Polaris Inc. Q4 FY2022 Earnings Call

Good day, and welcome to the Polaris Fourth Quarter and Fiscal Year 2022 Earnings Call and Webcast. Please note this 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, Betsy, 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 2022 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 summarizing the quarter and year as well as our initial expectations for 2023. Then we'll take your questions. During the call, we will be discussing various topics, which should be considered forward-looking for the purpose of the Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. You can refer to our 2021 10-K for additional details regarding risks and uncertainties. All references to fourth quarter and full year 2022 actual results and 2023 guidance are for our continuing operations and are reported on 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 the call over to Mike Speetzen. Go ahead, Mike.

Thanks, J.C. Good morning, everyone, and thank you for joining us today. We delivered another record year for both sales and earnings from continuing operations despite a difficult supply chain environment and lower retail versus our original expectations. We also improved our cash position in 2022 and executed over $500 million of share repurchases. I want to thank the entire Polaris team for your relentless effort in a challenging environment; we delivered record results once again, proving this is the best team in powersports. During the year, we made progress on our 5-year strategy with a renewed focus on powersports. And while we intentionally delayed several product launches in 2022 as the team focused on navigating the supply chain challenges and delivering orders to dealers and customers, we didn't stop investing in innovation. With more than $365 million invested in R&D in 2022, we continue to make our mark on the industry within the wide open side-by-side category with RZR Pro R and Turbo R. And through the introduction of the industry's first connected technology with RIDE COMMAND+. With a focus on extending our industry leadership, we divested TAP and redirected our resources, time and focus on our core powersports customer. A decision that has had a positive impact on our EBITDA margin and returns. While innovation is the foundation of everything we do, our #1 priority will always be the safety of our riders. We are making investments in product safety while standing behind our vehicles and acting if needed. This past year saw an increase in warranty expense and recalls driven largely by legacy designs or supplier issues. Our investments in safety and quality over the years have supported what I believe to be one of the broadest post-market surveillance programs in the industry, which is enabling us to aggressively monitor for and identify issues. We recognize these recalls are frustrating for dealers and customers, but we are committed to correcting these identified issues. This approach to monitoring our products even after they leave our factory floors, combined with our ongoing investments in engineering testing, supplier quality and manufacturing processes, bolsters our focus on providing our customers with safe, high-quality vehicles. Last point I'll make is that we benchmarked our recalls per 1,000 vehicles produced from 2016 through 2022 against automotive, On-Road motorcycles and powersports. Polaris was in the top quartile in terms of the fewest number of vehicles impacted per 1,000 produced. We have and will continue to invest in and drive improved quality for the safety of our riders. As we look at the fourth quarter specifically, sales grew 21% to $2.4 billion. Excluding marine, North American retail was down approximately 6% year-over-year with modest growth in Off-Road utility and Indian Motorcycle, offset by a slowing Off-Road recreational market. These trends are similar to what we saw in the third quarter and are expected to continue into 2023. While fourth quarter market share was down approximately 1.5 points year-over-year, it was our best market share performing quarter of the year, and we saw 2 consecutive quarters of sequential share growth in On-Road and ORV. Pontoon retail declined overall, with share loss concentrated at the low end of the market, and we gained share in the high end of the market. Both adjusted gross profit and EBITDA margins expanded nicely to drive year-over-year adjusted EPS. EPS growth of 57%, despite increased headwinds from warranty costs, interest expense and foreign exchange. I'm proud of our record performance, especially considering the environment and the unanticipated headwinds that the team worked relentlessly to overcome. Now let me talk about the demand environment. The demand story remains mixed. Polaris ORV Q4 retail was down 4% year-over-year and down 1% sequentially, mainly driven by softness in the REC space. Our ATV and