Good day, and welcome to the Polaris Fourth Quarter 2024 Earnings 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 this event is being recorded. I would now like to turn the conference over to Mr. J.C. Weigelt. Please go ahead, sir.

Thank you, Chuck, 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 fourth quarter and full year earnings call. We will reference a slide presentation today, which is accessible on our website at ir.polaris.com. Joining me on the call today are Mike Speetzen, our Chief Executive Officer; and Bob Mack, our Chief Financial Officer. Both have prepared remarks summarizing 2024 fourth quarter and full year as well as our expectations for 2025. 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 2024 fourth quarter and full year actual results and 2025 guidance are for our continuing operations and are reported on an adjusted non-GAAP basis, unless otherwise noted. Please refer to our Reg G reconciliation schedules at the end of the presentation for the GAAP to non-GAAP adjustments. Now I will turn the call over to Mike Speetzen. Go ahead, Mike.

Thanks, J.C., and good morning everyone. Thank you for joining us today. Before we discuss our Q4 results and our expectations for 2025, I'd like to begin today's call by reflecting on the past year and our key focus areas. 2024 presented significant challenges across the powersports industry, leading to a prolonged down cycle driven by various factors affecting OEMs, dealers and consumers. As Polaris navigated these challenges last year, I'm proud of how our team executed and stayed focused on the areas we could control. They maintained strong relationships with our dealers, launched innovation to consumers and enhanced our operational capabilities and efficiencies. Our goal remains to position Polaris to emerge from this down cycle even stronger. We concluded 2024 with a robust portfolio of new product innovations, including the new Indian Motorcycle Scout lineup, RZR Pro lineup, quality improvements in Ranger and new boats from Bennington and Hurricane. This commitment to innovation is unwavering as we continue to lead the industry, investing over 4% of sales into R&D. You've seen us ramp up our innovation productivity over the past couple of years with category defining vehicles and enhanced vehicle capabilities and comforts and we expect these trends to continue. Some of this innovation was showcased with championship race wins in RZR, Snow and Indian Motorcycles. This includes our RZR Factory racing team's recent first place finish at Dakar earlier this month in the Side-by-Side class. This is the second year in a row that our vehicle has outmaneuvered and outpaced everyone else in the field and walked away with the top spot on the podium. Our lean journey is in full swing with over $200 million in structural savings realized last year and additional opportunities identified for 2025 and beyond. I understand it's difficult to visualize the current impacts on margins given the negative absorption we're experiencing due to reduced shipments, but we are making real changes that should be reflected in our stronger incremental margins going forward and help us achieve our long-term target of mid to high teens EBITDA margin. 2024 was hard for everyone in the industry, including our dealers. At our dealer meeting last summer, we committed to our dealers to support them in both good and challenging times. We executed on that commitment by reducing dealer inventory while also providing additional flooring support to help them navigate these challenging market conditions. We reduced ORV dealer inventory by 16% year-over-year through lower shipments, but this commitment came at a cost as we realized approximately $140 million in negative absorption from lower build levels and left the year with a higher finished goods inventory than we would like. Although difficult actions like these are important as we adhere to our commitment to protect dealer health and maintain production in line with retail demand. While we executed well on the items we could control, it was a difficult environment to forecast and our strategic actions to protect dealers and compete led to pressure on our financial results. The retail environment didn't help as retail was down from our initial expectations for the year, but more impactful was our decision to cut vehicle shipments to help reduce dealer inventory. We also saw a higher promotional environment, adding almost 200 basis points of pressure to our EBITDA margins for the year, along with negative mix, which accounted for more than a point of EBITDA headwind. The headwinds we experienced during the year were far greater than our original guidance, but we believe many of these are short-term in nature. I remain confident that we're taking the necessary steps to emerge stronger as we strive towards higher incremental margins to improve profitability and innovation to help drive share gains. Looking specifically at our fourth quarter results, North American retail was down 7% driven by similar trends we've seen throughout the year with the addition of a very weak snow season and strong youth retail. We achieved the updated financial targets we laid out in October. We also achieved our ORV dealer inventory reductions target established mid-year. As I mentioned earlier, ORV dealer inventory was down 16% year-over-year versus our goal of down 15% to 20%. We told you we'd anchor our financial results and shipment plans to our dealer inventory goals. We did just that with ORV shipments in the fourth quarter being reduced approximately 30% versus Q4 2023. This reduction caused negative pressure within our business but was necessary as we partnered with our dealers to help them navigate this prolonged down cycle. Adjusted gross profit margin of 21.1% was up modestly given realized savings from lean and operational efficiencies as well as a favorable compare due to a one-time warranty expense last year and on-road. Adjusted gross profit and EBITDA were pressured by negative absorption associated with the shipment cuts. Somewhat offsetting these headwinds was the reduction to our variable compensation plan, term profit sharing and executive bonus plan due to the financial results in 2024, as well as structural cost reductions made to size the business to current market conditions, which included salary headcount reductions. Adjusted EPS of $0.92 was down 54% as a result of the previously mentioned factors. Interest expense was in line with our original expectations and our tax rate came in slightly favorable.

