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People turn to this Minnesota-based company when they want to add some action in their lives, whether that be cruising sand dunes with one of the firm’s off-road vehicles or plowing through snowy mountains with its popular snowmobiles. In May, the company announced Michael Speetzen was named CEO.

This year's Fortune 500 marks the 66th running of the list.

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Polaris, which is headquartered in Medina, Minn., manufactures snowmobiles, ATVs, motorcycles, and more.

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Polaris (PII): Company Profile, Stock Price, News, Rankings

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Polaris

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Good day, and welcome to the Polaris 4th Quarter 2024 Earnings Call and Webcast. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr.

Thank you, Chuck, and good morning or afternoon, everyone. I am J. C. Weigelt, Vice President of Investor Relations at Polaris. Thank you for joining us for our 2024 Q4 and full year earnings call.

We will reference a slide presentation today, which is accessible on our website at ir.polaris dotcom. 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 2024 Q4 and full year as well as our expectations for 2025. 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 2023 10 ks for additional details regarding risks and uncertainties. All references to the 2024 Q4 and full year actual results and 2025 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 the call over to Mike Speetzen.

Thanks, JC, and good morning, everyone. Thank you for joining us today. Before we discuss our Q4 results and our expectations for 2025, I'd like to begin today's call by reflecting on the past year and our key focus areas. 2024 presented significant challenges across the powersports industry, leading to a prolonged down cycle, driven by various factors affecting OEMs, dealers and consumers. As Polaris navigated these challenges last year, I'm proud of how our team executed and stayed focused on the areas we could control.

They maintained strong relationships with our dealers, launched innovation to consumers and enhanced our operational capabilities and efficiencies. Our goal remains to position Polaris to emerge from this down cycle even stronger. We concluded 2024 with a robust portfolio of new product innovations, including the new Indian Motorcycle Scout lineup, RZR Pro lineup, quality improvements in Ranger and new boats from Bennington and Hurricane. This commitment to innovation is unwavering as we continue to lead the industry investing over 4% of sales into R and D. You've seen us ramp up our innovation productivity over the past couple of years with category defining vehicles and enhanced vehicle capabilities and comforts and we expect these trends to continue.

Some of this innovation was showcased with championship in RZR, Snow and India Motorcycles. This includes our RZR factory racing team's recent first place finish at Dakar earlier this month in the side by side class. This is the 2nd year in a row that our vehicle has outmaneuvered and outpaced everyone else in the field and walked away with top spot on the podium. Our lean journey is in full swing with over $200,000,000 in structural savings realized last year and additional opportunities identified for 2025 beyond. I understand it's difficult to visualize the current impacts on margins given the negative absorption we're experiencing given reduced shipments, but we are making real changes that should be reflected in our stronger incremental margins going forward and help us achieve our long term target of mid to high teens EBITDA margin.

2024 was hard for everyone in the industry, our dealers included. At our dealer meeting last summer, we committed to our dealers to have our that they have our support in both good and challenging times. We executed on that commitment by reducing dealer inventory, while also providing additional flooring support to help them navigate these challenging market conditions. We reduced over the dealer inventory by 16% year over year through lower shipments, but this commitment came at a cost as we realized approximately $140,000,000 in negative absorption from lower build levels and left the year with higher finished goods inventory than we would like. Although difficult, actions like these are important as we adhere to our commitment to protect dealer health and maintain production in line with retail demand.

While we executed well on the items we could control, it was a difficult environment to forecast and our strategic actions to protect dealers and compete led to pressure on our financial results. The retail environment didn't help as retail was down from our initial expectations for the year, but more impactful was our decision to cut vehicle shipments to help reduce dealer inventory. We also saw a higher promotional environment adding almost 200 basis points of pressure to our EBITDA margins for the year along with negative mix, which accounted for more than a point of EBITDA. The headwinds we experienced during the year were far greater than our original guidance, but we believe many of these are short term in nature. I remain confident that we're taking the necessary steps to emerge stronger as we strive towards higher incremental margins to improve profitability and innovation to help drive share gains.

Looking specifically at our 4th quarter results, North American retail was down 7%, driven by similar trends we've seen throughout the year with the addition of a very weak snow season and strong youth retail. We achieved the updated financial targets we laid out in October. We also achieved our ORV dealer inventory reductions target established mid year. As I mentioned earlier, ORV dealer inventory was down 16% year over year versus our goal of down 15% to 20%. We told you we'd anchor our financial results and shipment plans to our dealer inventory goals.

