Polaris Inc. Q2 FY2023 Earnings Call

Good day, and welcome to the Polaris Second Quarter 2023 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I would now like to turn the conference over to J.C. Weigelt, Vice President, Investor Relations. Please go ahead.

Thank you, Rocco, and good morning or afternoon, everyone. I’m J.C. Weigelt, Vice President of Investor Relations at Polaris. Thank you for joining us for our 2023 second quarter earnings call. We will reference a slide presentation today, which is accessible on our website at ir.polaris.com. Joining me on the call today are Mike Speetzen, our Chief Executive Officer, and Bob Mack, our Chief Financial Officer. Both have prepared remarks summarizing the first quarter as well as our expectations for 2023. Then we'll take your questions. During the call, we will be discussing various topics, which should be considered forward-looking for the purpose of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. You can refer to our 2022 10-K for additional details regarding risks and uncertainties. All references to second quarter 2023 actual results and 2023 guidance are for our continuing operations and are reported on an adjusted non-GAAP basis unless otherwise noted. Please refer to our Reg G reconciliation schedules at the end of the presentation for the GAAP to non-GAAP adjustments. Now, I will turn it over to Mike Speetzen. Go ahead, Mike.

Thanks, J.C. Good morning, everyone, and thank you for joining us today. We hope everyone is enjoying their summer and the great outdoors with friends and families. For us at Polaris, summer certainly marks the peak of our riding season, and this year is especially exciting as we're welcoming our dealers back for our first in-person summer dealer meeting since 2019. In conjunction with this meeting, we'll also host our Capital Markets Day on July 31st in Nashville. Today's call will focus on recapping the quarter and the current state of the business, and we'll save commentary on some of the longer-term strategy and future initiatives for the Capital Markets Day event, which is less than a week away. For those who cannot make it, the event will be webcast on our Investor Relations website. Turning to the second quarter performance, sales grew 7%, driven by positive volume and higher net pricing. North American retail was up 14% with On-Road up more than 50% due to strong demand and availability of our Indian motorcycle and Slingshot products. In Off-Road, it was encouraging to see positive retail trends for both utility and recreation. Our Marine business did see some retail softness in the quarter. I'm proud of the team's performance and the fact that we gained share in Off-Road, On-Road, and Marine during the quarter. As we progress through the back half of the year, we expect to hold share in On-Road, while gaining more share in Off-Road with a robust product lineup that includes recently launched and soon-to-be launched vehicles. Margins were down modestly as we experienced near-term headwinds, including higher interest, foreign exchange and snow warranty costs. We also continue to experience production inefficiencies due to challenges with supplier delivery, mainly wire harnesses, as well as tight labor markets in specific regions. Our team has been working hard to remediate these issues. And while we have seen some progress in July on both fronts, we expect it to take some time to improve our efficiency to pre-pandemic levels. Adjusted EPS was flat relative to the prior year with higher interest expense and foreign exchange headwinds, partially offset by higher volume, price and lower share count. The year is progressing in line with what we told you in our January call. Retail has improved. Our product launches are on time with positive feedback from both dealers and customers, and inventory remains near optimal levels. While both gross profit and EBITDA margins expanded over 60 basis points and 50 basis points, respectively, in the first half of the year, margins have seen increasing pressure from labor, warranty and litigation costs, which we expect to continue in the back half of the year. However, I am proud of the fact that our teams remain focused on the five-year strategy we laid out last year, and margin expansion is a significant objective of that strategy to generate strong returns for our shareholders. Bob will provide more color on guidance shortly, but it's worth noting that with half of the year behind us, we have narrowed many of our guidance ranges. We are raising our sales guidance but increased costs incurred during the year thus far, and anticipated in the second half has us narrowing our adjusted EPS guidance accordingly. It's been an exciting year at Polaris and many of you will get to feel the energy and drive that we have as an organization at our dealer meeting and Capital Markets Day next week. We wear our passion on our sleeves and are driven to make Polaris stronger than ever before. Now let me share some thoughts relative to customer trends we're seeing. The demand story in Off-Road and On-Road improved during the second quarter, while Marine saw more challenges. Let me dive into Off-Road in more detail. Demand for our utility vehicles remained strong, and we expect this trend to continue as we progress through the year. Recreation improved during the quarter, and we expect share gains to continue as momentum builds around our recent RZR XP and Polaris XPEDITION launches. Promotions are working, and our team is doing a great job of targeting these dollars to the right customers and geographies to drive quality leads and generate dealer traffic. Lastly, July retail is off to a good start for the third quarter. For On-Road, Q2 retail was robust due to a combination of strong product line, easy comparisons given a weak second quarter last year and improved availability. This is true across both Indian Motorcycles and Slingshot. In Marine, we did not see a recovery in retail during the second quarter. As a reminder, the selling season kicked off later than anticipated this year due to weather. Dealers seem a bit reluctant to take on additional inventory given the combination of a healthy inventory position, higher flooring costs, and soft retail. Our team is responding appropriately. We have adjusted production schedules and are controlling our variable costs in the near term to protect profit. The bulk of the marine selling season ends in a few weeks and we will assess dealer sentiment and inventory levels at that time as we prepare for the 2024 season. But for now, the marine industry seems softer than our original expectations, and this is reflected in our revised guidance. Turning to what we've been hearing from dealers, our dealers are one of the greatest sources of feedback, and our biannual dealer survey provides great insights into how our dealers view working with Polaris as well as their outlook for powersports. This survey touches on many facets, including dealer satisfaction, sentiment, quality and inventory to name a few. We conducted the latest survey in mid-April for Off-Road with over 900 dealers responding. The results were certainly encouraging and give me great confidence that we are focused on the right areas, and Polaris is poised to succeed. A few highlights include: we continue to rank number one in dealer satisfaction relative to other OEMs. Sentiment around inventory strengthened as the supply chain improved; however, RANGER NorthStar supply continues to be an area of opportunity. Dealers expressed optimism about how promotions and product availability can positively impact retail, and our quality scores improved across all product lines. Lastly, the team and I regularly visit dealers. Earlier in the year, some of us visited Marine dealers in the Southeast, which we talked about last quarter. A month ago, we visited Off-Road dealers in the Mid-Atlantic region. The two biggest takeaways from our most recent visits are that dealers told us Polaris is winning the innovation race. From the launch of the Pro RZR Pro R and Turbo R, the RZR XP to the more recent Polaris XPEDITION. We believe that we are at the forefront of rider-driven innovation and are providing the best customer experience while expanding the market. Secondly, dealers noted their outlook on the year has improved relative to what they believed earlier in the year. Pressure remains at the low to mid-end of the recreation market, but premium continues to perform well, and there's plenty of excitement around our new products. As we indicated at the start of this year, 2023 is an exciting year for product innovation, and two of these launches are shipping now. The first is our completely redesigned RZR XP lineup. The multi-terrain category is the largest segment in the sport side-by-side segment, and the RZR XP has long been the best-selling sports side-by-side in the industry. In March, we launched the next generation of RZR XP with class-leading durability, comfort, and performance that takes this lineup to the next level. This product hits at the heart of the market, and we expect it to continue to be our top-selling RZR. Reception has been great, and many of you will get to see it in person for the first time at next week's meeting. The second product is the Polaris XPEDITION, which is hitting dealer floors during the summer. Similar to how RZR and General pioneered new categories in the side-by-side market, we are on the path to do that yet again with this entirely new adventure side-by-side category, targeting consumers who are into over-landing and have a destination in mind for camping, adventure, and exploration. The Polaris XPEDITION has added comfort and capabilities. Plus, it boasts the industry's largest fuel capacity of any factory side-by-side on the market with a 200-plus mile range, making it stand out against any other side-by-side in the market. Rider-driven innovation is one of our core strategic pillars, and we are not done yet. It's safe to say there's more yet to come this year. Regarding dealer inventory, we continue to be in a much healthier position relative to last year and are diligently working to get new products and more Ranger NorthStar to dealers' floors. Relative to 2019, inventory is down about 25%. We view this level as near optimal, and dealers seem to agree. While we occasionally hear feedback from dealers that their overall inventory is too high, they also tell us their Polaris inventory is in a good place, and their excess inventories are coming from lower-end OEMs they brought on during the pandemic to meet demand. On some of our recent dealer visits, we heard that dealers are working hard to sell those lower-end OEM products and evaluate the need for such OEMs now that vehicle availability has improved across the industry. We value our relationships with our dealers and continue to work with them to enable our mutual success. Switching to our Geared for Good strategy around a variety of ESG metrics, I want to recognize our recently published 2022 corporate responsibility report. I love seeing this report and the compilation of stories illustrating our team's passion and commitment to be good stewards. One of the highlights from this year's report was around our environmental goals. We celebrated exceeding our original three environmental goals that we set in 2017 and announced seven new 2035 environmental goals. We continue to take a genuine approach to the strategy and are aligned on what needs to be done to meet these goals and our other Geared for Good initiatives. So here we are halfway through the year, and thus far, it has played out very similar to how we initially expected in January. Innovation is back at Polaris in a big way, and we believe it will continue to drive retail growth and share gains across our business. Although some challenges remain, we have been working hard to remediate supply chain and labor constraints with positive momentum experienced thus far in July. While uncertainty remains in the broader economy, we are executing on the matters we can control. I'll now turn it over to Bob, who will summarize our second-quarter performance and provide additional detail for the balance of 2023, including guidance and expectations. Bob?

