Polaris Inc. (NYSE:PII) Q4 2023 Earnings Call Transcript

Polaris Inc. (NYSE:PII) Q4 2023 Earnings Call Transcript January 30, 2024

Polaris Inc. misses on earnings expectations. Reported EPS is $1.98 EPS, expectations were $2.57. Polaris Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the Polaris Q4 and Full-Year 2023 Earnings Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions]. I would now like to hand the call to J.C. Weigelt. Please go ahead.

J.C. Weigelt: Thank you, MJ, 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 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 summarized in the fourth quarter and full-year as well as our expectations for 2024. 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 the fourth quarter and full-year 2023 actual results and 2024 guidance 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.

Michael Speetzen: Thanks, J.C. Good morning, everyone, and thank you for joining us today. After what could only be categorized as a turbulent year, we ended 2023 with share gains across all three of our segments. While there was plenty that went right and aligned to the execution of our longer-term strategy, we faced several challenges, particularly in the fourth quarter as costs continue to run higher than we anticipated, which drove a miss to our margin and EPS guidance. While our performance was below expectations, there was much that went right in 2023. It started with us delivering on our commitment to bring industry-leading innovation to our customers. In Off-Road, we introduced two brand new category defining vehicles this year, the Polaris XPEDITION and the RANGER XD 1500.

Together with the launch of the completely redesigned RZR XP last spring, we now have the most competitive lineup of Off-Road vehicles the industry has ever seen. We also launched the all-new Lock & Ride MAX system with entirely new purpose-built accessories and attachments, resulting in endless customization and a remarkably intuitive platform. In On-Road, specifically Indian motorcycles, we launched the Indian Pursuit Elite and the Sport Chief, which raises the bar for the American V-twin Performance Cruisers. In marine, we introduced the new Bennington S and SV lines this past summer and early feedback has been positive, indicating that these new models strengthened Bennington’s value offering within the pontoon market. It was also a year to celebrate our race teams.

When we launched the RZR Pro R in 2021, we were bullish on the quality and performance of the vehicle, and we were right. The success this vehicle has had in crossing the finish line before all others is a testament to what customers expect from Polaris. Our drive to innovate and push the envelope of what is possible from horsepower to suspension technology has led Polaris to top the racing world again. Not only did we win the Baja 1,500 and 400 as well as the San Filipe 250 in 2023. We just secured a monumental win at the 48th annual DAKAR Rally, which is one of the most ruling races covering over 4,000 miles in two weeks through unforgiving terrain in the Saudi Arabia and some late-breaking news, Polaris swept the podium at the King of the Hammers Desert challenge.

We also cannot forget about another successful racing year for Indian Motorcycle where we took first place in American Flat Track and Super Hooligans. Hats off to our players race teams and our talented engineers on such a successful year. In addition to record levels of innovation, we stabilized dealer inventory, removing the challenges of product availability we’ve been dealing with for several years. Another highlight is the execution of our capital deployment strategy and the health of our balance sheet. In 2023, we generated over $500 million of adjusted free cash flow, and we’re putting that cash to work. We returned $326 million of that cash flow to shareholders between dividends and share repurchases. Our capital deployment strategy has been consistent, and we expect to continue to lean in organic investments, our dividend and share repurchases, all of which center around our goal to generate shareholder value.

While we certainly have a lot to be proud of, execution against our financial commitments fell short of our expectations. Our largest challenge centered around our manufacturing facilities. We did not achieve the efficiencies we planned, which resulted in margin pressure throughout the year. It’s important to note that operational costs did start to improve later in the year, but not to the level we had expected them to. This, coupled with lower manufacturing volumes and difficulty producing new products led to significant margin pressure. Add to that higher-than-anticipated product liability and warranty spend and our EBITDA margins came in below our expectations as well as below 2022. This was disappointing for me and our team, and we are focused on addressing the root causes of the inefficiencies with a focus on driving improved processes within sales, inventory, operations and planning.

North American retail was up 7%, driven by utility and snow. While we expected positive snow performance relative to last year, results were weaker than expected given the lack of snowfall in most regions. It was encouraging to see our side-by-side retail up low double digits, driven by continued strength in our range of vehicles. While utility saw strength, our recreational business continues to see pressure given higher interest rates and economic uncertainty. We ended the year gaining slightly over one point of share in Off-Road more if you exclude used vehicles that have little profitability associated with them. Share gains are positive season-to-date snow as we were able to deliver all of our SnowCheck units before the season started.

While share in our On-Road and Marine segments was under slight pressure in the quarter, we did gain share in both segments for the year, driven by better product availability and new products. Our sales results during the quarter were slightly lower than our expectations given lower retail than we anticipated and lower net price due to an increase in promotional activity. We saw heavy discounting of noncurrent inventory by competitors. In November and December, we increased our promotions for current inventory and response and our strategy seemed to play out well as we saw retail increase meaningfully in both those months. We view this situation as short term until competitive noncurrent inventory is lower. We also made the decision within the quarter to lower our recreational Off-Road shipments, specifically certain models of razor given continued lower retail and our goal of maintaining targeted levels of dealer inventory.

We feel these decisions are important given the seasonal trends of our product lines and to proactively manage dealer inventory. Consistent with last quarter, we saw an uptick in floor plan finance interest as a result of increased inventory and higher interest rates. This is expected to remain a headwind into 2024. These pressures on revenue also negatively impacted margins in the fourth quarter. In addition, we saw elevated warranty costs in the quarter, driven by a $23 million warranty expense in our Goupil business within our On-Road segment. This charge was associated with a battery component failure, which was caused by a supplier who had previously filed for bankruptcy. These issues coupled with elevated operational costs I mentioned earlier as well as the impact of product liability claims drove lower-than-expected margins.

Our resulting EBITDA margin was down 377 basis points versus last year in the fourth quarter. We’ve increased our accrual for product liability claims due to the challenging litigation environment. Most of the increase relates to product produced before 2018. This pressure, along with higher year-over-year interest expense drove adjusted EPS down 43% to $1.98, falling short of our guidance. The fourth quarter concludes a year that can be defined by a volatile macro environment and consistent consumer demand and a lack of execution on our part. While I’m proud of our ability to take share and generate strong adjusted free cash flow during the year, we need to operate more efficiently if we’re to hit our long-term margin targets. Moving forward, I believe our teams are aligned to drive operational improvements in 2024 while delivering share gains.

Let’s now talk about retail trends as well as the data at the dealer level. Broadly speaking, retail was lower than our expectations in the fourth quarter, driven by recreational portfolio within our Off-Road as well as our snowmobile business. Two important things to note here. First, as a reminder, our utility product makes up almost 60% of our Off-Road sales with the main product being our Ranger side-by-side. The purchase of these vehicles tends to be less discretionary in nature as they are primarily used for work purposes. Recreation makes up the remaining 40%, with the main products being the RZR and general side-by-side. Recreational Off-Road vehicle retail continued to see softness in the quarter, which marks the fifth straight quarter of negative retail in our recreational portfolio.

These vehicles tend to be more discretionary purchases and are more sensitive to economic conditions and the health of the consumer. We feel higher interest rates, coupled with economic uncertainty are negatively impacting retail. Second, we expect a positive contribution from our snow business given an easy comparison to last year and improved product delivery into the channel. While we executed on improved deliveries, growth was lower than expected given poor snow conditions in the fourth quarter, and we expect this to continue into the first quarter of 2024. As mentioned earlier, our promotional levels were elevated in Q4 given the competitive dynamics I explained earlier. We do expect promotions to remain elevated into Q1 of 2024. We are expecting industry retail to be down modestly in 2024.

While the industry will be challenged, we anticipate being able to grow share given our strong product portfolio a full-year of retail for Polaris XPEDITION and RANGER XD as well as additional new products expected to launch in 2024. We recently concluded our biannual ORV dealer survey that includes close to 700 responses. Sentiment from dealers worsened relative to the last time we conducted the survey in the spring. This survey conveyed that while dealers see promotional activity helping, they continue to be concerned about the broader economy, coupled with higher interest rates and the resulting impact on consumer demand. Dealers believe system inventory is still too high. While our channel inventory is healthier than many others. We have opportunities to improve, specifically in areas like RZR and Marine where we began making adjustments in 2023, and we’ve built those continued improvements into our plans for 2024.

We believe our channel inventory is within an optimal range for Ranger and Indian Motorcycle and that we still have an opportunity to build inventory with Polaris XPEDITION and RANGER XD given dealer feedback. That said, we intend to operate in a disciplined manner to ensure dealer inventory levels remain at optimal levels in 2024. We will balance how the industry plays out with the need to have the right inventory in the field to maintain our competitive positioning. Wrapping up my comments on the quarter and the year, we won the retail and share battle by playing offense in a complex and competitive environment. While our financial execution fell short, we did continue to make significant progress on executing against our strategic agenda.

We entered 2024 focused on execution at all levels to ensure we gain share, expand margins and execute against our financial commitments. I’ll now turn it over to Bob, who will summarize our fourth quarter performance and provide initial guidance and expectations for 2024. Bob?

Robert Mack: Thanks, Mike, and good morning or afternoon to everyone on the call today. Fourth quarter results were driven by lower factory shipments, lower net price, higher finance interest impacting both sales and margins. We made the decision during the quarter to scale back Off-Road vehicle shipments given a choppy retail environment. Promotions were in line with our plans, but continue to be higher year-over-year. Manufacturing costs remain elevated. And as Mike mentioned, we booked a sizable warranty expense during the quarter in our On-Road segment. Similar to the third quarter, we continued to see higher product liability costs relative to a year ago as COVID delayed cases progressed through the court system. PG&A continued its pace of record — of breaking records with growth of 14% in the quarter and gross profit margin expansion of over 300 basis points.

Our PG&A business continues to be a competitive advantage for us with the most recent addition of an offering in marine. Today, sales of PG&A products, which includes accessories installed at the factory, make up approximately 20% of total sales with very attractive profitability. Looking at 2024, we expect PG&A to continue to be a positive contributor with growth and margin expansion. In our Off-Road business, revenue increased 3%, driven by double-digit growth in utility, snow, and commercial-related product lines, somewhat offset by a 20% decline in recreational products. We continue to see increased demand for our premium vehicles, including the Polaris XPEDITION NorthStar Edition, which helped our crossover category gain almost 10 points of share during the quarter.

RANGER XD 1500 had minimal impact on retail during the quarter, given we began shipping in November. Utility saw mid-teens retail growth, which was a bit higher than previous quarters. We saw strong traction with our agricultural customer base, which tend to have a demonstrated need for the product. Unfortunately, overall snow retailer has been softer than expected given the late arrival of snow across much of North America and uncharacteristically high temperatures in the Midwest. Season-to-date, we have gained modest share. As we conclude the season, we expect lower shipping volumes for the upcoming season, given elevated inventory at dealers as the industry grapples with the lack of snow. Margins in the quarter were pressured by higher promotional levels, finance interest and mix as we sold fewer razors and more snowmobiles, which typically have a larger lower margin profile.

We expect a somewhat challenging first quarter on a year-over-year basis, driven by the lack of snowmobile shipments in the quarter and the channel refill on ORV that occurred in 2023. Recall that in 2023, we shipped a large volume of sleds late in the snow season, and we’re also finishing up on some channel refill to get dealer inventory to a healthier place. We do expect share gains to continue given our strong product portfolio as well as new products launching later this year. We are also planning for margins to expand as we realize manufacturing efficiencies at our two largest clients. So while it might be a challenging start in 2024, we believe we have the momentum to continue to improve our share position and operational efficiencies, setting us up to emerge stronger as we enter the back half of our five year strategy.

Switching to On-Road. I want to start off with a highlight and that is Indian motorcycle markets first year of profitability in 2023. Like Doherty and the team have done a great job building Indian Motorcycles into the number two motorcycle brand globally, we look forward to its continued success. Sales during the quarter were down 24% as the motorcycle market continued to be challenged given the difficult macro backdrop and high interest rates impacting monthly payments for consumers. We were also up for the full year against a difficult comparison to 2022 when we were refilling the dealer network with bikes given supply constraints. Indian Motorcycles lost modest market share during the quarter driven by competitive pressure in the heavyweight space, which was somewhat offset by continued strength in midsize.

On-Road gross profit was down 323 basis points due to the previously mentioned warranty expense booked in the quarter. Gross profit margin for Indian Motorcycles was up nearly 600 basis points marking the sixth straight quarter expanding margin over 250 basis points, helping them achieve profitability this year. In Marine, sales were down 41% as the industry continues to deal with elevated dealer inventory levels and higher interest rates impacting the consumer’s decision to purchase. We made the decision earlier in the year to curtail shipments given the trends we were seeing, which resulted in lower volumes in the fourth quarter. Gross profit margin was down 368 basis points given top line pressures. However, our team continues to actively manage the variable components of their cost structure to protect profits.

With the season concluded Bennington, Godfrey and Hurricane all took share in 2023. We are excited about the future of our Marine business as they continue to refresh their portfolio as well as add new dealers to the network. With boat show season upon us, the early read is that dealers continue to feel they are high on inventory and retail seems to be trending flat slightly down versus 2023. Quickly reviewing our full-year performance by segment. Retail ended up being more challenging. Segment sales were at or above our guidance, and we gained share in each segment with a strong offering of competitive products. Operationally, we have walked through the challenges in Off-Road. And again, it was great to see On-Road and specifically Indian motorcycles be profitable this year.

Moving to our financial position. We concluded the year with significant year-over-year growth in operating and adjusted free cash flow. During the year, we used this cash to support CapEx investments and returned $326 million to shareholders in the form of dividends and share repurchases. We are in a strong financial position, ending the year with a net leverage ratio of 1.6x, which is in the middle of our 1x to 2x range we like to manage the business. During the quarter, we completed our inaugural investment-grade public senior notes offering by issuing long five year bonds. This brings our mix of variable to fixed rate debt to 68% fixed and 32% variable. We repurchased 1.6 million shares in 2023 and remained well ahead of our target to repurchase 10% of our outstanding basic shares before the end of 2026.

We believe that we are well set up for a variety of scenarios in the broader market with our balance sheet and believe we can replicate last year’s cash generation from a dollar perspective in 2024. Now let’s move to guidance and expectations for 2024. We are initiating guidance today calling for 2024 sales to be down in a difficult retail environment, coupled with a reduction in shipping volumes as we lap dealer inventory fill in RV and marine and the timing of snow shipments which favored 2023. Most of these headwinds are expected to be realized in the first quarter. I think it is worth repeating what Mike said on dealer inventory, and then our goal of strong discipline around dealer inventory this year is based off a declining industry retail environment.

If retail estimates or our opinion on competitive positioning of inventory changes, we will update our levels of dealer inventory. Promotions and finance interest are expected to remain elevated as we progress through the year, which also adds pressure to our top line and margin. By segment, sales within Off-Road are expected to be down mid-single digits, driven by a tough comp in the first quarter and lower shipment volumes of snow and some models within ORV. These headwinds are expected to be somewhat offset by retail and channel fill of new products such as the RANGER XD and products scheduled to launch in 2024. We expect Off-Road to take share in 2024, given its strong competitive portfolio. On-Road sales are expected to be flat year-over-year as we continue to see a soft market given higher interest rates.

Our expectation is that On-Road gained share with some very exciting products launching later this year. Marine sales are expected to be down mid-teens percent as we work to reduce inventory in the channel in the midst of a challenging industry. We believe Bennington’s new S&SV lineup give us a great opportunity to continue taking share in the pontoon market. Our margin guidance calls for expanding both gross profit and EBITDA margins. As you can see with our guidance, the expansion happens at the gross profit level with savings and efficiencies expected to be realized in materials, logistics and at our plants. In total, we are targeting over $150 million in operational savings with an even larger funnel of opportunity. Within the plants, we see costs coming down with a renewed focus on lean manufacturing practices as well as being more efficient with the production of our new vehicles.

We also expect savings from the capital investments we made in Monterrey, Vietnam and [indiscernible], which include new paint systems and back shop vertical integration. Operating expense dollars are expected to be up 1% to 2% relative to 2023, driven by wage inflation and returned to target payouts on incentive compensation being mostly offset by cost reduction actions across the business. We have planned for product liability costs to remain at a similar level to 2023 as we continue to work through case backlogs. Additionally, a headwind to gross profit and EPS, but not EBITDA is that depreciation is up approximately 15% relative to 2023 due to tooling associated with the launch of new products introduced last year. A couple of other items to note include: modestly higher year-over-year interest expense.

This impacts our dealer floor planning, finance interest costs as well as debt costs. We have planned for three rate cuts in the second half. We are planning a higher tax rate as we do not expect the same amount of R&D credits as well as the benefit of some other onetime items that helped lower the rate in 2023. Foreign currencies remain volatile and are expected to once again be a headwind. We have planned for the Canadian dollar at 0.72, the euro at 1.07 and the peso at 17.5. We believe we are well hedged [indiscernible] changes in the Canadian dollar at peso below these rates. Accounting for all of these items, we are guiding to adjusted EPS between $7.75 and $8.25, which is a decline of 10% to 15% relative to 2023. For the first quarter, a few things to note.

As I mentioned, we have a meaningful headwind to sales due to the trend in snow shipments last year as well as channel refill in ORV and marine. Given such headwinds, we expect sales to be down approximately 20% in the first quarter. Higher promotions year-over-year at a similar run rate to the fourth quarter. We continue to experience headwinds from net pricing, finance interest and stable [indiscernible] efficient operational costs that we incurred during the fourth quarter. And lastly, FX and interest expense continued to be unfavorable year-over-year. So putting this together for the first quarter, we have a number of headwinds, predominantly the sales headwinds and pressure on margins that are expected to result in breakeven adjusted EPS.

We expect to see closer to flat sales year-over-year in the remaining three quarters of 2024 with share gains from new products offsetting a slower industry. These sales volumes, coupled with meaningful margin expansion as we go through the year and realize the savings and efficiencies from our efforts to fix our plants will yield year-over-year margin expansion. We expect another year of strong cash flow generation as the team continues to drive working capital down. It is also encouraging to see the early progress we’ve made in our plants from building the new vehicles more efficiently to reinvigorating lean processes. Before Polaris, my career was with the industrial sector, and I am encouraged by the renewed focus I see on lean at our plants.

I know we still have work to do, but the opportunity is great. Our teams are aligned on our plan, and we look forward to reporting out on the progress through the year. With that, I’ll hand it back over to Mike to wrap up the call. Go ahead, Mike.

Michael Speetzen: Thanks, Bob. We launched incredible new products in 2023 that strengthened our competitive position, and we’re not coming off the gas. There is much more to come in 2024, where we will once again demonstrate why we are the leader in power sports. Operationally, we must do better, and we will. Improved cost and quality remain a major focus for us. Our teams are poised to execute on the opportunities across our business to lower cost, improve quality and increase margins. Starting last quarter, our teams began working on many of these initiatives, and I’m confident that we have the focus, momentum and the best team to execute. While the environment is uncertain, our commitment to maintain an optimal level of dealer inventory is clear.

We worked hard to ensure the profitability of our dealers is maximized and our ability to maintain a healthy competitive and appropriate level of inventory is an important part of that equation. Our focus and commitment here is unwavering. We remain committed to our capital deployment strategy, which is to invest in our operations, remain a dividend aristocrat and repurchase shares. With our free cash flow yield hovering around 12%, we continue to see our stock as an attractive investment. 2024 also marks the halfway point to our 2026 targets. And while the first couple of years added additional challenges, we believe there is a path to our 2026 targets. Executing in 2024 is critical to meet those targets, and my team and I are focused on what needs to get done over the next 12 months to ensure those long-term targets are met.

While 2024 is not setting up to be a robust year from a retail standpoint, we will build on our leadership position within power sports with the most innovative products in the industry, unmatched customer experiences and stronger operational fundamentals. We have the best team in powersports and we know what needs to get done this year. We thank you for your continued support. And with that, I’ll turn it over to MJ to open the line up for questions. MJ?

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Q&A Session

Operator: Thank you very much. We will now begin the question-and-answer session. [Operator Instructions]. Today’s first question comes from Fred Wightman with Wolfe Research. Please go ahead.

Fred Wightman: Hey guys. Good morning. Thanks for the question. Bob, you gave us some high level thoughts on sort of the sales and earnings outlook for the first quarter. And I know you guys have some moving pieces year-over-year just with snow and ORV restocking. But can you just give us some more detail on either the segment performance or sort of the margin performance that you guys are assuming there? And maybe how to think about that implied improvement for the remainder of the year?

Robert Mack: Sure. So first of all, if you look at the drop for the year on revenue. I mean most of it, we’re seeing it in the first quarter, and it’s the two primary factors are snow and Off-Road, although both marine and motorcycles are dada [ph] on unit shipments also plus we have the continued high promo level from Q4, which is higher than what it was in Q1 of ’23. OpEx is expected to be flat for the year. It will be relatively flat sequentially versus Q4. As I said on the call, we do — we did — we anticipate product liability accrual costs to be higher or to continue at their high level in 2024, and we expect them to be pretty consistent with what we saw in 2023 as we work through some of these older cases related to the pass razor recall as well as any other cases we have.

So I mean, those are the big pieces for the quarter in terms of what’s causing the challenge in Q1. It’s really that this adjustment around getting dealer inventory, keeping dealer inventory at where we see the optimum level given what was a little bit slower retail in Q4 than we expected and what we think will be a fairly tepid retail picture in Q1. When you get into the rest of the year, the quarters start to look a lot more consistent and sales will be relatively flat with 2023 and the rest of the quarters. And you’ll start to see the earnings improvement from the operational efficiency gains come through. If you think through how the math sort of works, what we see in Q1 is really the inventory we built in Q4. So we are seeing improvement in Q1 sequentially in terms of cost, it just gets matched by the fact that we’re going to be so far down on volume that you’ll see that the factory hours, the impact of not having those factory hours start to hurt.

So you won’t necessarily — the margin improvement won’t stand out, but it’s there. And we have been working hard through the Q4 and into Q1 to make sure that we’re going to continue to drive that performance through the year.

Michael Speetzen: And remember, Fred, that Q1 is typically a pretty low quarter for us anyway. And for years, we’ve had the benefit of that snow business delivering late, which obviously is not optable for customers. So we’ve got that business in a much, much better spot. And as Bob mentioned, dealer inventory is now essentially at an optimal level. I look at it as — it’s essentially when our performance is kind of bottoming out. There’s a number of factors coming together at one time. And when you look at Q2 and Q3 and Q4, you’re not — this isn’t a heavy back-end loaded plan. It’s essentially getting back to shipping to retail, we obviously have opportunity in front of us to get cost out through the remainder of the year.

But this isn’t something where we’re not generating earnings in Q1 and making it all up in Q4. It’s really us getting back to running the business on a more normal level basis, essentially starting in Q2. And the team came out of the gate strong in January. I can tell you, we are monitoring even more measures and metrics than we have before, specifically around the operations of the business. And I’m encouraged with what I’ve seen so far, and we’re going to stay on top of it to make sure that the team executes.

Fred Wightman: Really helpful. And then Mike, just coming back to the industry retail outlook, I think you made a comment you’re expecting that to be down modestly. Is there anything else you can share just in terms of performance across categories or the cadence of the year? I think you mentioned you were assuming a couple of interest rates as well. How does that shake out?

Michael Speetzen: Yes. I mean I’d say a couple of things. I mean, one, obviously, the broader industry is going to behave as it will. And for us, it’s our relative performance. And we did it this past year in terms of gaining share in all three segments. And I’m really confident given the new products that we came out with, obviously, late in the year and getting a full-year of that with XPEDITION and XD. The work the Marine team has done, not just in Bennington, but with Godfrey and Hurricane. And then in our On-Road segment. We’ve got some, as Bob teased, we’ve got some very intriguing news coming this year. And to add on top of that, the dealers obviously have become a lot more discerning in what they want to have in their dealerships and we know that they’re pushing out a lot of those weaker brands, and that really benefits us because we continue to demonstrate that we are the leader, and there’s a reason behind that.

And I think that the dealers appreciate the adherence we have to making sure that the dealer inventory stayed at an appropriate level. So as Bob mentioned in his prepared remarks, we’re going to make sure we’re watching retail, and we’re going to monitor our shipments. We’re not going to get out ahead of our skis, and we’re going to make sure that we have the right inventory at the right dealers, but we’re not going to ignore trends. And if trends are better or worse, we’re going to adjust our shipping plans accordingly.

Robert Mack: And on the rate cut, Fred, we’ve got about 325 bp rate cuts built in, in the back half of the year in late Q3, Q4. It’s bit all over the map right now as to what people think the Fed is actually going to do. So we planned relatively conservatively there. We’ll see how the year develops.

Fred Wightman: Great. Thanks a lot.

Operator: Thank you. The next question is from Megan Alexander with Morgan Stanley. Please go ahead.

Megan Alexander: Yes, thanks for taking our question. Maybe if we could follow-up on the 1Q comments there. Is there any way you can maybe quantify the product liability accrual impact to the fourth quarter. I think that shows up in G&A and it seems like it was maybe a $35 million headwind just looking at your run rate prior. So maybe we could start there.