Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Polaris Inc (PII, Financial) has implemented significant cost-saving measures, achieving $50 million in operational savings year-to-date and targeting $150 million for the year.
- The company has maintained a strong focus on innovation, with new product launches such as the Indian Scout models and the all-electric RANGER XP Kinetic.
- Polaris Inc (PII) has made strategic decisions to prune its portfolio, divesting non-core businesses like GEM, Taylor-Dunn, and Transamerican Auto Parts to focus on powersports.
- The company has seen favorable results from efforts to gain efficiencies within manufacturing facilities, particularly in logistics and materials.
- Polaris Inc (PII) has implemented more flooring support for dealers to assist with the cost of inventory, reflecting a commitment to maintaining healthy dealer inventory levels.
Negative Points
- Sales were down 12% in the second quarter, impacted by macroeconomic and industry headwinds such as persistent inflation and elevated interest rates.
- Consumer confidence has weakened, especially for larger discretionary purchases, leading to lower retail sales in the industry.
- Dealers are conservatively managing their inventory due to higher flooring costs driven by higher interest rates, resulting in reduced orders.
- The company has revised its full-year 2024 guidance down due to a more challenging retail environment than expected.
- Elevated promotions across the industry to entice buyers have pressured gross profit margins, with lower net pricing related to a higher promotional environment.
Q & A Highlights
Q: First question on the outlook of a 15% to 20% reduction in shipments this year, what sort of retail is that baking in? And what product segments do you think require the greatest cuts?
A: We are anticipating a weaker retail environment than initially expected. The reduction by segment is proportional to Polaris's overall segments, with off-road being the largest. Within off-road, the recreational space is more heavily impacted, while utility, particularly RANGER, has held up better. We also went heavier on higher ASP vehicles to provide dealers relief from inventory costs. - Mike Speetzen, CEO
Q: As we turn the page on '24 and think about '25, how much of the EPS guidance cut is sort of one-time-ish in nature, and how much of that would you expect to come back next year?
A: We are still assessing the dynamics that emerged through Q2. If retail stabilizes and we return to shipping in line with retail, there are positive dynamics due to the reset we took this year. Operational efficiencies and cost structure improvements will also benefit us. However, the promotional environment and other factors will play a significant role. - Mike Speetzen, CEO and Bob Mack, CFO
Q: Retail overall seems to be down high single digits so far in the first half. Is there some implied additional destocking in the 10% additional cut to shipments?
A: Each segment has different dynamics, but we are taking a more aggressive position to ensure we are well-positioned. We do not expect significant improvements in the second half, except for specific areas like mid-sized motorcycles and new ATV launches. - Mike Speetzen, CEO
Q: How do you view each end market, each segment, off-road, on-road, marine, in terms of channel inventory position today versus where you'd like to be at year-end?
A: Off-road probably needed the most correction, although we made corrections in motorcycles and marine as well. We are the healthiest in terms of current to non-current inventory mix and day sales outstanding. We are working to ensure dealer inventory is at the lowest point it has been in a long time. - Mike Speetzen, CEO
Q: Can you talk about the plans for the ORV leadership going forward?
A: Given the challenging environment and the significance of ORV to our revenue, I will be spending more time with the team. We have strong business leaders for ORV, snow, commercial, and government defense, and we will decide on any organizational changes down the road. - Mike Speetzen, CEO
Q: Are you seeing any signs of incremental pressure at the higher-end consumer, or is it more about dealers being tapped out from a floor plan perspective?
A: It's more about dealers being tapped out from a floor plan perspective. High-dollar cash buyers are still buying premium products, but we are correcting inventory to balance what is selling well. - Bob Mack, CFO
Q: How do you protect your flank from competitors that may show less discipline in stocking dealers?
A: We rely on dealer feedback and our North Star program, which rewards dealers based on performance. Innovation and product quality are key to maintaining our position. We are committed to being the partner of choice for our dealers. - Mike Speetzen, CEO
Q: Can you provide any updates on the state of channel inventories overseas?
A: International retail is weak, but inventories are in a better position. The international component is less than 15% of our business, so the majority of the correction has been in North America. - Mike Speetzen, CEO
Q: How should we think about the differences in operational savings versus the $150 million target?
A: The categories are similar, with savings split between material and logistics, plant overhead spend, and direct labor. The first $150 million was more efficiency-related, while the additional savings are more volume-driven. - Bob Mack, CFO
Q: How much buffer do you think you have built into the guidance given the uncertain macro backdrop?
A: We have taken a realistic assessment of the market and are going more deeply after dealer inventory. We have been deliberate in our second-half expectations and have rightsized our cost structure. We will continue to protect dealer inventory and focus on innovation. - Mike Speetzen, CEO
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
