Polaris Inc.

Good day and welcome to the Polaris first quarter 2020 earnings call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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 Richard Edwards. Please go ahead.

Thank you, Jason, and good morning, everyone. Thank you for joining us for our 2020 first quarter earnings call. A slide presentation is accessible at our website at ir.polaris.com, which has additional information for this morning's call. Scott Wine, our Chairman and Chief Executive Officer, and Mike Speetzen, our Chief Financial Officer, have remarks summarizing the quarter, and then we'll take some questions. During the call, we will be discussing various topics which should be considered forward looking for the purposes 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 2019 10-K for additional details regarding these risks and uncertainties. All references to the first quarter 2020 actual results are reported on an adjusted non-GAAP basis unless otherwise noted. Please refer to our Reg G reconciliation schedules at the end of this presentation for the GAAP to non-GAAP adjustments. Now we'll turn it over to our CEO, Scott Wine. Scott?

Thanks, Richard. Good morning and thank you for joining us. I want to begin with sincere thank you to the Polaris team for stepping up and leaning in, as they always do, to support our customers and dealers through the first few months of this COVID-19 pandemic. Our people and our culture remain our most important strength, and their performance in the early days of this crisis is proving that out. The abrupt shutdown of global commerce was certainly a shock to our business, but our aggressive, planful response has positioned us to navigate and win through this lockdown and the recession to come. Our long-term commitment to being a customer-centric, highly efficient growth company is unwavering. But this crisis requires focus, so we defined four priorities to guide us. First and foremost, we are committed to employee safety. Next, we will ensure that Polaris is viable, and then support our dealers with the goal of being their preferred partner. Finally, we will continue to be a good steward for our shareholders and stakeholders. When China locked down in early February, Ken Poussel assumed the mantle of coronavirus czar and his leadership focus and structured approach has been essential to our ability to stay abreast with and often ahead of this dynamic situation. What began as a major risk with suppliers quickly evolved into employee health and safety concerns and then issues with mandated dealer closures and various state regulations. Ken and his team meet daily to assess the environment and their prompt actions and thorough execution has been immensely helpful. Mike Speetzen took a similar ownership of our liquidity and cash management and expertly turned a potentially significant concern into a very manageable scenario. He also quickly initiated our recession playbook, enabling us to execute cost down and restructuring activities with speed and precision. Both our retail flow management system and our overall agility were tested by the rapid demand shifts at the end of Q1. and I am pleased with how each performed as we successfully reduced shipments and implemented floor plan support to protect our dealers. This untimely shipment reduction in the lowest earnings and cash flow generation quarter of the year coupled with uncertainty around dealer operations and consumer demand put quite a bit of pressure on our liquidity outlook. Through extremely fast action on working capital, cost cuts across the enterprise and strong support from our bank group, We have reduced our liquidity concerns and are laser focused on managing cash flow. As in 2008, we are broadly and boldly reducing expenses, but protecting key product and strategic investments. We have already taken out over $120 million of annualized operating expenses of the business, mostly human capital related, and overall OPEX will be cut nearly 25% in the second quarter alone. Our lean factory operations will reduce hours in line with demand. Earlier this month, we announced the wind-down of three of our smaller boat brands, Rinker, Striper, and Larson FX, and we will continue to evaluate our portfolio for businesses and brands with a limited path to strong, profitable growth. We are protecting our strategic engineering investments while accelerating our ongoing engineering efficiency projects. Our protocols for dealing with all things COVID-19 utilize the best information we can obtain from CDC, WHO, local health departments, our retained medical experts, and many other sources. We continue to work tirelessly to keep our employees and their families safe and we are complying with quarantine and cleaning protocols. We have had seven confirmed COVID-19 cases amongst our 14,000 employees and all have either fully recovered or are recovering at home. Navigating this pandemic emphasizes our deep commitment to Geared for Good. From Climb and 509's donation to Goggles for Docs to our $220,000 donation of iPads and other devices to facilitate distance learning in our rural school communities, we are putting ESG into action. Even our autonomous partner, Optimus Ride, found a way to use our gym vehicles to fill a need for meal and grocery delivery in Arizona, serving the community and possibly creating an alternative business model. Overall, first quarter North American retail sales were down 8%, but the salient point is how we got there. We were up 5% through mid-March, then down 40% for the final two weeks, which unfortunately overshadows the strong market share gains and positive retail that Indian Motorcycles delivered for the quarter. ORV lost market share in the quarter, but made numerous advances in marketing and retail execution, which are contributing to mid-teens retail improvement month-to-date in April. with likely share gains as well. We also are seeing strong demand for PGA and aftermarket parts, which should utilize our large and growing installed base to outperform vehicle sales in a down market. Snow gained market share for the season, although retail was down slightly for the quarter and the year. And while the first quarter is relatively small for boats, our pontoon segment delivered gains in market share and retail. Dealer inventory rose 8% in the quarter as the sharp drop in retail occurred too late to fully offset with shipment reductions. Motorcycle inventory was up more in support of our strong demand for our new Challenger bike. We are undershipping RFM profiles upon dealer request and covering flooring costs through the end of May, in addition to sharing our COVID-19 learnings and best practices. Dealer closures were a huge problem in early April, but this is becoming more tractable as less than 15% of ORV and motorcycle dealers are now closed. Our online presence is becoming a more significant factor in retail sales and customer engagement, and we have taken significant steps to bolster virtual accessibility. Our fast, innovative launch of ClickDeliverRide and our institution of appointment shopping are both popular with consumers and dealers. and we will continue to leverage digital efforts to enhance our support for them. We previously communicated that we paused our global plant network in March to assess our supply chain, adjust to lower demand and implement social distancing procedures. Under almost all circumstances, our facilities have met the C-SERV requirements for essential business, so we have since ramped up operations everywhere except Monterey. We are pursuing every option to obtain the CC equivalent rulings that Polaris and our suppliers need to reopen in Mexico. Fortunately, our legal and government affairs team is adept at making this argument in support of our global network. That team was also instrumental in securing the substantial 301 list 3 tariff relief, which has finally come through. We must now work for extensions. Our strategic sourcing The program has adjusted to a new operating rhythm, but remains on track to deliver increasing savings throughout this year and beyond. I will now turn it over to our Chief Financial Officer, Mike Speetzen, who will update you on our financial results and plans.

