we had the same discussion with some of our dealers that we were out meeting with about a month ago. You know, when you look at the quarter, it looks pretty good.

We got the units out, but the reality of how we got them out still doesn't have the level of fines that we've exhibited in the past. Our rework is down from where it's been in the last couple of years, but it's still up significantly from where it was before the pandemic disrupted the supply chain.

And for us, the wire harness issue is pretty significant from the standpoint of you can't really start a vehicle until you have that wire harness set up and ready to go. Now, the good news is that we've been working with our supplier that's caused the disruption. We've seen significant sequential improvement. They continue to get better every day.

And so we anticipate that headwind starting to dissipate. The issue is we've still got to get caught up. And so we're working with the supplier to make sure that they're building an adequate level of safety stock.

But what that does is that creates a lot of inefficiency from a labor standpoint, and we're working to make sure that we're spending what we need to, to get the vehicles out because the demand level is there. The dealers need the vehicles, the customers want them. And as we indicated, it should start to get better sequentially.

But relative to what we originally thought for the year, it's still going to be higher in the second half..

That is really great color. And then, I guess, secondly here, as we think about inventories and ultimately shipments were about to lap of period from a year ago where there was significant replenishment based on the numbers you gave us, I think it was $350 million in the third quarter and another maybe $250 million in 4Q.

I feel like the answer to that question for some time has been sort of some of this new white space product that you haven't been a lot to talk about.

But maybe now you are I guess the question is, could that namely XPEDITION and I think you used another sort of game-changing ORV product, could that fill that gap of replenishment from a year ago or is that still going to ultimately create somewhat of a bad guy as we think about the second half?.

Yes. So James, if you think about second half of the year versus $22 million -- we kind of to your point, we had the channel refill last year in the second half, which was about $600 million.

The offset to that in 2023, is about 75% of it is new products, and that's the XPEDITION, the XP, they're still selling on the XP that we launched a few months ago, the new RZR and then some other products that you'll see next week at the dealer meeting -- and then there's also to keep in mind, there's about $100 million worth of snow mobiles additional in second half of the year, primarily in Q3 versus 2022.

If you remember, 2022, we really struggled to get snow mobiles out in time for snow season, and we shipped a lot of stuff in Q1 of 2023. We don't intend to repeat that in 2023. So snow will go out in a more normal cadence in Q3, Q4. And so that's got an impact as well..

That’s really helpful color. Thanks, guys..

Yes..

And our next question today comes from Noah Zatzkin with KeyBanc Capital Markets. Please go ahead. .

Hi. Thanks for taking my questions. Just one for me on the Marine side. Obviously, top line softer called out challenges in the Marine channel that you guys were able to expand gross margin.

So, if you could just talk about some of the levers you pulled there and how you're thinking about margins on the Marine side for the rest of the year? That would be helpful..

Yes, I think Marine, this year, we had good -- not what we had expected, but not really bad shipments in the first half of the year. We had good solid mix with some mix to higher-end boats, which helped us with margin expansion.

And then just some of the efforts we've had to continue to lean out the factories and bring some automation to the Marine industry. Some of that you'll hear about at Capital Markets Day to help drive better margins in the first half of the year. I think second half of the year, with revenue being down, margins certainly will be challenged.

It is very much a variable cost business. Labor is very flexible in Elkhart. And so we've adjusted our production schedules for what we think we're going to see in terms of retail and dealer inventory. Obviously, boat info came out yesterday, so everybody is still digesting that.

But we did see some share gains on the Bennington side, which is important for us. It's our biggest brand. It's tough to say what it's going to look like in the back half of the year, but we're preparing for it to be soft. And as I said in my remarks, it's hard to kind of say exactly what that -- when that turns.

And I will have a better sense as we get through our dealer meetings here in early August. But we're prepared to take the necessary actions to try to protect margins in the second half..

Thank you..

Thank you. And our next question today comes from Fred Wightman with Wolfe Research. Please go ahead. .

Hi, guys. Good morning. You mentioned that dealer inventories are near optimal levels. And you also alluded to some elevated products at your competitors, particularly in the lower entry-level side of the business.

So can you sort of talk about how you think the RFM program is holding up given all the moving pieces from a year-over-year perspective from a seasonality perspective and then just the competitive dynamics?.

Yes, I mean overall, Fred, we spent time with the dealers that I referenced in my prepared remarks. And the feedback by and large, was incredibly positive. A number of the dealers remarked that they felt we were doing a better job than most of getting product into the channel.

And from an RFM standpoint, the signals that we're getting is the retail unit and being able to move forward with getting a unit shipped to replenish that is working well. Now, I'll caveat that with we're still struggling on the high end of the business. That's where we tend to have a higher part content in the vehicles.

So any type of supplier disruption is going to delay delivery. And you can see that playing out probably largely -- the largest one you'll hear from the dealers is the NorthStar deliveries. That super premium segment has become a larger and larger portion of the Ranger business, so that has obviously larger and larger impact.

So it's an area that we've got a heavy amount of focus on. The other thing that you have to keep in mind is, even though our inventory is down pretty substantial from where it was in 2019, the ASPs on these vehicles is up.

And so when you combine that with the higher interest rates, the dealers are definitely feeling it from a foreign standpoint and then it gets compounded where they have some of these lower-end OEMs that really induced truckload buys and things like that, that the dealers are still trying to digest and the issue is that the low-end of the market is where there is the softest level of customer volume.

And so, we heard that they're doing a lot in terms of trying to move discounting and trying to do everything they can to move those units. But I think they're by and large, pretty frustrated with the lack of sophistication at that end of the market.

And the higher interest rates and the low consumer demand is compounding that.\ So we're focused on doing what we can to get the high-end products into the hands of the dealers. We saw a pretty significant improvement in our ability to get Ranger North Stars, and that's going to continue to improve as we get through the back half of the year..

Makes sense. And then just quickly on the cadence. I know you guys were expecting sort of 40-60 first half, back half. It looks like it's maybe a little closer to 50-50.

Was there a pull forward? Are you just more conservative on the back half? Like where was the biggest change?.

Yes, I wouldn't say there was so much a pull forward in terms of revenues and shipments. Some of the mix was pretty favorable in the first half. We did a better job of getting some of those higher-end vehicles, Mike was just talking about out in the half and net price promo was decent.

So it's just a little bit better financial results more than a pull forward..

Great. Thanks Rob..

Thank you. And our next question today comes from Joe Altobello with Raymond James. Please go ahead..

Thanks. Hey guys good morning.

I guess first question, maybe a little color on what drove the improvement in rec ORV demand in the quarter, maybe also the massive share gains that you guys saw in Indian?.

Yes, I mean on the rec side, we saw strength -- continued strength in our general the crossover category.

The high-end of the RZR category continues to be strong and our deliveries improved as we work through some of the overhang from the recalls that we had relative to the fuel tanks late last year and into the first part of this year as we got the rework completed on those.

So I think we're not seeing a significant change at the low-to-mid-range of the market. I think it's the crossover category continued to hold up strong.

And again, I think some of that is because those vehicles are used for a multitude of things and that there's an element of that, that crosses more into that utility space in terms of those vehicles being handy around multi-acre homeowner property.

And then obviously, the high-end of our categories pretty much across the board has been holding up strong, given employment levels remain favorable and income levels are strong..

Yes. On the Indian side, we saw really good -- we saw good growth in both heavyweight and midsized but midsize had the greater growth in the first half of the year.

And it's a mix of -- last year, we had the problems with black painted parts, and so that inhibited dealer inventory midsize tends to be more of an impulse purchase new buyer, first-time buyer and make good inventory in midsize in the dealers in the first half of the year in the prime selling season and that helped with the Indian growth..

Got it. That's helpful. And maybe just a follow-up in terms of the margin progression that you guys are talking about over the next several years, you'll probably address this next week.

But how do you see that ramp looking like? Is that more of a back-end weighted margin improvement? Or is there some to come in 2024?.