RANGER products were up low to mid-single digits sequentially and year-over-year. Remember, the utility space represents approximately 60% of our Off-Road business, including sales to commercial customers, which do not factor into our retail metrics. We continue to see and expect stable demand here as these customers use their vehicles for work applications on a ranch, farm, job site or multi-care homes. I'd also add that weaker recreation of retail in Q4 was partially driven by many RZRs being on a recall-related stop sale in December. As anticipated, the backlog of free sales declined in the quarter as shipments improved. We continue to see sales growth in our premium models such as RZR Pro R, Turbo R and RANGER Northstar as they remain favorites with customers due to their competitive features and capabilities. A few other points on demand include PG&A attachment rates are at or near record levels, indicating that customers are upgrading their vehicles with higher-margin accessories. We continue to see a steady mix of customers new to Polaris which is consistent with historical trends, while both short and long-term repurchase rates remain elevated or within the historic range. Interestingly, 5-year repurchase rates were at all-time highs and we're seeing these customers return and upgrade their vehicles to RZR Pro R, RANGER Northstar and even vehicles with RIDE COMMAND+. And on financing, the metrics we're seeing continue to point to a consumer in a healthy financial position. FICO scores improved and approval rates are consistent with last year. Also, credit availability has not meaningfully changed. There continues to be strong consumer interest in the space, measured by online activity versus pre-pandemic metrics with Off-Road organic online searches up approximately 30% versus 2019. Indian Motorcycles also saw strong web traffic leading to a record number of leads. So by segment, let me wrap up our thoughts on demand. In Off-Road, there remains a delineation between utility and recreation. Demand indicators are stable in utility, while recreation is soft with more pronounced moderation as you move through models with less content. We expect these trends to continue for the foreseeable future. In On-Road, we had a strong Q4 with the second quarter in a row of market share gains for India motorcycle. With a strong product line-up for 2023, we are optimistic that On-Road can continue seeing share gains in retail growth. The marine demand at premium levels continues to be healthy. Inventory is the healthiest it has been in a long time. So we're seeing customers shop around a bit longer. Boat Show season has kicked off and thus far, dealers are optimistic as we enter their busiest season of the year. Turning to North American dealer inventory. We continue to move closer to a more normal operating environment with seasonality even more present within our business versus recent history. For ORV specifically, we look at data from 2016 through 2019 to get a sense of the average seasonality with North American dealer inventory and retail before the disruption that occurred over the past couple of years. The data shows we typically see our highest dealer inventory levels and lowest retail levels in Q1, which makes sense as customers typically come in looking for units before the spring and summer riding season. We think this is an important context to note as we enter a more normal seasonal operating environment and to better understand the inventory build ahead of the heavier retail season in the summer. As for the current dealer inventory, we continue to make progress towards our new optimal level. In fact, most of our products are close to these optimal levels, except for our RANGER side-by-side portfolio especially the high-end Northstar additions, where we continue to see strong demand. Total company dealer inventory was up 116% from 2021 to 2022 but remains well below 2019 levels. We currently see the value of refilling dealer inventory at approximately $150 million, which is below the $400 million we discussed on the October call due to progress we made with shipments in the fourth quarter. We expect to reach this optimal level in inventory sometime in the first half of 2023. So today, given a return to a more normal operating environment and traditional seasonality, our operations are focused on building inventory into the channel where needed to ensure a strong retail season allowing dealers to sell products and not worry about availability. In summary, our say-do ratio in 2022 was high, with revenue coming in at the high end of our guidance and EPS exceeding guidance by $0.10 despite headwinds in the supply chain and increased pressure from interest rates and foreign exchange. I'll now turn it over to Bob, who will summarize our fourth quarter and full year performance as well as 2023 guidance and expectations. Bob?