Thanks, Scott, and good morning. As Scott indicated, these are unprecedented times, and we're diligently working to adapt our business to weather the storm. We aggressively activated our recession plan that I've referenced in past calls, and we stand ready to adapt as conditions change. Given the current environment, most of my remarks will be targeted at our liquidity profile and what we anticipate in the coming months and quarters. For the first quarter, sales were down 6% versus the prior year. With the exception of motorcycles, all segments reported lower sales during the quarter driven by the COVID-19 related economic slowdown that began impacting our industry and business in the second half of March. Motorcycles growth was driven entirely by new products as the Indian Challenger continue to sell well, and the new slingshot auto drive model began sales in the quarter. First quarter earnings per share on a gap basis was a loss of 9 cents. Adjusted earnings per share was 22 cents, down 80% for the quarter. Adjusted gross margins were down 280 basis points year over year, about half driven by volume margin loss and related underabsorption at our factories. and the remaining half due to cost actions taken to protect and support employees and dealers as a result of COVID-19. Operating expenses were up 6% in the quarter due to investments in research and development and enhanced sales and marketing programs we made before the COVID-19 pandemic began to impact demand. Since that time, all non-essential expenditures have been either canceled or postponed until we have better visibility into future demand. Foreign exchange had a negative impact on the quarter versus 2019, with all currencies being impacted by the global pandemic. In the first quarter, foreign exchange had a negative impact on pre-tax profit of approximately $8 million, or $0.10 per share. Moving on to our balance sheet and liquidity profile for the quarter. Operating cash flow was a $71 million use of cash in Q1, driven by negative income. I'd also point out that our Q1 cash profile is typically low given we pay out our profit share slash bonus program in Q1. We had been in the market repurchasing shares given the significant share price reduction, but ceased that activity when the environment worsened. As you would expect, we were spending a significant amount of our time monitoring our cash position and debt capacity levels to enable adequate liquidity to sustain the company through the crisis. Our total debt levels finished the quarter just under $2.2 billion. Cash on hand at quarter end was $424 million. We have taken a number of actions to further solidify our cash and credit availability, including drawing down our additional cash under our revolving credit facility, substantial reductions to operating expenses and postpone capital expenditures that do not impact safety or quality or critical and strategic product programs, suspended our share repurchase program, Optimize working capital needs by quickly adjusting our build plans, resulting in material and component purchase reductions. And finally, on April 9th, we executed the accordion feature under our credit agreement and entered into an incremental $300 million, 364-day unsecured term loan facility. Following these actions, along with limited shipments to date, as of April 23rd, we had cash on hand of $475 million and $250 million available under our revolving line of credit. Total debt outstanding as of April 23rd stands at $2.35 billion. Given the actions taken and the measures Scott spoke to earlier, we expect to generate positive free cash flow in the second quarter and feel confident in our financial position and that we have adequate liquidity to manage through this crisis. However, we are only a few weeks into the second quarter, and as Scott noted, this is a very fluid situation. It's hard to predict how the restart will go in May and June. As a result, we intend to be very prudent with capital until we return to a more predictable environment. But just to be clear, even as we model downside scenarios for Q2, given the COVID-19 and current economic landscape, we do not anticipate any concerns with liquidity. We are, however, managing to certain leverage covenants