Polaris Inc.

and welcome to the Polaris First Quarter 2025 Earnings Call-In 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. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to J.C. Weigelt, Vice President of Investor Relations. Please go ahead.

Thank you, Allison, 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 2025 first quarter earnings call. We will reference a slide presentation today, which is accessible on our website at ir.polaris.com. Joining me on the call today are Mike Speetson, our Chief Executive Officer, and Bob Mack, our Chief Financial Officer. Both have prepared remarks summarizing the 2025 first quarter, 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 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 2024 10-K for additional details regarding risks and uncertainties. All references to 2025 first quarter actual results and future period 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 gap to non-gap adjustments. Now, I will turn the call over to Mike Speetson. Go ahead, Mike.

Thanks, JC, and good morning, everyone. Thank you for joining us today. 2025 has continued to be a dynamic period for our industry. These are certainly challenging times, but we're managing the situation thoughtfully. And as I mentioned in our last earnings call, it has become increasingly evident over the last several months that one of Polaris' greatest strengths continues to be our determined, and unrelenting team, one that is willing and able to conquer any challenge. Today, Bob and I will walk through how the business performed in the first quarter, share more on our strategic approach to mitigating the impact from tariffs, and discuss how we intend to emerge stronger to deliver sales growth, stronger earnings power, and higher returns. In Q1, we continued to focus on managing what is within our control. As expected, sales were down 12% driven by our decision to continue reducing shipments to manage dealer inventory amidst a prolonged downturn in power sports and a higher promotional environment. Margins were slightly below our expectations due to elevated promotions in the industry. Tariffs did not materially impact the first quarter results due to timing and the deferral of related costs. We partially offset these headwinds through ongoing operational savings, including lower manufacturing spend and favorable material and logistics costs during the quarter. Adjusted EPS of negative 90 cents came in at the midpoint of the guidance range we provided in January. North American retail was down 7% with relatively better performance in our utility business versus recreational products. On our prior earnings call, we highlighted the positive indicators around ridership, pent-up demand, and continued interest in the power sports category. This point was reinforced this last quarter in our snowmobile business as late-season snow in the flatlands resulted in strong retail growth of approximately 50% in the quarter. Additionally, in a Razor consumer study we recently conducted that looked at vehicle usage and owner repurchase rates, Razor ridership and engagement within the category remains strong. In fact, over 90% of Razor riders in our study say they are planning to ride the same or more than last year. However, more than 40% of those we surveyed Acknowledge that they're holding on to their vehicle longer than they typically would given factors like interest rates and economic uncertainty. The share story was mixed this quarter as we gained share in motorcycles and pontoons but lost modest share in ORV. Remember that we were among the first to execute a dealer inventory reduction strategy, demonstrating our commitment to a strong partnership with our dealers. We continue to see ORV share being impacted by elevated promotions from some of the Japanese OEMs that continue to lag Polaris in reducing dealer inventory. In our view, this is a short-term issue, and we believe that we remain well-positioned to gain back share with our innovative product line across ATBs and side-by-sides once inventory levels normalize and industry retail stabilizes. The uncertainty in today's market reminds me of 2018 when we were dealing with the initial wave of tariffs that were placed on China. The environment is fluid and changes daily. My goals then as CFO and now as CEO are consistent. Successfully navigate the situation with the best team in power sports by staying close to our dealers, preserving cash, and positioning this great American company to emerge stronger than ever and further cementing Polaris as the leader in power sports. We've decided to withdraw our full year guidance that we provided in January. This was not an easy decision. However, given the fluidity of the tariff environment, including the frequency of new tariffs, changing tariff rates, and the temporary suspension of certain tariffs coupled with the potential impact to consumer spending, we have determined that withdrawing our full-year guidance is the most prudent course of action. We're actively monitoring developments and will reevaluate our decision on guidance once we have greater clarity. Our commitment remains to stay focused on navigating these challenges and positioning players for sustained long-term success. Retail trends in the quarter were similar to what we've seen in recent quarters. Within off-road, our utility retail was down high single digits, led by double-digit declines in ATVs. Recreation was down high teens, driven by greater than 20% declines in Razor and youth vehicles. Volatility amongst intra-quarter months was elevated with double-digit swings month to month, with February being down roughly 20%. It's worthwhile calling out our premium products, such as Polaris Expedition, Ranger XD, and Ranger XP North Star, as these products had positive retail in the quarter. The sustained demand for our premium, feature-rich products highlights strength among cash buyers. Within on-road, the motorcycle market continues to be pressured both domestically and internationally due to its discretionary nature. However, Indian motorcycles outperform the industry and gain share in North America, driven by the new Power Plus lineup and our heavyweight portfolio of bikes. In marine, the boat show season is behind us, and retail at those shows was flat to slightly down against last year. During our recent dealer visits, there was a lot of excitement from dealers regarding the new boats we launched, and while we expect sales pressure to remain in the marine industry due to high costs and the discretionary nature of the product, we believe we can win share with our innovative portfolio of boats. As previously mentioned, we also continue to see OEMs in the marine space impacting share with aggressive promotions to help dealers move non-current inventory. While this negatively impacts us in the short term, we do not believe this is a