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

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

Thanks, J.C. Good morning, everyone, and thank you for joining us today. After what could only be categorized as a turbulent year, we ended 2023 with share gains across all three of our segments. While there was plenty that went right and aligned to the execution of our longer-term strategy, we faced several challenges, particularly in the fourth quarter as costs continued to run higher than we anticipated, which drove a miss to our margin and EPS guidance. While our performance was below expectations, there was much that went right in 2023. It started with us delivering on our commitment to bring industry-leading innovation to our customers. In Off-Road, we introduced two brand new category-defining vehicles this year, the Polaris XPEDITION and the RANGER XD 1500. Together with the launch of the completely redesigned RZR XP last spring, we now have the most competitive lineup of Off-Road vehicles the industry has ever seen. We also launched the all-new Lock & Ride MAX system with entirely new purpose-built accessories and attachments, resulting in endless customization and a remarkably intuitive platform. In On-Road, specifically Indian motorcycles, we launched the Indian Pursuit Elite and the Sport Chief, which raises the bar for the American V-twin Performance Cruisers. In marine, we introduced the new Bennington S and SV lines this past summer and early feedback has been positive, indicating that these new models strengthened Bennington's value offering within the pontoon market. It was also a year to celebrate our race teams. When we launched the RZR Pro R in 2021, we were optimistic about the quality and performance of the vehicle, and we were right. The success this vehicle has had in crossing the finish line before all others is a testament to what customers expect from Polaris. Our drive to innovate and push the envelope of what is possible, from horsepower to suspension technology, has led Polaris to top the racing world again. Not only did we win the Baja 1,500 and 400 as well as the San Felipe 250 in 2023, we just secured a monumental win at the 48th annual DAKAR Rally, which is one of the most grueling races covering over 4,000 miles in two weeks through unforgiving terrain in Saudi Arabia. And some late-breaking news, Polaris swept the podium at the King of the Hammers Desert challenge. We also cannot forget about another successful racing year for Indian Motorcycle where we took first place in American Flat Track and Super Hooligans. Hats off to our race teams and talented engineers on such a successful year. In addition to record levels of innovation, we stabilized dealer inventory, removing the challenges of product availability we've been dealing with for several years. Another highlight is the execution of our capital deployment strategy and the health of our balance sheet. In 2023, we generated over $500 million of adjusted free cash flow, and we're putting that cash to work. We returned $326 million of that cash flow to shareholders between dividends and share repurchases. Our capital deployment strategy has been consistent, and we expect to continue to lean into organic investments, our dividend, and share repurchases, all of which center around our goal to generate shareholder value. While we certainly have a lot to be proud of, execution against our financial commitments fell short of our expectations. Our largest challenge centered around our manufacturing facilities. We did not achieve the efficiencies we planned, which resulted in margin pressure throughout the year. It's important to note that operational costs did start to improve later in the year, but not to the level we had expected them to. This, coupled with lower manufacturing volumes and difficulty producing new products led to significant margin pressure. Add to that higher-than-anticipated product liability and warranty spend and our EBITDA margins came in below our expectations as well as below 2022. This was disappointing for me and our team, and we are focused on addressing the root causes of the inefficiencies with a focus on driving improved processes within sales, inventory, operations, and planning. North American retail was up 7%, driven by utility and snow. While we expected positive snow performance relative to last year, results were weaker than expected given the lack of snowfall in most regions. It was encouraging to see our side-by-side retail up low double digits, driven by continued strength in our range of vehicles. While utility saw strength, our recreational business continues to see pressure given higher interest rates and economic uncertainty. We ended the year gaining slightly over one point of share in Off-Road, more if you exclude used vehicles that have little profitability associated with them. Share gains are positive season-to-date in snow as we were able to deliver all of our SnowCheck units before the season started. While share in our On-Road and Marine segments was under slight pressure in the quarter, we did gain share in both segments for the year, driven by better product availability and new products. Our sales results during the quarter were slightly lower than our expectations given lower retail than we anticipated and lower net price due to an increase in promotional activity. We saw heavy discounting of noncurrent inventory by competitors. In November and December, we increased our promotions for current inventory in response, and our strategy seemed to play out well as we saw retail