with our lenders. If needed, we believe we can work out additional flexibility with our long-term financing partners. Thank you for joining us. to get even more comfort around financial covenants and still allow us to pay the dividend on the same timing in mid-June. We believe this is a measured and prudent approach in this environment and will enable us to make the best possible decision. The health of our credit arrangements for dealers and consumers also remains in a very solid position. Financial services income, which is comprised of wholesale finance income, retail credit income and miscellaneous income, principally from the sale of extended service contracts, was up 5% in the first quarter of 2020. Retail credit income was up 28% and dealer wholesale financing income was up 4% during the quarter. Our long-term wholesale financing joint venture, Polaris Acceptance, now in its 23rd year of existence, continues to supply ample credit to dealers. For the first quarter of 2020, the wholesale portfolio was approximately $1.4 billion, an increase over the first quarter of 2019 given the growth in the business last year Thank you. Thank you. Thank you. We believe the dealer support initiative that Scott mentioned in his remarks will help our dealer base weather the storm in the coming months and quarters, and we believe our dealers are stronger and better equipped now to handle this as compared to 2009. Moving now to our retail credit finance programs with Sheffield Synchrony and Performance Finance. During the first quarter of 2020, these three retail credit providers wrote approximately $220 million of new credit contracts to customers in the United States. which represents about 31% of Polaris products sold to consumers in the US. The approval rate is similar to the first quarter a year ago, but given the pandemic impact on demand late in the first quarter, we would expect the level of consumer contracts written to decline in the second quarter. Financial services income was up primarily due to a change in retail financing programs with one of our retail providers which allowed the release of certain reserves maintained under the previous program into income. Excluding this adjustment, Financial services income would have been lower than last year given lower retail sales. We continue to believe our retail credit relationships are stable. Turning to our segment performance, with the exception of motorcycles, all segments experienced lower sales during the quarter due to sharp downward pressure in the final two weeks of the quarter as the pandemic began to take hold on the country. Gross profit margins across the segment were negatively impacted by underabsorption of fixed costs along with the cost actions taken to protect our employees and dealers. These impacts were partially offset by modest tariff favorability. I would add that we have seen continued success in exemptions being granted, which include the ability to recover past funds paid for tariffs. Our tariff exposure has come down as a result of this, as well as a substantial anticipated full-year volume decline. We will not spend time during this call on tariff projections and will provide additional color as we get more comfort around the full year forecast. You will recall that we withdrew our full year sales and earnings guidance back in March, given the dynamic nature of the COVID-19 pandemic, limiting our visibility to accurately estimate the impact on our results. Our current view is that the economic recovery will take more of a U shape, where demand in the second quarter will be the weakest. Estimated to be down in the 25-30% range. We anticipate that the third quarter will improve over the second quarter and likely be down somewhere in the range of about half of the Q2 year-over-year decline. And finally, we expect that the fourth quarter sales, while still down year-over-year, to be down much less than the third quarter year-over-year percentage decline. Obviously, there are a multitude of scenarios that could play out over the next few quarters, and we are prepared to take the necessary steps if actual results begin to deviate from our current thinking. With that, I'll turn it back over to Scott for some final thoughts.