Thanks, Mike, and good morning or afternoon to everyone on the call today. Q4 was another record quarter for us, driven by volume, pricing, and a mix toward higher-priced vehicles. International sales grew 7% year-over-year, overcoming a 9 percentage point drag from currency fluctuations. Adjusted EBITDA margin expanded by 272 basis points, despite rising warranty, marketing, and G&A expenses. Below operating profit, interest expenses continued to increase due to higher rates. In Q4, we executed $400 million in 3-year floating to fixed swaps at an all-in rate of approximately 5%, starting in February 2023. This will help us maintain our fixed to floating debt ratio near our 50-50 target for 2023. Additionally, we were active in share buybacks, repurchasing 1.2 million shares in the quarter. Adjusted EPS from continuing operations was $3.46, up 57%, setting a new quarterly record for Polaris. Looking at the full year, we accomplished what we set out to do, achieving a 15% growth in both sales and EPS. Pricing and a favorable mix towards higher content vehicles contributed significantly to these results. We were also proactive with share repurchases, purchasing over $500 million in shares. Despite challenges, I am extremely proud of our team that delivered these results while dealing with ongoing supply chain issues, rising inflation, and additional warranty costs. In terms of segment results for Q4, Off-Road sales increased by 19% over last year, reaching $1.9 billion. Whole goods rose by 22%, while parts, garments, and accessories were up 8%. Adjusted gross profit margins increased significantly by 503 basis points. Similar to Q3, sales growth and margin expansion were primarily driven by pricing and mix, which outweighed higher warranty expenses and commodity costs. Retail performance showed a decline of about 4% in North America for ORVs, with decreases in recreation somewhat balanced by growth in utility. Within the utility category, RANGER performed better than ATVs. We believe the industry was down low single digits, indicating some modest share loss for us this quarter. Some of that loss was due to holds on recall products, and we expect to regain that share once we work through the recall and lift the sales hold in the first quarter. Sequentially, we were able to gain share due to higher shipments and healthier dealer inventory. Q4 also recorded our highest quarterly ORV share performance in 2022. Positive trends continue in our utility segment, alongside strong double-digit growth in our commercial, government, and defense business. The snow segment was challenged by rework associated with two recalls, but fixes have now been communicated to our dealers. With healthier inventory across our Off-Road portfolio and new innovations, we aim to gain market share in 2023. Shifting to On-Road, sales of $302 million were up 29% compared to last year, with whole goods up 35% while parts and accessories remained unchanged. Remember, our On-Road segment includes the Aixam and Goupil businesses in France along with our Indian motorcycles division, which reflects a strong mix of international revenue—though impacted by foreign exchange pressures. On-Road shipments last quarter were the second highest of the year as we adjusted to a more normal supply chain environment. This helped Indian motorcycle maintain share for the second straight quarter. Gross profit margin was up 358 basis points to 17.1%, thanks to our team executing effectively on the road to profitability. The quarter's margin expansion was driven by volume and a shift towards heavyweight motorcycles along with increased pricing. In our Marine segment, sales reached $245 million, a 36% increase driven by pricing and mix. Inventory levels across all three brands are the healthiest they've been all year. We still need to improve in the entry and high-end models, but a stabilized supply chain is paving the way for quick progress as we aim to prepare dealers for a successful boat show season. North American retail for pontoons was down in the low 30s as we focus on high-end boats. With recent improvements in dealer inventory, we anticipate a return to a balanced mix of entry, mid, and high-end boats in 2023, which should lead to market share gains. Gross profit margin increased by 209 basis points, driven by improvements in mix and pricing, along with enhanced supply chain stability. For the full year, actual results were in line with our expectations, with some outperformance in margin from the On-Road Group. The performance last year positions us well for a strong 2023, highlighted by expected market share gains and a wealth of innovative new products and technologies being launched. Our financial health remains robust, with a leverage ratio of 1.6x and a solid cash position. Free cash flow grew by over 800% year-over-year, with all the growth occurring in the second half of the year. We expect this cash generation momentum to persist, anticipating further growth in 2023. As a dividend aristocrat, we wrapped up our 27th consecutive year of increasing our dividend. We've invested over $300 million in capital expenditures and allocated 4% of sales to research and development in 2022. We believe we are well-prepared for various scenarios in the broader market due to our strong balance sheet and cash generation capabilities in 2023. Now, regarding our initial guidance for 2023, we expect sales to be flat to up 5% compared to 2022. Key