Polaris Inc. (NYSE:PII) Q1 2023 Earnings Call Transcript

Polaris Inc. (NYSE:PII) Q1 2023 Earnings Call Transcript April 25, 2023

Polaris Inc. beats earnings expectations. Reported EPS is $2.05, expectations were $1.72.

Operator: Good morning, and welcome to the Polaris Inc. First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to J.C. Weigelt, Vice President, Investor Relations. Please go ahead.

J.C. Weigelt: Thank you, Gary, 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 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 2023. 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 first quarter 2023 actual results and 2023 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.

Mike Speetzen: Thanks, J.C. Good morning, everyone, and thank you for joining us today. This may be a little premature here in Minnesota, but I hope your spring and writing season has opened up from what seemed to be a prolonged winter. Although I can’t complain too much as it was helpful to our snowmobile business. I consistently reinforced with my team that the key to a successful year is a strong start, and our first quarter results reflect just that. Sales were up over 20%. Adjusted EBITDA margin expanded 172 basis points and adjusted EPS grew 55% versus last year. Sales growth was driven by strong mix and higher ship volumes favorable net price, which is price net of promotions. Increased share in off-road, on-road and marine as availability improved through the back half of last year and into Q1 and a great start in our commercial business.

and the balance of the restocking benefit mainly in Off-Road that we discussed in January. While North American retail was down 5% versus last year, it increased 14% versus 2019. Our teams and dealers are seeing a return to more normal seasonality. The spring selling season, which continues for the next couple of months is going to be an important gauge for the remainder of the year. April is off to a good start despite a delayed spring for most of the country given poor weather conditions in early March. We saw gross profit and EBITDA margin expansion for the third consecutive quarter as we maintained our focus on process improvements and efficiencies that can drive us closer toward our long-term target of mid- to high teens EBITDA margins.

We executed margin expansion despite factory inefficiencies as a result of late deliveries from suppliers. This gives me confidence in the margin improvement opportunity as we drive suppliers to more normalized delivery performance and continue to drive efficiencies in the factories. I shared in January that 2023 is going to be an exciting year, and we came out of the gate strong with the launch of the Ranger XP where we made the industry’s best-selling side by an even better with more horsepower, stronger chassis redesigned ergonomics and added comfort. Initial reviews of this all-new Ranger are very strong, and we’re excited for deliveries to start later in Q2. We also started production of our first all-electric Ranger XP Kinetic, which is now shipping to customers.

Our Mighty G pontoon, Agari pontoon designed specifically with an electric motor option in mine, will be entering its first selling season and should do well given a very strong order book. On-Road has its most competitive portfolio of bikes and Slingshots ever with a fresh lineup of FTRs, the debut of the Indian Challenger Elite as well as our Scout and Indian Pursuit lineup. There’s certainly a lot to be excited about this year, given what we’ve launched thus far, but we’re not done. I’m incredibly excited about the launches we have planned for the rest of the year, so stay tuned. Overall, we’re off to a strong start in 2023 and — that said, we are closely monitoring external factors that could impact our customers, and we remain laser-focused on being agile and adaptable, should the demand environment change.

Now let me share some thoughts related to customer trends that we’re seeing. The demand story remains mixed and largely consistent with what we’ve been seeing over the past couple of quarters. In off-road, demand for our utility vehicles remains steady as the use case for these products is less affected by mild fluctuations in the macro environment. Recreation remains soft and we expect this to be the case as we progress through 2023 with share gains for us coming from new product launches. We continue to see higher demand for our premium products regardless of category, including Ranger North Star and RZR Pro R and Turbo R. SnowCheck for model year 2024 hit our target, making it the third best not-check in the past 20 years. And lastly, April retail is off to a very good start.

For On-Road, we’re just now entering the selling season and April has been very encouraging as spring has arrived, and our dealers have an extremely competitive lineup of Indian motorcycles and slingshots. In fact, we believe our lineup of bikes has never been more competitive than where we are today. In Marine, it was a later-than-anticipated start due to weather, but the boating season is upon us in many parts of the country and inventory is finally healthy. I was recently on the road visiting some of our marine dealers with our marine team, and they told us they’ve had a successful boat show season, but the customers seem to be taking longer to make a decision about buying a boat given improved inventory levels. Like our other segments, the high end of the marine market continues to perform well.

In addition to customer trends, we also keep a close eye on credit and lending trends that we see with our customers. In general, the metrics we monitor remain consistent with past levels. If anything, we’re reverting closer to prepandemic metrics. As normalization within our retail finance continues, the key metrics we follow are average FICO scores, approval rates and penetration, each of which has not deviated materially from data dating back to 2018. Our information comes from our partner banks that are available to our dealers to provide credit to customers. These partner banks finance about one quarter of retail purchases and the information we’re sharing today comes from that piece of our business and our partnership with these key banks.