I think there's some. We will talk about it next week, but we continue to drive both short-term and long-term activities that will improve margins. We've got some headwinds. Obviously, FX has moved quite a bit since we set those targets, but we're working to overcome that, and we're not changing our targets.

But there's some near-term operational things as we continue to work through just the inefficiencies in the factories and get back on track and get that price cost ratio correct. We had a good -- we're having a good year with Indian and Slingshot, and that profitability improvements really helped total company profitability.

So that's kind of the near-term stuff. And then we'll talk about some longer-term things around factories and product design at Capital Markets Day..

Yes, I mean, Joe, when you think about foreign exchange, that hit us really hard. So I obviously assume foreign exchange kind of holds where it is today. And as you get out over the next couple of years, that impact gets more and more muted, but it's far more pronounced for the first half of the year was just shy of 1 point of GP impact.

So like Bob said, we're working to overcome that, it's overshadowing some of the good work we have. And then clearly, as we get our factories running more efficiently as the suppliers start to deliver at a stronger cadence, we'll obviously be able to work a lot of that cost out of the factory.

So we're pretty optimistic about where we stand, and we'll have more to show you next week..

And the next question today comes from Robin Farley with UBS. Please go ahead. .

Thank you. This is actually Arpine for Robin. Could we go back to July trends for a second. You talked about retail strength in Q2 or June having continued into July.

Would that mean for ORV up so far year-over-year in July? And then it seems you expect to be a share gainer in the back half and full year in ORV and outpace industry which it seems you're guiding up slightly.

Does that mean ORV retail for full year is up better than low single-digits? I guess what's the extent of that guidance for ORV on a full year basis? And then I have a quick follow-up..

Yes, I mean, I guess the way I would characterize it in July, we've continued to see strength in ORV, which would have us up not only versus last year, but up versus 2019. For the Marine segment, obviously, we're continuing to see that be soft and On-Road is just at its normal starting to slow down from a seasonality standpoint.

So everything seems to be playing out pretty consistent I think the simple answer is, yes, we expect Off-Road to be up. We expect to gain share.

The thing to keep in mind is we're adding in several new products that are new, either replacement, strong replacement products like the RZR XP or category defining like Polaris XPEDITION and the to be yet announced product that we've referenced a number of times. So that's obviously going to drive incremental retail.

And so that's what we see driving the strength in our Off-Road segment..

Thank you. And in terms of lower end OEM inventory at dealer that you talked about, one of the key feedbacks from dealers we talked to us used to be the profitability of those units versus Polaris.

How do you think about that competitively sort of longer term, as we think about lower end OEMs?.

Well, I mean, I think they were able to get profitability because the lower-end guys were able to ship when we and the rest of the, I'll call it, mid-to-high end of the segment were not. And I would think that as you're talking to dealers, because I know I heard this a month ago, that margin dynamic is changing pretty significantly.

They're paying a lot of interest on those units. They're moving really slow. And they have to do a lot of discounting. So we're confident with where we're at. It doesn't mean that we're done, continuing to look at the value and entry side of our business. We know that it's important in terms of bringing customers into the brand.

And we're pretty confident with the product lineup we have and how competitive we are as we move forward..

Great. Great. Thank you. And I'm sorry, one more clarification question, if I may.

In terms of the production inefficiencies that you mentioned in Off-Road, could you quantify the impact of that and how temporary that is in terms of impacting margin?.

Yes, I think I answered that. It's about $40 million in the second half..

In the second half, okay, not on a full year basis..

Okay. Thank you..

Thanks..

Thank you. And our next question today comes from Tristan Thomas-Martin with BMO Capital Markets. Please go ahead..

Hi. Good morning. Just the $40 million, did you also say there was a one point of margin impact in the first half.

So then if I add it up, it's about $75 million full year impact? Is that right or not?.

Mike said there was a one point impact from FX in the first half..

Yes, just one..

Okay. Got it. So then the $40 million was how much is the margin impact in the first half kind of like-for-like with that $40 million..

It's not a huge impact in the first half, because we had assumed that that inefficiency was there. It was really the improvement that we were expecting into the back half that's not materializing at the same rate we had expected which is largely driven by the fact that our rework levels continue to be high.

And as I mentioned, we're seeing progress sequentially primarily around that 1 supplier that I had mentioned, but that, obviously, we have to continue to see that momentum. And we'll see improvements sequentially, but it's just not going to be at the same level that we had anticipated when we came out with guidance earlier this year..

Right..

Okay..

I mean, so just to be clear, we are improving -- we have improved significantly versus 2022. We're just not seeing as much improvement in the back half of the year relative to where we thought we'd be when we did guidance..

Okay. Got it. And then one more question.

Can you maybe break out any Marine retail trends you're seeing at kind of the various price points?.

Yes, through the first half of the year, I would say the higher-end products were really strong as Marine went into the selling season, and I haven't had a chance to go through the Marine data, the SSI data that came out yesterday in a tremendous amount of detail.

But what we saw so far in the kind of the kind of May, June timeframe was that some of the smaller boats were starting to come back stronger from a retail perspective or perform stronger from a retail perspective, which I think probably lends credence to the concern we're hearing from dealers is that just the high finance rates, given the longer tenors of boat loans and the higher cost of boats relative to some of the other products we sell that those finance rates are kind of biting more in Marine, which would drive consumers probably towards the smaller like sizes, just a cheaper but less to finance.

So that's the only dynamic we've really seen that's changed a little bit in the last couple of months..

Okay. Thank you..

Thank you. And our next question today comes from David MacGregor at Longbow Research. Please go ahead. .

Yes. Good morning, everyone, Mike, I wanted to ask you about recreational ORV, and you noted the softer sales patterns in the low and medium segment of the line.

Is there less consumer interest, which I would guess would be reflected in lead generation? Or are we just seeing credit constraints at work here?.

No. Actually, the lead generation is very strong, both the organic and inorganic I think there's two things driving the hesitation. One is starting to abate as the talk or the rhetoric around inflation probability starts to soften because I think it is a discretionary purchase.

And when people are hearing the word recession thrown around every 15 seconds, that does cause a little bit of a pause. So that's number one. Number two is interest rates, buyers at the low to midrange on that reside are heavy financers. And the rates have moved up, we are continuing to evaluate.

If you look at our promo spend, a good portion of it is directed at buying rates down. I would suspect we'll continue to be aggressive in that area. I think there's probably more that we'll talk about at the dealer meeting next week.

But that's the area we see the greatest opportunity to help consumers get over the bubble relative to the rates that just 1.5 years ago that they were able to finance that, they're higher. And even though it's not a tremendous impact on the payment, it's still a little bit of a shock when the buyer gets into the showroom floor.

So I think with hopefully what sounds like good news on the economic -- broader economic front, I hope that starts to at least take some of the pressure.

And if we get a little bit of stability coming out of the Fed where people feel less and less concerned about where the interest rates are headed, that could work in our favor and we're certainly going to steer promotion to make sure we're able to help consumers out..

Right. Thanks for that. And the second question for me, just on promotions.

How are you seeing consumers responding differently to promotions in, say, On-Road versus Off-Road? Is there a notable difference there?.

I don't think there's a notable difference. As Mike said, I think promo starting to lean a little bit more towards finance promo and buying down rates then rebate offers, but I don't think we're seeing a different consumer behavior on either side. I would say the one difference in On-Road and Off-Road is that trade-ins play a bigger factor in On-Road.

And so you still encounter some people that are upside down and stuff that they bought during the pandemic paying full retail plus dealer fees and things like that. I would say those stories, though, are a bit more -- they're one-offs. They're not a huge driver, but trade-ins has more of an impact in On-Road..

David, what I'd say is our behavior is continuing to evolve. We're, I think, doing a better and better job of being far more directed at where we're spending money, being -- we're doing tests to see if discounts versus buy down of rates works. And we've spent a lot of money over the past several years in our CRM capability.

And so we're able to pinpoint and target customers far greater than we used to. So doing targeted offers where we have a consumer who hasn't upgraded their machine in a while rather than making a broad promo offer to a category where we're not going to induce maybe somebody new to come in. We're doing a lot more of that type of work.

So I think we're using the money better as a percentage of MSRP promos are still down relative to where they were historically, which I think is a good thing, especially given how much we're, having to push towards supplementing high interest rates right now..

Got it. Thanks very much. See you next week..

See you next week..

And our next question today comes from Jamie Katz with Morningstar. Please go ahead..

Hey guys. Good morning. I just want to touch on something that we haven't talked about in a while, which I guess is the direction of the EV business.

Sort of how is the adoption of that going? What is the consumer interest? And how do you see that product lineup evolving overtime?.

The receptivity is incredibly strong. We started delivering the XP Kinetic. Customer feedback has obviously we've been staying very close to the customer, given not only that's a new product, but given the category that it's in. Feedback has been incredibly strong.

I'd encourage you, you can go out and there's a number of different independent reviews that were done that probably are some of the best reviews we've gotten. We're in the process of evaluating, opening up a second ordering window. We do know from talking with dealers that the consumer demand is very strong.

We knew that we were oversubscribed when we came out with the first allotment. So we anticipate that when we open up the second order window, probably not in the too distant future that we're going to see pretty strong demand. I would anticipate that we're going to continue to focus in on this utility segment.

It's proven to be the area that we need to focus in on. And so we'll continue to evolve in that category centered around the RANGER vehicle and obviously, given our other product lineup, you can kind of anticipate where that means we're going to go with the next vehicles we come out with..

Okay. The other question I have is on Snowmobiles. And I guess Yamaha has recently announced that it will be exiting the market. And although it has a pretty small market share presence at this point in time.

Is there any reason you guys wouldn't go after sort of their consumer base to incrementally bolster market share or is that something that could provide a little bit of lift over the next year or two?.

Yes, I mean it will certainly provide a lift. But we're going to be talking to our Board about it just given the recency of the news. They're such a tiny player in the market. There are broader implications to one of the other competitors as well, just given the relationship that they have. So we'll continue to watch it.

It's going to take a couple of years for them to phase out. I'm probably more excited about the direction that we're taking with our business. We had a great dealer meeting where we talked a lot about the changes that we're making in the business, renewed focus around quality and simplification.

The team has done a great job of making sure that we're in a position to deliver the sleds to consumers ahead of the season. We put a pretty big incentive on the back of that to prove how serious we were about it, and the team is living up to that commitment, and I'm really excited about what we have to offer.

So I think we're going to be in a great spot regardless of what Yamaha does..

Okay. Thank you..

Thank you. And our next question today comes from Xian Siew with BNP Paribas. Please go ahead..

Hi guys. Thanks for the question. You mentioned the inventories near optimal levels. I guess I just want to clarify, are you thinking about that in terms of like absolute units or relative to the 2019. I guess, what I'm thinking is in the slide, I think, it's number six, you show how historically dealer inventory destock in Q3.

So from here, do we expect a similar historical detach? Or is it units are holding from here?.

Well, I mean, overall, we're looking at unit. That's how we look at the dealer inventory measurement by category and by region. The tough part is dealer inventory on an aggregate level. There's a lot going on in there.

So, we've got a couple of areas where the financing interest focus is probably going to be renewed as we move into the back half as the inventory is probably a little bit heavier than we'd like.

That said, we're still way below where we'd want to be on the premium utility side, the North Stars, for example, and so we'll continue to make sure we're rebalancing that. And then the inventory for the most part, will follow a normal cyclical pattern with the exception of we've got these new vehicles coming into the market.

We obviously start delivering here in Q2. But there's going to be heavy deliveries as we get into Q3 and Q4. We do anticipate a good portion of that is going to retail obviously, but we're making sure that we're getting dealers stocked with those units, given that they are new category-defining deals..