We did just that with ORV shipments in the 4th quarter being reduced approximately 30% versus Q4 2023. This reduction caused negative pressure within our business, but was necessary as we partner with our dealers to help them navigate this prolonged down cycle. Adjusted gross profit margin of 21.1% was up modestly, given realized savings from lean and operational efficiencies, as well as a favorable compare due to a one time warranty expense last year and on road. Adjusted gross profit and EBITDA were pressured by negative absorption associated with the shipment cuts. Somewhat offsetting these headwinds was the reduction to our variable compensation plan, term profit sharing and executive bonus plan due to the financial results in 2024, as well as structural cost reductions made to size the business current market conditions, which included salary headcount reductions.

Adjusted EPS of $0.92 was down 54% as a result of the previously mentioned factors. Interest expense was in line with our original expectations and our tax rate came in slightly favorable. Breaking down retail further. In off road, we saw similar trends across the portfolio relative to prior periods this year. Typically, snow is an added benefit this time of year, but we are currently in the middle of another difficult snow season given the lack of snow in the Flatlands.

This is the 2nd season in a row with below average snow, resulting in elevated inventory at dealerships and sharply lower retail. We've already lowered our build schedule to account for this week's sales season to date and this is accounted for in the guidance given today. I think it's also important to call out youth in our performance of recreational retail. It was up strong double digits in the quarter due to a positive holiday selling season and a favorable compare to last year. Outside of youth, recreational side by sides were down mid teens as we still see growth in crossover offset by pressure in razor.

Utility was down low single digits with modest pressure on both Ranger and ATBs. Sequentially, our Ranger retail decline was lower in Q4 than in Q3. On road retail in Q4 was again driven by softness in the heavyweight segment. We saw share gains and growth in our midsized bikes given the successful launch of our new Indian Motorcycle Scout lineup. However, this was muted by the challenging dynamics in the overall industry.

At our motorcycle dealer meeting last week, we launched several new bikes, including Sport Chief, Roadmaster Power Plus and Chieftain Power Plus. The Power Plus models incorporate our new 112 Cubic Inch version of the Power Plus engine, which we spent 2 years developing and refining through the Indian Motorcycle Racing program as demonstrated in our 2024 King of the Bangers Championship. The response from dealers was positive on new products and cautious on 2025. In marine, retail was down modestly in a seasonally light quarter. And although we are entering the boat show season, feedback thus far has been positive.

I commented last quarter on how we've seen other OEMs running at elevated promotional rates as they work through higher than normal non current inventory levels. This dynamic remains ongoing in the market today and continues to drive short term share gains for those OEMs. We do not view this tactic as sustainable or one that can drive long term high quality share growth. We believe these aggressive promotions are the result of over shipping into a declining retail environment, resulting in dealers being saddled with non current inventory that cannot move without these elevated promotional dollars. If I could sum up dealer sentiment right now, I would say they are cautious.

They are closely watching inventory across all categories and OEMs. Dealers are seeing OEMs take different approaches in this prolonged down cycle and are therefore choosing to keep inventory light as they continue to experience low retail. Just this last quarter, we've seen news of OEMs filing for bankruptcy or shutting down production for a prolonged period of time, as well as OEMs putting part of their business up for sale, which leads many questions many to question the future of some brands. Dealer health is something we watch closely through our Polaris Acceptance joint venture and currently there are no alarming signs of an abnormal number of dealers and financial distress. Dealers are taking the appropriate steps to manage downturn by surgically lowering inventory levels and focusing on growth areas such as service to improve cash flows.

Throughout this time, we've worked hard to stay close to our dealers in order to be a strong partner. I think it's important to acknowledge that while we met our dealer inventory goals for the year, that does not necessarily mean shipments will begin to grow. We're going to continue to actively manage dealer inventory and given the most recent retail data, we're forecasting shipments to be down in the Q1. Lastly, I want to comment on ridership and customer trends and interest as it relates to the off road portion of the business. According to our ORV ridership data, riding remained equal to or slightly above pre pandemic levels.