Thanks, Mike, and good morning or afternoon to everyone on the call today. Second quarter results were encouraging on many fronts, including top-line growth of 7%, share gains in Off-Road, On-Road, and Marine, double-digit retail growth, and the introduction of the Polaris XPEDITION. EBITDA margin for the quarter was down almost 40 basis points, driven by continued high labor costs and finance interest. We are also seeing some pressure from increased snow warranty expense and litigation costs. Partially offsetting some of these headwinds was net pricing and lower cost premiums on items such as logistics in the quarter. While margins were down a bit in the quarter, they remained ahead of the same period in the prior year on a year-to-date basis, and we continue to expect margin expansion for the full year. International sales continue to perform well, posting growth of 6%. PG&A grew 12% driven by parts, healthy accessory attachment rates, and strong e-commerce growth. In our Off-Road business, revenue increased 9%, driven primarily by side-by-side sales to both dealers and commercial partners. ORV retail was up 14%, and market share was up in the quarter. While we continue to see good demand in the utility space, it was great to see those same demand metrics improve across the Recreation segment, which includes RZR, General, and our new Polaris XPEDITION. With regard to expected share gains in the back half of the year, we are now shipping both the new RZR XP and the Polaris XPEDITION. Both have received positive feedback from our dealer network, and many sites were taking pre-orders for the Polaris XPEDITION. Plus, we are excited to share with you more product news at the dealer meeting and Capital Markets Day next week. We expect these efforts to help us continue to gain share as we remain the innovation leader in powersports. Margins in the quarter were pressured by increased promotions, finance interest, snow warranty costs, and unfavorable mix as we shipped more snowmobiles versus the prior year, which typically have a lower margin associated with them. It remains an exciting time in our Off-Road business, and we expect the positive retail momentum we saw in Q2 to extend into the back half of the year. We have never let up on innovation, and history shows that innovation can lead to share gains as well as growing the market, and we believe we are positioned to do so in the second half of the year. Switching to On-Road, our fourth straight quarter of share gains was driven by our strong product portfolio and healthy inventory. North American Indian Motorcycle retail was up over 40%, bolstering market share gains with share now over 13%. Our European brands, Aixam and Goupil, both had strong quarters with double-digit growth in sales and gross profit despite meaningful foreign exchange headwinds. On-Road gross profit margin was up 480 basis points, driven by favorable product mix and higher volumes. We had another strong quarter in Indian Motorcycles and Slingshot. Improving the profitability of these businesses is a key component of our five-year plan to expand company EBITDA margin to mid to high teens. For the first half of the year, On-Road gross profit margins are up over 400 basis points. Moving to our Marine segment, results were lower than we were expecting as the industry never fully recovered from a softer start to the selling season. While we believe the pontoon industry was down mid-single-digits in the quarter, we have confidence that we gained some modest share in Bennington. Dealers are telling us that consumers are hesitant to purchase boats due to continued concerns around the economy and higher interest rates; plus, given healthy inventory levels, dealers are cautious about increasing inventory due to higher prices and floor plan interest rates. Gross profit margin was up 130 basis points with higher net pricing, and we are actively managing our variable costs to protect profits. As the primary selling season concludes in less than a month, we are closely watching inventory levels and talking to dealers to get a pulse on what is ahead for 2024. We are not expecting any material turnaround in the back half of the year; thus, results are likely going to be pressured. While an inflection point is hard to predict, we are continuing to invest in innovation and expect to emerge from this current slowdown with a stronger portfolio of boats. Moving to our financial position, we continue to see our balance sheet as a competitive advantage. Cash generation in the first half was strong relative to previous years, and our net leverage ratio continues to be in a healthy spot at 1.5 times. We repurchased almost 1 million shares during the first half of the year and are well ahead of our target to repurchase 10% of our outstanding shares before the end of 2026. We believe we are set up well for a variety of scenarios in the broader market with our balance sheet and cash generation capabilities in 2023. Now, let us move to guidance on our current expectations for 2023. Given how the first half of the year ended