Good morning, and welcome to the Polaris Inc. First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. 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, Gary, 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 first 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 first 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.

Thanks, J.C. Good morning, everyone, and thank you for joining us today. This may be a little premature here in Minnesota, but I hope your spring and riding season has opened up from what seemed to be a prolonged winter. Although I can't complain too much as it was helpful to our snowmobile business. I consistently reinforced with my team that the key to a successful year is a strong start, and our first quarter results reflect just that. Sales were up over 20%. Adjusted EBITDA margin expanded 172 basis points and adjusted EPS grew 55% versus last year. Sales growth was driven by strong mix and higher ship volumes favorable net price, which is price net of promotions. Increased share in off-road, on-road and marine as availability improved through the back half of last year and into Q1 and a great start in our commercial business. The balance of the restocking benefit was mainly in off-road that we discussed in January. While North American retail was down 5% versus last year, it increased 14% versus 2019. Our teams and dealers are seeing a return to more normal seasonality. The spring selling season, which continues for the next couple of months, is going to be an important gauge for the remainder of the year. April is off to a good start despite a delayed spring for most of the country given poor weather conditions in early March. We saw gross profit and EBITDA margin expansion for the third consecutive quarter as we maintained our focus on process improvements and efficiencies that can drive us closer toward our long-term target of mid- to high teens EBITDA margins. We executed margin expansion despite factory inefficiencies as a result of late deliveries from suppliers. This gives me confidence in the margin improvement opportunity as we drive suppliers to more normalized delivery performance and continue to drive efficiencies in the factories. I shared in January that 2023 is going to be an exciting year, and we came out of the gate strong with the launch of the Ranger XP where we made the industry's best-selling side by side even better with more horsepower, stronger chassis, redesigned ergonomics and added comfort. Initial reviews of this all-new Ranger are very strong, and we're excited for deliveries to start later in Q2. We also started production of our first all-electric Ranger XP Kinetic, which is now shipping to customers. Our Mighty G pontoon and Agari pontoon designed specifically with an electric motor option in mind will be entering its first selling season and should do well given a very strong order book. On-Road has its most competitive portfolio of bikes and Slingshots ever with a fresh lineup of FTRs, the debut of the Indian Challenger Elite as well as our Scout and Indian Pursuit lineup. There's certainly a lot to be excited about this year, given what we've launched thus far, but we're not done. I'm incredibly excited about the launches we have planned for the rest of the year, so stay tuned. Overall, we're off to a strong start in 2023, and that said, we are closely monitoring external factors that could impact our customers, and we remain laser-focused on being agile and adaptable should the demand environment change. Now let me share some thoughts related to customer trends that we're seeing. The demand story remains mixed and largely consistent with what we've been seeing over the past couple of quarters. In off-road, demand for our utility vehicles remains steady as the use case for these products is less affected by mild fluctuations in the macro environment. Recreation remains soft and we expect this to be the case as we progress through 2023 with share gains for us coming from new product launches. We continue to see higher demand for our premium products regardless of category, including Ranger North Star and RZR Pro R and Turbo R. SnowCheck for model year 2024 hit our target, making it the third-best SnowCheck in the past 20 years. Lastly, April retail is off to a very good start. For On-Road, we're just now entering the selling season, and April has been very encouraging as spring has arrived, and our dealers have an extremely competitive lineup of Indian motorcycles and Slingshots. In fact, we believe our lineup of bikes has never been more competitive than where we are today. In Marine, it was a later than anticipated start due to weather, but the boating season is upon us in many parts of the country and inventory is finally healthy. I was recently on the road visiting some of our marine dealers with our marine team, and they told us they've had a successful boat show season, but customers seem to be taking longer to make a decision about buying a boat given improved inventory levels. Like our other segments, the high end of the marine market continues to perform well. In addition to customer trends, we also keep a close eye on credit and lending trends that we see with our customers. In general, the metrics we monitor remain consistent with past levels. If anything, we're reverting closer to pre-pandemic metrics. As normalization within our retail finance continues, the key metrics we follow are average FICO scores, approval rates and penetration, each of which has not deviated materially from data dating back to 2018. Our information comes from our partner banks that are available to our dealers to provide credit to customers. These partner banks finance about one quarter of retail purchases, and the information we're sharing today comes from that piece of our business and our partnership with these key banks. As you've heard me say many times, our relationships with these banks are very important because we do not have a captive financing arm; we have minimized credit risk and exposure. These partner banks are well-established, strong and well-capitalized, and we are appreciative of our relationship with them and their willingness to work so closely with our dealer network to help make consumer financing available. They are truly allied in our strategy to provide the best customer experience. Lastly, these key partner banks are telling us they want more volume, and we're working with our dealers to make this happen. Regarding dealer inventory, I'm happy to say that we are in a much healthier position than we've been in a long time. We believe inventory is mostly at our targeted and optimal levels as we enter our prime selling season. We do have a few exceptions and are working to optimize dealer inventory across all categories. Year-over-year, the number looks staggering. But remember, we're coming from a point in 2022, where dealers were starved of inventory given supply chain constraints and our inability to build and deliver enough product. Relative to 2019, inventory is down about 20%. We're getting numerous signals from dealers and our own data shows that we're returning closer to a more normal seasonal trend as inventory levels improve. When you look at the average North American retail for off-road vehicles, excluding snowmobiles for 2016 through 2019, the first quarter is typically our smallest quarter, and we anticipate this to be the case in 2023. Historical performance and seasonality show that we typically see a sizable jump in retail sequentially from Q1 as the riding season begins and weather improves. We expect this to be the case this year, and our April performance supports this assumption. The magnitude of the jump in Q2 is expected to be a bit more muted due to a strong start in Q1 as well as some of the macro headwinds. As the chart shows, history would suggest that we would see a sequentially similar third quarter followed by a dip into Q4. The bottom line is that our first quarter performance was in line with our expectations and April's performance is trending consistent with our expectations. Although challenges remain, our team remains focused on enhancing our internal processes and systems to improve efficiency and delivery. We continue to see ourselves in a strong position to gain share as the year progresses with healthy inventory at the dealers and a big year for innovation and product launches. We also remain vigilant as we assess consumer trends. While nothing has changed significantly compared to the past couple of quarters and our original expectations, our team remains agile and committed to optimizing the business. Finally, we remain committed to delivering on our 5-year strategy and plan to provide a comprehensive update on our progress during our recently announced Institutional Investor and Analyst Day on July 30. I'll now turn it over to Bob, who will summarize our first quarter performance and provide additional details for the balance of 2023, including guidance and expectations. Bob?