Thanks, Mike. And good morning or afternoon to everyone on the call today. Fourth quarter sales declined 23% compared to last year. Similar to the third quarter, the main factor for our sales decline was our decision to actively reduce dealer inventory in the second half of the year by shipping less product to dealers. Retail performance was slightly below our expectations during the quarter due to a challenging snow season. Mix was also negative as we are lapping some difficult comparable periods when we were still filling the channel with new products such as RANGER XD and Polaris XPEDITION. In addition, we are shipping fewer premium products to provide more attractive entry points for consumers and help dealers manage their flooring expenses. Lastly, as Mike mentioned, the environment remains highly promotional. Our international business was down 7%, driven by a drop in shipments as we have adopted a similar strategy in the international markets as in North America to help dealers manage their inventory. PG&A sales were negatively impacted by the lower factory shipments and slower whole goods retail. Going back to Mike's comments on ridership, we did see growth in items like parts and oil outside of our snow business. Historically, these are good indicators that our customers are out enjoying their vehicles. Gross profit margins were negatively impacted by volume and mix, as well as the negative FX impact from a strengthening dollar. Somewhat offsetting these headwinds were savings within our operations and the cuts we made to our employee profit sharing program associated with the subdued financial performance in 2024. A little background on our profit sharing program, as it differs from what many companies refer to as a bonus plan or annual incentives. At Polaris, we maintain an equitable approach while both sharing in the success of our efforts and the challenges during downturns. Our profit sharing program is not exclusive to executives or limited to a specific job level. Instead, it is deeply rooted across the organization and even extends to the majority of our U.S.-based factory employees. This program is a cornerstone of our culture, helping us attract, retain and engage strong talent. It is also slightly larger than similar programs at other organizations, reflecting our commitment to shared success. The program adjusts based on financial performance with lower payouts when results fall short of targets. That was the case in 2024, which provided a benefit to our financial results. However, this dynamic will reverse in 2025, which I will address when discussing guidance. Turning to Off-Road, sales were down 25% due to lower volume and negative mix, snow had an oversized impact in the quarter given sales in retail were both down over 30% versus the prior year driven by the lack of snow across many important regions for trail riders. North American ORV retail in the quarter was flat with weakness in RZR offset by strength in youth in the crossover category. We believe retail in the ORV industry was up mid-single digits for the quarter. Promotions and discounting from other OEMs, primarily on noncurrent products, are driving most of the share dynamics in the industry today as they work to clear out aged products. Gross profit margin was positively impacted by operational efficiencies partially offset by negative mix and financing interest. As we look at the first quarter, we expect shipments to remain down in Off-Road as we continue to manage dealer inventory in a declining retail environment and we have a difficult comparable period where we were still filling the channel with RANGERs. We also expect margins to be a headwind with unfavorable mix partially offset by net price. Switching to On-Road, sales during the quarter were down 21%. There continues to be a divergence between our midsize and heavyweight business. In midsize, we are winning with the all-new Indian motorcycle Scout lineup we launched last year and continue to hold the number one market share position. In the heavyweight segment, we are facing challenges from competitive launches in a more challenging market environment as these motorcycles are positioned at higher price points. We also saw elevated competitive promotions during the quarter that negatively impacted sales. Indian motorcycles gained modest share during the quarter driven by the success of the Scout launch. Adjusted gross profit margin was up 235 basis points driven by an easier comparable quarter last year when we booked a one-time warranty expense. Outside of that, margin would have been pressured given the mix headwind in heavyweight bikes and elevated promotions. In Marine, sales were down 4% in what is typically a very light seasonal quarter as the industry ramps up for boat show season. The latest industry data we have shows the pontoon industry was down 11% in 2024 as OEMs continued to work down inventory and consumers decided to forego larger discretionary purchases. We have received positive innovation on our feedback in Marine this year from dealers as we head into boat show season. Order flow of these new boats has been encouraging as dealers want to showcase the innovation to consumers in person on their dealer floors. Gross profit margin in Marine was down given unfavorable absorption from lower