Of course, we saw a spike in our ridership data during COVID, which peaked in 2022. That started coming down and seemed to have bottomed out in late 2023. Since then, ridership has heavily increased with our latest data showing a mid teens percentage increase versus January of 2020. We also track short term and long term repurchase rates, all of which are in line with pre pandemic levels. The 5 year repurchase rate has been consistent for over 4 years, unless the data tells us that if this trend continues, we should expect a greater number of repurchases in the next several years given the higher retail levels in the early months of the pandemic.

We believe this data around repurchases and ridership supports the notion that interest in the off road industry remains healthy and customers continue to enjoy being outside on our vehicles. Shifting gears to our focus on lean and operational efficiencies. We are in full swing with these initiatives and the team is executing at a high level. This was always going to be a longer term journey measured in years versus quarters. There were initial opportunities that we were able to capture in 2024.

The team went above and beyond to deliver over $250,000,000 in savings relative to our initial goal of $150,000,000 driven by the need to respond to lower volumes and taking an appropriate amount of cost out of our business. Our focus areas are commodities, parts, logistics and plants, and these will continue to be the areas of focus going forward. As you know from past calls, headwinds and absorption due to lower production in these current market conditions are masking much of the benefit, but the changes are real and sustainable. More importantly, we validated that there's a larger opportunity to improve within our existing footprint, given an ample runway to increase profitability as volumes return from cyclical lows. We now have lean lines up and running in Monterrey, Mexico and Huntsville, Alabama and are currently establishing a lean line in Roseau, Minnesota.

Our efforts resulted in a meaningful drop in variable costs in our plants. However, this was offset by the negative absorption from lower production. Raw inventory was down 25% last year and we plan on additional reductions to finished goods inventory in 2025. All of this should lead to lower working capital and increased cash flows. We will continue our lean journey in 2025, focusing on sustaining and building on the gains we've made so far.

Our savings target in 2025 is approximately $40,000,000 through these efforts. Given we're expecting lower production volumes in 2025, much of this will continue to be offset with negative absorption. However, we're executing on these items to build higher incremental margins for Polaris when volume does return. This work has always been about the longer term value and I'm confident that we're taking the right steps to realize this goal. Now I'm going to turn it over to Bob to provide you with more details on the financials.

Thanks Mike and good morning or afternoon to everyone on the call today. 4th quarter sales declined 23% compared to last year. Similar to the Q3, the main factor for our sales decline was our decision to actively reduce dealer inventory in the second half of the year by shipping less product to dealers. Retail performance was slightly below our expectations during the quarter due to a challenging snow season. Mix was also negative as we are lapping some difficult comparable periods when we were still filling the channel with new products such as Ranger XD and Polaris Expedition.

In addition, we are shipping fewer premium products to provide more attractive entry points for consumers and help dealers manage their flooring expenses. Lastly, as Mike mentioned, the environment remains highly promotional. Our international business was down 7%, driven by a drop in shipments as we have adopted a similar strategy in the international markets as in North America to help dealers manage their inventory. PG and A sales were negatively impacted by the lower factory shipments and slower whole goods retail. Going back to Mike's comments on ridership, we did see growth in items like parts and oil outside of our snow business.

Historically, these are good indicators that our customers are out enjoying their vehicles. Gross profit margins were negatively impacted by volume and mix as well as the negative FX impact from a strengthening dollar. Somewhat offsetting these headwinds were savings within our operations and the cuts we made to our employee profit sharing program associated with the subdued financial performance in 2024. A little background on our profit sharing program as it differs from what many companies refer to as a bonus plan or annual incentives. At Polaris, we maintain an equitable approach while both sharing in the success of our efforts and the challenges during downturns.

Our profit sharing program is not exclusive to executives or limited to a specific job level. Instead, it is deeply rooted across the organization and even extends to the majority of our U. S.-based factory employees. This program is a cornerstone of our culture, helping us attract, retain and engage strong talent. It is also slightly larger than similar programs at other organizations, reflecting our commitment to shared success.

The program adjusts based on financial performance with lower payouts when results fall short of targets. That was the case in 2024, which provided a benefit to our financial results. However, this dynamic will reverse in 2025, which I will address when discussing guidance. Turning to Off Road, sales were down 25 percent due to lower volume and negative mix. Snow had an oversized impact in the quarter given sales in retail were both down over 30% versus the prior year, driven by the lack of snow across many important regions for Trail Riders.