Thanks, Mike. We did not anticipate the COVID-19 pandemic or the significant stoppage of commerce that became a key part of the virus defense, but we are fighting determinedly to right our ship and deliver on our four priorities. We will work tirelessly to keep our employees safe so they can support our dealers as well as the customers who use our products to do some of the best social distancing there is on trails, roads, water, and mountains. We have not found our last idea to reduce costs or create more efficient growth, and we will leverage our team and our culture to win through this cycle. Our work to help our communities and others during this crisis will continue as our Geared for Good movement gains momentum. I will not extrapolate the first 27 days of April into the quarter, much less the remainder of the year, but our surprisingly positive ORV retail offers confidence that our brand and our sport are resonating with consumers who are looking for an adventure or a new tool to use on the farm. We will be there for them as they think outside. With that, I'll turn it over to Jason to open the line for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please limit yourself to one question and one follow up. If you have any further questions, you may re-enter the question queue. The first question is from Robin Farley from UBS. Please go ahead.

Thank you. I wanted to just clarify your comment about the ORV retail. You used the phrase mid-teens retail improvement. Are you saying that actually for the three weeks of April it's mid-teens increase year over year? I just want to clarify that. That's so surprisingly strong. And then just for my follow-up question on tariffs, and I know you said you're sort of going to discuss that more later, but just if you could clarify in Scott's opening remarks, his comments about tariffs, I know you've gotten some smaller amounts of tariff relief in the past. Are you suggesting that there's something new right now in terms of that, you know, sort of much larger amount that you've still been paying? Just trying to clarify what those comments were. Thank you.

Okay. Thanks, Robin. Yeah, to be honest, and I think I said it in my remarks, we are surprised as well about how well off-road vehicles. Steve Minetto and his team are executing extremely well, and what our finding is that You know, our dealers, when they get open, are really finding ways to serve their customers. So through yesterday, we are up mid-teens percent year over year in off-road vehicles. That's what I said. That's exactly what I meant to say. As for tariffs, as you recall, we talked a lot about tariffs last year. And in the October earnings call, we talked about the fact that we believed that we would get substantial relief. and what we are seeing now that has come through is that substantial relief that we expected for List 3, 301 or 301 List 3 and again that's all we'll say now. We'll provide additional color but I was just trying to confirm what we said in October has now finally come through.

Hey Robin and the other piece that I would emphasize on the tariff exemption success is that we are recovering funds from and many of the past tariff bills that we've paid. And as I've mentioned in the past where the process has been cumbersome, the one thing that the government has opened up is electronic funds transfer which is allowing us to get at that cash much faster. So it's a net benefit obviously from a P&L standpoint but given the current environment just to have that added liquidity is a much appreciated event.

That's great. Thank you. And in terms of, you mentioned you'll quantify that more. I assume you won't wait until Q2 results. Will that be something you put in a 10Q or an 8K or something when you are ready to quantify it in terms of tariffs?

No, I would think, you know, Robin, I think we're going to wait until we get to the second quarter earnings. It's my hope, and we'll have to see how things play out, that If things start to stabilize, we'd be in a position to at least start contemplating if we're going to get back into providing guidance for the back half. If we were to do that, we would certainly provide color around tariff impact.

Okay, thank you.

The next question comes from Craig Kenison from Baird. Please go ahead.

Hey, good morning. Thank you for taking my question. Scott, what are you doing to support your dealer network, and how does that stand out relative to what competitors are doing? And then secondly, could you frame the level of dealer failures in the last financial crisis and put that into context for this crisis?

Sure. Good question, Craig. You know, one of the things with RFM, as you know, we've made huge investments in that program. It put us in a position to have better inventory balances going in, despite the fact that it was up 8%. It was targeted. We knew exactly where it was, and Steve and his team put together plans to talk individually with each dealer about how to mitigate inventory. And quite frankly, now they're asking for truckloads of product more often than asking us not to ship. So one of the things, just managing dealer inventory well like we always do. Steve and his team were the first ones to provide flooring support and motorcycles did as well but just making sure that dealers felt comfortable in these early days when things were locked down not having those interest expense and we've covered through the end of May. We really have shared all of our advice on how to navigate the various CESA rulings to make sure that they can stay open and Ken Fussell and his team have shared all of our best practices with COVID-19-related protocols and procedures and whatnot. And really, the most important thing we can do is provide the advertising support. And again, we are not heavily promotional right now, but so that they can have accelerated retail, and that's really what's been working for us so far. And as far as dealer... Yeah, dealer closures. As you recall, we were, I mean, I was new to the business at that point. We were really surprised at how few dealer closures we had. It was in that 1% range, and we've not seen much. As Mike indicated in his remarks, our dealers are stronger. You know, we've taken out the weaker dealers over the years. They've either self-selected out. So overall, the strength of the dealer network is better, and, you know, What we see is our ability to move product from one dealer to another to alleviate pressure points is usually pretty good. And Wells Fargo has been a really good partner with us as we work through this.

Would you expect dealer inventory to be lower at the end of Q2?

Well... Lower to what? Lower than Q1. It's hard to say. I mean, we've got, as we mentioned on the call, we've got to get Monterey ramped up so we can start shipping again. The April retail was not in our forecast. We've been through these crises before. We saw down 30% or 40%. That's what we anticipated. Again, we're not extrapolating that that's going to continue throughout the quarter, but if it does, it would put us in a position to have lower dealer inventory. Thank you.

Is that like four questions, Craig?

One with three cards. Next question.

Next question comes from Joe Altobello from Raymond James. Please go ahead.