volumes. Moving to our financial position, we have a strong balance sheet and continue to prioritize maintaining investment grade metrics. Our capital deployment priorities start with investing in our core business. Our second priority is preserving our dividend as we have raised the dividend for 29 consecutive years. In 2025, we intend to put a higher priority on paying down debt. As we focus on working capital improvements and plan for lower capital expenditures, we expect 2025 to be a strong year of cash generation. Last year, we made progress on lowering raw material inventories but also built finished goods balances as we work to rebalance our production line. In 2025, we will execute a plan to drive down this high level of finished goods inventory. We expect this to be accomplished with improved planning, a reduction in rework, and lower unit production levels. Accordingly, we expect to start seeing finished goods inventory decline later in the year. By lowering our working capital needs and planning for lower capital expenditures, we believe we can generate approximately $350 million in adjusted free cash flow this year. We remain confident in our financial position and are driving our teams to improve working capital in this part of the economic cycle. Next, I would like to discuss our 2025 full year guidance and the assumptions that led us to these guidance metrics. First, sales are expected to be slightly lower than last year. The two biggest factors driving this decline are lower expected shipment volumes and the continued strength of the U.S. dollar. Regarding the volume drop, we've accounted for a sizable cut in production in our snow business given the second season in a row of poor riding conditions in the flatlands. It is also worth noting that we expect positive net price with some moderate price increases. Mix is expected to be a headwind during the year, but more pronounced in the first half as we have difficult comparison periods given channel fill and strong RANGER NorthStar sales in the first half of 2024. By segment, Off-Road sales are expected to be down low single digits. Again, our decision to reduce dealer inventory is the biggest factor driving this segment's lower-than-anticipated sales. We expect a flattish year in ORV. In On-Road, I've already noted that we are taking down shipments due to a weak industry. In Marine, we are expecting low single-digit growth from market share capture and the innovation across our three brands of boats. We expect EBITDA margin to be down year-over-year for the following reasons: first, the reset of our employee profit sharing program, which is expected to have the biggest impact. Second would be the mix headwind I noted earlier, as well as lower volumes to actively manage dealer inventory in a challenging industry. Third, the lower production targets also put added pressure on our margins through negative absorption. Somewhat offsetting these headwinds, we continue to expect savings within our operations as we make progress on our lean journey. We also expect net price to be positive with modest price increases being marginally offset by promotional dollars. Putting all this together, we expect adjusted EBITDA margin to be down 170 to 200 basis points. Given these pressures, we expect approximately $1.10 for adjusted EPS this year. Cost headwinds are driving lower earnings despite some of our mitigation efforts. The reset of our employee profit sharing program, the expected drop in volume, and lower mix plus negative absorption are expected to be a headwind of almost $3 to adjusted EPS. We are working hard to offset some of these pressures with continued savings expected within our plants as well as the benefit of our cost reduction efforts last year. Costs such as depreciation and interest expense are also eroding EPS since there is no additional volume to offset, and these are somewhat fixed year-over-year. Note that our guidance does not assume a change in regulatory policy, which includes tariffs. Some quick thoughts on the first quarter, sales are expected to be down over 10% due to a difficult comparable as last year we were still filling the channel with product. As I noted when discussing Off-Road, we are expecting some material year-over-year headwinds from mix and FX in the quarter, where we are planning to continue reducing shipments to manage dealer inventory. We expect this drop in volume, coupled with the specific margin pressure I mentioned, to result in adjusted EPS loss of $0.85 to $1 in the first quarter. Our expectations are for earnings to improve and turn positive in the second quarter. Importantly, we believe the innovation we have brought to the market and the work we are doing with our dealers put us in a very strong competitive position in this industry. We expect to gain or hold market share with this innovation and look forward to being the partner of choice with our dealers as we navigate this market. We believe our proactive efforts on cost and efficiencies will set us up well for a strong recovery when the industry returns to growth. We are also taking actions to generate more cash this year with specific actions around inventories. As Mike shared consumers are still riding, and we view this as a positive indicator for the longer-term viability of this industry.