North American ORV retail in the quarter was flat with weakness in razor, offset by strength in use in the crossover category. We believe retail in the ORV industry was up mid single digits for the quarter. Promotions and discounting from other OEMs, primarily on non current products, are driving most of the share dynamics in the industry today as they work to clear out aged products. Gross profit margin was positively impacted by operational efficiencies, partially offset by negative mix and financing interest. As we look at the Q1, we expect shipments to remain down in off road as we continue to manage dealer inventory in a declining retail environment and we have a difficult comparable period where we were still filling the channel with Rangers.

We also expect margins to be a headwind with unfavorable mix partially offset by net price. Switching to on road, sales during the quarter were down 21%. There continues to be a divergence between our midsize and heavyweight business. In midsize, we are winning with the all new Indian Motorcycle Scout lineup we launched last year and continue to hold the number one market share position. In the heavyweight segment, we are experiencing pressure from competitive launches in a more challenging market environment as these motorcycles are positioned at higher price points.

We also saw elevated competitive promotions during the quarter that negatively impacted sales. Indian Motorcycles gained modest share during the quarter driven by the success of the Scout launch. Adjusted gross profit margin was up 2 35 basis points driven by an easier comparable quarter last year when we booked a one time warranty expense. Outside of that, margin would have been pressured given the mix headwind in heavyweight bikes and elevated promotions. In marine, sales were down 4% in what is typically a very light seasonal quarter as the industry ramps up for boat show season.

The latest industry data we have shows the pontoon industry was down 11% in 2024 as OEMs continued to work down inventory and consumers decided to forego larger discretionary purchases. We have received positive innovation on our feedback in marine this year from dealers as we head into boat show season. Order flow of these new boats has been encouraging as dealers want to showcase the innovation to consumers in person on their dealer floors. Gross profit margin in marine was down given unfavorable absorption from lower volumes. Moving to our financial position.

We have a strong balance sheet and continue to prioritize maintaining investment grade metrics. Our capital deployment priorities start with investing in our core business. Our second priority is preserving our dividend as we have raised the dividend for 29 consecutive years. In 2025, we intend to put a higher priority on paying down debt. As we focus on working capital improvements and plan for lower capital expenditures, we expect 2025 to be a strong year of cash generation.

Last year, we made progress on lowering raw material inventories, but also built finished goods balances as we work to rebalance our production line. In 2025, we will execute a plan to drive down this high level of finished goods inventory. We expect this to be accomplished with improved planning, a reduction in rework and lower unit production levels. Accordingly, we expect to start seeing finished goods inventory decline later in the year. By lowering our working capital needs and planning for lower capital expenditures, we believe we can generate approximately $350,000,000 in adjusted free cash flow this year.

We remain confident in our financial position and are driving our teams to improve working capital in this part of the economic cycle. Next, I would like to discuss our 2025 full year guidance and the assumptions that led us to these guidance metrics. First, sales are expected to be slightly lower than last year. The two biggest factors driving this decline are lower expected shipment volumes and the continued strength of the U. S.

Dollar. Regarding the volume drop, we've accounted for a sizable cut in production in our snow business given the 2nd season in a row of poor riding conditions in the Flatlands. It is also worth noting that we expect positive net price with some moderate price increases. Mix is expected to be a headwind during the year, but more pronounced in the first half as we have difficult comparison periods given channel fill and strong Ranger Northstar sales in the first half of twenty twenty four. By segment, Off Road sales are expected to be down low single digits.

Again, our decision to reduce snow inventory is the biggest factor driving this segment's lower than anticipated sales. We expect a flattish year in ORV. In On Road, I've already noted that we are taking down shipments due to a weak industry. In Marine, we are expecting low single digit growth from a market share capture and the innovation across our 3 brands of boats. We expect EBITDA margin to be down year over year for the following reasons.

First, the reset of our employee profit sharing program, which is expected to have the biggest impact. 2nd would be the mix headwind I noted earlier, as well as lower volumes to actively manage dealer inventory in a challenging industry. 3rd, the lower production targets also put added pressure on our margins through negative absorption. Somewhat offsetting these headwinds, we continue to expect savings within our operations as we make progress on our lean journey. We also expect net price to be positive with modest price increases being marginally offset by promotional dollars.