and our assumptions for the remainder of the year, we are adjusting guidance where it makes sense. Regarding sales, given what we saw in the first half of the year, we feel it is prudent to raise our sales guidance from flat to up 5% to up 3% to 6%. This increase is driven by the strong performance in Off-Road and On-Road in the first half of the year as well as narrowing the range with half the year behind us. We expect Off-Road to be the biggest contributor to our results in the second half of the year following the new products we have launched. Therefore, we are raising our Off-Road guidance for the year from low to mid-single digits to up high single digits. We are holding On-Road sales guidance at this time to up low single digits, and we are lowering marine sales guidance, given what we have seen thus far this year and expectations for the back half of the year. Marine sales guidance is now down mid-teens from flat sales for the year, as we look to match dealer inventory levels and retail. Share gains are expected to continue in the back half of the year, given healthier inventory levels and new product launches. We also believe retail for the industry improved in Off-Road, and thus are raising our assumption to call for modestly higher retail for the industry in 2023. But given our share gains and updated retail assumptions, we have greater confidence in our ability to outpace industry retail growth this year. Our international and PG&A businesses are expected to be strong contributors to growth this year. Offsetting some of these sales drivers are promotions and the downward revision in our expectations for the marine industry. Gross profit margins, we are holding guidance at 10 to 40 basis points expansion. Although there are a number of moving pieces and timing impacts in aggregate, this is still where we believe we will land for the year. We have positive momentum with net pricing and logistics, but there are headwinds such as finance interest expense and warranty costs, all of which we expect to linger in the second half of the year. While improving over 2022, operationally, our plants continue to suffer from elevated production costs associated with component shortages and increased labor costs. Typical start-up inefficiencies associated with launching major new products are also a temporary headwind and particularly in Q3 as we start shipping Polaris XPEDITION and a second new category-defining ORV product. On EBITDA margins, we are seeing elevated operating expenses that were not accounted for in our guidance. This is primarily driven by product liability litigation and settlement costs as courts continue to catch up on case backlogs and delays driven by COVID closures and higher demand creation spend to support the improved retail and share outlook. You can also see this in our revised outlook for operating expenses. On the flip side, we expect higher income from financial services, given the improved retail outlook. Therefore, we are lowering the top end of our EBITDA margin guidance by 10 basis points to 20 to 40 basis points. We also narrowed the range for EPS from continuing operations to down 2% to up 3% from down 3% to up 3%, with most of the potential drop-through from margin expansion being consumed by a higher interest rate expense. For the third quarter, a couple of things to note, we expect retail to be flattish due to pressure and seasonality from On-Road and Marine. Recall last year, we had a very strong On-road business in the third quarter as the supply chain recovered and we were able to ship product and fulfill pre-sold orders. Off-Road retail is expected to be up modestly sequentially and up double-digits versus the prior year. Margins are expected to be down modestly year-over-year, as we navigate the build of new ORV vehicles this quarter, which, as I mentioned earlier, causes some initial inefficiencies. In addition, we have planned on higher labor costs. These headwinds are partially offset by lower warranty costs as we lap recalls in the prior-year period. We have significant other cost headwinds from higher finance interest, debt interest, and foreign exchange that we expect will persist through the remainder of the year. Operating expenses will be higher in Q3 versus Q4 due to the cost of the dealer and supplier meetings we have next week in Nashville and the timing of launch expenses for Expedition and other new products. Overall, we continue to be on pace for a great year. Our teams remain focused on delivering strong results, which we have done consistently amid the puts and takes of the broader economy. We are on track to meet our guidance halfway through the year and have raised our outlook for sales while narrowing other metrics. We strive to deliver on our commitments, and we are doing just that with innovation, market share gains, and allocating capital to deliver strong returns. I'm proud of what we have accomplished and look forward to what this team can do in the future. With that, I will turn it back over to Mike to summarize our call today. Go ahead, Mike.

