Polaris Inc. Q1 FY2024 Earnings Call

Good day, and welcome to the Polaris First Quarter 2024 Earnings Conference Call and Webcast. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I'd 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 2024 first quarter earnings call. We will reference a slide presentation today, which is accessible on our website at ir.polaris.com. Joining me on the call today are Mike Speetzen, our Chief Executive Officer; and Bob Mack, our Chief Financial Officer. Both have prepared remarks summarizing the first quarter as well as our expectations for the remainder of 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 2023 10-K for additional details regarding risks and uncertainties. All references to the first quarter actual results and 2024 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. First quarter performance largely came in consistent with our expectations. You'll recall that headed into the year, we expected the first quarter to be one of the most challenging quarters given the difficult year-over-year comparisons and our plan to actively manage dealer inventory coupled with a more normalized production delivery of Snowmobiles. Q1 also saw us focused on continuing to execute the early stages to improve delivery, increase efficiencies, and drive down operating costs in our larger manufacturing facilities. Sales in the first quarter were down 20%, which was in line with our expectations, and adjusted EPS came in above our expectations given better performance on cost management. While we're pleased with our financial performance, we did experience the worst Snowmobile season we've seen in 13 years, driven by a lack of snow across much of North America. Overall, it was encouraging to see our products gain market share in ORV, motorcycles, and marine. Our new product innovation is resonating with customers, which will drive future share gains. Coupled with our operational improvements, this makes me very optimistic about the direction of the business. North America retail was down 10%, driven by a weak Snow season, but was up 3% when you exclude snow. Utility Off-Road vehicles continue to lead the way with strong demand for our RANGER lineup. Recreation was down, while On-Road was up for the quarter, driven by strength in North American markets, somewhat offset by international market weakness. Within Marine, we believe retail was flat during the first quarter using our internal registration data as we await the March data from SSI. We continue to play offense when it comes to innovation. Our RZR XP, Polaris XPEDITION, and RANGER XD products are garnering much attention from dealers for their attractive features and cutting-edge technology with RIDE COMMAND+ and industry-leading capabilities. We recently expanded this launch with the new model year full-size RANGER portfolio and the new Indian motorcycle Scout portfolio. Once again, we delivered industry-leading innovation, further reinforcing our position as the global leader in powersports. Following through on our commitment to actively manage dealer inventory, we flexed inventory up in categories where we've seen consistent growth, such as Off-Road utility and new product models. We also reduced shipments to help better manage dealer inventory in categories that have been underperforming, such as Off-Road recreation and Marine. I'd also remind you that we've been doing this for several quarters. This approach is driven by our ability to adjust to trends we've seen materializing over multiple quarters, aided by our retail flow management system, which is one of the most sophisticated dealer inventory tools in the industry, allowing us to quickly adapt our production and delivery system to the current demand environment. The system gives us near real-time access to our dealer inventory by region and by product. We use this data in conjunction with conversations with our dealers to actively manage inventory to ensure dealers have the right inventory to efficiently run their businesses. Adjusted gross profit margin was down 248 basis points, driven by elevated promotions that began last year as well as higher warranty costs. Partially offsetting these headwinds was the continued progress to improve our operations. This operational improvement enabled us to more than offset deleverage in the quarter given the lower volumes. We're targeting $150 million of operational savings this year, and while it's still early in the year, our progress thus far aligns with this objective. During the first quarter, we saw meaningful savings on material costs and logistics, and our Huntsville manufacturing facility made tremendous strides in reducing indirect labor and rework costs, achieving significant improvements in execution against their build schedule. We are also seeing significant improvements in Monterrey, where the production line that created significant issues for us in delivering XPEDITION and RANGER XD in the second half of 2023 is now operating at the targeted output rate, with significant improvements in efficiencies starting to materialize within the facility more broadly. In summary, it was encouraging to see results that were largely in line with or slightly above our original expectations, recognizing the headwinds we faced entering the year. As we proceed through the remaining three quarters of the year, we expect further share gains given the significant innovation we've introduced over the past few years, and we remain committed to actively managing dealer