Putting all this together, we expect adjusted EBITDA margin to be down 170 to 200 basis points. Given these pressures, we expect approximately $1.10 for adjusted EPS this year. Cost headwinds are driving lower earnings despite some of our mitigation efforts. The reset of our employee profit sharing program, the expected drop in volume and lower mix plus negative absorption are expected to be a headwind of almost $3 to adjusted EPS. We are working hard to offset some of these pressures with continued savings expected within our plants as well as the benefit of our cost reduction efforts last year.

Costs such as depreciation and interest expense are also eroding EPS since there is no additional volume to offset and these are somewhat fixed year over year. Note that our guidance does not assume a change in regulatory policy, which includes tariffs. Some quick thoughts on the Q1. Sales are expected to be down over 10% due to a difficult comparable as last year we were still filling the channel with product. As I noted when discussing Off Road, we are expecting some material year over year headwinds from mix and FX in the quarter, where we are planning to continue reducing shipments to manage dealer inventory.

We expect this drop in volume, coupled with the specific margin pressure I mentioned, will result in adjusted EPS loss of $0.85 to $1 in the Q1. Our expectations are for earnings to improve and turn positive in the Q2. Importantly, we believe the innovation we have brought to the market and the work we are doing with our dealers put us in a very strong competitive position in this industry. We expect to gain or hold market share with this innovation and look forward to being the partner of choice with our dealers as we navigate this market. We believe our proactive efforts on cost and efficiencies will set us up well for a strong recovery when the industry returns to growth.

We are also taking actions to generate more cash this year with specific actions around inventories. As Mike shared, consumers are still riding and we view this as a positive indicator for the longer term viability of this industry. We are bullish on powersports over the long term, understanding this is a cyclical business. We know these are challenging times for consumers in our industry. It's easy to take a short term view.

However, I am confident we are taking the appropriate steps today and are focused in the right areas to navigate the current environment, while still executing towards our longer term initiatives around growth and stronger earnings power. Our ability to execute this year should have a direct impact on our ability to emerge stronger. The Polaris team is aligned on what needs to be done in order to define success for all of our stakeholders. With that, I'll turn it back over to Mike to wrap up the call. Go ahead, Mike.

Thanks, Bob. Our key focus areas for 2025 are not all that different from 2024. I believe these focus areas set us up to be a strong partner with our dealers as we navigate the prolonged down cycle in the powersports industry and strengthen our operations, become more efficient and position Polaris to emerge from this down cycle even stronger. We continue to value our long term partnership with dealers striving to be their OEM of choice. We're actively working with them to navigate the current environment and we expect shipments to be down in the Q1 as we continue to manage dealer inventory levels.

We have worked closely with dealers to align their inventory and RFM profiles to an industry that is expected to be pressured by a recreational consumer dealing with elevated interest rates, inflation and higher debt. Turning to innovation, it's been several great years of innovation from Polaris. We expect to continue marching forward on innovation in 2025 and beyond. I've already discussed the new Indian Motorcycles launched last week. In off road, we currently have one of the most innovative and diversified portfolios in the industry and we look to strengthen our position in the base segment later this year.

In marine, customers will get their first look at the upcoming boat shows at the completely redesigned helms in Bennington, pontoons, as well as the new Series M. We feel this next wave of innovation can continue to deliver on what customers want, while leaving our competition in catch up mode. As noted earlier, we expect to remain on the lean journey we began a year ago. The results we saw last year are real and encouraging. We will build on those results in 2025 knowing there is still more work to do and additional savings to be created.

I am proud of the team's dedication to changing their behavior and embracing this lean initiative. Lastly, we are highly focused on working capital, specifically inventory, to help improve our cash generation. We made progress last year on raw materials, but grew finished goods as we adjusted production schedules to protect dealer inventory. For 2025, we reduced our build schedule to drive down finished goods inventory and generate more cash. This should be more evident during the back half of the year, but the initiatives internally have begun.

Similar to dealers, we remain cautious about the industry. Retail trends have not given us a reason to change our outlook, nor do we see much change for the consumer in 2025. We have committed to dealers that we are going to actively manage their inventory with the cadence of production leading to lower shipments as we start the year. I do want to be clear that our teams are closely watching the data for any type of change in trends and we are ready to shift into high gear if we see demand improving. This is certainly a dynamic time in the history of powersports and we stand willing and able to partner with our dealers as we navigate toward better times together.