Thanks, Mike, and good morning or afternoon to everyone on the call today. Our first quarter results kicked off what we believe is going to be a strong year for Polaris in regard to share capture, new product launches and margin expansion, all of which lead us forward on the path to achieve our 5-year targets. Sales grew 22%, driven by a number of factors Mike mentioned earlier, including strong performance from our international business, which grew 16% year-over-year, overcoming a 5 percentage point drag from currency. On margins, we saw all segments expand gross profit margins over 125 basis points versus Q1 2022, with On-Road expanding an impressive 330 basis points as that segment continues to execute on its profitability plans. Turning to our off-road results. Sales rose 19% relative to last year to $1.6 billion. Whole goods increased 25% with share gains across the board. In snow, we recently concluded the '22/'23 season and gained about 1 point of share, which exceeded our expectations given the recalls we had early in the season. PG&A results within Off-Road were driven by stable retail accessories per unit. Retail trends were consistent with last quarter, while actual industry performance was down in the quarter. Our share gains were driven by outsized gains in ATVs and general side-by-sides. With healthier inventory across our entire off-road portfolio and our innovative offerings of new products, we expect share gains to continue throughout the year. Outside of utility and recreation, we saw double-digit growth in commercial, which continues to have a strong backlog. Margin expansion drivers included higher net price and lower cost premiums offsetting higher warranty costs and finance interest. Switching to On-Road, our third straight quarter of share gains were driven by our strong product portfolio and healthy inventory. North American Indian Motorcycle retail was flat year-over-year, but up 11% relative to 2019. International sales were bolstered by strong Indian motorcycle sales in Australia. It's worth noting our European brands, Aixam and Goupil, both had record revenue quarters, and while they face meaningful headwinds, they continue to drive margin expansion. On-Road gross profit margin was up 331 basis points driven by favorable product mix and higher volumes. Moving to our Marine segment, inventory is healthy, and we are operating in an environment that feels like pre-pandemic times. Sales continue to be driven by consumer preference for more premium boats as well as the pricing actions we took last year. The most recent data we have shows we gained share in Marine during the first quarter. Dealers believe it was a successful boat show season, and while they are optimistic about the upcoming retail season, we are seeing a return to seasonality in terms of the timing of boat registrations and pickups. Similar to Off-Road, we are currently seeing increased promotional activity which we believe can positively impact buying patterns as we enter the spring selling season. Gross margin was up 129 basis points with higher net pricing and favorable product mix being the primary drivers. Moving to our financial position. We continue to see our balance sheet as a competitive advantage. Cash generation in the first quarter was strong relative to previous years, and our net leverage ratio continues to be in a healthy spot at 1.6x. We believe we are set up well for a variety of scenarios in the broader market with our balance sheet and cash generation capabilities in 2023. Now let us move to guidance and our expectations for 2023. Before giving more details, you should know that our expectations today are the same as they were in January when we first provided 2023 guidance. Broadly speaking, what we are seeing across our segments today is in line with our original expectations. Our first quarter results reflect momentum in sales, share gains and margin expansion, which should help us achieve our full year goals. Regarding sales, there continue to be a long list of opportunities to achieve our guidance. Mix continues to be a positive and is expected to remain a contributor given the launch cadence we have planned for the remainder of the year. Today, our product launch calendar remains on track, and we expect a bigger contribution in the back half of the year from mix as those new category-defining products enter the channel. We expect to gain share throughout the year with the support of healthier inventory levels and new product launches. So even though we anticipate flattish retail industry for the year, we expect to do a bit better as a share gainer. As Mike mentioned earlier, dealer inventory is near optimal levels allowing us to realize the positive share impact we were expecting. We also spoke about robust growth in our commercial business and expect that to continue throughout the year, just as we saw in the first quarter. Our international and PG&A businesses are expected to be strong contributors to growth this year. Offsetting some of these sales drivers are continued headwinds from FX and the return of promotions. We are planning FX conservatively given the volatility in the markets, but should FX rates hold at their current levels, we expect to see a tailwind versus our plan. For margins, we expect modest margin expansion at the adjusted gross profit and EBITDA lines. Drivers continue to include volume and mix along with our expectation that input costs will decline throughout the year. While most things are moving in the right direction, we are seeing input costs around steel and diesel rise. But at this point, they are not expected to have an impact on our financial plan for the year. It is important to understand that there are many things going right operationally and with our supply chain, but it takes time, and we expect this journey to continue throughout the year. Adjusted EPS from continuing operations is still expected to be in the range of down 3% to up 3%, with most of the potential drop-through from margin expansion being consumed by higher interest rate expense. For the second quarter, a couple of things to note. We are seeing seasonality return, but not yet in line with historical patterns, which usually translates into a sizable sequential ramp in shipments and sales in the second quarter. We do not expect a material ramp in our second quarter sales sequentially this year due to the timing of snowmobile shipments, which carried over into our first quarter. Next, history reflects that approximately 40% of our annual EPS is derived in the first half of the year, and we expect this cadence to hold true this year. The negative hit from FX in the second quarter is expected to be in line with what we saw in the first quarter if FX rates stay constant. To wrap up, Q1 results proved to be a strong start of the year. Our expectations for the year remain consistent with our initial thoughts. Although it is happening slower than we thought, we are seeing the supply chain improve. With our focus and investment on internal efficiencies and processes as well as continued progress in the supply chain, we believe there remains a real opportunity to drive margin expansion this year and beyond. We remain excited about the product launches we have for the remainder of the year and believe they can contribute to growth this year as well as future years. We are taking share and are committed to winning through our ability to deliver high-quality and innovative products to those that play and work outside. Our teams remain agile as we enter the 2023 selling season, and we are in a good spot with inventory. As we close out the first quarter, we are grateful to be in this position and excited about the initiatives we are focused on to help deliver our 5-year strategy. With that, I'll turn the call over to Gary to open the line up for questions.