inventory and driving efficiencies within the business. I'm incredibly proud of our team's execution in the first quarter and want to thank them for their continued dedication and focus. Turning to more detail on retail, broadly speaking, retail trends remain consistent with what we've seen over the past year, with the exception of snowmobiles. Recreation Off-Road vehicles were down for the sixth straight quarter. As we've shared previously, we view the purchase of these vehicles as discretionary and they are more sensitive to economic conditions such as elevated interest rates. Our utility portfolio, consisting of RANGER side-by-sides and ATVs, continues to see strength, as reflected in our mid-single-digit increase in retail. As a reminder, this category is far less discretionary and plays an important role in work applications for ranchers, farmers, and owners of multiple acres of land, as well as in commercial settings, making up approximately 65% of our Off-Road segment sales. As expected, promotions were elevated across the industry during the quarter, and we expect a higher promotional environment to continue through 2024. This impacts each of our segments as the industry grapples with elevated interest rates. For Polaris and the industry, this impact is more noticeable within the Marine and Off-Road recreational categories where we've seen weak retail for several quarters, resulting in elevated inventory. Hearing from dealers, they continue to view all powersports inventory as too high and are actively looking for opportunities to manage inventory with strategies ranging from reducing the number of OEMs they carry to adding additional promotional dollars from their own wallets as well as taking fewer shipments from OEMs. Every dealer is dealing with their own unique version of these industry issues. While we can't influence other OEMs, we believe that, in total, we are doing our part to assist dealers. We're reducing shipments in product segments that are most challenged and adding promotional dollars where necessary to assist them with moving product. Given the current trends in recreation and utility and the weak snow season, we've adjusted our manufacturing outlook for these lines for the remainder of the year. We made meaningful cuts in snow for the upcoming season, given the elevated inventory in the channel today. We also reduced RZR side-by-side production as recreation retail has been down, and we do not see a near-term improvement due to elevated interest rates impacting consumer purchasing decisions and the likelihood that rates will stay higher longer than originally anticipated. We've also decreased production of Slingshots, which have a higher mix of consumers who finance their vehicles. While it's early in the retail season, the marine environment is largely playing out as anticipated. In utility, we made the decision to increase production of RANGER side-by-sides given multiple quarters of strong retail growth and healthy dealer inventory turns. Polaris continues to operate in a disciplined manner regarding our dealer inventory to ensure we have the right inventory in the field to maintain our competitive position without burdening dealers with excess flooring costs. Our goal is to remain agile while being the partner of choice with our dealers to ensure a healthy relationship today and in the future. Moving to one of my favorite topics, innovation. We've had a busy couple of months with the launch of our new Indian Scout platform, the new 2025 Snowmobile lineup, and the 2025 lineup of full-size RANGERs. The Scout platform was first launched by Polaris 10 years ago and has quickly grown to become the best-selling platform in the Indian motorcycle lineup. We're excited to carry on the tradition of this historically important bike with this new launch. Not only does the bike have a completely new engine, but also added highly sought-after tech features to enhance the rider experience. Scout is an entry point into the brand, with more than 90% of Scout owners being new to Indian motorcycle and serving as a pipeline for growth into other parts of our lineup. We've seen roughly 70% of our midsized riders move up to heavyweight cruisers or our bagger and touring lineup with their next motorcycle purchase, further reinforcing the importance of Scout and the role it plays in driving further share gains. We also announced and started shipping the lineup of model year 2025 full-size RANGER side-by-sides. These new RANGERs have rider-inspired design enhancements, upgraded transmission, and additional factory-installed accessories. The new lineup makes the best-selling vehicle in the market even better. RANGER is the number one side-by-side in the market, and as the utility market continues to grow, we're excited to bring more innovation to our core utility customers. Wrapping up my comments on the quarter, we executed well in what we knew was going to be a challenging environment. We gained share with a strong product portfolio, made even stronger with our recent new product launches. We're working in partnership with our dealers to ensure they have the right mix and quantity of inventory to effectively manage their business, and we continue to execute our plan to drive $150 million in operating savings in 2024, consistent with our long-term goal to drive EBITDA margin expansion. I'll now turn it over to Bob, who will summarize our first quarter performance and provide updated commentary around our guidance and expectations for 2024. Bob?