As you’ve heard me say many times, our relationship with these banks are very important because we do not have a captive financing arm, we have minimized credit risk and exposure. These partner banks are well established, strong and well capitalized, and we are appreciative of our relationship with them and their willingness to work so closely with our dealer network to help make consumer financing available. They are truly allied in our strategy to provide the best customer experience. Lastly, these key partner banks are telling us they want more volume, and we’re working with our dealers to make this happen. Regarding dealer inventory, I’m happy to say that we are in a much healthier position than we’ve been in a long time. We believe inventory is mostly at our targeted and optimal levels as we enter our prime selling season.

We do have a few exceptions and are working to optimize dealer inventory across all categories. Year-over-year, the number looks staggering. But remember, we’re coming from a point in 2022, and where dealers were starved of inventory given supply chain constraints and our inability to build and deliver enough product. Relative to 2019, inventory is down about 20%. We’re getting numerous signals from dealers and our own data shows that we’re returning closer to a more normal seasonal trend as inventory levels improve. When you look at the average North American retail for off-road vehicles, excluding snowmobiles for 2016 through 2019, the first quarter is typically our smallest quarter, and we anticipate this to be the case in 2023. Historical performance and seasonality show that we typically see a sizable jump in retail sequentially from Q1 as the riding season begins and weather improves.

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We expect this to be the case this year, and our April performance supports this assumption. The magnitude of the jump in Q2 is expected to be a bit more muted due to a strong start in Q1 as well as some of the macro headwinds. As the chart shows, history would suggest that we would see a sequentially similar third quarter followed by a dip into Q4. The bottom line is that our first quarter performance was in line with our expectations and April performance, is trending consistent with our expectations. Although challenges remain, our team remains focused on enhancing our internal processes and systems to improve efficiency and delivery. We continue to see ourselves in a strong position to gain share as the year progresses with healthy inventory at the dealers and a big year for innovation and product launches.

We also remain vigilant as we assess consumer trends. While nothing has changed significantly compared to the past couple of quarters and our original expectations, our team remains agile and committed to optimizing the business. Finally, we remain committed to delivering on our 5-year strategy and plan to provide a comprehensive update on our progress during our recently announced Institutional Investor and Analyst Day on July 30. I’ll now turn it over to Bob, who will summarize our first quarter performance and provide additional details for the balance of 2023, including guidance and expectations. Bob?

Bob Mack: Thanks, Mike, and good morning or afternoon to everyone on the call today. Our first quarter results kicked off what we believe is going to be a strong year for Polaris in regard to share capture, new product launches and margin expansion, all of which lead us forward on the path to achieve our 5-year targets. Sales grew 22%, driven by a number of factors, Mike mentioned earlier, including strong performance from our international business, which grew 16% year-over-year, overcoming a 5 percentage point drag from currency. On margins, we saw all segments expand gross profit margins over 125 basis points versus Q1 2022 with On-Road expanding an impressive 330 basis points as that segment continues to execute on its profitability plans.

Turning to our off-road results. Sales rose 19% relative to last year to $1.6 billion. Whole goods increased increased 25% with share gains across the board. In snow, we recently concluded the ’22/’23 season and gained about 1 point a share, which exceeded our expectations given the recalls we had early in the season. PG&A results within Off-Road were driven by stable retail accessories per unit. Retail trends were consistent with last quarter, while actual industry performance was down in the quarter. Our share gains were driven by outsized gains in ATVs and general side-by-sides. With healthier inventory across our entire off-road portfolio and our innovative offering of new products, we expect share gains to continue throughout the year.

Outside of utility and recreation, we saw double-digit growth in commercial, which continues to have a strong backlog. Margin expansion drivers included higher net price and lower cost premiums offsetting higher warranty costs and finance interest. Switching to On-Road, our third straight quarter of share gains were driven by our strong product portfolio and healthy inventory. North American Indian Motorcycle retail was flat year-over-year, but up 11% relative to 2019. International sales were bolstered by strong Indian motorcycle sales in Australia. It’s worth noting our European brands, Aixam and Goupil both had record revenue quarter and while they face meaningful headwinds, they continue to drive margin expansion. On-Road gross profit margin was up 331 basis points driven by favorable product mix and higher volumes.

Moving to our Marine segment. inventory is healthy, and we are operating in an environment that feels like pre-pandemic times. Sales continue to be driven by consumer preference for more premium boats as well as the pricing actions we took last year. The most recent data we have shows we gained share in Marine during the first quarter. Dealers believe it was a successful boat show season, and while they are optimistic about the upcoming retail season we are seeing a return to seasonality in terms of the timing of boat registrations and pickups. Similar to Off-Road, we are currently seeing increased promotional activity which we believe can positively impact buying patterns as we enter the spring selling season. Gross was up margin was up 129 basis points with higher net pricing and favorable product mix being the primary drivers.