performance drivers include a favorable mix from new products, higher content vehicles, and increased parts and accessories sales. Most of our new products are anticipated to launch in the second half of the year and will be priced above similar products in our portfolio. We expect retail to modestly outperform the industry in Off-Road. Our commercial segment is projected to also perform well, though those units don't factor into our retail share performance. On-Road is expected to have a strong year with a competitive lineup of bikes, while Marine is positioned for improved competitiveness with healthy inventory and new boats across all three brands. Pricing is expected to counterbalance higher promotional activity, with pricing playing a more significant role in the first half of the year due to carryover effects from 2022. We foresee foreign exchange rates and finance interest as headwinds that could impact sales growth by over 160 basis points. These expectations are based on a steady industry retail forecast for the year, meaning any changes in the industry could positively or negatively influence our results. The timing of new product launches in the second half of the year could also be a significant factor. By segment, we anticipate Off-Road sales will rise by low to mid-single digits; On-Road sales will see low single-digit growth driven by retail and market share gains. With new products and better dealer inventory, we expect Marine to remain flat relative to last year, with share gains from newer offerings, although partially countered by a weaker industry. Regarding margins, we expect modest expansion in adjusted gross profit and EBITDA margins. Contributing factors include volume, mix, and lower cost premiums due to inflation and an improved supply chain. However, we acknowledge some headwinds such as increased financing interest and foreign exchange rates. We predict foreign exchange to impact EBITDA by around 60 basis points primarily due to recent Canadian dollar movements, while we are closely monitoring the euro's situation. Adjusted EPS from continuing operations is projected to decrease by 3% to increase by 3%, largely due to higher interest expenses offsetting margin expansion benefits. When combining the headwinds from foreign exchange and increased interest expenses in 2023, we estimate an overall impact of approximately $1.50 on adjusted EPS, but we anticipate some offset from the benefits in share count due to our repurchase activities in 2022. Before I turn it back over to Mike, I want to highlight a few additional items. Operating expenses are expected to increase as a percentage of sales, primarily due to sales and marketing. This increase is linked to a return to more normal advertising levels and in-person dealer events. We encourage you to model shares as flat compared to Q4, roughly around $58.5 million. Financial services income is projected to rise by 40% due to higher interest rates and an increase in dealer inventories leading to more income from receivables. Both operating and free cash flow are expected to rise significantly compared to 2022, as working capital investments are not predicted to be a drag. Lastly, we plan to make substantial investments in back shop capacity in Mexico to bring outsourced fabrication and injection molding activities back to their historical levels. In addition to that, we will invest in capacity expansion at several facilities, which will drive higher capital expenditures year-over-year. Mike will touch on these points briefly, but we are enthusiastic about the opportunity to invest in growth while gaining greater control over our supply chain. Our capital deployment priorities for 2023 include continued investments in the business, with an intention to mark our 28th consecutive year of dividend increases. Following that, we'll balance share repurchases and debt reduction, likely pursuing a mix of both this year. At a minimum, we aim to offset dilution from our stock-based compensation program. Part of our five-year strategy involves reducing our base share count by at least 10%. With last year's repurchase activities ahead of schedule, we anticipate being opportunistic with share buybacks while also managing debt repayments based on what we believe is best for the company in line with our return metrics and maintaining a healthy financial position. Finally, as we look toward the first quarter, there are several moving parts to consider. We expect retail, excluding Marine, to be flat to slightly up year-over-year. Keep in mind that promotions are taken out of revenue, and with increased promotion levels, there will be a headwind to both revenue and gross profit margin. We also foresee year-over-year pressure from foreign exchange and interest expenses. Conversely, we have favorable elements such as pricing and an expected reduction in cost premiums. On the EPS front, we have analyzed pre-pandemic earnings patterns and expect 2023 to follow a more normal earnings cadence, with 16% to 17% of our full-year EPS coming in the first quarter, traditionally a seasonally softer retail quarter. Overall, we believe we are positioned for a strong year, including share gains across segments, margin expansion, and robust cash generation, despite existing headwinds. Our team remains focused on delivering these results as we progress towards our five-year targets. With that, I will now hand it back to Mike for further insights on 2023.