Thanks, Mike, and good morning or afternoon to everyone on the call today. First-quarter sales were $1.7 billion, down 20% versus last year. The decline was expected due to several factors we called out when we spoke in January. These factors included late-season Snowmobile shipments in Q1 2023 due to supply constraints, which did not repeat in Q1 2024, the lapping of ORV and marine channel fill in Q1 2023, lower planned factory shipments to contend with elevated dealer inventory in Off-Road recreation and marine, and lower net price given the high promotional environment versus Q1 of last year. Therefore, there were not many surprises on the top line, although the Snow season was weaker than we expected, which mostly impacted our Snow retail and related Snow PG&A lines. Despite this, PG&A sales were up 3%, with strength in our factory-installed accessories in Off-Road. We continue to view our PG&A business as a driver for both sales and margin throughout the year. Adjusted EBITDA margin was down 459 basis points due to many of the same factors impacting sales, such as volume and higher promotions. In addition, we are seeing slightly higher warranty costs in Off-Road and continue to experience higher finance interest associated with flooring interest support for our dealers. As expected, foreign exchange was also a headwind. Somewhat offsetting these headwinds was a positive contribution from operations despite the deleverage from lower volume and controlled operating expense spending. One unique item to note is that our tax rate in the quarter was 49.3%, more a function of lower net income year-over-year than anything structural, and we still expect our full-year tax rate to be between 21.5% and 22.5%. Adjusted EPS of $0.23 was above our initial expectations for the quarter. In our Off-Road business, revenue was down 16%, mainly driven by factors already discussed, such as the channel fill and the lapping of Snow season shipments last year. We shipped close to 6,000 units of our new Polaris XPEDITION and RANGER XD combined during the quarter as we strive to meet customer demand for these category-defining vehicles. Data shows we gained share on both unit and dollar basis during the quarter in ORV. On a dollar basis, which puts more weight on the premium side of the market versus the lower end and youth, we gained more share, capturing nearly 50% of the ORV market. We believe this illustrates our strength as a premium OEM within the ORV market versus inflating market share with youth and lower-tier products. The lack of snow across most of North America impacted both our retail and industry retail. The primary impact to us is a change in expected selling of Snowmobiles for next season given current dealer inventory levels. Margins in the quarter were pressured by volume, higher promotional levels, and finance interest. Operational improvements within our plants were realized and are expected to contribute more dollars as the year progresses. Thinking about the second quarter, we expect long-term trends to continue within utility and recreation. Promotions are expected to remain elevated, and we believe our competitive position should only get stronger with the recent launch of our new RANGER portfolio as well as continued interest in the products we launched last year. On margins, we expect meaningful gross margin expansion as we continue to make progress on our operational savings strategy. Switching to On-Road, sales during the quarter were down 14%, driven by weakness in Slingshot and a soft international motorcycle market. Indian Motorcycles gained modest share during the quarter, driven by continued strength in the midsized category, which is a strength for us, especially with the launch of the new Scout. On-Road gross profit margin was up 41 basis points due to strength from our European businesses, somewhat offset by higher promotions in the heavyweight categories. During the second quarter, we expect a modest benefit from the new Scout launch with offsetting pressure coming from Slingshot and continued promotions. In Marine, sales were down 53% as the industry continues to deal with elevated dealer inventory levels and higher interest rates impacting the consumer's decision to purchase. Our shipments in the quarter were in line with our expectations given the trends we are seeing in the second half of 2023, resulting in lower volumes in the first quarter and a reduction of dealer inventory versus first quarter 2023. SSI data through February reflected the decline in year-over-year retail, although our internal data through March suggests our brands will be relatively flat year-over-year in the first quarter. As we head into the Spring selling season and compare inventory levels to previous years, we feel that our position is much healthier than many of our competitors. Gross profit margin was down 776 basis points given top line pressures and less labor absorption at our plants. Our team continues to actively manage the variable components of our cost structure to help protect profits. We continue to expect industry challenges during the second quarter as dealers work through current inventory levels and consumer purchases are hampered by elevated interest rates. Moving to our financial position, we knew the first quarter was going