Moving to our financial position. We continue to see our balance sheet as a competitive advantage. Cash generation in the first quarter were strong relative to previous years, and our net leverage ratio continues to be in a healthy spot at 1.6x. We believe we are set up well for a variety of scenarios in the broader market with our balance sheet and cash generation capabilities in 2023. Now let us move to guidance and our expectations for 2023. Before giving more details, you should know that our expectations today are the same as they were in January when we first provided 2023 guidance. Broadly speaking, what we are seeing across our segments today is in line with our original expectations. Our first quarter results reflect momentum in sales, share gains and margin expansion, which should help us achieve our full year goals.

Regarding sales, there continues to be a long list of opportunities to achieve our guidance. Mix continues to be a positive and is expected to remain a contributor given the launch cadence we have planned for the remainder of the year. Today, our product launch calendar remains on track, and we expect a bigger contribution in the back half of the year from mix as those new category-defining products enter the channel. We expect to gain share throughout the year with the support of healthier inventory levels and new product launches. So even though we anticipate flattish retail industry for the year, we expect to do a bit better as a share gainer. As Mike mentioned earlier, dealer inventory is near optimal levels allowing us to realize the positive share impact we were expecting.

We also spoke about robust growth in our commercial business and expect that to continue throughout the year, just as we saw in the first quarter. Our international and PG&A businesses are expected to be strong contributors to growth this year. Offsetting some of these sales drivers are continued headwinds from FX and the return of promotions. We are planning FX conservatively given the volatility in the markets, but should FX rates hold at their current levels, we expect to see a tailwind versus our plan. For margins, we expect modest margin expansion at the adjusted gross profit and EBITDA lines. Drivers continue to include volume and mix, along with our expectation that input costs will decline throughout the year. While most things are moving in the right direction, we are seeing input costs around steel and diesel rises.

But at this point, they are not expected to have an impact on our financial plan for the year. It is important to understand that there are many things going right operationally and with our supply chain, but it takes time, and we expect this journey to continue throughout the year. Adjusted EPS from continuing operations is still expected to be in the range of down 3% to up 3% with most of the potential drop-through from margin expansion being consumed by a higher interest rate expense. For the second quarter, a couple of things to note. We are seeing seasonality return but not yet in line with historical patterns, which usually translates into a sizable sequential ramp in shipments and sales in the second quarter. We do not expect a material ramp in our second quarter sales sequentially this year due to the timing of snowmobile shipments, which carried over into our first quarter.

Next, history reflects that approximately 40% of our annual EPS is derived in the first half of the year, and we expect this cadence to hold true this year. The negative hit from FX in the second quarter is expected to be in line with what we saw in the first quarter, if FX rates stay constant. To wrap up, Q1 results proved to be a strong start of the year. Our expectations for the year remain consistent with our initial thoughts. Although it is happening slower than we thought, we are seeing the supply chain improve. With our focus and investment on internal efficiencies and processes as well as continued progress in the supply chain, we believe there remains a real opportunity to drive margin expansion this year and beyond. We remain excited about the product launches we have for the remainder of the year and believe they can contribute to growth this year as well as future years.

We are taking share and are committed to winning through our ability to deliver high-quality and innovative products to those that play and work outside. Our teams remain agile as we enter the 2023 selling season, and we are in a good spot with inventory. As we close out the first quarter, we are grateful to be in this position and excited about the initiatives we are focused on to help deliver our 5-year strategy. With that, I’ll turn the call over to Gary to open the line up for questions.

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Q&A Session

Operator: Our first question is from Fred Wightman with Wolfe Research. Please go ahead.

Fred Wightman: I just wanted to touch base on the comments Bob made for 2Q and sort of the first half of the year. It sounds like that 40-60 split as far as first half, second half is still the right way to think about the year. But that would also sort of suggest 2Q numbers for The Street need to come down. So can you sort of walk through maybe where we missed things. It sounds like FX might be a little bit of a headwind, but just sort of the 2Q outlook and then sort of the implied stronger back half of the year given the macro environment?

Bob Mack: Yes. Sure, Fred. So right, the 40-60 split is the right way to think about it. When we started the year and got into the year, we had expected to ship a bit more of the snow volume in late in December, more of it shipped and was really revenue recognized in January, February because of some of the recalls we had it holds we add on product. So that sort of knocked the cadence off a little bit. So what you saw was heavier shipments in snow in Q1 with lower side by side, and then you’ll see more side-by-side in Q2, but you won’t see — because of the snow shipments that will mask a little bit of that normal ramp-up. So I think as we look at it right now, the beat in Q1 really offsets part of what we would have normally seen in Q2. But it does take the hill to climb for the year down a bit, but that’s really the dynamic that’s at play.