I am confident that there are better times ahead for us, our dealers, customers and also for our investors. We appreciate your continued support and with that, I’ll turn the call back over to Chuck to open the line for questions.

Thank you. We will now begin the question-and-answer session. The first question will come from Fred Wightman with Wolfe Research. Please go ahead.

Hey guys, good morning. I just wanted to start with the EPS guide and if we go back last quarter, Mike, I think you sort of hinted that something flattish versus the 2024 guide was a reasonable starting point and then obviously the formal outlook today came in flat a bit below that. So I’m wondering if you could just walk us through what, if anything changed. Did we sort of misinterpret what you were trying to convey? How should we think about that?

Yes. Thanks, Fred. I guess, I’d start with obviously we were in October, so we were trying to avoid making too many comments about 2025. My comment was specifically, you got to start at $3.25 and that was deliberate because we had a number of analysts that were projecting much, much higher numbers that we knew were just not where the business was headed. And the key word there was key words start with. I also made comments about the fact that you’d have to adjust for some of the moves we’ve made in incentive compensation. And we obviously didn’t provide a lot of details about that at the time. But as Bob just went through the incentive compensation adjustment and profit share adjustments pretty sizable. And then the reality is we were watching what was going on with retail in October, November and December. That was informing the trajectory that we saw things going into 2025. And at the time, we said the $3.25, that was based on the revenue we were delivering in 2024. And the reality is our revenue is going to be down 1% to 4%. And as Bob indicated, given softer retail in the fourth quarter, we ended up holding back on some shipments and now we have a higher finished goods inventory. So you’ve got a lower revenue base, you’ve got a lower production base. So we’re going to be producing less than what we’re shipping into the channel, and that’s going to create some deleverage that we have in the business. And then as I commented on my prepared remarks, the snow industry is under pressure again. We met in early January based on seeing how things closed out in December and given where dealers were and made the decision that we were going to pull our production down even further and work to get dealer inventory down even further in the first half. And then in the Marine segment, obviously, given continued weakness from a retail standpoint, as you all saw in the recent notes that came out on SSI. We’ve made the decision to keep pushing dealer inventory down there. So there’s a lot of factors, which is why we would prefer to steer clear from trying to give guidance for the next year in October of the prior year. There’s more factors that build in. We shipped a lot of premium vehicles in, in 2024 as we pushed the XPEDITION and the RANGER XD into our dealerships. And so there’s going to be less of those shipping in. And then as I mentioned, we’re going to have some value products coming in later in the year that are going to create some mix headwind. And then Bob pointed to foreign exchange. So there's a lot going on. What I would come back to is, as we emerge from this, and we were very deliberate, both Bob and I, about the indicators we're watching to make sure that people are still active in our segment and they are and they're riding more than they did before the pandemic. We're gearing this business to have a lower fixed cost base and the efforts we're making from a lean standpoint are going to mean we can get more throughput through the factories with less input, meaning that the incremental is coming out of this and the performance for our business will generate higher EPS. And that is what we are focused on right now. Bob and his finance team have done an excellent job from a treasury standpoint, making sure that we're in a good spot for investment grade rating and protecting our debt position with our banks. And when you look around at the field of folks in our industry and the struggles and problems that they're having and businesses going out of business, I think we're managing through this as best we can. Bob, is there anything you'd add to that?