Thanks, Bob. We made a lot of progress on our long-term strategy in 2022 and are well aligned on what needs to get done this year to meet our 5-year goals. Starting with the strategy we laid out at Investor Day last February, nothing has changed. This team is focused on executing the strategy. We consistently review progress to our strategic objectives as a team as well as with our Board. We believe the 6 pillars of our strategy will drive growth, improve margins and drive strong financial returns for investors. Rider-driven innovation and best customer experience will be on full display in 2023 and we have a very exciting year for new product introductions across all segments. Consistent with the success we saw in 2022 with the RZR Pro R and Turbo R, I think you will be impressed with our Off-Road launches in 2023. Polaris Off-Road will not only raise the bar for our industry, but will redefine product categories. Both dealers and customers should be excited to see and experience what's to come. Indian motorcycle had much to be proud of in 2022 with the launch of the new FTR Sport and Indian Challenger Elite. And 2023 is set up to be an even better year with new bikes and accessories consistent with the innovation riders have come to expect from America's first motorcycle company. Our Marine business is gearing up to ship new products across all 3 brands from Godfrey Mighty G to the Hurricane Sundeck 2600 and plus more to be announced in 2023. Boat show season is upon us, and I saw firsthand the level of excitement and energy around these already released products. Our strategy isn't just about innovation. Last year, we invested significant money back into the company to ensure we have agile and efficient operations as well as capacity to support the innovation. In 2022, we expanded our PG&A distribution center in Ohio, added capacity at our Monterrey, Mexico facility to support new Off-Road products coming out in 2023, and added capacity in Elkhart, Indiana for our marine business to support the growth in our large boat cat segment. As we look forward, we see a need for additional capacity in our Off-Road business to support planned growth. Starting in 2023, we're investing in vertical integration as well as capacity expansion in a new location in Monterrey, Mexico. The investments in construction are scheduled to start this year with the benefits being realized in early 2024. This is certainly an important step to support our 5-year strategy and align with our agile and efficient operations pillar. Lastly, we're well on our way and on trajectory to achieve our 5-year financial objectives. 2022 saw us drive growth, expand margins, improve returns and execute on our capital deployment plans. While 2023 is bound to have some challenges, I expect another solid year of progress against our objectives. Let me wrap up. We did what we said we would do in 2022. We expect demand signals to be mixed in 2023 as they have been for the past couple of quarters. We're closely watching a number of demand indicators and our plan is to remain agile in managing our manufacturing and shipment plans so that we can swiftly respond to positive or negative trends. We expect overall powersports retail to be relatively flat this year, plus or minus a point or 2 as we settle into a more normal operating environment. For Polaris, it's expected to be an exciting year for product launches and new services as we accelerate rider-driven innovation and the best customer experience. There are meaningful headwinds to our financial results given recent foreign exchange moves and higher interest rates. We have done our best to help you model them given the information we know today, but realize both of these have been volatile as of late. This environment requires us to remain agile to changing conditions, and we are well poised to do just that. As I have said before and it remains true today, we know that winning in a competitive environment requires our entire organization to be focused on delivering. With the best team in power sports, I'm confident we will deliver on our commitment of being the global leader in powersports. We're excited for 2023 and what it offers us, our dealers, our customers and our shareholders. We believe the decisions and investments we are making today will not only set Polaris up to deliver a strong year, but also generate strong growth and returns over the long term. With that, I'll turn it over to Betsy to open the line for questions.

The first question today comes from Craig Kennison with Baird.

I wanted to ask about the flattish retail forecast that is embedded in your guidance. To me, that suggests you hold or maybe gain a little share in an economy that does not enter a recession. I'm just curious if you considered scenarios with a deeper economic downturn or pressure on your market share, and what those downside scenarios might look like?

Okay. Thanks, Craig, and I appreciate the question. Yes, we've modeled a number of different scenarios and the results on operations. The key element to keep in mind is it's not predicated on a substantially better economy. If you think about the areas where we lost share in 2022, they are predominantly concentrated around the RANGER product line, the utility space. When we look at the inventory levels for that business, they are still well below even the optimal levels, and those optimal levels are well below where we were in 2019. Given that we see that market holding up, it's an opportunity for us as delivery improves to get back in and pull that share back. We have seen that playing out over the last two quarters. So we know when we've got the availability that we're going to pull the share back. We are happy with the performance we had in REC last year, the Pro R and Turbo R put us in a share gain position, which is great given some of the challenges we've had over the past. It really came down to availability within our RANGER product line. We have seen that steadily improving, and we anticipate that will continue through 2023. Being able to catch up on both dealer inventory as well as just the continued solid demand we have in that category is important. The other element is we do have new products coming out that serve new segments. There will be a little bit of cannibalization that comes from these products, but they will appeal to a different subset of the industry, and that's going to put us into a really good spot. The last point I'd make is we have managed this business through some pretty volatile and uncertain environments in the past several years. The team has a strong track record of being able to react and move the business in the right direction. We know what our guideposts are relative to dealer inventory. We'll let that plus the demand data from the dealers be our guidepost. Dealer inventory obviously was up strong versus last year, but compared to 2021, a lot of that inventory went into the channel late in the quarter. We were still dealing with some manufacturing disruption from suppliers and recalls as well. A lot of that inventory clearing out in January, which we were able to get into the hands of dealers and they are delivering to customers. We believe those vehicles are in demand and we've had consumers place initial deposits that show up in the presale numbers. So we're watching January closely right now; retail is outpacing what we would be shipping into the channel. We feel good about the dealer inventory levels.

The next question comes from Fred Wightman with Wolfe Research.

I wanted to ask about the retail commentary you just provided and how it relates to the reported sales guidance. What factors influence whether we reach the low end or the high end of the sales projections? Is it mainly the duration or persistence of the price and mix benefit, or does retail play a significant role in this? What is driving these outcomes?

There will be a retail aspect to it. We have considered the appropriate level of promotions based on industry conditions, with much of that focused on interest rate buy downs, given the sensitivity of low to mid-range markets to interest rates. We've incorporated this into our pricing strategies. I don't expect any significant price changes. Much of this will depend on demand and dealer inventory levels. We have expanded our guidance range more than usual due to the considerable uncertainty. When we discuss stable retail, we are exploring scenarios where we might see slight declines or increases, and using this information to guide our shipping plans while also taking into account the introduction of new products that cater to new segments.

Makes sense. And then just on that new product introduction, you gave us the earnings cadence of 16% to 17% in the first quarter, but regarding the timing of these products, should we be looking to historical cadence for the quarters? Should it be more back half weighted because of these products? How do you want us to think about that?

Yes. Look back at historical cadence; it's the right direction to go. There will be a little more weight towards the back half than historical just because of the new products and their timing. Additionally, the growth we expect for next year is driven by direct sales to commercial accounts, which do not occur through dealers but do contribute significantly to our revenue. This commercial business is strong due to the infrastructure and chip fab bills. These markets are robust, and that gives us stability and confidence.

The last point I would make is from a sales standpoint because, again, it doesn't show up in retail, our PG&A business typically performs well if people aren't buying new vehicles. They still repair and upgrade their vehicles. We know that this part of our business will be resilient as people keep their current vehicles.

I guess first question on margins. What's the margin drag that you guys are assuming from increased promo activity in '23. Does pricing offset that dollar for dollar? Or is it margin neutral?

If you look at '23 versus '22, the pricing carryover from '22 into '23 really carries through the first half, and that will largely offset the increased promo for the year. The other piece of that drag is dealer finance with floor plans with dealer inventory being up, floor plan rates being up, the floor plan finance cost for us is a drag. But promo itself is mostly offset by the carryover of the price.

And keep in mind that when we talk about the finance promo, the way Bob has structured this with our financial partners, we end up pulling back some of that income below the line. So some of that GP margin headwind gets offset much lower in the financial statements.

Okay. Could you quantify the expected headwind? Is it 100 basis points?

No, it's less than that. You have to remember, we're such a large portion of the industry. When you have a combination of us at the end of the year facing a significant stop sale for our REC business and struggling with product delivery for the utility business, it places a lot of pressure on the industry as a whole. However, as we look into 2023, we expect things to stabilize and improve as our RANGER product line availability gets back on track and we continue to launch new products.

The next question comes from Robin Farley with UBS.

A couple of little clarifications. You mentioned retail in January, you said sort of outpacing what you're shipping. Can you kind of put that into roughly like a retail year-over-year, how January is pacing so far?

I don't know that would provide a whole lot. But the point is similar to what we experienced; we talked about dealer inventory moving quite a bit coming off the third quarter. Specifically, we have been watching retail sales which were double the shipments for RANGER and ATV. There are late shipments on utility and RZR vehicles due to recall issues.

And can you quantify roughly what percent of retail in Q4 was presold? I think you've been giving out that number in prior quarters. So just wondering where that ended for Q4.

I'm not going to give a specific number, but it's kind of been down quarter-over-quarter. We did see strong presold, though due to a model year change some people stopped preordering because they wanted to wait for new models. While it was down, we are seeing strong presold. It's still well above where it would have been historically.

As Bob indicated, now it's becoming a better indicator around the demand where we don't have dealer inventory levels at the adequate level or product that is on hold. We have seen this play out with our RZR and RANGER products.

Okay. Great. Just one final clarification, if I could. In your market share numbers, dealers have been talking about some OEMs imports from China growing share. And I think initially, those were not included in the market share data that you gave. Are those other brands now in your market share numbers or not yet still kind of just legacy competitor brands?

When we give market share data, we only provide it for the folks that participate in ROVA; some of the Chinese manufacturers don't participate in the trade organization, so we don't get their reported data. The bulk of their products, especially during the pandemic, has been lower-end products in a range that we don't participate in meaningfully. We don't dismiss any competitor, but I believe their growth has broadened the market more than it has changed share dynamics.

We'll not dismiss our competitors; however, we do know we spend time meeting with dealers and the consistent dialogue from them indicates that the majority of those purchasing lower-end options are not necessarily customers for higher-end competitors as we've seen this change in dynamic. The availability of our products as well as those within the industry has improved substantially.

The next question comes from David MacGregor with Longbow Research.

Just a question on PG&A. You noted attachment rates are healthy. With reduced dealer whole goods inventory targets in 2023, does that extend the PG&A or do you lean more aggressively into attachment sales with higher dealer in stocks?

Certainly, they operate PG&A on an RFM model similar to whole goods. That said, if you're seeing fewer whole goods move, people are likely to buy accessories since people are still riding their vehicles at historic levels. There will be some of that, and the attachment rates have steadily increased. I anticipate that these rates will continue to grow, likely not at the same rapid levels we’ve seen over the last five years but there will still be growth.

Got it. And then second question on motorcycles. This is a category where you've had some margin challenges over the years, but you made a lot of progress in 2022 on motorcycle gross margins. So just talk about the drivers of the margin improvement other than mix, which you referenced in your prepared remarks, but the gains seem to be holding well here. So how should we think about the potential upside from here? And what have we assumed in your 2023 guidance with sales up low single digits on raw material cost relief?

We've talked a lot about our team driving a path to profitability plan, and we're pleased with the adherence to it without compromising quality and innovation. Key factors include the scale of the business. As you grow it, you leverage your overhead. The pricing and promotional environment has stabilized as our largest competitor has done so under new leadership. Scarcity has driven a premium in the past. Engineering has also played a role as we built up bikes across categories. As we introduce new models, they fill the product gaps. PG&A has been a focus area, and there's room for improvement, particularly in international markets which account for a significant portion of the growth.

I would add that we've also continued to pursue localization in our motorcycle business. Unfortunately, motorcycles are most impacted by FX given how global it is, but we've increased the level of bikes assembled in the region. We started assembly in Vietnam last year, and that will benefit us moving forward.

