POLARIS Earningcall Transcript Of Q2 of 2024

Robert Mack -- Chief Financial Officer

Thanks, Mike, and good morning or afternoon to everyone on the call today. Second quarter
sales declined 12% versus last year due to a decline in volumes and elevated promotions,
partially offset by favorable -- PG&A continued to post strong results with 7% sales growth due
to the greater volume of accessories on products like Polaris XPEDITION and RANGER North
Star. Gross profit dollars and margins were primarily pressured by lower net pricing related to a
higher promotional environment. Removing the impact from promotions, our progress against
our target of realizing $150 million in operational savings more than offset the impact of lower
volume on absorption.

Year to date, we have realized approximately $50 million in operational savings related to
materials, logistics and plant spend. We continue to work toward the $150 million savings
target, which would be expected to have a positive impact on the earnings power of Polaris
once industry conditions normalize. In off-road, sales were down 6%, mainly driven by volume
declines in ATV and RZR as well as a headwind from elevated promotions. Share with an ORV
was flat year over year with gains in side-by-sides, including RANGER and crossover.

Polaris XPEDITION continues to provide a tailwind in crossover, helping to drive 5-plus points of
share gain in this category during the quarter. We saw heavy promotions in the channel on ATVs
as OEMs work to clear inventory leading to share losses in this subcategory during the quarter.
However, our data reflects almost a point of ORV share gain on a dollar basis. While we did see
margin pressure in the quarter driven by the factors already mentioned, I remain pleased with
the progress we are making within our factories that are driving real changes to our cost
structure.

These improvements are helping to mitigate the impact from unabsorbed overhead from
volume reductions. As we look toward the third quarter, we expect shipment volumes to be
down meaningfully given the decisions we have made around prioritizing dealer health and
inventory levels in this challenging environment. Promotions are expected to remain elevated as
the industry continues to use promotions to stimulate demand and clear noncurrent inventory.
We expect further pressure on margins given these lower volumes and the impact on plant
overhead absorption.

Switching to on-road. Sales during the quarter were down 19%, driven by lower shipments,
particularly in the heavyweight segment. Indian Motorcycles lost market share during the
quarter, driven by weakness in the heavyweight category. We believe fundamental consumer
retail was weaker than what the industry experienced in the quarter as industry retail was
stimulated by competitive product launches.

We began shipping our new Scout Indian motorcycle in June and expect our share position to
improve in the back half of the year as these bikes arrive at dealerships. During the third quarter,
we continue to expect lower retail as the industry grapples with a consumer that seems to have

cut back on larger discretionary purchases. There continues to be a lot of excitement around the
new Indian Scout models. However, this is expected to only somewhat offset industry pressure.

In marine, sales were down 40% as the industry continued to deal with elevated dealer inventory
levels and higher interest rates impacting the consumer's decision to purchase. Our shipments
in the quarter continued to decline with dealer inventory down approximately 18% versus a year
ago and in line with 2018 levels, which we view as a viable baseline for the industry. SSI data
through May reflected a decline in year-over-year retail and while we held share in Pontoons, we
ceded some share in Deck Boats. Gross profit margin was down given the top-line pressures
driving less fixed cost absorption.

We continue to be agile with variable costs, which is demonstrated with gross margins
remaining above 20% despite the significant reductions in volume. We are continuing to see a
challenging environment across the industry during the third quarter as dealers work through
current inventory levels and consumer purchases are hampered by elevated interest rates. The
next big data point will come early this fall when dealers begin to make ordering decisions as we
head into the 2025 selling season. Moving to our financial position.

We are lowering our expectations for cash generation this year due to our updated thoughts on
our business performance. With this update, we have realigned capex and are driving working
capital efficiencies to improve our use of cash during this period. Given the change in volume
expectations, it will take us time to flush through working capital. As a result, we expect cash
performance in the fourth quarter to be better than cash generation in the third quarter.

We maintain our goal of offsetting dilution from stock-based compensation programs this year,
and we remain well ahead of our target of reducing the basic shares outstanding by 10%. During
the quarter, we used cash to continue our investments in innovation and key strategic capital
projects and returned over $100 million to stockholders in the form of dividends and share
repurchases. We remain confident in our financial position and are driving our teams to improve
working capital in this part of the economic cycle. Now let's move to guidance and expectations
for 2024.

We have lowered our financial targets for the year given soft retail trends across all product lines
and a macroeconomic climate that has deteriorated relative to our expectations at the start of
the year. With these factors at play, we have decided to rightsize shipments and increase our
promotional efforts, underscoring our ongoing commitment to prioritizing the health of our
dealer partners heading into the second half of the year. The result of this decision will be lower
shipping volumes leading to lower absorption at our plants, which is expected to negatively
impact our third quarter results more heavily than the fourth quarter. These cuts are happening
across each segment, however, they are more pronounced in off-road given reductions already
taken in on-road and marine.