Our first question is from Fred Wightman with Wolfe Research. Please go ahead.

I just wanted to touch base on the comments Bob made for Q2 and sort of the first half of the year. It sounds like that 40-60 split as far as first half, second half is still the right way to think about the year. But that would also sort of suggest 2Q numbers for the street need to come down. So can you sort of walk through maybe where we missed things? It sounds like FX might be a little bit of a headwind, but just sort of the 2Q outlook and then sort of the implied stronger back half of the year given the macro environment?

Yes, the 40-60 split is the right way to approach this. As we began the year, we anticipated shipping more snow volume in late December, but more shipments and revenue were actually recognized in January and February due to some product recalls. This affected our usual cadence. In Q1, we had heavier snow shipments and lower side-by-side shipments, while Q2 will see more side-by-side, though the snow shipments will somewhat obscure that normal ramp-up. The stronger performance in Q1 offsets part of what we would typically expect in Q2. While the overall picture for the year has become slightly less challenging, this is the current dynamic we are facing.

The other thing Fred, to keep in mind is, as I mentioned, the number of new products that we've got coming out and the timing of those deliveries really is more weighted into the back half. And aside from the XP, the other products are not what I would term as highly cannibalizing of our existing products. They really target new categories. And so that will obviously be a big part of that second half ramp-up in deliveries.

Make sense. And then just to ask about the retail financing landscape. The slide that you guys provided was super helpful. But I'm wondering if you gave this for Q1. I'm wondering as you moved throughout the quarter, did you see either FICO scores or approval rates or penetration sort of dip off in March? Or maybe if you could comment into April?

No. I mean, the data has been really consistent and consistent with the past, and we've talked to all the banks about where they are with their lending standards, down payments and really, that's all remained very consistent across the board. So I think you'll continue to see our penetration rates return to kind of more normal 30-plus percent levels. If there's any slowdown in financing, it's more on the local bank side, and that's why we have these partners in place to be able to step up and fill that gap, and they've all been very aggressive and are very interested in lending more money into the space.

Our promo, Fred, is largely aimed at doing rate buydowns to put things back into a more attractive category. And you got to step back and think about who our customers are, and we track that. They've done well over the past few years. Their income levels are up. When you hear about layoffs and things that are going on in the economy right now, they primarily tend to be centered around the tech areas, which don't necessarily have a high correlation to our customer base. So at this point, the customers remain healthy. And as I talked about in my prepared remarks, once the weather opened up, we've heard this pretty consistently from all of our businesses. We've seen customer activity really increasing. So we think the weather had a pronounced impact, and I think you're going to see those customers coming in, and that's why our retail finance partners are looking to grab an even bigger piece of the business.

The next question is from Joe Altobello with Raymond James. Please go ahead.

I just want to get some more clarity on Fred's first question actually about your implied guide for Q2. So I understand why the delayed snowmobile shipments from December to Jan and Feb would boost Q1. But I'm a little unclear as to why that would impact Q2. I mean, were there other pull-forwards that you experienced in this quarter?

No. What I was trying to say is that the snowmobile shipments, if you look at what would have been the normal seasonal ramp from Q1 to Q2, you'd see a bigger ramp. But Q1 was, to some degree, unusually high if you were thinking normal seasonality relative to history to sort of like a '19 compare because of those snow shipments. And so the sales ramp just looks lower. But the real dynamic is we'll ship more side-by-side and more off-road and motorcycles in Q2; you just won't see as big of a revenue pop because we had those snow units in Q1.

Okay. But it also implies earnings are going to be down year-over-year in Q2 as well?

Yes. I mean, Q2 last year, everything last year was really driven by ability to ship. So our Q1 last year was significantly lower from a shipment standpoint than where we were in Q1 this year. So getting into riding season, we had a lot more inventory to try to make up and get in the channel in Q2, whereas this year, we're sitting a little bit better because we had better shipments in Q4 and Q1. So that's the dynamic there. We just don't have as much of an inventory hole to make up in Q2.

And you're dealing with the effects of foreign exchange and interest rates on top of that, that just pronounced that earnings decline in the second quarter versus last year.

Got it. And just one last one on April retail. It sounds like you're pretty positive there. Maybe could you guys quantify for us what that might have looked like?