increase meaningfully in both those months. We view this situation as short-term until competitive noncurrent inventory is lower. We also made the decision within the quarter to lower our recreational Off-Road shipments, specifically certain models of RZR, given continued lower retail and our goal of maintaining targeted levels of dealer inventory. We feel these decisions are important given the seasonal trends of our product lines and to proactively manage dealer inventory. Consistent with last quarter, we saw an uptick in floor plan finance interest as a result of increased inventory and higher interest rates. This is expected to remain a headwind into 2024. These pressures on revenue also negatively impacted margins in the fourth quarter. In addition, we saw elevated warranty costs in the quarter, driven by a $23 million warranty expense in our Goupil business within our On-Road segment. This charge was associated with a battery component failure, which was caused by a supplier who had previously filed for bankruptcy. These issues, coupled with elevated operational costs I mentioned earlier as well as the impact of product liability claims, drove lower-than-expected margins. Our resulting EBITDA margin was down 377 basis points versus last year in the fourth quarter. We've increased our accrual for product liability claims due to the challenging litigation environment. Most of the increase relates to product produced before 2018. This pressure, along with higher year-over-year interest expense, drove adjusted EPS down 43% to $1.98, falling short of our guidance. The fourth quarter concludes a year that can be defined by a volatile macro environment and consistent consumer demand and a lack of execution on our part. While I'm proud of our ability to take share and generate strong adjusted free cash flow during the year, we need to operate more efficiently if we're to hit our long-term margin targets. Moving forward, I believe our teams are aligned to drive operational improvements in 2024 while delivering share gains. Let's now talk about retail trends as well as the data at the dealer level. Broadly speaking, retail was lower than our expectations in the fourth quarter, driven by recreational portfolio within our Off-Road as well as our snowmobile business. Two important things to note here. First, as a reminder, our utility product makes up almost 60% of our Off-Road sales with the main product being our Ranger side-by-side. The purchase of these vehicles tends to be less discretionary in nature as they are primarily used for work purposes. Recreation makes up the remaining 40%, with the main products being the RZR and general side-by-side. Recreational Off-Road vehicle retail continued to see softness in the quarter, which marks the fifth straight quarter of negative retail in our recreational portfolio. These vehicles tend to be more discretionary purchases and are more sensitive to economic conditions and the health of the consumer. We feel higher interest rates, coupled with economic uncertainty, are negatively impacting retail. Second, we expect a positive contribution from our snow business given an easy comparison to last year and improved product delivery into the channel. While we executed on improved deliveries, growth was lower than expected given poor snow conditions in the fourth quarter, and we expect this to continue into the first quarter of 2024. As mentioned earlier, our promotional levels were elevated in Q4 given the competitive dynamics I explained earlier. We do expect promotions to remain elevated into Q1 of 2024. We are expecting industry retail to be down modestly in 2024. While the industry will be challenged, we anticipate being able to grow share given our strong product portfolio, a full-year of retail for Polaris XPEDITION and RANGER XD, as well as additional new products expected to launch in 2024. We recently concluded our biannual ORV dealer survey that includes close to 700 responses. Sentiment from dealers worsened relative to the last time we conducted the survey in the spring. This survey conveyed that while dealers see promotional activity helping, they continue to be concerned about the broader economy, coupled with higher interest rates and the resulting impact on consumer demand. Dealers believe system inventory is still too high. While our channel inventory is healthier than many others, we have opportunities to improve, specifically in areas like RZR and Marine where we began making adjustments in 2023, and we've built those continued improvements into our plans for 2024. We believe our channel inventory is within an optimal range for Ranger and Indian Motorcycle and that we still have an opportunity to build inventory with Polaris XPEDITION and RANGER XD given dealer feedback. That said, we intend to operate in a disciplined manner to ensure dealer inventory levels remain at optimal levels in 2024. We will balance how the industry plays out with the need to have the right inventory in the field to maintain our competitive positioning. Wrapping up my comments on the quarter and the year, we won the retail and share battle by playing offense in a complex and competitive environment. While our financial execution fell short, we did continue to make significant progress on executing against our strategic agenda. We entered 2024 focused on execution at all levels to ensure we gain share, expand margins, and execute against our financial commitments. I'll now turn it over to Bob, who will summarize our fourth quarter performance and provide initial guidance and expectations for 2024.