As has been the case, we remain on offense with our investment in innovation and our cadence of new vehicle launches. This is deeply rooted in our DNA and a key driver of our global leadership in the powersports industry. The decisions we make today are not made with short term results in mind. We continue to build a company that we believe can emerge stronger and we remain committed to the mid cycle financial targets we gave in 2022 when we talked about driving shareholder value through mid single digit sales growth, mid to high teens EBITDA margin, double digit EPS growth and mid-20s ROIC. Until then, we're focused on items that are within our control.

We have a strong balance sheet, a robust innovation pipeline coupled with great dealers and a team at Polaris that is willing and able to tackle any challenge. I am confident that there are better times ahead for us, our dealers and customers and also for our investors. We appreciate your continued support. And with that, I'll turn the call back over to Chuck to open the line for questions.

Thank you. We will now begin the question and answer session. And the first question will come from Fred Wightman with Wolfe Research. Please go ahead.

Hey, guys. Good morning. I just wanted to start with the EPS guide. And if we go back last quarter, Mike, I think you sort of hinted that something flattish versus the 2024 guide was a reasonable starting point. And then obviously, the formal outlook today came in a bit below that.

So I'm wondering if you could just walk us through what if anything changed? Did we sort of misinterpret what you were trying to convey? How should we think about that?

Yes. Thanks, Fred. I guess I'd start with obviously, we were in October, so we were trying to avoid making too many comments about 25. My comment was specifically, you got to start at 325 and that was deliberate because we had a number of analysts that were projecting much, much higher numbers that we knew were just not where the business was headed. And the key word there was start with.

I also made comments about the fact that you'd have to adjust for some of the moves we've made in incentive comp and we obviously didn't provide a lot of details about that at the time. But as Bob just went through the incentive comp adjustment and profit share adjustment is pretty sizable. And then the reality is we were watching what was going on with retail in October, November December and that was informing and instructing the trajectory that we saw things going into 'twenty five. And at the time we said the $325,000,000 that was based on the revenue we were delivering in 2024. And the reality is our revenue is going to be down 1% to 4%.

And as Bob indicated, given softer retail in the Q4, we ended up holding back on some shipments and now we have a higher finished goods inventory. So you have got a lower revenue base, you have got a lower production base. So we're going to be producing less than what we're shipping into the channel and that's going to create some deleverage that we have in the business. And then as I commented on Mike's prepared remarks, the snow industry is under pressure again. We met in early January based on seeing how things closed out in December and given where dealers were and made the decision that we were going to pull our production down even further and work to get dealer inventory down even further in the first half.

And then in the Marine segment, obviously, given continued weakness from a retail standpoint, as you all saw in the recent notes that came out on SSI, we've made the decision to keep pushing dealer inventory down there. So there's a lot of factors, which is why we would prefer to steer clear from trying to give guidance for the next year in October of the prior year. There's more factors that build in. We shipped a lot of premium vehicles in 2024 as we pushed the Expedition and the Ranger XD into our dealerships. And so there's going to be less of those shipping in.

And then as I mentioned, we're going to have some value products coming in later in the year that are going to create some mix headwind. And then Bob pointed to foreign exchange. So there's a lot going on. What I would come back to is, as we emerge from this and we were very deliberate, both Bob and I, about the indicators we're watching to make sure that people are still active in our segment and they are and they're writing more than they did before the pandemic. We're gearing this business to have a lower fixed cost base and the efforts we're making from a lean standpoint are going to mean we can get more throughput through the factories with less input, meaning that the incrementals coming out of this and the performance for our business will generate higher EPS.

And that is what we are focused on right now. Bob and his finance team have done an excellent job from a treasury standpoint, making sure that we're in a good spot for investment grade rating and protecting our debt position with our banks. And when you look around at the field of folks in our industry and the struggles and problems that they're having and businesses going out of business and solvent, businesses being sold, I think we're managing through this as best we can. Bob, is there anything you'd add to that?

Yes, just a couple of things, Fred. As you guys saw in CDK, October retail looked probably the best of the quarter. And unfortunately, we've seen that dynamic a few quarters in a row now where the 1st month starts off well and then it tails off and we saw that again in the Q4. So that drove a more conservative view of what we think 2025 retail will look like. And then to Mike's point, there are a number of other factors.

Interest will be relatively flat for the year. We're going to start paying down debt. We'll prioritize paying down debt after we invest make the necessary investments in innovation and in our factories and pay our dividends. So we'll start to bring that interest cost down, but we're not factoring in any substantial interest rate cuts as obviously everybody has seen the market seems to think that that's going to not be much of an opportunity in 2025. So there's some of that is just sort of adjusting the size of that to the new size of the business.

And as we work through that, those things will continue to be less of an impact, but we're going to have to deal with it in 2025.

Okay, thanks. And then just on the free cash flow outlook, you guys are guiding for a pretty nice year over year improvement despite the EBITDA on the earnings outlook. CapEx is coming down. You've mentioned some potential tailwinds or expected tailwinds from finished goods, but can you just sort of walk us through the big moving pieces there, please?

Yes. I mean CapEx will be down to the low 200s. We've had a fair amount of capital build in 2023 2024 as we built those the new facilities in Mexico and Vietnam that work is substantially complete. And those as you recall, those are mostly back shop facilities in Mexico and then a motorcycle assembly facility in Vietnam. We'd also updated paint facilities and other things like that in the factory.

So we're kind of through that cycle. We're going to focus on the capital side on tooling, so we're driving innovation. And then high return projects in the plants, things that need to we need to do to support lean investments for quality and safety, obviously. And but so we'll be pretty lean, I think, for a couple of years here on capital, which I think we're in a good position to do because we had been investing through the cycle. And then on inventory, we're about $100,000,000 between $150,000,000 $200,000,000 heavier unfinished goods than I'd like to be.

And as Mike said, that's because as we went through the year and particularly the Q4, as we made pretty rapid adjustments to drive down dealer inventory, that all had to flow somewhere and you can't just stop production immediately. You have to figure out how to best balance the lines. We said we would be the shock absorber we were. We drove that allowed us to drive some stuff out of raw and get the raw balances down, but now we got to flow the finished goods out through the course of the year. So it will be part capital, part inventory, but I feel pretty good about where we are going to be from a cash flow standpoint.

Hey, Fred, back to your first question. If you look at our 'twenty four EPS results and you adjust for the 2 big things that Bob mentioned, the incentive comp plan where we essentially cut the plan in half given the performance and then a recalibration of foreign exchange, it really would say that $0.24 EPS was more like $1.69 So you're really bridging from $1.69 to $1.10 and because we're planning on paying out the full profit share and incentive plan in 2025. And that's where you can really see the effects of volume and the deleverage. But I think that probably helps bridge the difference between 'twenty four performance and where we're expecting 'twenty five to play out. That incentive plan, which Bob did a great job of highlighting why we do what we do and it's been a cornerstone of this company since its founding in 1954.

That will help kind of bridge why the performance looks so dramatic on a 1% to 4% revenue decline.

Your next question will come from Joe Altobello with Raymond James. Please go ahead.

Thanks. Hey, guys. Good morning. Yes. So I guess first question on the industry.

You mentioned a few times here this morning that you do expect to continue challenging environment here in 2025. So I assume you're expecting another down year from an industry standpoint. But are you guys assuming we're going to start to see some growth in the back half of the year?

Yes. I mean, right now, we view the industry as probably down low single digits in 2025 and a lot of that is really being driven by motorcycles, marine and the snow categories. And I think it's tough, Joe. Certainly for us from a retail expectation standpoint, we think the first half is still going to be continued challenges. And that really is just reflective of the trends we have seen coming into the Q4 and as we exit the Q4, there is anything magical about the New Year.

And as Bob indicated, right now, we are who knows how many rate changes there will be this year. But consumers still are carrying a lot of debt. Inflation is kind of stalling out

mid-2s, which would signal that there may not be that many interest rate cuts this year. And as we've talked about in the past, it's going to take time for this to work through. The interesting thing is, as we look at the performance in the industry, kind of the 24%, 25% combined to pre pandemic levels, it's really the rec areas that have struggled the most, all of which are either flat to down before the pandemic. And we think that's largely being driven by interest rates, discretionary spend pullback. The utility category has held up low single digits growth.

And I think that bodes well in terms of at least being a little bit of a shock absorber. And as I talked about in my prepared remarks, we know what the repurchase rates are. We know people are using these vehicles. But it's a tough environment. They paid full MSRP.