Okay, very helpful. Thanks. And maybe just a follow-up. I think you mentioned versus 2019 retail you're expecting 3Q to be flat did I hear that correctly? Because I think 2Q was down like 5% I guess it's ORV, but down 5% versus 2019.

So is it kind of underlying improvement?.

Yes, I mean as we look at 2022, when we started the year, we thought it would be relatively flat to 2022. We think we'll be -- I think the industry will be better than that, and then we'll continue to take share. 2022 was about 10% below 2019.

And so assuming that all comes to play in the second half of the year, we think for the year, the industry will be relatively flat to 2019, it will take some share..

Okay, got it. Very helpful. Thanks..

And the next question today comes from Brandon Rolle with D.A. Davidson. Please go ahead. .

Good morning. Thank you for taking my couple of questions. Just briefly on the On-Road business clarification.

Did you say you expect to hold share in the back half of the year?.

Yes..

Okay. And obviously, you guys gained some strong market share during 2Q, but what do you expect changes maybe in 3Q and 4Q? Or is it just a function of the better channel fill year-over-year in Q2..

Yes. Well, I think it's better channel filled, obviously, made a difference in Q2. But I mean, we're going to move into more normal seasonality as we get into the back half. And at this point, we're not expecting obviously, internally, we're going to target to continue gaining share.

But if you do the year-over-year comparisons, that first half of last year, for that business was the most challenged given the black paint issue that we had. And so we just don't see those dynamics necessarily playing out as much as we move into the back half..

Okay, great. And just following up on that. Just looking at the motorcycle industry as a whole. I know there's a view of the industry is in secular decline.

Do you see that based on the underlying demand you're seeing in the market right now? Or any concerns about that materializing?.

No, that's not necessarily what we're seeing. I mean I think there's obviously, one particular player that has such a large market share that, that moves things around. But we continue to see a tremendous amount of excitement around the various platforms that we have, and we're optimistic about what that means for the future of the business..

Okay, great. Well, thank you so much.

The next question today comes from Scott Stember with ROTH MKM. Please go ahead. .

Good morning. Thanks for taking my questions..

Good morning. .

Mike, in the past, you've said that PG&A could be considered, I guess, the canary in the coal mine, if there was anything to worry about. Maybe just talk about PG&A by maybe by segment and by price point. Just trying to see how elastic things really are as you go down the food chain..

Yes, I mean the PG&A performance overall has continued to hold up. I mean the thing to keep in mind is we have increased the content on our Off-Road vehicles substantially and a good portion of that is through what we call factory install, meaning that the vehicles are coming out with more and more accessories on them.

If you look at the RZR XP you look at the Polaris XPEDITION, you look at the new vehicle that we'll be talking about next week. Number one, they're coming with higher and higher accessory offerings, and they're coming with more and more factory install options. And so we continue to see that level increasing.

Overall, we continue to see the PG&A markers that we watch things like repair activity continue to hold up.

We do know that the average miles that people are driving Off-Road vehicles is down a little bit year-over-year, but that doesn't necessarily point to anything other than folks as people are going back to the office and spending more time in the office, probably aren't putting as many miles on, but repair activity continues to hold up.

Parts sales remain strong. And at this point, we don't see anything out there that has us overly concerned..

All right. And last question, just going back to the commentary about ORV and the production inefficiencies.

If I heard correct, you pretty much were just saying that you are at this point for the back half of the year and probably the full year, about $40 million lower than you originally expected of savings, right, or of abatement compared to what you thought at the end of the first quarter.

Is that correct?.

Yes, I mean I think rough math, that's a good proxy to use. Like we said, we started the year expecting declines on a year-over-year basis in terms of the cost premiums and excess costs we were paying, we are seeing declines. We're just not seeing them at the rate that we had originally forecasted.

And given that we had kind of sloped it into the year, the impact is more noticeable in the second half than the first..

Got it. That’s all I have. Thank you..

Thanks, Scott..

Thank you. And ladies and gentlemen, this concludes today's question-and-answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day..