For sales, we now expect sales to be down 17% to 20% versus a year ago. In addition to lower
volumes, we expect headwinds from promotional activity as well as finance interest, both of
which are expected to be larger than our original guidance. As Mike noted, the added finance
interest is in part due to our decision to help dealers manage the elevated cost they are seeing
from carrying a higher value of inventory relative to the past few years. As it relates to our
decision to curtail shipments further, you can see our initial plan to manage inventory on top of
our current revised plan.

Recall that we started going down this path last year with marine and RZR due to what we were
seeing in the channel as well as trends in retail. We began this year with certain assumptions on
retail based off current trends and macroeconomic forecasts. Within this plan, at the beginning
of the year, we were targeting a reduction of approximately 10% in shipments versus 2023 to
help dealers lower their inventory levels. Fast forward to today, and we've seen interest rates
stay higher for longer, along with elevated inflationary pressures which have impacted consumer
discretionary purchase patterns on larger ticket items.

This is coupled with the feedback from our dealers on how flooring costs have quickly ramped
up and are now one of the dealers largest expenses. Based on this, we have made the decision
to step in and hold the value proposition with our dealers by supporting them with additional
flooring aid as well as reducing our shipments further in the back half of the year versus our
original plan. We now expect to end the year shipping to levels that can drive dealer inventories
down 15% to 20% versus last year, helping to put our dealers and ourselves on a better footing
going into 2025. Moving to EPS.

We are now expecting adjusted EPS to be down over 50% and in the range of $3.50 to $4.
Importantly, the magnitude of the volume drop we are dealing with has an oversized impact on
margins due to lower absorption of overhead at our plants and other fixed costs. The various
items impacting sales such as volumes, additional promotions and unfavorable mix represent a
$5 EPS headwind. From a manufacturing perspective, we are seeing approximately $0.50 of net
headwind with negative absorption accounting for $1.90 of the EPS takedown and
overshadowing $1.40 of EPS tailwind from the great work our teams are doing on the targeted
operational efficiencies to mitigate these pressures.

The bright side is that these operational efficiencies are expected to positively impact the
earnings power of Polaris in a normal operating and macro environment. Additionally, within
opex, we have cut spending in noncritical areas and completed a headcount reduction earlier in
July. We believe these actions were necessary as we rightsize the organization for the current
environment. As noted before, these cuts do not impact our investments in growth and
innovation, which remain integral to our long-term strategy.

From an EPS and net income perspective, it is important to note that percentage reduction is
significantly more than the percentage reduction of revenue, gross profit and EBITDA due to the
relatively fixed nature of depreciation and debt interest. For the third quarter, a few things to
note. Given how our plan looks today, the result of cutting shipments is expected to have a more
meaningful impact to third quarter results versus fourth quarter. Retail is expected to remain
down, although we expect to gain modest share with innovation.

Before I turn it back to Mike, I want to emphasize that many of these headwinds are not typically
seen in a normal operating environment or an industry that has historically grown low to
mid-single digits. We would expect volume and plant absorption tailwinds in an environment
where we are growing at or near historical levels in shipping to retail. Plus our business typically
mixes up with the introduction of new innovation and technology as well as the progression to
side-by-side from ATVs. Current promotional levels are elevated for many reasons associated
with the macroeconomic factors and specific industry dynamics.

Over time, we see an opportunity for these to come down, which we believe would benefit
margins. Additionally, the operational efficiency gains we are making are still expected to have a
positive impact on earnings. So while the current environment is challenging, we have a positive
outlook on the future of power ports at Polaris. We believe the decisions we are making today
are in the best interest of all our stakeholders, including customers, dealers, employees and our
stockholders.

We intend on emerging stronger with a robust pipeline of innovation, leaner operations and a
healthy level of cash with the ultimate goal of delivering strong stockholder returns. With that, I'll
turn it back over to Mike to wrap up the call. Go ahead, Mike.

Michael Todd Speetzen -- Chief Executive Officer

Thanks, Bob. We're expecting the same macro issues that impacted our second quarter
performance to persist throughout the year, resulting in subdued consumer demand for
powersports and a cautious dealer network. For the second half of the year, we will continue to
draw dealer inventory down through a combination of lower shipments as well as seed the
market with strategic promotions to help dealers move inventory. I'm confident in our strategy
and believe that we're on the right path to ensure Polaris' global leadership in powersports, while
generating strong shareholder returns.

We're working hard to navigate these current trends while remaining vigilant to emerge stronger
than ever when retail demand returns. Our recent customer metrics point to continued interest
in the category with elevated levels of search and organic traffic to our site. People are shopping
for Polaris, and we will be well positioned when those shoppers feel more confident to become

buyers. Innovation remains a top priority, and we have begun to see real transformational
efficiencies within our operations.

So while the journey might take longer than originally anticipated to realize the financial targets
we laid out, our determination and passion are unwavering to grow this business mid-single
digits, expand EBITDA margin to mid to high teens, improve ROIC to the mid-20s and grow EPS
by double digits. I'm confident in this team and the great work we've already begun will set us up
to emerge stronger with greater earnings power and cash generation capability while also
maintaining our leadership in powersports. We thank you for your continued support. And with
that, I'll turn it over to Rocco to open up the line for questions.

Questions & Answers: