James Hardiman: And then maybe help us navigate and you touched on it, Bob, like the comparisons are maybe all over the place. if we just did the math, ORVs were up 6% versus ’19. I think if we were to hold that relationship on a year-over-year basis, they would be up a lot in the second quarter. I know you’re not sort of guiding retail, but you guys know I know love a good slide. Slide 6, I think it is, where you talk about sort of Q2 retail versus historical average. What is that telling us exactly? I think it’s telling us that maybe you don’t expect Q2 retail to be above ’19, but I just want to sort of understand, make sure I’m picking up while you guys are putting down here?
Mike Speetzen: Well, I mean, what we were trying to get across on that slide was probably — I mean, that trend for retail is a composite. So it was less about a specific comparison point. And I think really, the point was trying to demonstrate where we’re at in terms of dealer inventory channel fill, which as you rightly pointed out, we’ve largely completed that, although we have pockets where we still have inventory that’s probably lower than where we would like it to be, and we’ll keep working that. But we’re — the point around returning to more seasonal, but we’re not saying completely returning to seasonality because we have those pockets where inventory isn’t where we’d like it to be. But on the other side of that, we’re not ignoring the broader macro environment as we’ve talked about, our Rec business is definitely under pressure just given it’s a more discretionary purchase.
So Again, I don’t want to steer into talking about quarterly retail because it doesn’t take much to have movement between quarters and then we spend an awful lot of time trying to help people understand that. I think Q1 is a prime example that I think will help us as we get into Q2, given some of the delays we had. But at the same time, we’ve got another couple of months to go. And there’s a lot yet to play out from a broader economic perspective.
James Hardiman: But just to clarify, if we were to sort of do the math of if you maintain plus 6% versus 2019. That’s probably going to get us to the wrong answer or maybe not.
Bob Mack: Well, if you use the math of plus 6% to 2019 and carry that through the rest of the year, it would definitely get you to the wrong answer since percent, we’re going to be flat and 2019 was a good bit ’22. So I don’t think you can say that seasonality in ’22 will be the same as it was in ’19. Not to say that there’s — that, that can’t happen, but to Mike’s point, the year is setting up a little different, and it’s still in certain segments of the market, it’s still impacted by product availability, and that’s going to take a while to continue to work through that. So — and there’s a dynamic as Mike was, I think, also pointing out that you’re seeing a higher level of utility sales relative to rec sales in 2023, relative to ’22 and ’19.
And that season is a little bit different. Ray tends to do really well in the spring as people get ready for riding. And we’re not anticipating rec to have a great year given just the macro environment. So that utility versus remix has that impact as well.
Operator: The next question is from Noah Zatzkin with KeyBanc. Please go ahead.
Noah Zatzkin: I guess first, hoping you could provide some color on the elevated production costs you called out and where that hit within ORV? And then somewhat relatedly, as it relates to the redesigned RZR XP product. I think you had mentioned more favorable margin dynamics related to kind of the modular approach. Just wondering if there are benefits to be thinking about this year related to that product.
Mike Speetzen: Well, I’ll let Bob can get into more specifics. But in general, the way I would characterize what happened in Q1 is we largely got the units out that we were targeting. The issue is how we executed that resulted in a lot of inefficiencies. So we were still building product into rework, nowhere near the same magnitude that we’ve had historically because suppliers are still delivering late. Now last year and the year before, when we said a supplier was delivering late, we were talking about weeks, months, sometimes quarters. Now we’re talking about days and weeks, so what that means is we’re still able to get the product out, but we’re not doing it in an incredibly efficient manner. And the teams are still working with that.
We’re narrowing it down. The number of suppliers that are late continues to come down. And as that happens, it improves our ability to get efficiency in the plant. And that really is largely what drove it, and that’s going to show up obviously in our gross margin performance within the off-road vehicle business. As we look forward, it’s tough to say how and when those will play out. We did add that to the list of assumptions that are essentially embedded in our guidance. And obviously, we’re going to continue to work that as aggressively as we can. Steve Menneto and his team are laser-focused on making sure that we’re driving efficiencies in Huntsville and Monterrey as quickly as we can. It’s largely dependent on how suppliers deliver to us.
So we’re working backwards to make sure that suppliers have everything they need to be able to deliver on time.
Bob Mack: Yes. I think in addition to the sort of operational inefficiencies, Mike just talked about, what we saw in the quarter, steel had been trending in a positive direction as we kind of exited Q4, there’s been a bump in steel prices. Probably won’t be long term, but that any benefit from steel that we were expecting in Q1 and Q2 is sort of taken up by change in the curve. But again, we think that will trend back towards normal. Same thing with diesel. It’s coming down a little. It’s forecasted to start coming down. We haven’t seen it but it’s come down slower than we had anticipated. There was a little bit of benefit on the ocean freight side. Those rates turned a bit favorable in the quarter. So some puts and takes on the rest of the cost side.
But overall, it’s just a little more negative than we had expected, but nothing that’s going to change our full year guidance. And then on the new RZR, so that vehicle benefits to some degree from some of the modularity work we’re doing. But that project was started it would have been nearly probably 4 years ago. So it’s not getting the full benefit. I wouldn’t consider that to be the first product we’ve launched with our new philosophy. But given what Mike talked about the 100 new PG&A items and multiple models across that, having a good, better, best sort of range of product in the market, which we hadn’t historically had. We do expect to see some margin benefit from it.