Yes, just a couple of things, Fred. As you guys saw in CDK, October retail looked probably the best of the quarter. And unfortunately, we've seen that dynamic a few quarters in a row now where the first month starts off well and then it tails off. And we saw that again in the fourth quarter. So that drove a more conservative view of what we think 2025 retail will look like. And then to Mike's point, there are a number of other factors. Interest will be relatively flat for the year. We're going to start paying down debt. We'll prioritize paying down debt after we invest – make the necessary investments in innovation and in our factories and pay our dividend. So we'll start to bring that interest cost down, but we're not factoring in any substantial interest rate cuts as obviously everybody has seen. The market seems to think that that's going to not be much of an opportunity in 2025. So there's some of that is just sort of adjusting the size to the – size of that to the new size of the business. And as we work through that, those things will continue to be less of an impact, but we're going to have to deal with it in 2025.

Okay, thanks. And then just on the free cash flow outlook, you guys are guiding for a pretty nice year-over-year improvement despite the EBITDA and the earnings outlook. CapEx is coming down, you've mentioned some potential tailwinds or expected tailwinds from finished goods, but can you just sort of walk us through the big moving pieces there, please?

Yes. I mean CapEx will be down to the low 200s. We've had a fair amount of capital build in 2023 and 2024 as we built new facilities in Mexico and Vietnam. That work is substantially complete. And those – as you recall, those are mostly back shop facilities in Mexico and then a motorcycle assembly facility in Vietnam. We’d also updated paint facilities and other things like that in the factory. So we're through that cycle. We're going to focus on the capital side on tooling. So we're driving innovation and then high return projects in the plants, things that we need to do to support lean investments for quality and safety obviously.

Hey, Fred, back to your first question. If you look at our 2024 EPS results and you adjust for the two big things that Bob mentioned, the incentive compensation plan, where we essentially cut the plan in half given the performance and then a recalibration of foreign exchange. It would really mean that 2024 EPS was more like $1.69. So you're really bridging from $1.69 to $1.10. And – because we're planning on paying out the full profit share and incentive plan in 2025 and that's where you can really see the effects of volume and the deleverage. But I think that probably helps bridge the difference between 2024 performance and where we're expecting 2025 to play out. That incentive plan, which Bob did a great job of highlighting why we do what we do, has been a cornerstone of this company since its founding in 1954. That will help kind of bridge why the performance looks so dramatic on a 1% to 4% revenue decline.

Okay, really helpful. Thank you guys.

Thanks. Hey guys. Good morning. So I guess first question on the industry. You mentioned a few times here this morning that you do expect to continue challenging environment here in 2025. So I assume you're expecting another down year from an industry standpoint, but are you guys assuming we're going to start to see some growth in the back half of the year?