Hey, guys. Good morning. Just wanted to follow up on the previous questions on the North America retail for our views in April. Obviously surprising to us as well, although Remax did say last week that boat sales were up too. So I guess not all big-ticket purchases are created equal. But with that said, I mean, what do you guys attribute that to? I mean, how much of that is maybe pumped up demand That was starting from March. Is there any difference in geography in terms of that number?

I think there's a couple of things that we are attributing it to. One is that, as I've said before, PowerSports customers don't hibernate. And I think that even with these stay-at-home orders prevalent throughout the country, people do want to get outside. And our dealers have found a way. We were quick to launch the... click buy deliver programs so that they could get access to the products and remember most of the hot spots with COVID-19 are not in what I would call great off-road vehicle riding areas so I believe that most of our customers and potential customers are in areas that haven't been as hard hit so that's certainly helpful and again just really want to give credit where credit is due to the work that Steve Mineto, Rod Crois, Pam Kermish, that team is really doing a nice job of executing, and I think that we're seeing the results of that.

That's very helpful. And just if I could follow up with Mike, could we get a sense for the operating expense number for the year? I think you mentioned Q2, you're cutting about 25%. Is that going to continue for the rest of the year, maybe a capex number in terms of how we're thinking about cash flow this year?

Yeah, so I think the way to think about OpEx is we took a pretty heavy reduction in Q2. If you look back at the press releases around the timing of the furloughs, so Q2 is going to be a little bit more heavily weighted. If you think about the full year versus last year, our operating expenses will probably be down in the range of about 10%. and I would tell you that it's probably a similar level of reduction relative to the capital spending. It'll be in that 10 to 20% range.

Okay, great. Thank you guys. The next question comes from Brett Andrus from KeyBank. Please go ahead.

Hey, good morning. So just to kind of follow up on the comment again around April, I guess what factors are you thinking about that give you hesitation to extrapolate those retail trends? Is it something you're seeing in the consumer behavior? Is it a catch-up demand? Is it stimulus driven? What factors are you considering there?

There's been a big shock to the system. I like to refer to it as we stopped commerce in much of the country and it just I believe that at some point that's got to have an impact on consumer demand. We have not seen that. So that's part of what's causing caution. Secondly is, you know, we're still battling supplier risks. You know, we've got problems in Italy that we're working through, problems in India we're working through, Mexico's an increasing concern right now, so we need to make sure that we've got that. Now granted, we've got Finish Goods that we can downright, and we can now. But those are some of the things that cause us pause. But again, it's significantly better than we thought, and we're trying to manage through that.

And just kind of following up on that last comment around the suppliers, I mean, can you give us a sense of where retail inventories sit now, especially on top of a lot of the retail trends that you saw in April? Just kind of where are we at with that, and are those lower inventories presumably starting to impact April sales trends?

No, we do not have any concerns about dealer inventory or factory inventory being too low right now, like zero concerns. Maybe that'll be a problem at the end of the quarter, but no, we've still got plenty of inventory in the network.

Understood. Thank you.

The next question comes from Garrick Johnson from BMO Capital Markets. Please go ahead.

Good morning, everybody. I just want to follow up on Joe's question about March and April. Maybe if you could combine the last two weeks of March, first three weeks in April, what kind of number that would be? And then my other question would be about adjusted gross margin down 280 basis points. Was there any sort of one-time acceleration of reserves or allowances? and how does floor plan support affect your gross margin? Thank you.

Well, floor plan support is, it's not de minimis, but it's almost de minimis. So it doesn't really have much of an impact. The last two weeks of March and the first two weeks of April in any year would be a really down trend because March is usually really big and the beginning of April is not. But because March was down, you know, down 40s, I think what we said those last two weeks, and granted it didn't start off, April was not gangbusters out the door because there was a large number of our dealers that weren't open for retail, but it did accelerate rather quickly. But it was a bad, really, two weeks and then the first week of April wasn't very good and then it's improved since then.

Hey, Garrick, from a margin standpoint, a couple things. Scott's right, the floor plan support financial interest that we cover for the dealers relative to the size of the company is not material. It does hit the gross margin. It's part of what we deem promo cost. And then as far as, you know, if you look at our Q1 decremental margin versus last year, it was pretty substantial. And my In my prepared remarks, I talked about half of that is the typical drop rate. The other half is as we started looking at promo, COVID pay where we had factories that were starting to have to shut down, etc., making sure that we had all that provision for. As we look through the balance of the year, assuming that sales profile and all the actions that we've taken, We would expect our gross margin drop rate to look something more like, call it 35% from a full year standpoint.

The next question comes from Tim Condor from Wells Fargo. Please go ahead.

Thank you. Gentlemen, first of all, congrats on just getting on it and preserving what you can and keeping things rolling. On ORVs, can you just confirm where you stand with your MAP policies, one, and then specifically the ORVs and maybe any other of the product lines? Any way to parse out what the oil patch is doing ex-COVID? I know it's probably a very difficult question. And then lastly, Scott or Mike, whoever wants to take this part, on the supplier risk, you mentioned Italy, Mexico. Any additional color you can give us there? We expect those could be resolved and any color on China.

Thanks. You know, Matt Policy, you know, one of the... Steve Minetto's got rich, deep, deep history with our channel and understands extremely well. And so what he's brought to it is just a look at Matt Policy. We still believe in doing everything we can to protect... Dealer profitability and give them the opportunities to grow their businesses. What we can't do with MAP is make it restrictive. And I think what Steve's done is taken, and Rod Krois, they've done a good job of looking at what makes sense and where does it not make sense to have MAP. So there's been slight adjustments to the policy, but no grand architecture change at all. The other question is that the global supply chain When this thing started in China, we were hyperventilating, but ultimately we managed through that. And then it moved, we had problems with suppliers in California, and then it was suppliers in New York, and then it was suppliers in Italy. Italy's coming back reasonably well. Even India, which was a complete lockdown for a bit, very scary. Give it a couple weeks and they get more comfortable with how to address it, and that's starting to come, get better management. and right now the concern is Mexico, but like we've seen in all of these other countries, we expect that they will come around in their thought processes and we'll be able to get back to operating, but we're not there yet.

The next question comes from Greg Badishkanian from Wolf Research. Please go ahead.

Great, thank you. Two quick ones here. First one is just, you know, April ORV up mid-teens. How much of that do you think is driven by the industry being, you know, strengthening versus market share gains? And then just as you look out for the rest of the year, you operate in just about all the power sports categories. Which one is best position versus worst position as we move out throughout the year from a retail perspective?

We've done some research and we believe it is mostly industry but also some market share gains in off-road vehicles.

That's what we believe.

I think that side-by-side still continues to be the best opportunity for growth. Motorcycles is still negative for the month but they've had a sequential improvement throughout the month so they're getting less worse, if you will. The demand for boats has been reasonably good, but again, we were trying to bring down dealer inventory there, so it's going to take a lot to bring that back. But good weather and better consumer sentiment as it relates to getting outside could certainly help that.

Thank you. The next question comes from Dan Cardamon from Wedbush. Please go ahead.

I think that's me, James. So going back to getting from down 40 in the back half of March to up mid-teens, maybe you've answered this. If so, I apologize. As we sit here today, I think you gave us that 85% of your dealers are now open. Where and when did that number bottom out? And do you have any visibility on when that 85 can get back to 100%?

I don't recall. It was sometime in April when it bottomed out, you know, the first 10 days of April. I don't know exactly, you know, what the date was. And I don't remember what the number was. It was, you know, it never got to like down 50 or anything like that. But it was just, and we, again, it's almost hand-to-hand combat in each state going through the CISA ruling and just making sure that we understand it, our dealers understand it, and can navigate through that. What was the other question?

The other question was where it goes from here, but just to clarify on that last point, you think the improvement in April is more about dealers that were already open seeing accelerating sales rather than just more dealers being open? Oh, for sure.

If you think about it, the dealers that are Most aggressive are the ones that probably were the ones that found a way to be open sooner.

I mean, it just kind of feeds itself.

The network is doing a really good job of managing the protocols, creating a safe environment, using the opportunities to schedule appointments. I mean, they're really doing a nice job.

Got it. And then help me bridge the up mid-teens or the up in April overall. with Mike's comments about the expectation is for QQ demand to be weakest, and I think you said down 25% to 30% range. You may have answered this. Was the latter assumption made before you saw how strong April was? I'm just trying to bridge those two.

Yeah, so James, a couple things. One, Scott did mention that the April performance is better than what we were expecting. You know, the 25% to 30% is really driven by two things. One, it was our expected demand profile. And then the second is our capability to actually ship. And with the factories having been shut down, as Scott mentioned, you know, we've got the factories coming back online. Obviously, Monterey is not back up and running, and that represents a pretty substantial part of our ability to meet demand. and so we really patterned it after that as well as where we wanted to see dealer inventory be as we got to the end of the second quarter and obviously leading into the model year changeover. As we indicated, that's why we pulled guidance is that this is an evolving environment. We want to see how April plays continues to play out and what the implications are for May and June and we're working daily with Steve Minetto and his team to assess that but It's not as easy as just pulling a trigger. We've got a supply chain that's still trying to get up and running. We've still got a plant network that's still trying to get completely up and running.

But just to be clear, those two numbers are not connected to one another. In other words, May and June would need to be down, I don't know, 40% or 50% to get to that down 25% to 30%. That's not how you're thinking about it right now, correct? Correct.

Just keep in mind retail versus wholesale. We're trying to also manage the dealer inventory. You've got mix involved. You've got the promo actions involved. Again, it's why we pulled guidance because we're in a bit of a volatile environment and just trying to make sure we're managing through it. Okay. I apologize.

I thought the 25 to 30 was a demand comment. You're saying that's a reported sort of wholesale assumption that you're making? Correct. Correct. Got it. Okay. Thanks, guys. Appreciate it. Yep.

Next question comes from David McGregor from Longbow Research. Please go ahead.

Good morning, everyone. Pretty impressive progress, I guess, around the second quarter operating expense expectations, down 25%. How much of that comes back with a volume recovery versus how much of that is a permanent structural cost reduction?

Most of it's permanent structural costs. I mean there was some cutting of advertising and managing the other operating expenses but it was mostly people cost actions and really looking at our business as we've structured to be this customer centric highly efficient company and what does it look like in this lower demand environment and how do we do that and I think across the business we've done a good, now some of them are are short-term furlough-type things that won't repeat unless it's necessary. But most of it was structural costs that will stay out of the business.

Good. Thank you very much. That's it for me.

Next question comes from Jamie Katz from Morningstar. Please go ahead.

Hey, good morning. I have two quick questions. First, given the commentary on April, it would seem that we are not going to have a reiteration of oil patch demand falling off imminently like we did in 2015. Is that fair, or have you seen any changes there?

You know, I think over the last couple of years of weakness, we've gotten to a level of sales in those oil patch regions that up or down doesn't mean that much to us. And it was – remember – In 2015, it was the hiring of so many people to work on the rigs that were just ideal Polaris customers. That hasn't repeated itself because, remember, they got so much more efficient. Before the price went down, they were very efficient and needed less labor and less people. So, I mean, yes, it's going to go down, but it's going to go down from such a low base it really won't matter much.

Excellent. And then for gross margins at cap, they got, or for aftermarket parts, that segment got squeezed. Pretty well, and I'm curious if there are any steps you guys have taken to mitigate the margin degradation going forward. Thanks.

Yeah, I mean, I'd tell you that, you know, there were things that we had underway heading into the year that we will, you know, likely spend some time talking about as we get later in the year to improve the margins. But, you know, at this point, we're working through it. You know, I think as we look at Craig and the team's performance at Transamerican, they actually are doing better than the broader automotive segment which tend to be some of the peer groups that they compete against. So they're managing through the retail channel quite well and wholesale continues to be a bit of a challenge.

Next question comes from Joe Speck from RBC. Please go ahead.

Thanks, good morning everyone. Mike, you did a lot of impressive and hard work here on liquidity in pretty short order. But I think one of the surprises, at least to us, was maybe how perilous it got so quickly. So this may be a once-in-a-lifetime event, but real simple question, does this cause you to change the way you think about capital structure, liquidity, and minimum cash on hand going forward?

It's a good question, Joe. I think... One of the things that we probably had not spent enough time in the business was just managing the daily cash flow. We have the benefit, which is much different than a lot of companies with our wholesale finance structure that we get paid relatively quickly after we ship. And most companies have to focus on managing the receivable side as well as the payables, the output side. We've been very fortunate to have such strong liquidity that we probably didn't have as tight a process. That will definitely change as we go forward in the rigor and this cash war room approach that we put in place very quickly will continue as we go forward. I think from a debt standpoint, it wasn't optimal to be at the level that we were. I think the strategy we had and continue to have, which is to Thank you for joining us. Make sure we sustain through that, and then I think we'll do a lot of look-backs to really assess how we run the company going forward.

Thanks. Maybe a follow-up. I know first quarter typically is a working capital use that happened again, but given the extraordinary events, how are you thinking about the working capital sort of drawdown or rewind, I guess, over the balance of the year?

Yeah, it's been priority number one focus really for us has been around dropping the inbound material. As I mentioned, most companies when the slowdown happens, they have a bow wave of payables, but they also have a bow wave of receivables. And so from a cash position, they tend to be offsetting or slightly positive. Our company is structured differently. Our cash was collected in Q1. on the materials that we're paying for in Q2. And so the timing difference is paramount to us. I give a lot of credit to the organization around being able to go back and rerun our psyops, which is where we link the demand planning back through the supply chain, and rapidly shut down the inputs. We've seen it. We track our cash on a daily basis now. We can watch how those inputs are coming down. I would anticipate that our inventory relative to what we were expecting in Q2 and then for the balance of the year will be down and we're continuing to push that and that will really help from a cash standpoint and be something that the team has probably executed faster than I clearly was expecting.

Thank you very much. Next question comes from Scott Stemper from CL King. Please go ahead.

I'm not sure if you mentioned, what was the promotional environment like so far in April for ORV versus what you saw in the 40% decline in the back half of March?

It's more promotional in April. I mean, we're one of the things that we're committed to is not chasing retail down with promotions, so we've, Steve and his team, again, have done a really nice job of of managing promotions, so we're competitive, but not leading that way. Our brand messaging is really resonating, and I think you see that in the advertising campaigns that we've gotten. The way that we're partnering with our dealers is better, so it's taking less promo, but the industry has been a little bit more promotional in April.

Okay. And just last question on tap, down I think about 10% in the month. or in that vicinity. How is TAP performing so far in April and are there any moves that need to be made from a cost perspective there?

TAP's taken a lot of cost moves. Craig and the team have really looked holistically at how to step down the cost infrastructure there. The big issue at TAP is almost a third of their retail stores are in California. and as you know, that's about as locked down as tight as anything in the United States. So that's been a bigger problem. As you know, they've got a big online presence and we're seeing that pick up. So they are, again, steadily improving but that slowdown in California was impactful to them.

Got it. That's all I have. Thanks. Thanks.

Next question comes from Mark Smith from Lake Street Capital Markets. Please go ahead.

Hi guys, can you give us some insight into boat dealer trends versus kind of the 85% that you talked about, how many maybe are open and closed today, and then any additional trends that you see in April in boats?

Yeah, we don't have as granular of data on boats, but what we do know is that while most off-road vehicle dealers did fit into the clear CESA eligibility to remain open, that is not true for boats, so it was a little bit more of a Thank you very much.

And then can you give us any insight, and I'm not sure if you have it, on maybe the impact that government checks coming into consumers' hands have had, even if we look at just within the PG&A segment?

You know, PG&A is performing extremely well, and Steve Eastman does a great job with that business. We did hear anecdotally that there were a lot of $1,200 deposits put down on vehicles, so I don't I'm not sure that that's a big bow wave, but certainly it didn't hurt.

Thanks. Next question comes from Mike Swartz from SunTrust. Please go ahead.

Hey, good morning, guys. I apologize if I missed this in your comments, Scott, but did you call out any reasons why the ORV share was down? for the quarter and maybe how to think about that in the second quarter and beyond.

I didn't quantify why. I can tell you that it got sequentially less bad throughout the quarter, so a lot of the work that the team has done started to pay dividends. It was not across all categories, so I feel really comfortable that Steve and his team have their Pulse on that one and are turning it around as I mentioned they're doing in April.

Okay, just a question quickly on boats as well. I think during the quarter you or in recent weeks you announced you're shutting down a couple brands. How material were those brands to revenue in your boat segment?

Not I mean it was not they were the revenue was very small in the profit was none. So, I mean it really doesn't, they weren't material to the boat business actually.

Okay, next question.

Next question comes from Tim Condor from Wells Fargo.

Please go ahead. My question on the oil patches, well let me just rephrase it I guess on the oil patch. The percentage of your revenues now, Scott, you said that they've been reduced quite a bit. Just any update as maybe the end of the year 19 or where that stands as a percent of revenues from the oil patch in North America or however you want to frame it for ORVs?

Yeah, Tim, I think at the peak it was about 15%. It is now down more in line around 13%. Scott had made the comment that the revenue movement's are probably less and less correlated with just oil. You know, that was something that had driven outstripped demand back in, you know, call it 14, 15 timeframe. Now I think, you know, those regions, which, you know, we don't track it specifically, they tend to be more state specific, they tend to just move with the broader, you know, economics. And certainly oil, you know, has reacted to the drop in demand and the supply levels that, you know, are far greater than what the current demand is. And I think that's all tied back to what COVID-19 has done to the broader economic cycle. So it's tough to parse the two right now.

Okay, great. Thank you, gentlemen.

Okay, last question.

Next question comes from Brett Anders from KeyBank. Please go ahead.

Thanks for squeezing me back in. I'm sorry if you already mentioned this, but are you planning any changes to Your new product launch cadence this year. And then the second question, Mike, did you give an operating expense number for the year? I know you kind of gave us some color on 2Q, but did you give anything for the year?

I think Mike said down 10 for the year. Yep. And we are not pushing out. We are not planning to push out our product launch cadence. I will remember a couple of years ago, we kind of went to a more Thank you. Okay.

I want to thank everyone for participating in the call this morning and we look forward to talking to you again next quarter. Thanks again and have a good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.