to be a quarter with minimal EBITDA and cash generation as is typically the case during the early part of the year with dealer holdback and employee bonus payments being made in Q1. Therefore, we have limited share repurchase activity in the first quarter as we prioritized maintaining our net leverage ratio in the range that we have previously communicated. For the full year, we expect to repurchase enough shares to offset dilution from stock-based compensation plans, and we remain well ahead of our 2026 target of reducing the basic shares outstanding by 10%. During the quarter, we used cash to support CapEx investments and returned $53 million to shareholders in the form of dividends and share repurchases. We remain confident in our financial position, and our net debt-to-EBITDA ratio is expected to trend lower as we generate more EBITDA and cash as the year progresses. We continue to expect strong adjusted free cash flow this year and believe our capital deployment priorities are aligned with the strategy to build shareholder value. Now let's move to guidance and expectations for 2024. We are not changing our full-year guidance for Polaris at this time but are making a minor adjustment at the segment sales level given the adjustments we have made within On-Road to account for current trends. This updated outlook calls for On-Road 2024 sales to be down mid-single digits versus our original guidance of flat year-over-year sales. Recall the On-Road change is in response to weaker trends we are seeing in Slingshot and some additional pressure on motorcycles internationally. While both of these markets are being impacted by higher interest rates, we have seen a more pronounced impact on Slingshot retail and thus have adjusted our production schedule downward. Promotions and finance interest are expected to remain at elevated levels, which continues to add pressure to our top line and margin. We maintain our guidance for Off-Road 2024 sales as down mid-single digits. Within Off-Road, we are now expecting lower Snow sales in the second half of the year given dealer inventory levels coming out of this past season. Additionally, we have pulled back on recreation, Off-Road vehicles volume given retail and industry trends. These pullbacks have been offset by the added volume from continued strength we see in our Utility Off-Road vehicles. Regarding dealer inventory, we are actively addressing areas with elevated inventory coupled with weaker retail trends, particularly in Off-Road recreation and marine by reducing shipments of those products to help minimize flooring interest for our dealers. We are also actively managing the mix of products in those segments to align trim levels with consumer expectations. We target building inventory with new products and in growth categories. One such growth area is Utility, where dealers hold approximately three times the RANGER inventory, which is comparable to pre-pandemic levels. Indian Motorcycles are also at similar turns versus pre-pandemic levels. We have a strong discipline around dealer inventory and understand the frustration our dealers have with other OEMs overshipping the channel or lacking a sophisticated inventory management system. We strive to be a business partner of choice for our approximately 4,000 dealers globally and want to share in their success. As previously communicated, our margin guidance calls for expanding both gross profit and EBITDA margins, with most of the expansion resulting from savings and efficiencies at the gross profit level. In total, we are targeting over $150 million in operational savings with an even larger funnel of opportunity. Foreign currencies remain volatile and are expected to continue to be a headwind. Given the recent strength of the dollar, we see additional downside pressure from FX. We now believe the negative impact on EBITDA for the year is about $30 million versus our original expectation of approximately $20 million. For the second quarter, a few things to note. As I mentioned on the January call, we expect sales in the remaining three quarters of the year to be relatively flat year-over-year, including the second quarter. Our assumption is that industry retail is going to be down modestly for the year remains intact, with Polaris gaining modest share through the year. Higher year-over-year promotions and finance interest continue to be headwinds. Operational synergies are expected to be larger, to be reflected in margin expansion during the quarter. Lastly, FX and interest expense continue to be unfavorable year-over-year. Before I turn it back to Mike, I want to emphasize how encouraging our recent operating review meetings have been. The energy level around lean and operational improvements is clear. While these improvements take time, we believe we have the right team in place for the journey and expect to begin seeing results and margin expansion in the second quarter. It's an exciting time to be at Polaris and witness the innovation we are launching and the passion from our team. We have a lot of opportunities to improve our market share position, margin profile, and cash generation capabilities, all of which can lead to increasing value for our shareholders. With that, I will turn it back over to Mike to wrap up the call. Go ahead, Mike.