Yes. I mean, right now, we view the industry as probably down low single digits in 2025 and a lot of that is really being driven by motorcycles, marine and the snow categories. And I think it's tough, Joe, certainly for us from a retail expectation standpoint. We think the first half will still be continued challenges, which reflects the trends we've seen coming into the fourth quarter. And as we exit the fourth quarter, there is anything magical about the New Year. And as Bob indicated, right now, we're – who knows how many interest rate changes there will be this year. But consumers still are carrying a lot of debt. Inflation is kind of stalling out in the mid-2s, which would signal that there may not be that many interest rate cuts this year. And as we've talked about in the past, it's going to take time for this to work through. The interesting thing is, as we look at the performance in the industry, kind of the 2024 and 2025 combined to pre-pandemic levels, it's really the recreation areas that have struggled the most. All of which are either flat to down versus before the pandemic. And we think that's largely being driven by interest rates and discretionary spending pullback. The utility category has held up low single-digit growth, and I think that bodes well in terms of at least being a little bit of a shock absorber. And as I talked about in my prepared remarks, we know what the repurchase rates are. We know people are using these vehicles. But it's a tough environment. They paid full MSRP, they've got a low finance loan, trade-in values are going to be lower than what they would have expected when they first bought the vehicle. They're trading into higher interest rates. So it's going to take a little bit of time. I would hope that things start to improve in the back half of the year. Certainly, that would be encouraging for us in terms of forward momentum. But I think we're going to steer clear of making any big prognostications right now.

That’s very helpful. Maybe just to follow up and I’m hesitant to ask about it. But tariffs, you mentioned this morning, you’re not assuming any additional tariffs in your outlook. But obviously it’s been discussed. So I’m just curious, I think last year tariffs were about $70 million to $75 million. Given what’s been discussed, how much incremental tariffs could we potentially see in 2025?

Yes. We’ve got about, call it $60 million to $70 million of tariffs in the business today. And that’s largely the 301 tariff List 1, 2 and 3 that were put in place under Trump’s first administration. I’ll just give you – I’ll give you some basic data. We’re going to steer clear of trying to forecast where this is all headed. We’re obviously watching it very closely. We have some excellent government relations folks out in D.C. who are staying very close to this. As you know, it changes by the hour. As of yesterday, we were hearing that it’s far more targeted around specific areas like semiconductors. But there’s no telling where things could go. I’m sure there’ll be some short-term things that may get pulled back because they’re being used as a negotiating tactic. So, at this point, we’re staying focused on the things we can control within the business. If you look at China, we procure about $0.5 billion of components out of China. About half of that goes into the U.S., and about half of that goes into our Mexico facilities. Obviously, the stuff going into the U.S. is where we’re paying tariffs today on all the applicable items that hit in List 1, 2 and 3. We have a couple billion dollars worth of revenue that comes out of our Mexico manufacturing facility. It’s about a third of our production in terms of sales that come into the U.S., and we have less than $100 million worth of revenue that comes out of the U.S. into Mexico. We’re less than $0.5 billion worth of revenue into Canada, and we import less than $50 million into the U.S. What I would tell you is, for China, we have been working since the original set of tariffs were put in place. We’ve pulled down considerably by about a couple hundred million dollars the amount that we’re procuring out of China. The team has plans in place. As we’ve talked about, this is not stuff that you can do overnight. These supply chains have been established for decades. But we’ve been working with our Chinese suppliers. Our sourcing organization has worked aggressively to find alternative supply. We’re going after an aggressive amount during 2025, and then we obviously have plans identified for 2026 and 2027. The list gets harder and harder as we get lower and lower into the components that we would be going after. And that’s what we’re going to be focused on. I would say that, relative to the rest of the powersports industry, up until this point we’ve been incredibly disadvantaged. We’re the only U.S. manufacturer, yet we’re the only ones paying tariffs. Some of our competitors, three of them specifically, have pretty heavy manufacturing bases down in Mexico. And obviously, we would be impacted, but they would be more impacted, some of which have almost all their manufacturing coming out of Mexico. So it’s a volatile environment. We’re going to stay focused on the things that we can control as it relates to how much we’re procuring out of China, and we’re going to do what we can to help influence policy where appropriate.