I'm not going to provide specific details, but I can say that we have been closely monitoring the situation. Our business units track retail activities daily. As I mentioned earlier, the weather had a negative impact in early March. However, we noticed improvements and an uptick in retail momentum as conditions got better. Our recent dealer council meetings have reinforced this perspective, with dealers reporting that customer traffic in dealerships increased once the weather improved. The buying process is indeed altered due to the availability of inventory and higher interest rates, leading consumers to be more cautious in their decisions. I also mentioned the current state of the boat business, where financing is significant. While customers are still willing to buy, they are taking their time due to a greater selection of inventory. Overall, we are optimistic based on what we've observed through April.

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

We receive numerous inquiries from investors regarding our guidance and the expectation for retail to remain flat. Given the potential for a recession and tighter credit conditions, which may not yet be evident, what gives you confidence in this flat outlook? Are we perhaps underestimating the product cycle, or could we be overlooking the impact of product availability and your capacity to meet demand on a larger scale?

Yes. I would say it's a few things, Craig. I mean, one, the utility side of our business, which for Off-Road makes up about 60% of the volume, the demand there remains stable. In fact, on the commercial side, it's very strong. And so that gives me confidence as we get availability into the channel, we are seeing those products retail out or sell-through. And so there's obviously an element there that as long as that market continues to hold up, and frankly, we're not seeing anything that tells us anything differently, that gives us confidence. The second is we talked about it. We're not expecting growth in our recreational category from the existing products. So we're anticipating things to continue to be a little slow there, just given that that's a far more discretionary purchase and consumers are obviously impacted by what's going on. Even if credit is available, the cost of credit is obviously a strong consideration. But I do think the new product elements, both for recreational and utility that we have coming out later this year probably are being a bit underestimated. They're largely not cannibalizing products. So they're redefining segments or defining new segments. And we're really excited about what we believe that means for the business. When you add on top of that, we didn't talk about it, but we had considerable growth in our international markets, pretty much across the board, particularly strong in our Indian Motorcycle brand but even growth in off-road and growth in PG&A that comes as a result of organic but also with those new products. We are, at the same time, launching a number of PG&A options. So for example, when we launched the all-new RZR XP, there were close to 100 accessories that came out literally at the same moment that vehicle did. And so when you add all those factors together, we believe that puts us in a pretty good environment to at least execute on a flat retail environment.

It's important to remember that when considering the retail comparisons for 2022, that year was not typical due to both timing and inventory issues. Additionally, it was significantly lower than 2019. So, when you view 2019 as the last normal year for the industry, a 22% comparison to 2019 does not represent an extraordinary figure. We are already below pre-pandemic levels when looking at unit numbers compared to 2019.

If I could just follow up. Are you able to track sort of the average retail selling price and given dealers have to be sharper on their pricing. Are you actually seeing maybe the monthly payment for a like-for-like unit tick down given maybe a more competitive price from dealers?

There are two main factors to consider: price and interest rate. I would say that the increase in promotions across the industry, as well as dealers possibly reducing their margins slightly, plays a role here. During the pandemic, margins were typically at their highest. This shift can lower the finance amount a bit. However, most of the positive effects seem to be counterbalanced by the rising rates that have been increasing steadily each quarter. Currently, I don't believe this is having a significant impact. If rates were to stabilize, it might begin to have a small effect. However, feedback from dealers indicates that the monthly payment amount isn't the main concern; rather, it's the initial shock of seeing rates over 7%, which causes hesitation among buyers.

Yes. And when we were out with the marine dealers, they were looking for some help from us, not necessarily financial help, but helping how do you articulate to consumers that, that headline rate may be higher, but the impact from a monthly payment standpoint really is not significantly impacted. So they're happy to think differently about how they're selling. The other thing I would point out is the comments that we've made around the high end of the business, and that's true, whether it's on-road, off-road or marine, that the customer remains very strong, and we don't talk about it really much anymore, but that presold order book obviously has come down from the heights that we had now that inventory is better. But it's still up pretty significantly relative to where it was before the pandemic. And really, that's centered around areas like the Ranger North Star, where we're still not at optimal inventory levels. And that just tells you that customers are still anxious to get that product. That's good for dealers because whether it's the Turbo R, the Pro R or the North Star Ranger, the amount of discounting that they have to do is minimal, and that tends to be a more affluent customer that may not be as sensitive to the financing rate. So we feel pretty good about where those dynamics stand right now.

The next question is from Robin Farley with UBS. Please go ahead.

I would like to clarify something. I understand that April retail has already been discussed, but could you specify whether when you describe it as strong, you mean it is showing positive year-over-year growth or are you simply indicating that you are continuing to gain market share? Additionally, considering your expectation for retail to remain flat for the year, it appears that Q1 was set to see modest growth. Is there another quarter later this year, possibly Q2 or Q3, where you anticipate retail will show year-over-year growth?

Yes. So I would say this. April is tracking with our expectations. It is up versus last year. And obviously, that's 1 of 3 months that we've got to execute on. So at this stage, we feel pretty good about it. I think we're going to probably steer clear of trying to make commentary around the quarters on retail. The first quarter, the difference between what happened in our expectations really, there are a couple of things. One, as you well know, we had a fair number of our recreational products on shipment holds or retail holds. We did clear those. But as it happened later in the quarter, I'm sure that there was some of that that was still caught up and getting the work done on them. And then the second point that I made earlier is we're still not where we need to be from a Ranger inventory standpoint. And so we know when we get that product in at retail, and we know that, that's an area where we fell short of some of our expectations, and it was purely around having that product at the dealers. So a lot of timing effects that go in there. But I think the key message is weather cleared up product availability both correlate to improving retail, and we've seen that continue to improve, not only relative to our expectations but also sequentially as we came out of the first quarter.

No, that's very helpful color around Q1. Just a quick follow-up on the commentary about your retail financing partners. Just given what's going on in the broader environment, there's concern about how much credit would be available for consumer financing. Do you have an annual contract with your retail finance partners? Is there like a particular time of year when the terms of that get revisited where if they had a change in view about how aggressive they want to lend in different parts of the consumer space where those new terms would come into play?

Yes, Robin, it's Bob. There are four partners, and the contracts are all multiyear. They expire and renew at different times. One of the advantages of having these four partners is that they're not only competing with the credit unions for business, but they're also competing with each other. This competition helps us maintain strong credit availability and favorable approval terms, along with the right level of assertiveness from the finance group. We meet with them monthly; the team connects more often, but I speak with them every month. We feel positive about their position. They are not indicating any lack of commitment to the market, nor are they altering their credit standards. Our FICO scores have stayed very consistent. Our average consumer earns over $100,000, and their income has increased by 16% since 2019. This creates a robust consumer group that banks are eager to finance.

Robin, we've discussed this before. What I appreciate about our current setup, which we've expanded from just two partners, is the existence of performance incentives outlined in the contracts, as well as the clear separation between different roles, ensuring we aren't guiding them toward risky decisions that could jeopardize their balance sheets, nor are they being overly cautious. We believe this creates a balanced approach. This is likely why you are seeing an increase in their penetration rates, which in turn offers great opportunities for our customers.

The next question is from James Hardiman with Citi. Please go ahead.

I had a question on the quarter and then maybe a question on the outlook. I guess, as I think about the retail performance and then the reported sales performance, I was hoping you could maybe bridge that gap, particularly on ORV or off-road, right? ORV retail was down 10 reported whole goods sales were up 25%. Obviously, that's pretty big delta. It's not apples-to-apples. It never is, but maybe sort of walk us through the big contributors to that, maybe start with the ASP number. I think you mentioned snowmobiles probably helped increase that gap as well. And then there was obviously some channel fill. I'm assuming a good chunk of that call it, $150 million was ORVs. But I just want to make sure I'm not sort of missing any of the key components with regard to that sort of gap.

Sure. This is Bob. I'll address that broad question by highlighting a few key points. During the quarter, we made some progress on the ATV side, especially in terms of shipments. We're just beginning to ship the new RZR range, but we did manage to increase inventory for the Pro R and Turbo R models, which are in high demand. As Mike mentioned, we didn't achieve the progress we initially expected. For the Ranger, shipments and retail numbers were quite similar, showing a slight improvement but not significant. A part of our focus is on improving channel inventory ahead of the season, primarily for ATVs and somewhat for Ranger. Weather conditions played a role as well. Additionally, average selling prices have contributed to our results, with most of our figures reflecting carryover from last year. Our last major price increase was in early Q2 of last year, which has led to significant increases in off-road sales and modest growth in on-road and marine categories.

And then maybe help us navigate and you touched on it, Bob, like the comparisons are maybe all over the place. If we just did the math, ORVs were up 6% versus '19. I think if we were to hold that relationship on a year-over-year basis, they would be up a lot in the second quarter. I know you're not sort of guiding retail, but you guys know I know love a good slide. Slide 6, I think it is, where you talk about sort of Q2 retail versus historical average. What is that telling us exactly? I think it's telling us that maybe you don't expect Q2 retail to be above '19, but I just want to sort of understand, make sure I'm picking up while you guys are putting down here?

What we aimed to convey in that slide was a broader trend for retail rather than a specific comparison. The main message was to illustrate our current status regarding dealer inventory channel fill, which we have mostly completed. However, there are still areas with inventory levels lower than our ideal, and we will continue to address that. While we are moving toward more seasonality, we are not fully returning to typical seasonal patterns due to these inventory issues. Additionally, we are mindful of the overall macro environment; our recreational business is experiencing pressure because it is more of a discretionary purchase. I'm hesitant to delve into quarterly retail specifics, as fluctuations can easily occur between quarters, leading to confusion. For instance, Q1 serves as a good example that might influence our Q2 outlook, considering some delays we experienced. Yet, we still have a couple of months ahead, and many factors will play out from an economic standpoint.

But just to clarify, if we were to sort of do the math of if you maintain plus 6% versus 2019. That's probably going to get us to the wrong answer or maybe not.

Using a comparison to 2019 with a plus 6% adjustment could lead to an inaccurate conclusion, as we expect flat performance and 2019's figures were significantly lower than those of 2022. Therefore, it wouldn't be accurate to assume that the seasonality in 2022 will mirror that of 2019. While it's possible, the current situation is shaping up differently, with certain market segments still affected by product availability issues that will take time to resolve. Additionally, there's a notable shift this year with higher utility sales in comparison to recreational sales when looking at 2023 compared to 2022 and 2019. The season is also distinct, as Ray typically performs well in the spring as people prepare for riding, but we do not expect recreational sales to thrive this year due to the broader economic conditions.

The next question is from Noah Zatzkin with KeyBanc. Please go ahead.

I guess first, hoping you could provide some color on the elevated production costs you called out and where that hit within ORV? And then somewhat relatedly, as it relates to the redesigned RZR XP product. I think you had mentioned more favorable margin dynamics related to kind of the modular approach. Just wondering if there are benefits to be thinking about this year related to that product.

Well, I'll let Bob get into more specifics. But in general, the way I would characterize what happened in Q1 is we largely got the units out that we were targeting. The issue is how we executed that resulted in a lot of inefficiencies. So we were still building product into rework, nowhere near the same magnitude that we've had historically because suppliers are still delivering late. Now last year and the year before, when we said a supplier was delivering late, we were talking about weeks, months, sometimes quarters. Now we're talking about days and weeks, so what that means is we're still able to get the product out, but we're not doing it in an incredibly efficient manner. And the teams are still working with that. We're narrowing it down. The number of suppliers that are late continues to come down. And as that happens, it improves our ability to get efficiency in the plant. And that really is largely what drove it, and that's going to show up obviously in our gross margin performance within the off-road vehicle business. As we look forward, it's tough to say how and when those will play out. We did add that to the list of assumptions that are essentially embedded in our guidance. And obviously, we're going to continue to work that as aggressively as we can. Steve Menneto and his team are laser-focused on making sure that we're driving efficiencies in Huntsville and Monterrey as quickly as we can. It's largely dependent on how suppliers deliver to us. So we're working backwards to make sure that suppliers have everything they need to be able to deliver on time.

Yes. I think in addition to the sort of operational inefficiencies, Mike just talked about, what we saw in the quarter, steel had been trending in a positive direction as we kind of exited Q4, but there's been a bump in steel prices. Probably won't be long term, but that any benefit from steel that we were expecting in Q1 and Q2 is sort of taken up by change in the curve. But again, we think that will trend back towards normal. Same thing with diesel. It's coming down a little. It's forecasted to start coming down. We haven't seen it but it's come down slower than we had anticipated. There was a little bit of benefit on the ocean freight side. Those rates turned a bit favorable in the quarter. So some puts and takes on the rest of the cost side. But overall, it's just a little more negative than we had expected, but nothing that's going to change our full year guidance. And then on the new RZR, that vehicle benefits to some degree from some of the modularity work we're doing. But that project was started, it would have been nearly probably 4 years ago. So it's not getting the full benefit. I wouldn't consider that to be the first product we've launched with our new philosophy. But given what Mike talked about the 100 new PG&A items and multiple models across that, having a good, better, best sort of range of product in the market, which we hadn't historically had. We do expect to see some margin benefit from it.

The next question is from David MacGregor with Longbow Research. Please go ahead.

I wanted to ask about the On-Road segment. And clearly, there's been a tremendous amount of progress made here over the past few years. But 21.4% gross margin, up 300 basis points. How much more upside is there to margins? And maybe the more important question is just how sustainable are these margins given what we think is going on, the mix, everything else?

Well, I'd say a couple of things. One, we've talked about, obviously, this segment includes Indian Motorcycles, Slingshot, but also a couple of the businesses that we have over in France, Axiam and Goupil, which both of which have strong margin performance. So there's an element of that margin performance that those businesses continue to execute on. I wouldn't suggest that they're going to move meaningfully one way or the other. The real opportunity for us is around Indian and Slingshot. And as we've talked about, the path to profitability for both of those brands is continued focus with Mike Dougherty and his team. They've made really strong progress over the past couple of years. And we expect that to be an opportunity as we go forward. When you think about the size of those businesses and the growth opportunity for both, there's meaningful improvement that we think we can make there. It's going to play out over time. As we've talked about in the past, we probably hadn't done a really good job with either Slingshot or Indian; these are essentially brand-new businesses that we started from scratch, and it takes time to get to profitability. The team is laser-focused on that, whether that's driving efficiencies and engineering now that we've got all the products that we essentially need out. So that takes your initial platform investment down or continuing to drive globalization. We've got a meaningful presence in Vietnam. We look like we're going to continue to expand that for in-region motorcycle delivery. We've got a presence in Europe. Europe is our fastest-growing market for Indian, and we've got assembly operations in Opole, Poland. So all those things help as we continue to grow the business, and we're really confident in our ability to continue to expand those margins.

Yes. It's impressive. Congratulations on the progress there. Second question, you just talked about today about the commercial business and the contribution to growth. I guess it's been a while since we really talked about that. Can you just remind us in terms of the size and the profit contribution from that business?

Yes, we don't specifically discuss the size. Bob is very knowledgeable about this business as he previously had operational responsibility before we implemented various changes over the years. This segment has become a significant part of the Ranger portfolio. You've seen the press release from United Rentals announcing several orders of the new Ranger XP kinetics. We maintain a strong relationship with them and other operators in the industry, and we have effective partner programs that support us. Given the ongoing infrastructure and commercial development, our order backlog looks promising for this year, and we are confident that this business will continue to grow over the next few years.

The next question is from Jamie Katz with Morningstar. Please go ahead.

I have just one quick one. One of your competitors talks quite a bit about new entrants and brand switchers and how that has supported growth for the top line. So can you guys give us a little insight into what you're seeing from your customer base, how that's evolving and what your ability is currently to sort of attract new entrants to the space or brand switchers?

Yes, we continue to see new customers, though not at the pandemic levels when they were in the low to mid-70s percentage range. New customers still account for about 60% of our incoming volume. Word-of-mouth recommendations from family and friends who use our vehicles remain a significant selling point, and we are making the most of that. Recently, the management team and I visited one of our adventure locations in Arizona and were amazed by the number of people there. We are now starting to build stronger relationships with these customers to transition them to a Polaris Adventures Select subscription program or encourage them to purchase a vehicle. This represents a great opportunity for us to broaden our reach and attract new customers. We have focused on educating newcomers about how to use the vehicles safely, including loading them onto trailers, to improve the ownership experience. Additionally, we've worked closely with our dealers to enhance their interactions with customers. We have invested significantly in our website to simplify the user experience for new customers trying to determine which vehicle suits their needs, whether it’s a 2-seat or 4-seat option. We aim to help them navigate these decisions before they visit a dealership, which can often be intimidating. We believe we have made considerable strides in this area. Lastly, we are ensuring that we offer a diverse range of vehicles. Not every customer will start at the high end of the market, so we have developed more accessible, lower-cost entry-level vehicles. The launch of Polaris Exchange has been a major advancement for us, as we are now the largest source of used vehicles. This platform serves as a valuable resource for dealers, allowing them to offer used vehicles to newcomers who may not want to invest in a new high-end model but are interested in more affordable options. With Polaris Exchange, we provide dealers with an effective way to manage inventory, which we control instead of simply sending vehicles to auction.

And then actually, I have one follow-up. I think there is some debt coming due later this year. Can you guys talk about whether you're thinking about renewing that, paying it down? Or does that sort of depend on what the capital allocation opportunities are?

Yes. So the $500 million 360 core term loan comes due late in the fourth quarter. We have rerolled that the last couple of times it's come due. Certainly, I believe that option will be available if we choose to take it. But we'll look at that as we get through the year and decide where do we think the best use of the capital is to either pay that off or to refinance it and use the money for CapEx, share buyback or targeted M&A. But that will unfold as the year progresses.

The next question is from Gerrick Johnson with BMO Capital Markets. Please go ahead.

This morning, I'd like to ask Bob. Can you quantify the floor plan interest impact? What was that contra as a percent of gross sales how did it look compared to last year? What was the change there? And maybe the same for discounts and promotions, how they impacted gross net?

The impact on the retail finance side last year compared to this year was quite minimal. On the wholesale side, it was approximately $5 million.

Okay.

$5 million greater.

Okay. All right. Great. And since we're always talking about the snowmobile shift, maybe could you quantify what the amount was that shifted from 4Q to 1Q? Would make our math a little easier.

I would think about it in terms of a few thousand sleds.

The next question is from Sabahat Khan with RBC. Please go ahead.

You talked a little bit about the boats earlier. I was just hoping you could provide a little more comment on just kind of the share situation in the pontoons. And just generally speaking, how do you expect that market to evolve over the course of 2023? Do you think it is as much or less or more dependent on the macro backdrop, some perspective on maybe boats in general and specifically the pontoon side?

Yes. I mean, look, I think we expect that there's probably going to be some challenges. I mean the opportunity for us was really getting inventory back up at the appropriate levels. Obviously, the SSI data, you can digest that, but pontoons were down in the 30% range. On a relative basis, I feel really good about where we're at. I mean, the work that's been done to bring Godfrey up over the last couple of years and be on a pretty consistent trajectory to gain share. The work that's been done there is now being applied to Bennington, and we saw that coming through in the March data, although there's obviously a number of states that haven't reported. We did see Bennington back in a share gain position, which was really encouraging. So we're going to run the business relative to what's going on from a broader market perspective. But I think whether it's just pontoons or even including the deck boat brand Hurricane, we're in a really good position to gain share this year, right? We've lost share over the last couple of years in the Bennington brand. It's been largely at the lower end of the market. The high end of the market for us has been very strong and very strong from a share standpoint. So the opportunity is really for us to go reinvigorate some of those lower-end boats and be in a more competitive position, and we feel like we've got that laid out pretty well.

Okay. Great. And then just one quick one. This graph on the right side of Slide 6. I just want to understand kind of the detail of the dealer inventory here in units. It looks like it's back about in line with kind of pre-pandemic levels. But I guess is this adjusted for sort of days inventory? I may not be reading it, right? But just thinking a higher level of sales post-pandemic. Is it just dealers are thinking a lower absolute level of inventory makes sense at this point? Or how should we think about inventory in days?

Yes. I mean it's tough because each of the businesses is in a different spot. I mean, as I mentioned, our Ranger business is still below where we think an optimal level would be. But the point that we made in the prepared remarks about the fact that relative to 2019, which is really probably the best baseline that we've got before the impact of the pandemic, that inventory level is down about 20%. And broadly speaking, we see that as probably closer to optimal, meaning we don't believe we're going to have to carry near as much as we have in the past. And that's a generic statement because there's going to be some areas where you've got to carry a pretty similar level of inventory. But with the ability to deliver product quickly and as I mentioned around some of the presold stats, there's still going to be a desire as people walk in to want to put more of a customized touch to the vehicle. And through our factory choice offerings and with a more stable supply environment, we should be able to do that for consumers and be able to get vehicles in their hands on a relatively quicker basis than we have historically. So I think long-winded way to say that the inventory levels are going to be lower than where they were before the pandemic, and we think we're probably closer to where we should be right now.

All right. Great. If I could maybe squeeze just a quick one in just a bigger picture one. Obviously, your press release out yesterday on kind of a new electric offering. As you think about the development of that entire side of your business, is that macro dependent? Is that something you only continue if the macro holds in? Or is that something because of the longer-term opportunity you'll continue to invest in regardless of what happens with the macro backdrop here over the next, call it, one to two years?

Yes, I'd say my answer to this is not just specific to EV. It's strategy. I mean making sure that we're investing in the long term for this business is absolutely essential. And given the ambiguity Bob, myself and our business unit leaders are being very cautious about where we're adding costs into the business. But we're not compromising on making sure that we're pushing the strategic agenda forward, which obviously includes the investments we've got around electric. But there's a lot of other great things from a technology as well as product development standpoint that are going on. And the key for us is making sure that we're managing the business in a very surgical manner so that we're not starting and stopping and then we keep our strategy execution on a pretty consistent cadence.

The next question is from Xian Siew with BNP Paribas. Please go ahead.

Maybe another perspective on the revenue could be helpful. You mentioned approaching typical seasonality. Last year in Q2, ORV retail grew about 13% quarter-on-quarter, which may have been constrained by limited availability. Considering this for Q2, we might expect a steeper ramp compared to last year. Is that how we should interpret it?