Thanks, Bob. We're pleased with the first half of the year and believe it sets us up for a successful second half to gain share and modestly expand margins. While we had estimated industry retail to be flattish this year, the results we saw in the second quarter point to a stronger environment than we had originally expected, and we're cautiously optimistic on retail. You're seeing firsthand why we've been so bullish on innovation with RZR XP and Polaris XPEDITION launches, and we look forward to sharing more with you next week. It is certainly exciting to see these products come to life, and we're eager to get them in the hands of the best dealers and customers in powersports. While operationally, the business is running smoother than the past couple of years, there remain opportunities to address efficiencies within the supply chain and our manufacturing facilities. We're focused on expanding margins and meeting all of our five-year targets. Next week's Capital Market Day is going to be a great opportunity for us to update you on the progress to these targets while laying out what still needs to be done in order to deliver strong returns for shareholders. We thank you for your continued support, and we look forward to seeing many of you in person in Nashville next week. With that, I'll turn it over to Rocco to open the line up for questions, Rocco?

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

Yes. Hi. Good morning. Thanks for taking my questions. I wanted to follow up on your Q3 retail guidance of sequentially flat. The math we do internally suggests that's going to be a very significantly positive number on a year-over-year basis. Bob, I think you said something like up maybe low-double-digits, but we would get even a stronger number based on how we do that. Just wondering if you can put a finer point on what your expectations are on a year-over-year basis for Q3 retail? And what is driving that?

Yes Craig, thanks for the question. It's the comps year-over-year. We got a lot of dynamics that happened both in 2022 and 2021 in terms of product availability. So, when I look at 2022 from Q2 to Q3, our retail had actually dropped sequentially. So there's an element of the comparisons when you hold flat this year in terms of 2023, Q2 to Q3. We continue to baseline back against 2019, and I would say we're going to be relatively flattish relative to 2019 in the third quarter. And it's really being driven by our Off-Road vehicles. One, it's the continued strength we're seeing in the utility market. Recreation, although weak relative to where it had been, is still performing slightly better than we had expected. And then I'll remind you, we've got two new products, and we've hinted pretty strongly at yet another one to come, and that's going to be obviously helping us as we get into the third end and then into the fourth quarter from a retail perspective because those are entering new market segments.

Got it. Thank you, Mike.

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

Hey. Good morning. I had a question on margins. I wanted to dig into and then a question on inventories. A lot of moving pieces on margins. Maybe if you could quantify a couple of the things that you called out. I think you said production inefficiencies as a lot during the prepared remarks. Any quantification of how big you think that impact is? Doesn't sound like you think those are going to go away during the back half but just trying to get a feel for sort of maybe what the opportunity is once those clear up and then a similar question on the OpEx side? You called out labor warranty litigation costs. Any quantification there would be great.