Thanks, Mike, and good morning or afternoon to everyone on the call today. Fourth quarter results were impacted by lower factory shipments, reduced net prices, and increased finance interest which affected both sales and margins. We decided to reduce Off-Road vehicle shipments due to a challenging retail environment. Promotions aligned with our strategies but remained higher than last year. Manufacturing costs are still elevated. Additionally, we recorded a significant warranty expense in our On-Road segment during the quarter. Similar to the previous quarter, we faced increased product liability costs compared to last year, as cases delayed by COVID progressed through the court system. Our Parts, Garments & Accessories segment saw record-breaking growth of 14% and gross profit margin expansion of over 300 basis points. This segment continues to provide us with a competitive edge, with a new addition in marine offerings. Currently, PG&A products, including factory-installed accessories, account for approximately 20% of total sales, generating attractive profits. Looking ahead to 2024, we anticipate PG&A will keep contributing positively through growth and margin expansion. In our Off-Road division, revenue grew by 3%, driven by double-digit increases in utility, snow, and commercial product lines, although this was somewhat offset by a 20% drop in recreational products. Demand for our premium vehicles remains strong, notably for the Polaris XPEDITION NorthStar Edition, which helped our crossover category gain nearly 10 points of market share this quarter. The RANGER XD 1500 had limited impact on retail as shipping started in November. Utility retail grew in the mid-teens, exceeding previous quarter performance, particularly among our agricultural customers who show strong product demand. Unfortunately, snow retail has been weaker than expected due to a late snow season and unusually high temperatures in the Midwest. Season-to-date, we've made slight market share gains. As the season wraps up, we expect lower shipping volumes for the next season because of high dealer inventory amidst snow scarcity. Margins were impacted by higher levels of promotions, increased finance interest, and a product mix that included fewer razor sales and more snowmobiles, which typically have lower margins. We foresee a somewhat difficult first quarter compared to last year due to fewer snowmobile shipments and the channel refill of Off-Road vehicles which occurred in 2023. Recall that in 2023, we shipped a large number of sleds late in the snow season, and we're still working on channel refills to establish healthier dealer inventory. We do anticipate continued market share gains, supported by our strong product lineup and new launches scheduled for later this year. We also expect margins to expand as we achieve manufacturing efficiencies in our two largest plants. Although the beginning of 2024 may be challenging, we believe we are well-positioned to enhance our market share and operational efficiencies as we progress through the second half of our five-year strategy. Moving on to On-Road, I'd like to highlight Indian Motorcycle's first year of profitability in 2023. The team has done an excellent job of establishing Indian Motorcycles as the second-largest motorcycle brand globally, and we look forward to their ongoing success. Sales this quarter declined by 24% due to challenges in the motorcycle market stemming from a tough macroeconomic environment and high interest rates affecting consumer monthly payments. For the full year, we showed growth against a difficult comparison in 2022 when we were restoring dealer inventory due to supply constraints. Indian Motorcycles experienced a slight loss in market share because of competitive pressures in the heavyweight segment, although there was ongoing strength in the midsize category. On-Road gross profit declined by 323 basis points due to the previously mentioned warranty expense recorded during the quarter. However, gross profit margin for Indian Motorcycles improved by nearly 600 basis points, marking the sixth consecutive quarter of margin expansion of over 250 basis points, which has contributed to their profitability this year. In the marine sector, sales fell by 41% as the industry continues to face high dealer inventory and elevated interest rates affecting consumer purchasing decisions. We decided earlier in the year to limit shipments based on the emerging trends, leading to lower volumes in the fourth quarter. Gross profit margin decreased by 368 basis points due to pressures on sales. Nevertheless, our team is actively managing the variable components of their cost structure to protect profits. With the season now concluded, brands like Bennington, Godfrey, and Hurricane have gained market share in 2023. We are optimistic about the Marine business’s future as they refresh their product lineup and add new dealers. As the boat show season begins, the early signs indicate that dealers feel overstocked, with retail trends slightly declining compared to 2023. Reviewing our full-year performance by segment, retail proved to be more challenging. Segment sales met or exceeded our expectations, and we gained market share across all segments with a strong array of competitive products. Operationally, we addressed the challenges in Off-Road, while it was encouraging to see On-Road, especially Indian Motorcycles, achieve profitability this year. Concerning our financial status, we ended the year with considerable year-over-year growth in both operating and adjusted free cash flow. Through the year, we utilized this cash for capital expenditures and returned $326 million to shareholders via dividends and share repurchases. We maintain a strong financial position, closing the year with a net leverage ratio of 1.6 times, which falls within our desired range of 1 to 2 times. During the quarter, we completed our initial investment-grade public senior notes offering by issuing long-term five-year bonds, shifting our debt profile to 68% fixed and 32% variable rates. We repurchased 1.6 million shares in 2023, remaining ahead of our target to buy back 10% of our outstanding basic shares by the end of 2026. We believe our balance sheet positions us well for various market conditions, and we anticipate replicating last year’s cash generation in 2024. Now, let’s discuss our guidance and expectations for 2024. We are initiating guidance today, predicting that 2024 sales will decline amid a challenging retail environment and reduced shipping volumes due to dealer inventory fills in recreational vehicles and marine, along with the timing of snow shipments favoring 2023. Most of these challenges are expected to be evident in the first quarter. It's important to reiterate what Mike said about dealer inventory, and our goal for strict management of dealer inventory this year is informed by a declining industry retail situation. If our retail forecasts or competitive assessments change, we will adjust our dealer inventory levels accordingly. Promotions and finance interest are anticipated to remain high throughout the year, putting additional stress on our top line and margins. By segment, we expect Off-Road sales to decline by mid-single digits, influenced by a tough year-over-year comparison in the first quarter and reduced shipments of snow and certain models. However, we expect these challenges to be partially offset by retail and channel fills of new products, including the RANGER XD and other launches planned for 2024. We foresee Off-Road gaining market share in 2024, given its strong competitive portfolio. On-Road sales are projected to remain flat year-over-year amid a weak market due to rising interest rates. We expect On-Road to gain market share as we introduce exciting new products later this year. Marine sales are projected to decline by the mid-teens as we aim to reduce dealer inventory during a tough industry climate. We believe Bennington’s new S&SV lineup presents a great opportunity to continue capturing share in the pontoon market. Our margin forecasts indicate we expect to see expanding gross profit and EBITDA margins. As indicated in our guidance, the margin expansion will originate at the gross profit level, with savings and efficiencies anticipated from improvements in materials, logistics, and our manufacturing facilities. Overall, we aim for operational savings exceeding $150 million, with a broader funnel of opportunities. In our plants, we anticipate cost reductions through a focus on lean manufacturing practices and enhanced efficiency in producing new vehicles. We also expect savings from our capital investments made in Monterrey, Vietnam, and our facility that includes new paint systems and back shop vertical integration. Operating expense dollars are forecasted to increase by 1% to 2% compared to 2023, largely due to wage inflation and the return to targeted incentive compensation payouts, largely offset by cost-cutting measures across the business. We expect product liability costs to remain similar to 2023 levels as we manage ongoing case backlogs. Additionally, depreciation costs are projected to rise by around 15% compared to 2023 due to tooling related to last year’s new product launches, which may impact gross profit and earnings per share but not EBITDA. A few more items of note include a slight increase in interest expenses year-over-year, affecting our dealer floor planning, financing costs, and debt expenses. We anticipate three interest rate cuts in the latter half of the year. We expect a higher tax rate this year, as we do not foresee the same level of R&D credits and other one-time benefits that helped reduce our rate in 2023. Currency fluctuations remain volatile and are projected to present challenges again. We anticipate the Canadian dollar at 0.72, the euro at 1.07, and the peso at 17.5. We feel well hedged against decreases in the Canadian dollar and peso below these rates. Considering all these factors, we are anticipating adjusted earnings per share between $7.75 and $8.25, reflecting a decline of 10% to 15% compared to 2023. For the first quarter, a few key points to consider include significant sales headwinds due to last year's trends in snow shipments and the channel refilling in Off-Road and marine. With these challenges, we predict sales will be down by roughly 20% in the first quarter. Higher promotions are expected year-over-year at a rate similar to the fourth quarter. We will continue to face headwinds from net pricing, finance interest, and stable operational costs incurred during the fourth quarter. Additionally, foreign exchange and interest expenses are projected to be unfavorable compared to last year. Given these conditions, we expect to see breakeven adjusted earnings per share for the first quarter. We project flat sales for the year in the remaining three quarters, with market share gains from new products helping to counteract the slower industry environment. These sales volumes, along with significant margin expansion as we progress through the year and benefit from our plant efficiency improvements, are expected to achieve year-over-year margin growth. We anticipate another strong year for cash flow generation as the team continues to effectively decrease working capital. It's also encouraging to observe the early advancements we've made in our plants, improving vehicle production efficiency and revitalizing lean processes. My background before Polaris was in the industrial sector, and I’m pleased to see the renewed emphasis on lean methodologies at our plants. While we still have work to do, the potential for improvement is significant. Our teams are committed to our strategy, and we look forward to sharing our progress throughout the year. Now, I’ll turn it back over to Mike to conclude the call.