Mike Speetzen: The other thing Fred, to keep in mind is as I mentioned, the number of new products that we’ve got coming out and the timing of those deliveries really is more weighted into the back half. And aside from the XP, the other products are not what I would term as highly cannibalizing of our existing products. They really target new categories. And so that will obviously be a big part of that second half ramp-up in deliveries.

Fred Wightman: Make sense. And then just to ask about the retail financing landscape. The slide that you guys provided was super helpful. But I’m wondering if you gave this for 1Q. I’m wondering as you moved throughout the quarter, did you see either FICO scores or approval rates or penetration sort of dip off in March? Or maybe if you could comment into April?

Bob Mack: No. I mean it’s — the data has been really consistent and consistent with the past, and we’ve talked to all the banks about where they are with their lending standards, down payments and really, that’s all remained very consistent across the board. So I think you’ll continue to see our penetration rates return to kind of more normal 30-plus percent levels. if there’s any slowdown in financing, it’s more on the local bank side, and that’s why we have these partners in place to be able to step up and fill that gap and they’ve all been very aggressive and are very interested in lending more money into the space.

Mike Speetzen: Our promo, Fred, is largely aimed at doing rate buydowns to put things back into a more attractive category. And you got to step back and think about who our customers are, and we track that. They’ve done well over the past few years. Their income levels are up. When you hear about layoffs and things that are going on in the economy right now, they primarily tend to be centered around the tech areas which don’t necessarily have a high correlation to our customer base. So at this point, the customers remain healthy. And as I talked about in my prepared remarks, once the weather opened up and we’ve heard this pretty consistently, from all of our businesses. We’ve seen customers and the activity really increasing. So we think the weather had a pronounced impact, and I think you’re going to see those customers coming in, and that’s why our retail finance partners are looking to to grab an even bigger piece of the business.

Operator: The next question is from Joe Altobello with Raymond James. Please go ahead.

Joe Altobello: I just want to get some more clarity on Fred’s first question actually about your implied guide for Q2. So I understand why the delay snowmobile shipments from December to Jan, Feb would boost Q1. But I’m a little unclear as to why that would impact Q2. I mean were there other pull forwards that you experienced in this quarter?

Bob Mack: No. What I was trying to say is that the snowmobile shipments, if you look at what would have been the normal seasonal ramp from Q1 to Q2, you’d see a bigger ramp. But Q1 was, to some degree, unusually high if you were thinking normal seasonality relative to history to sort of like a ’19 compare because of those snow shipments. And so the sales ramp just looks lower. But the real dynamic is we’ll ship more side-by-side and more off-road and motorcycles in Q2 you just won’t see as big of a revenue pop because we had those snow units in Q1.

Joe Altobello: Okay. But it also implies earnings are going to be down year-over-year in Q2 as well?

Bob Mack: Yes. I mean, Q2 last year, everything last year was really driven by ability to ship. So our Q1 last year was significantly lower from a shipment standpoint than where we were in Q1 this year. So getting into riding season, we had a lot more inventory to try to make up and get in the channel in Q2, whereas this year, we’re sitting a little bit better because we had better shipments in Q4 and Q1. So that’s the dynamic there. We just don’t have as much of an inventory hole to make up in Q2.

Mike Speetzen: And you’re dealing with and you’re dealing with the effects of foreign exchange and interest rates on top of that, that just pronounced that earnings decline in the second quarter versus last year. .

Joe Altobello: Got it. And just one last one on April retail. It sounds like you’re pretty positive there. Maybe could you guys quantify for us what that might have looked like?

Mike Speetzen: You know I’m not going to do that. But I will just tell you that we’ve been watching it. We obviously watch what retail is doing on a daily basis. We would do it even more frequently if we could. I know our business units do — and as I mentioned earlier, the weather really did suppress things in the early part of March. And once we saw things improving, we saw retail momentum picking up, we’ve had a couple of dealer council meetings and that has confirmed that viewpoint. The dealers are playing back to us that once the weather improved, customers started coming back into the dealerships, I think the buying process is definitely a little bit different given that there’s inventory availability and with higher interest rates, obviously, consumers are going to make sure that they’re making the right decision.

And I made the comment about what’s going on in the Boat business right now. We’re obviously financing plays a big part — and it’s not that they won’t buy, but they’re just taking their time. They’ve got more inventory to pick from, and we feel good about what we’ve seen so far through April.

Operator: The next question is from Craig Kennison with Baird. Please go ahead.