Hey James, it's Bob. So, a couple of things. I think on the cost side, there's positives and negatives, right? We're seeing great progress on some of the ocean freight items. And we're seeing some stability on the labor side in terms of just people and being able to retain recruitment retain people. That's improved the last several weeks. Where the challenge lies really is just getting the plants back to their more normal operating cadence as we come out of COVID and as the rework starts to diminish. We still do have some part shortages with some key suppliers. So, we're not 100% out of the woods there. I think that feels like it's getting better sequentially month-over-month and quarter-over-quarter, but there's work to do to just get the inefficiencies out of the plant, some of the excess labor, some of the excess warehousing that's accumulated through the course of COVID. So in terms of dollars, I think as you look at the second half of the year, it's in the $40-plus million range in terms of the headwind. On the OpEx side, not as big of an issue. The legal costs really are not so much that they're different relative to last year. It's more of as we thought about laying out guidance, we've got more cases coming through in the year in terms of things hitting the court dockets that we had anticipated when the year started. That's not necessarily a bad thing; it's just the kind of natural unwinding of the court systems being closed during COVID. We feel good about where we are in terms of stability going forward on product liability. So this is really just a catch-up of things that were stuck in the system during COVID.

Yes, James, I'll provide a bit more detail. I mentioned in my prepared remarks the situation with wiring harnesses. Looking at the quarter, it appears to be strong. We managed to deliver the units, but the method of delivery does not match the efficiency we typically achieved in the past. Our rework numbers have decreased from previous years, but they remain considerably higher than before the pandemic affected the supply chain. The wire harness issue is critical because a vehicle cannot be started without it being assembled and ready. On a positive note, we've been collaborating with our supplier who caused the disruption, and we've seen notable improvements over time. They are getting better each day, so we expect that challenge to lessen. However, we still need to catch up. We are working with the supplier to ensure they are producing enough safety stock, but this creates inefficiencies from a labor perspective. We aim to allocate the necessary resources to deliver the vehicles since the demand is strong; the dealers and customers want them. As we mentioned, we expect improvements going forward, but based on our original projections for the year, the situation will still be more challenging in the latter half.

That is really great color. And then, I guess, secondly here, as we think about inventories and ultimately shipments were about to lap a period from a year ago where there was significant replenishment based on the numbers you gave us, I think it was $350 million in the third quarter and another maybe $250 million in 4Q. I feel like the answer to that question for some time has been sort of some of this new white space product that you haven't been a lot to talk about. But maybe now you are I guess the question is, could that namely XPEDITION and I think you used another sort of game-changing ORV product, could that fill that gap of replenishment from a year ago, or is that still going to ultimately create somewhat of a backlog as we think about the second half?

Yes, James, when you compare the second half of this year to 2022, we had a channel refill last year in the same period that amounted to around $600 million. In 2023, about 75% of that is coming from new products such as the XPEDITION and the XP, along with continued sales of the recently launched RZR and several other products that will be showcased next week at the dealer meeting. Additionally, there will be approximately $100 million worth of snowmobiles added in the second half of this year, mainly in the third quarter compared to 2022. To remind you, we faced challenges in 2022 getting snowmobiles ready in time for the snow season, and we ended up shipping a lot in the first quarter of 2023. We are not planning to repeat that scenario this year, so snowmobiles will be released in a more regular manner in the third and fourth quarters, which will also have an effect.

That’s really helpful color. Thanks, guys.

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

Hi. Thanks for taking my questions. Just one for me on the Marine side. Obviously, top line softer called out challenges in the Marine channel that you guys were able to expand gross margin. So, if you could just talk about some of the levers you pulled there and how you're thinking about margins on the Marine side for the rest of the year? That would be helpful.

Yes, I think we had decent shipments in the first half of the year, which were better than expected, although not outstanding. The sales mix included some higher-end boats, contributing to margin growth. We have made efforts to streamline our factories and introduce more automation in the Marine sector, which we will discuss at Capital Markets Day to enhance margins. In the second half of the year, with revenue declining, we anticipate margins will face challenges. The nature of our business involves variable costs, and labor in Elkhart is adaptable. We've modified our production schedules based on our expectations for retail and dealer inventory. Recent boat information was released, and everyone is still processing that. However, we did see some market share gains with Bennington, our largest brand, which is significant for us. It's hard to predict the second half of the year, but we are preparing for a slower performance. As I mentioned earlier, it's difficult to pinpoint when things might turn around. I'll have more clarity after our dealer meetings in early August. We are ready to take the necessary steps to protect margins in the latter part of the year.