The next question comes from Jaime Katz with Morningstar.

I'm hoping you can elaborate on Marine, mostly the trajectory of the improvement you're hoping to achieve. I'm wondering if mostly a remedy that stems from correcting the supply chain, so it's sort of a smooth improvement going forward vs. the recent declines at retail? And then is there any way to think about what the impact of the switch coming on to the market might have had on the lower price point end of the market for demand?

Yes. I’ll take the last question first. We know that the introduction of new products has had an impact. When we look at the pontoon market, the true segment should behave independently of new entrants. We feel that the traditional brands are holding well. We track their performances closely and see no significant market share loss. New products tend to attract different segments of consumers. Regarding improvements in Marine, I would categorize it as a tale of two businesses. We have worked hard to turn Godfrey and Hurricane around in the past years, and we believe we will continue to achieve market share gains. The challenge with Bennington has been addressed with new leadership, and we're confident in the market share prospects moving forward.

People may miss that our marine profitability has increased significantly since we acquired the business, and I think there are more efforts underway to continue driving that profit growth. We're confident that these initiatives will yield strong results across the brands under our umbrella.

As for capital investments, the reason we made statements about our new location in Monterrey is that it allows us to bring activities back into our own operations rather than outsourcing. We’ll need to invest initially but will benefit in the long run. Changes in capacity will begin this year with results expected to yield additional improvements by early 2024.

The next question comes from James Hardiman with Citi.

I wanted to dig into the inventory replenishment dynamics, continual conversation we've had over the last couple of quarters. What was the full year replacement benefit for 2022? Is it easier to just take the $750 million that you gave us a couple of quarters and subtract the $150 million that you gave us this time around? Doesn't that suggest a sizable headwind this year even with the $150 million left over?

The basic math works out that way. Yes, $150 million is the mathematical difference, but we cleared a significant amount of that dealer inventory through January and February from recall holds and other issues. We expect to catch up on shipments, and there's ongoing solid demand. The $150 million can be considered somewhat understated as we work through initial consumer orders already established.

Keep in mind that the growth in the commercial business won't affect dealer inventory per se. It contributes significantly to revenues but operates through direct sales channels. This gives more stability and assurance to our ride and RANGER lines.

Just to clarify, I shouldn't be thinking of this as a headwind spread throughout the year or just mainly weighted in the second half?

I wouldn’t view the headwind as being relegated to the second half. It’s not as straightforward when we're factoring in retail demand as well as new product rollouts in the second half. We're expecting strong shipments as we work to build inventory levels in anticipation of demand.

As you evaluate these numbers, remember that inventory levels were impacted by retail declines in Q3 and Q4, but with the expectation for flattish retail, we are well-positioned for growth across different segments.

Pricing is expected to remain relatively stable for the upcoming year. We have seen pricing rebounding in the fast lane and should remain resilient without further hikes expected. Thus, the fundamental driver remains mix and demand.

The next question comes from Gerrick Johnson with BMO Capital Markets.

Two questions here. First, just to clarify on what happened in the fourth quarter. You expected fourth quarter retail to be positive. So in or down 6%. Where does that come from? Is that all the recall? What else left retail like short of your expectations?

It was a combination of recall holds on a significant number of RZR and the timing of shipments of utility vehicles into the channel. We faced specific supplier issues that delayed shipments late in Q4. While customers are unhappy with the delay, we were able to move those products into the market by January.

From a unit standpoint, we had challenges related to margins, but we also did not recognize revenue from sales impacted by recalls. It pushed some snow units into the early part of 2023.

Okay. Got it. And a second question here to you, Bob. Maybe give us a bridge to the financial service percent flat retail and more cash buyers. How do we get up 40%?

Even on flat retail, we're seeing two things. Promotions have increased our levels which means financing opportunities continue to grow. Additionally, with floor plan financing, our rates reflect higher values, increasing income from our receivables.

The promo programs do not impact our financial services income; it is captured in gross margin. However, we do share in the returns from our financing partners, which results in income at a lower level.

This concludes our question-and-answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.