They got a low finance loan. Trade in values are going to be lower than what they would have expected when they first bought the vehicle, they're trading into higher interest rates. So it's going

little bit of time. I would hope that things start to improve in the back half. Certainly, that would be encouraging for us in terms of forward momentum, but I think we're going to steer clear of making any big prognostications right now.

That's very helpful. And maybe just a follow-up, and I'm hesitant to ask about it, but tariffs, you mentioned this morning, you're not assuming any additional tariffs in your outlook, but obviously it's been discussed. So I'm just curious, I think last year tariffs were about $70,000,000 to $75,000,000 Given what's been discussed, how much incremental tariffs could we potentially see in 'twenty five?

Yes. We've got about, call it, dollars 60,000,000 to $70,000,000 of tariffs in the business today, and that's largely the 301 tariff List 1, 2 and 3 that were put in place under Trump's first administration. I'll give you some basic data. We're going to steer clear of trying to forecast where this is all headed. We are obviously watching it very closely.

We have some excellent government relations folks out in DC who are staying very close to this. As you know, it changes by the hour. As of yesterday, we were hearing that it's far more targeted around specific areas like semiconductors. But there's no telling where things could go. I'm sure there'll be some short term things that may get pulled back because they're being used as a negotiating tactic.

So at this point, we're staying focused on the things we can control within the business. If you look at China, we procure about a $500,000,000 of components out of China. About half of that goes into the U. S, about half of that goes into our Mexico facilities. Obviously, the stuff going into the U.

S. Is where we're paying tariffs today on all the applicable items that hit in Less 1, 2, and 3. We have a couple of $1,000,000,000 worth of revenue that comes out of our Mexico manufacturing facility. It's about a third of our production in terms of sales that come into the U. S.

And we have less than $100,000,000 worth of revenue that comes out of the U. S. Into Mexico. We're less than $500,000,000 worth of revenue into Canada, and we import less than $50,000,000 into the U. S.

What I would tell you is, for China, we have been working since the original set of tariffs were put in place. We've pulled down considerably by about a couple of $100,000,000 the amount that we're procuring out of China. The team has plans in place as we've talked about. This is not stuff that you can do overnight. These supply chains have been established for decades.

But we've been working with our Chinese suppliers. Our sourcing organization has worked aggressively to find alternative supply. We're going after an aggressive amount during 2025. And then we obviously have plans identified for 2026 and 2027. The list gets harder and harder as we get lower and lower into the components that we would be going after.

And that's what we're going to be focused on. I would say that we have relative to the rest of the powersports industry up until this point, been incredibly disadvantaged. We're the only U. S. Manufacturer, yet we're the only ones paying tariffs.

Some of our competitors, 3 of them specifically, have pretty heavy manufacturing bases down in Mexico. And obviously, we would be impacted, but they would be more impacted, some of which have almost all their manufacturing coming out of Mexico. So it's a volatile environment. We're going to stay focused on the things that we can control as it relates to how much we're procuring out of China. And we're going to do what we can to help influence policy where appropriate.

next question will come from Craig Kennison with Baird. Please go ahead.

I was hoping to follow-up on the tariff topic and then also the dividend. But with respect to tariffs, Mike, and the last point that you made, do you have a sympathetic year in Washington that appreciates frankly that you build more units in the U. S. And also pay the highest tariff? Just feels like whatever policy is not editorialized, but whatever policy they're aiming for, it feels to be missing the mark in powersports in a fairly big way.

And I'm wondering if you have a sympathetic year there.

Yes and no. We were successful during Trump's first administration. If you remember, we got a pretty considerable list of exemptions. But the exemptions were short lived. So yes, they were sympathetic, they listened, but the message at the end was get out of China.

And they gave us some time, although it was not anywhere near as much as we would need. The reality is we are kind of going at it alone, because the rest of our industry is not facing some of these same challenges. We did make the point loud and clear that we are the only American power sports company and we are the ones being disadvantaged both against the Japanese as well as the Canadian competitors and Chinese. There's new players involved, but there's still some consistent ones that will be there. We have attempted to make some inroads, but they are not at a point where they're willing to engage with industry at all.

Polaris (PII) Q4 2024 Earnings Call Transcript

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