Thank you.

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

Hi, guys. Good morning. You mentioned that dealer inventories are near optimal levels. And you also alluded to some elevated products at your competitors, particularly in the lower entry-level side of the business. So can you sort of talk about how you think the RFM program is holding up given all the moving pieces from a year-over-year perspective from a seasonality perspective and then just the competitive dynamics?

Overall, we engaged with the dealers I mentioned earlier, and their feedback was largely very positive. Many dealers noted that we seem to be doing a better job than most in getting product into the market. From our RFM perspective, we're receiving positive signals regarding retail units and our ability to ship units for replenishment is functioning well. However, I should mention that we are still facing challenges in the high-end segment of the business, which has a higher component of parts that can face disruptions from suppliers, affecting delivery times. This is particularly evident with the NorthStar deliveries, which have become a larger part of the Ranger business and thus have a greater impact. We're focusing heavily on this area. Additionally, while our inventory is significantly lower than in 2019, the average selling prices for these vehicles have increased. Coupled with higher interest rates, dealers are feeling the pinch, especially as they deal with lower-end OEMs that have oversupplied the market. This has made it challenging for dealers to move product, particularly at the lower end where consumer demand is weakest. They've been working hard to implement discounts and push sales, but there's considerable frustration due to the lack of sophistication in that market segment. The combination of high interest rates and low demand is exacerbating these issues. We're committed to enhancing our supply of high-end products to dealers, and we have seen notable improvement in our ability to deliver Ranger North Stars, with expectations for continued progress as we move further into the year.

Makes sense. And then just quickly on the cadence. I know you guys were expecting sort of 40-60 first half, back half. It looks like it's maybe a little closer to 50-50. Was there a pull forward? Are you just more conservative on the back half? Like where was the biggest change?

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

Great. Thanks Rob.

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

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

Yes, we observed continued strength in our general crossover category within the recreational side. The upper range of the RZR category remains robust, and our deliveries have improved as we addressed the issues from last year's recalls related to the fuel tanks. We have completed the necessary rework, so there hasn't been a significant shift in the low-to-mid-range market. The crossover category shows strong performance, likely because these vehicles serve multiple purposes and are useful for homeowners with larger properties. Overall, the high-end segments across the board are also performing well, supported by favorable employment and strong income levels.

Yes, we experienced solid growth in India for both heavyweight and midsized vehicles, with midsized showing the highest growth in the first half of the year. This is partly due to last year's issues with black painted parts, which affected dealer inventory. Midsized vehicles are typically more of an impulse buy for new and first-time buyers, and having good inventory available at dealers during the prime selling season in the first half of the year contributed to our growth in India.

Got it. That's helpful. And maybe just a follow-up in terms of the margin progression that you guys are talking about over the next several years. You'll probably address this next week. But how do you see that ramp looking like? Is that more of a back-end weighted margin improvement? Or is there some to come in 2024?

I believe there are some updates to share. We will discuss more next week, but we are actively working on both short-term and long-term initiatives to enhance our margins. We are facing some challenges, especially with foreign exchange fluctuations since we established our targets, but we are determined to maintain those targets. Currently, we are addressing some operational issues as we work to resolve inefficiencies in our factories and improve our price-cost ratio. We're seeing positive results from our Indian and Slingshot operations, which have significantly contributed to the overall profitability of the company. That summarizes our immediate concerns. Additionally, we will cover longer-term strategies regarding our factories and product design during Capital Markets Day.

Yes, I mean, Joe, when you think about foreign exchange, that hit us really hard. So I obviously assume foreign exchange kind of holds where it is today. And as you get out over the next couple of years, that impact gets more and more muted, but it's far more pronounced for the first half of the year was just shy of 1 point of gross profit impact. So like Bob said, we're working to overcome that, and it's overshadowing some of the good work we have. And then clearly, as we get our factories running more efficiently as the suppliers start to deliver at a stronger cadence, we'll obviously be able to work a lot of that cost out of the factory. So we're pretty optimistic about where we stand, and we'll have more to show you next week.