The ramp last year in Q1 was relatively slow. We had weak performance, although retail was acceptable and shipments were limited. When we mention returning to seasonality, it's important to note that we are not fully back to seasonal trends yet. Comparing 2022 to 2021 isn’t very informative since it mainly depends on what we shipped in the early part of the quarter, which varied significantly from 2020 to 2022. Typically, Q2 would see much higher numbers than Q1 due to the shipment of recreational products like ATV and RZR into the market for the season, which would then sell in Q2 as the season kicks off. This year, we expect a somewhat muted performance due to the shift from utility to recreation, as the recreation segment is under more pressure from the current macroeconomic conditions. We did see good retail performance compared to 2019, which was a more typical season in Q1. Therefore, we are being cautious about Q2, as we are not sure if the previous performance was a pull forward or an indication of stronger retail ahead.

Okay. Got it. And then maybe on gross margin if you can think about it by segment. So Off-Road maybe down a bit quarter-on-quarter, but it sounds like either there's just some of these inefficiencies. So maybe a little bit more muted in Off-Road, meanwhile, On-Road was quite strong. So should we be thinking like On-Road is up and Off-Road maybe flat to down? Or how do we think about the composition of the gross margin guide?

Yes. It's important to remember that while Q1 2023 performed significantly better than Q1 2022, it was also much lower than Q4. The difference in volumes from Q4 to Q1 was mainly due to the size of the quarters, and the mix changed slightly as well, with more snow in Q1 which typically yields lower margins. Last year in Q1 and Q2, we faced challenges with shipments due to a paint issue, leading to relatively low volumes. Those shipments should increase in Q2, although the margins for On-Road will still be lower compared to Off-Road. Overall, this is a negative factor, but On-Road margins are expected to improve. Meanwhile, we anticipate that Off-Road margins will continue to rise throughout the year, though the progress may be uneven due to supply chain issues and operational challenges that have been discussed.

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

Just looking at the PG&A business and particularly Off-Road, flat versus up 25% on whole goods. In the past, a few quarters ago, maybe there were some questions asked about what could be a canary in a coal mine for retail trends and just the consumer not having as much money in their pocket to buy these units. But what do you explain the falloff, does it have anything to do with a shift away from recreation products?

No, it's primarily retail. In the first quarter, retail was below 22%, which contributed to the situation. PG&A typically aligns with retail rather than wholesale shipments. We're also observing a slight slowdown in inventory shipments on the PG&A side, particularly with accessories, as dealers adjust their inventory levels. Their Days Sales Outstanding (DSOs) are trending back to normal after being elevated during the pandemic due to irregular shipments and back orders, as dealers wanted to ensure they had the necessary PG&A when units arrived. As we address this, back orders have decreased, and dealers are starting to focus more on their DSO. We believe this trend has mostly played out during the quarter, but it likely had a minor negative effect on shipments. However, we have observed solid attachment rates for the units sold in the quarter, which have actually increased slightly. Therefore, we aren’t seeing any alarming signs regarding accessories, parts, and related work orders; those aspects remain relatively stable. We consider this a temporary trend in one quarter as dealers adjust their accessory inventories, and we anticipate a return to normal growth, with PG&A likely outpacing whole goods growth for the year.

And Scott, with our RIDE COMMAND penetration, we're able to observe the right activities for those vehicles, which are up year-over-year. Discussions with dealers indicate that the volume in their service shops has remained steady. The difference is that they no longer have the backlog; they had been weeks behind in servicing vehicles. However, things are starting to return to a more normal pattern. This likely reflects the reality that the work-from-home trend has not unfolded as many anticipated two years ago, and people are returning to the workplace. Riding activity remains strong and appears to reflect a more normalized situation.

Got it. And then last question on the Marine side. The pontoon industry down high 20s, and you're talking about how, I guess, the high end of that market is performing well. And the first question is, is that segment of the market actually up and the other question is what is the divergence between the low end and the high end? It seems pretty high.

Yes, we're not going to discuss market share by categories, but we see strong demand and a backlog in our higher-end products. Throughout 2022, we focused on this, which meant we weren't shipping many of our smaller and entry-level boats. We have distributed a lot of those to the market in late Q4 and early Q1. As the season begins, we anticipate an uptick in that segment of the market. While the overall growth of the marine industry may not meet expectations this year, we believe we have a solid opportunity to regain market share in the lower end of the market where we have not been shipping products over the past couple of years due to the pandemic. We don’t see this as a negative; rather, it presents us with an opportunity to reclaim some share, and we'll observe how this unfolds.

Your next question is from Brandon Rolle with D.A. Davidson. Please go ahead.

I just had a quick question on market share. Would you be able to comment on your North American ORV market share exiting 1Q, where you expect it to be at the end of '23? And maybe the market share growth opportunity in 2024 and beyond, especially given some of your competitors are increasing capacity and maybe improving their inventory availability in the coming years?

Yes, I don't want to get into all the specifics, but both we and our competitors are increasing capacity. However, I don't view that as a significant concern. I want to highlight that our Off-Road business has shown strong momentum over the past few quarters, significantly due to product availability. We are also introducing new products that will enhance this momentum. The feedback on the new RZR XP has been extremely positive; I encourage you to check the reviews. Dealers are very enthusiastic about the quality improvements. Bob and I attended the dealer meeting in Orlando during the launch and had the chance to speak with dealers, who were thrilled about the enhancements. We have more innovative products coming this year, which I believe are category defining. Polaris is once again focusing on product innovation, and I am confident in the direction this will lead us in the future.

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