Thanks, Bob. The macro environment remains uncertain. And given that, we expect to remain agile regarding both production and dealer inventory. We carried our North American market share gains from last year into the first quarter of 2024. Our expectation is that we'll continue to take share this year with industry-leading innovation, a healthy partnership with our dealers, and a strong value proposition to bring memorable experiences to customers who enjoy working and playing outside. Introducing new customers to powersports continues to be a focus for us as they make up a strong portion of the business. During the first quarter, we saw similar patterns with approximately 70% of our customers being new to Polaris vehicles. This is a great statistic to see. As the market leader, we continue to grow the space and create awareness of the capabilities and experiences provided by our vehicles. Operationally, we're on a journey. I was encouraged with the progress we made at the largest facilities and I'm confident in our improvement plans for the year. I believe our first-quarter results, coupled with a focus to drive market share and margin expansion positions us well to deliver on our 2024 guidance. We thank you for your continued support. And with that, I'll turn the call back over for any questions.

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

Good morning. Thank you for taking my questions. I wanted to hear your thoughts, Mike, on the current state of the dealer network, especially considering feedback from dealers about excessively high inventory levels and signs of market stress due to low margins and significant floor plan costs. It seems like you have done everything right, but your competitors are dealing with too much inventory. I'm not entirely sure that's the same feedback I'm getting from dealers.

Yes. Look, I appreciate it, Craig. In this environment, it's something we're spending a disproportionate amount of time on. I can tell you that, different from many of our competitors, Bob and I, and our GBU leaders spent a lot of time out in the field with our dealers. In January, we met with Indian motorcycle dealers, and in March, Bob and I were out with marine dealers in Michigan, which is the largest market. We're headed back out with Steve in May to talk to Off-Road dealers on the West Coast. Look, they certainly are under stress. I can tell you from sitting in those dealerships that the conversation is not just a simple five-minute phone call; it's in detail. First and foremost, I think we probably have the best grip on this across the industry. We've got incredible visibility that's enabled through the systems that we have. The RFM process gives us essentially real-time data. We are always going to be a large part of the discussion because we are the market leader. You have to add up a lot of other OEMs to even get close to our numbers. They typically will have more inventory for Polaris than with the others. But the devil's in the details relative to the efficiency of the inventory. We know that we can see through the systems through CDK, where we have visibility into about 70% of the inventory, and we are either number one or top quartile when you look at metrics like days sales outstanding, six, and 12 months at the dealership or look at their mix of current inventory to noncurrent inventory. Just to give you a frame of reference, there's an OEM that was shipping over 70% through the first quarter of inventory into dealers from model year '23. That helps put into perspective the dynamics at the dealers. In my prepared remarks, I discussed the fact that dealers are taking things into their own hands. One of the things that became evident as we've met with the marine dealers is that they're trying to move out some of the smaller brands they brought in during the pandemic when they were desperate to get their hands on boats. They still have inventory in those brands that they're trying to move, and there's a lot of focus and attention around that. Financially, it's a bit of a drag. Through our joint venture with Wells Fargo, we are expanding to cover our marine segment, so we have good visibility into each of our dealers. We monitor their financial health closely. Bob is the Chairman of the Board for that joint venture. We keep a very close eye. That joint venture has been effective for over 20 years in helping us work with the dealers. Hopefully, as the industry leader, we'll get the rest of the OEMs to follow suit and behave in a consistent manner. We can't control that. We're going to do everything we can to do our part. I look at dealer inventory; we're up versus where we were in Q1 of last year. If you remember, last year, the channel was still very light in inventory. When I look at the models that aren't moving quickly, whether that's marine or boats, in aggregate, we've taken those categories down 14% year-over-year. That's pretty significant. It reflects our efforts to manage dealership inventory levels. We've adjusted our production schedules. The good news is, given our RANGER lineup and the concentration we have around utility, we're recognizing the benefit. Higher-margin vehicles bring a lot of accessories along with them. We will operate with incredible discipline. We were clear in our guidance that as retail goes, our business goes, and we will ensure we keep our dealers healthy in the near term because we value that long-term relationship.

I think a couple of things to think about, Craig. Like Mike said, we're the biggest in the industry, so we're always going to have the highest box count. We also put out more innovative products than other folks. We manage with RFM. If you really look at the recreational categories, Mike talked about how much we've taken that inventory down. Typically, from Q1 to Q2, you would build dealer inventory mid- to high double-digit range, 15% to 20%. This year, we're down in RZR; we're flat in marine. We constrained dealer inventory for '23 and in the first quarter of '24, and we didn't see the typical build we would have going into seasonality. We're hopefully using that seasonality to help keep those inventory levels down in categories that we see as most challenged. We feel like we've been the most aggressive by a large margin in managing dealer inventory. Our marine inventory is very clean. It's been a challenging market. We believe it will be relatively flat for Q1. We're not sitting on dealer inventory at our factories. We build to order, and we manage our business with incoming dealer orders. We think we're in a good position compared to many other OEMs.

Thanks, Bob.

Hi, thanks for taking my question. I guess you covered this a bit, but in terms of where you are on the ORV side, in terms of mix, what do you think that implies for promo levels relative to Q1? And then if you could talk through the operational improvements that you're realizing and the ability to offset promo looking ahead? And then second, not to pry too much, but I think sometimes you give some EPS color on the forward quarter. So any thoughts there would be helpful. Thanks.

Yes. On the ORV mix and promo implications, when we talked about the year-over-year '24 versus '23 and we discussed the increase in promo, most of that really happened in Q1 of this year. We expect those levels to essentially remain similar as we go into Q2, Q3, and Q4. If you look back to last year, promo would start ramping up through the course of the year. We think promo will be up. It's probably going to be a little higher than we originally expected because we know that there's a lot of noncurrent inventory from some of our competitors out in the market. But as we look at how we've rebalanced production, we brought RZR and Slingshot down but we're increasing RANGER to recognize the utility strength. We believe those things will counterbalance somewhat, but we do think there will be a little bit of a headwind from a promo standpoint, but that's all well within the guidance range that we've discussed. Regarding operational improvements, I wouldn't say we're able to push those higher than what we had expected. We've got a significant amount of work to get done. The team did an excellent job. We talked in the call in late January, early February, about progress coming out of '23, and that momentum is continuing into '24. The improvement was relatively small in Q1 relative to the overall objective, but we expected that because it was our smallest quarter, and the team is driving that forward. Bob can provide some comments on the EPS cadence.

Yes. Revenue is going to be relatively flat year-over-year for the remaining three quarters. We're not going to give EPS guidance by quarter, but I would say you'll see stronger operating improvements in the back half of the year given that all the improvements you make tend to lag a quarter. What we saw in Q1 is a result of a lot of the work that happened in Q4. Those will build through the year in terms of earnings, but that's all the guidance we're going to give on EPS for the quarter.

Thanks, guys. Good morning. So you mentioned earlier that the earnings upside in the quarter really came from better-than-expected operational costs. How much of that was timing related? Maybe you realized some costs earlier than you expected. Is there upside potentially to that $150 million number this year?

I wouldn't say it was hugely time-related. We just got a bit more than we expected, and there were many puts and takes in the quarter. The operational improvements are on track with where we thought they'd be. They build through the year. I don't believe there's significant upside to the $150 million. It's a lot of work to get there. Your efforts typically lag results by a solid quarter. Everyone is working hard, and we're focused on getting the $150 million this year with a good exit rate that can carry into '25, but I wouldn't plan for a lot of upside to that number as we sit here today.

Okay. That's helpful. Maybe secondly, the strategy behind shipping model year '25 RANGERs here in April seems a little early?

The product, obviously, we work on these products for a long time. It was ready. We were coming into the season, and we've got strong performance in the utility segment. We wanted to get that product into the hands of consumers. We made significant enhancements to quality and drivability that we think respond to what consumers are looking for. So with it ready, we decided to proceed with model year '25 this April.

It's all about leaning into the most favorable market right now, Joe. I can tell you these are excellent products. We've addressed several sources of concern from customers regarding shifting. We have spent a lot of time with consumers looking for ways to enhance what was already an excellent vehicle. So we were excited to get it out. The team did a great job of executing the program, allowing us to ship it. There’s a lot of excitement surrounding that vehicle, as well as the vehicles we launched last year.

Got it. Okay. Thank you, guys.

Nice job.

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

Hey guys. Good morning. Thanks for the question. I guess, just simplistically, you've given a handful of puts and takes on some changes to sort of the production makeup or expectations for the rest of the year, but you guys did beat where you thought you would in Q1. What is sort of the offset? Is there something later in the year that you're more cautious on as far as why you didn't adjust the full-year outlook?

Well, I think, Fred, I touched on it earlier—the promo levels are slightly elevated from where we expected. Q1 was pretty close to what we anticipated, but as we look out through the balance of the year, given interest rates are likely to move, we had expected around three reductions for the year, but in light of inflation holding up and the comments the Fed has made, we're likely not to see three. I think we might not see any. That will likely play out in higher promo rates as we continue to adjust for the rest of the year.

The interest cost isn't planned late in the year, so the impact from a forecast standpoint is not particularly significant. To Mike's point, we think that if there are a few rate cuts, consumers may start to feel a bit better, which might have a positive impact on retail and promos. If that doesn't happen, we will remain in the same environment we're in today. We were a bit more successful in Q1, but nothing that at this point would cause us to change our outlook for the year.

Fair enough. Thanks. I guess, Bob, you mentioned earlier just the sequential build in dealer inventories that you normally see from 4Q into 1Q. We didn't see that this year, right because you guys are managing that closely. When you look at the embedded benefit that you expect for gross margins as we move throughout the year from some of the new products. Do you think that inventories where they are today should still support a portion of the gross margin expansion that comes from mix?

Yes. We are seeing a good inventory build on XPEDITION and XD and the new products, RANGER. We launched the product about a week ago, and we began shipping immediately. I believe they started hitting dealers just in the last few days. That was all factored in. A lot of the cost improvement is attributed to the cost of operating the plants and the efficiency in the plants. That improves fairly immediately as those vehicles get into inventory, alongside with materials. We have that all still very aligned.

Hi, good morning. I have one question on pricing. Looking at your RANGER '25 lineup, base models seem to have price reductions, while premiums are higher year-over-year, but with that adoption. How should we think about your overall pricing on average across all your products? And what's the margin difference between a factory-installed accessory relative to one that you ship into the dealer channel?

The margin difference is not significant. The bigger advantage to factory-installed accessories is that you don't have to worry about a dealer or the customer selecting non-Polaris accessories because it's already on the vehicle. That's the primary benefit. Regarding pricing, there has been significant price noise in the market due to the pandemic between MSRP increases, surcharges, and now increased promos. Across the OEM space, you're seeing people adjust that mix of MSRP, surcharge, and promo as new model years are rolled out. The impact on net price may not be significantly different; it's just where it shows up. I don't believe the industry has tremendous pricing power going into model year '25 given the increases that have occurred in the current consumer state. We will focus on getting trim levels right to ensure that the customer is comparing vehicles as they want to buy them.

You mentioned your expectation that you're about gaining share through the year. But you also talked about how other OEMs have some work to do, which I assume is specific to ORV. Wouldn't that make it tough to grow share if others have more inventory to clear than Polaris?

Yes, it’s not helpful. Certainly, there are pockets of that. When we talk about share, the internal discussion is far more in-depth by model, by trim line, and things like that. Some areas do present significant challenges. We're not going to overreact to competition clearing inventory that's a year or more old. The good news is, eventually, those challenges will pass, and we'll be on better footing. We are making adjustments between price and promo to ensure we're touching on market trends. Given the innovation we've integrated into our products and our competitive positioning, I feel great. Our new products will drive desire, and the new Scout will be highly sought after. We're excited about current demand and previous successful launches.

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