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

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

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

Sure. To start with the revenue drop this year, most of it is seen in the first quarter. The two main factors are snow and Off-Road, although we are also experiencing declines in marine and motorcycle unit shipments. Additionally, we have high promotional levels from the fourth quarter that exceed those in the first quarter of 2023. We expect operating expenses to remain flat for the year and comparable to the fourth quarter. As mentioned on the call, we do anticipate that product liability accrual costs will remain high in 2024, consistent with what we observed in 2023 as we continue to manage older cases related to the past razor recall and other existing cases. These are the main factors contributing to the challenges in the first quarter. The adjustment regarding dealer inventory is essential to maintaining it at an optimal level, especially given the slower retail conditions in the fourth quarter and our expectations for modest retail performance in the first quarter. Looking ahead, the rest of the year appears more stable, with sales projected to be relatively flat compared to 2023, and we expect to see earnings improvement due to operational efficiency gains. The inventory we built in the fourth quarter is influencing the first quarter. We are experiencing some cost improvements sequentially in the first quarter, but the significant volume drop will affect factory hours, making the margin improvement less noticeable. Nevertheless, it is there, and we are diligently working through the fourth quarter and into the first quarter to ensure we continue to enhance our performance throughout the year.

Q1 is usually a slow quarter for us. For years, the snow business has delivered later than ideal, which is not optimal for customers. However, we have improved that aspect significantly. Dealer inventory is now at a good level, and I view this as the time when our performance is at its lowest. Several factors are aligning simultaneously. Looking ahead to Q2, Q3, and Q4, this plan isn't heavily reliant on the later quarters. It's really about getting back to regular shipping to retail and finding opportunities to reduce costs throughout the year. We're not in a situation where we're not earning in Q1 and relying on Q4 to make up for it. Instead, we are returning to normal business operations starting in Q2. The team started strong in January, and we are monitoring more measures and metrics for our operations than ever before. I'm optimistic about what I've seen thus far, and we will maintain our focus to ensure the team performs effectively.

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

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

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

Great. Thanks a lot.

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

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

Yes, that's mostly correct. The overspend in G&A during Q4 was primarily due to the increase in the product liability accrual. This was influenced by the number of cases moving through the court system in Q3 and Q4. We review these accruals biannually, considering both incurred but not reported cases and specific known cases that have had developments, such as factual information and rulings from pretrial motions. The update to this accrual was larger than we expected and historically has been, driven by the surge in cases over the past couple of quarters and their effect on our analysis. Looking ahead to 2024 and OpEx, we've maintained a consistent legal run rate, not at the fourth quarter level but for the full year. Our OpEx is mostly flat, influenced by challenges like merit and cost-of-living increases affecting the bonus pool, which we plan to have at full payout although we don't have that this year due to missing our guidance. We also have tailwinds from cost-cutting and efficiency improvements as we enter the year. We're being careful with hiring and other expenditures, but we're committed to maintaining our focus on engineering and innovation, especially since the main challenge for 2024 is the expected revenue drop in the first quarter. We will continuously evaluate our investments if the year proves to be significantly different from our current expectations.

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

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

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

Okay, got it. Thanks, Mike.

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

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

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

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

Great, thank you.

Thanks.

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

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

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

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

I believe we didn’t address enough of it in 2023. The part we overlooked will definitely be addressed in 2024. While we managed to reduce costs in 2023, it wasn’t as much as we had aimed for. In addition to our ongoing efforts, there’s already some momentum with certain commodities starting to decrease sequentially, which will take time to work through our inventory. Bob and the team have a clear plan for what needs to be done, and we are reviewing this on a weekly and monthly basis.

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

Last year?

Yes, Q1.

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

The impact is mainly from snow and ORV, with some effect in marine and motorcycle.

And Joe, I mentioned earlier that we are essentially experiencing the lowest point in our performance. Most of the revenue decline occurred in the first quarter. There are a couple of factors contributing to this, as well as promotions. One factor is the snowmobile fixing the business, which helps us avoid issues from delayed deliveries. Another factor is the lack of the 40 days of days sales outstanding inventory opportunity. As we move into the second quarter, we'll return to shipping to retail. While the industry may be down slightly, we are outperforming thanks to our product offerings. This will lead to a more consistent performance in the second, third, and fourth quarters.

Got it, okay. Thank you.

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

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

The majority of the improvement in gross margins for the segment will come from Off-Road, since the factories that have been underperforming are primarily our Monterrey and the two large facilities focused on Off-Road. Therefore, we expect to see most improvement there. On-Road is expected to remain relatively flat this year, with a continued emphasis on margin by Indian. The outcome will largely depend on the mix between heavyweight and midsize vehicles, which will be influenced by industry trends. It's worth noting that heavyweights usually offer a higher gross margin compared to midsize. In the marine segment, they are successfully managing margins despite lower shipment volumes. The variable cost structure of that business allows us to maintain overall EBITDA margins even with slight declines in gross margins. Thus, the notable improvement will primarily come from Off-Road.

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

Yes, it's difficult to determine. I believe the opportunity with XD and XPEDITION, considering their positive reception, will likely be largely incremental. While we will certainly attract some customers away from the general market for XPEDITION and the core Ranger business for XD, the majority of this will be incremental, likely surpassing any potential new products we might introduce due to the size of those markets.

Yes, we didn't ship XPEDITION well in Q4. There will be some additional on XPEDITION. However, as Mike mentioned, most of XD will be additional to the XD that was shipped in 2023, which was quite low.

Okay, thank you.

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

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

Yes, we anticipate that, as Mike mentioned earlier, some competitors had a significant amount of carryover inventory from the 2023 model year. Our inventory was more streamlined, which led to increased promotional spending on our part. Although we had current inventory, we needed to react to prevent losing market share to competitors selling their 2023 models with ample inventory, which proved effective in the fourth quarter. That inventory is now decreasing, so we expect the disparity between 2023 and 2024 to start to lessen in the first quarter. Additionally, we are coming off a quarter that had lower promotional activity because we experienced significant channel filling in the first quarter of last year, thus we are comparing this against the highly promotional fourth quarter. Throughout the year, we believe, as Mike indicated, that many of our industry competitors share our intention to maintain dealer inventory at reasonable retail levels and to reduce dealer inventory over the course of the year. Based on what we've observed so far, it appears that competitors will adopt a similar cautious approach to shipments in the early part of the year, which should improve overall inventory positions as we move into the second quarter. Therefore, we expect promotions to remain relatively consistent with this year, heavily influenced by dealer inventory levels.

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

We expect the industry to experience a decline, and there seems to be a misconception that it significantly benefited from COVID. Looking back, there was a time when a lot of inventory was sold off dealers' floors, and we've spent recent years trying to catch up. With the industry likely to be down next year, we anticipate volumes will remain around historical levels. There are two key issues that need resolution: economic uncertainty regarding our discretionary and recreational products, along with interest rates. Although current financing doesn't majorly affect monthly payments, people are hesitant to finance at high market levels. Changes in interest rates significantly influence the market, and I believe a movement in rates will positively impact the industry as people will be more inclined to participate. We're not seeing a large influx of used vehicles on the market; instead, our repurchase rates, which we track from various periods, stagnated during the pandemic but have begun to rise as the market's intensity has decreased. This is encouraging, as we know consumers are looking to upgrade their aging products. There’s a lot of new product and innovation available, and I feel positive about the industry’s outlook as we move through 2024 and towards a more favorable setup in 2025 for both our company and the industry overall.

Great, I would like to ask about the marine aspect. One of the marine companies that ends its fiscal year in June is experiencing significant revenue declines, which are considerably more than what you are anticipating for '24. Could you discuss your position in the marine sector? With expectations of rate cuts, do you think the marine business could improve in the latter half of the year? What are your thoughts on this business throughout '24, especially regarding the guidance of mid-teens declines?

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

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

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

Great, thanks very much for all that color.

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

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

Yes. We've done a lot of analysis on what the numbers for 2025 and 2026 should look like. We can't repeat the last couple of years from an economic standpoint. What gives me confidence is that I believe we are at the end of a historically tight cycle and are emerging from an unpredictable environment created by COVID and various geopolitical factors. While there may still be challenges ahead, I believe we are entering a more stable period. Years ago, we faced criticism for losing market share and lacking new products. We've made significant improvements in that area, and we're not finished yet—our team has more products in the pipeline, though I won't detail them now. It's encouraging that we gained market share last year and even more so if you exclude youth products. However, we have more ground to cover, and we're determined to regain that share. We're not planning on making acquisitions. Given our current stock price, I believe there is no better investment than Polaris right now. I find it hard to justify acquiring another company to achieve our revenue growth targets. Our main challenge will be maintaining margins, which I previously mentioned in response to Craig's question. The initiatives we have control over make me confident in our ability to address these challenges. Our team is aware of the stakes and is highly motivated and committed, and I wouldn’t bet against them.

Great, thank you very much.

Thank you.

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

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

Yes. It's definitely not the focus it once was. We've come to terms with the fact that these issues are likely permanent. We don't know what will happen in 2024, and we can't control that. Our government relations team is working hard to advocate for us, even with limited resources, ensuring that exemptions are renewed and addressing our case since we feel at a significant disadvantage as the global leader in powersports and the only U.S.-based company truly paying tariffs. It seems quite unfair. We've been pushing for near-shoring, and while we've made some progress, there's still a lot more to accomplish. Specifically, we need to focus on locating our sourcing in Mexico, especially given our substantial presence there. This will help ensure continuity of supply, producing closer to home rather than relying on distant continents, which exposes us to supply chain risks and potential tariff benefits. However, we haven't seen significant improvements yet. We are fully aware of the tariffs and how to calculate them. If we receive positive news, that would be fantastic, but I'm not expecting it. Even with a Republican president, the pressure concerning China remains strong, and it will take time for any changes to materialize. We'll continue operating under the assumption that these tariffs are permanent and strive to do what's best for the business.

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

Thank you.

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

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

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

Thank you.

This does conclude our question-and-answer session, and the conference has now concluded. Thank you for your participation. You may now disconnect your lines.