Sounds good. Thanks guys.

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

Thank you. This is actually Arpine for Robin. Could we go back to July trends for a second? You talked about retail strength in Q2 or June having continued into July. Would that mean for ORV up so far year-over-year in July? And then it seems you expect to be a share gainer in the back half and full year in ORV and outpace industry, which it seems you're guiding up slightly. Does that mean ORV retail for full year is up better than low single-digits? I guess what's the extent of that guidance for ORV on a full-year basis? And then I have a quick follow-up.

Yes, I mean, I guess the way I would characterize it in July, we've continued to see strength in ORV, which would have us up not only versus last year, but up versus 2019. For the Marine segment, obviously, we're continuing to see that be soft, and On-Road is just at its normal starting to slow down from a seasonality standpoint. So everything seems to be playing out pretty consistent. I think the simple answer is, yes, we expect Off-Road to be up. We expect to gain share. The thing to keep in mind is we're adding in several new products that are new, either replacement, strong replacement products like the RZR XP or category-defining like Polaris XPEDITION and the yet-to-be-announced product that we've referenced a number of times. So that's obviously going to drive incremental retail. And so that's what we see driving the strength in our Off-Road segment.

Thank you. And in terms of lower-end OEM inventory at dealers that you talked about, one of the key feedbacks from dealers we talked to used to be the profitability of those units versus Polaris. How do you think about that competitively sort of longer term, as we think about lower-end OEMs?

Well, I mean, I think they were able to get profitability because the lower-end guys were able to ship when we and the rest of the, I'll call it, mid-to-high end of the segment were not. And I would think that as you're talking to dealers, because I know I heard this a month ago, that margin dynamic is changing pretty significantly. They're paying a lot of interest on those units. They're moving really slow, and they have to do a lot of discounting. So we're confident with where we're at. It doesn't mean that we're done, continuing to look at the value and entry side of our business. We know that it's important in terms of bringing customers into the brand. And we're pretty confident with the product lineup we have and how competitive we are as we move forward.

Great. Great. Thank you. And I'm sorry, one more clarification question, if I may. In terms of the production inefficiencies that you mentioned in Off-Road, could you quantify the impact of that and how temporary that is in terms of impacting margin?

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

Okay. Thank you.

Thanks.

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

Hi. Good morning. Just the $40 million, did you also say there was a one point of margin impact in the first half. So then if I add it up, it's about $75 million full year impact? Is that right or not?

Mike said there was a one-point impact from foreign exchange in the first half.

Yes, just one.

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

It's not a huge impact in the first half because we had assumed that that inefficiency was there. It was really the improvement that we were expecting into the back half that's not materializing at the same rate we had expected, which is largely driven by the fact that our rework levels continue to be high. And as I mentioned, we're seeing progress sequentially primarily around that one supplier that I had mentioned, but that, obviously, we have to continue to see that momentum. And we'll see improvements sequentially, but it's just not going to be at the same level that we had anticipated when we came out with guidance earlier this year.

Right.

Okay. Got it. And then one more question. Can you maybe break out any Marine retail trends you're seeing at kind of the various price points?

Yes, through the first half of the year, I would say the higher-end products were really strong as Marine went into the selling season, and I haven't had a chance to go through the Marine data, the SSI data that came out yesterday in tremendous detail. But what we saw so far in the kind of May, June timeframe was that some of the smaller boats were starting to come back stronger from a retail perspective or perform stronger from a retail perspective, which I think probably lends credence to the concern we're hearing from dealers is that just the high finance rates, given the longer tenors of boat loans, and the higher cost of boats relative to some of the other products we sell, that those finance rates are kind of biting more in Marine, which would drive consumers probably towards the smaller sizes just a cheaper but less to finance. So that's the only dynamic we've really seen that's changed a little bit in the last couple of months.

Okay. Thank you.