Operator: The next question is from David MacGregor with Longbow Research. Please go ahead.
David MacGregor: I wanted to ask about the On-Road segment. And clearly, there’s been a tremendous amount of progress made here over the past few years. But 21.4% gross margin, up 300 basis points. How much more upside is there to margins? And maybe the more important question is just how sustainable are these margins given we think is going on, the mix, everything else?
Mike Speetzen: Well, I’d say a couple of things. One, we’ve talked about, obviously, this segment includes Indian Motorcycles, Slingshot, but also a couple of the businesses that we have over in France, Axiam and Goupil, which — both of which have strong margin performance. So there’s an element of that margin performance that those businesses continue to execute on. I wouldn’t suggest that they’re going to move meaningfully one way or the other. The real opportunity for us is around Indian and Slingshot. And as we’ve talked about the path to profitability for both of those brands is continued focus with Mike Dougherty and his team. They’ve made really strong progress over the past couple of years. And we expect that to be an opportunity as we go forward.
And when you think about the size of those businesses and the growth opportunity for both, there’s meaningful improvement that we think we can make there. It’s going to play out over time. And as we’ve talked about in the past, we probably hadn’t done a really good job with either Slingshot or Indian, these are essentially brand-new businesses that we started from scratch and it takes time to get to profitability. The team is laser-focused on that, whether that’s driving efficiencies and engineering now that we’ve got all the products that we essentially need out. So that takes your initial platform investment down or continuing to drive globalization. We’ve got a meaningful presence in Vietnam. We look like we’re going to continue to expand that for in-region motorcycle delivery.
We’ve got a presence in Europe. Europe is our fastest-growing market for Indian and we’ve got assembly operations in Opole, Poland. So all those things help as we continue to grow the business, and we’re really confident in our ability to continue to expand those margins.
David MacGregor: Yes. It’s impressive. Congratulations on the progress there. Second question, you just talked about today about the commercial business and the contribution to growth. I guess it’s been a while since we really talked about that. Can you just remind us in terms of the size and the profit contribution from that business?
Mike Speetzen: Yes, we don’t necessarily get into the size. Bob knows this business well. He used to have operating responsibility for it before we made all the changes over the past few years. It’s just — it’s turned out to be a great segment for the Ranger portfolio. You’ve seen a press release that United Rentals came out and has bought ordered a bunch of the new Ranger XP kinetics. We continue to have a strong relationship with them and with several other operators in the space, and we have some really strong partner programs that help us as well. And with the amount of infrastructure and commercial development that’s underway in the contracts, the order backlog looks great for this year, and we’re confident this business will continue to grow for at least the next couple of years.
Operator: The next question is from Jamie Katz with Morningstar. Please go ahead.
Jaime Katz: I have just one quick one. One of your competitors talks quite a bit about new entrants and brand switchers and how that has supported growth for the top line. So can you guys give us a little insight into what you’re seeing from your customer base, how that’s evolving and what your ability is currently to sort of attract new entrants to the space or brand switchers.
Mike Speetzen: Yes. I think we continue to see — it’s obviously not at the levels that we had in the pandemic when new customers were in the, call it, the low to mid-70s. But new customers still represent about 60% of the incoming volume. And so we know that word-of-mouth family members, friends taking folks out on our vehicles is a big selling point, and we continue to leverage that. But we’ve done a lot. In fact, the management team and I were out at one of our ventures locations in Arizona in the last month. And it was just incredible to see the volume of people going through that particular location. It was staggering. And we’re now starting to activate upon that. So building a stronger relationship with those customers to either migrate them to a Polaris Adventures Select, which is more of a subscription program or into buying a vehicle.
And so we think that, that’s a really good opportunity to continue to open the aperture and bring new people in. We’ve done a lot around educating, making sure with a lot of new people coming into the category, making sure they understand how to use the vehicles, how to safely use the vehicles, how to load them on a trailer, all the different aspects associated with that. So we’ve tried to make that ownership experience much better than it has been. And frankly, we’ve done a lot of work with our dealers to really get them to up their game in terms of how they interact with the customer. We invested heavily in our website, which we just rolled out at the beginning of the year to make it an easier experience for customers to get on and get through the basics.
Someone new to the category trying to figure out what vehicle they need. Is it a 2-seat or a 4-seat? Those are all pretty challenging things, and we want to help them get that work through before they have to walk into a dealer, which can be an even more intimidating experience. We Think we’ve done a really good job of doing that. And then the last point I’d say is making sure we have vehicles that cover the spectrum. Not everybody is going to come in at the high end of the segment. So we’ve done a lot of work to make better, more accessible, lower-cost entry-level vehicles. And then the launch of Polaris Exchange was a big move. I mean we are the single largest source of used vehicles. And we know that, that becomes an important tool for dealers to have those used vehicles to bring people that are new into the category that may not want to spend the money you need to spend on a new RZR XP or Pro R, but getting out of used Turbo S or Pro XP may be a good way for them to enter the brand.
And now with the introduction of Polaris Exchange, that really gives the dealers a tool to get out that inventory, and it does it in a more efficient way where we’re controlling it versus just sending those vehicles off to an auction.