long-term strategy to move share. In the first quarter of 2025, Bob and I spent time meeting with some of our off-road and marine dealers. This is an important part of the job, and I always walk away from those meetings impressed with the partnership we have with our dealers and their commitment to Polaris. My takeaway from those meetings are that partnership matters. They feel like we're listening and are making appropriate adjustments. and they were appreciative of us meeting our commitment to reduce inventory last year and into this year. Innovation matters. Dealers feel we're listening to our customers, and it can be seen in the features we added to our model year 25 lineup. Innovation also includes quality, where we've seen significant improvements in model year 25 warranty claims, and dealers confirm that Polaris is among the best in this regard. Lastly, dealers voiced concern and uncertainty for the remainder of the year. We assured them that we would remain close and make the appropriate adjustments to help ensure their businesses are protected. From our visits, it was clear that those dealers who are focusing on all five profit centers within their dealership are faring better financially given strength in service, used vehicles, and accessories. So while uncertainty remains high, I feel our relationship with dealers is healthy and strong. We understand each other's priorities and are working hard to ensure we experience mutual success. Now shifting gears to tariffs. Every day seems to bring a new headline or new information, so we're staying focused, keeping a level head, and being proactive. This includes going to Washington, D.C. to meet with our elected officials and their staff to reemphasize the fact that we are the only major U.S.-based power sports company. Our story started more than 70 years ago as a small business founded in Minnesota, and while we have grown to be a global company, We maintain our strong sense of pride being headquartered in the US with the most significant US manufacturing, testing, and R&D presence in the industry. We employ more than 8,000 Americans while supporting approximately 35,000 American workers employed by our US dealers. In addition, approximately 65% of our US production value stems from US content. Unfortunately, the tariff policies as written today have created an environment that disadvantages Polaris for our US manufacturing footprint. As we mentioned at our Capital Markets Day in March, we import approximately $250 million of components from China to the U.S. to be used to assemble vehicles. Under the current tariff regime for China, we are forecasting an incremental tariff rate of approximately 145% on our U.S. imported Chinese components, equating to approximately $200 to $240 million in new estimated tariff costs this year. This 145% tariff rate doesn't apply to competitors who also source from China but manufacture in other countries like Mexico or Japan and then ship products to the U.S. The same goes for many of the retaliatory tariffs throughout the rest of the world, which equates to a potential gross tariff impact this year of approximately $35 million. This current environment puts us at a competitive disadvantage because we have a U.S. manufacturing footprint. All in, we expect to incur between approximately 320 to 370 million of gross tariff costs, of which approximately 60 to 70 million was budgeted within our original guidance. With costs being capitalized in inventory, we can defer a large portion of these costs into the back half of the year in 2026. In response to the tariffs, we've launched a tariff mitigation strategy. Following the initial tariff announcements in February, we mobilized cross-functional teams to evaluate the implications for our supply chain and cost structure. These teams meet daily, we have war rooms, and have already implemented several actions to help mitigate the potential tariff impact. To manage this complexity and reduce our exposure, we're executing a four-prong mitigation strategy focused on One, making adjustments to our supply chain and manufacturing to diversify sourcing and optimize our production footprint. Second, initiating cost control initiatives to offset pressures elsewhere in the business. Third, reprioritizing markets and pricing where appropriate to preserve margin. And finally, ongoing government affairs and advocacy to ensure our perspective as a U.S. manufacturer is represented in policy discussions. Within our supply chain and manufacturing footprint, our immediate focus has been on our Chinese content given the size of the impact. We've started moving, we started moving sourcing out of China and into other countries, including the U.S. in 2018. By the end of this year, we anticipate we'll have reduced our Chinese source parts by approximately 30% with plans in place to make further reductions in 2026. Regarding our manufacturing in Mexico and U.S. MCA compliance, Approximately 95% of our US imports from Mexico are USMCA qualified. We are working to increase that percentage to further reduce tariff exposure. On the cost control front, we acted quickly to reduce discretionary spending, including tightening travel requirements and placing a selective near-term pause on hiring. As Bob will discuss shortly, we're taking a disciplined and proactive approach to managing costs, preserving liquidity, and ensuring Polaris remains well positioned in this period of uncertainty. In response to retaliatory tariffs, we've taken action to reduce shipments of Slingshot and certain motorcycles to Canada and motorcycles to Europe for a short period. We do not fear losing any material sales and share given current dealer inventory levels in those regions, and we can reevaluate this approach mid-year. We also pre-position motorcycles in Europe ahead of the announcement of retaliatory tariffs. We're carefully assessing our pricing strategy to ensure we remain competitive while navigating the complexity of the current trade environment. We began meeting with congressional members as well as leaders from the administration a couple of weeks ago and will continue to do so. My takeaway from those conversations is that we're approaching this in the right manner and the message is resonating, that the only U.S. headquartered power sports company is being impacted the most. We believe the Trump administration understands our issues and we remain hopeful that productive negotiations on tariffs between the administration and key countries will progress in the near term. As you can see, there's a lot going on and we are implementing actions that can reduce our tariff exposure over the short and long term. What I just walked through is not an exhaustive list. There are several other actions identified that our teams are working diligently on and we'll execute them once we have further clarity on tariff policy. Adding together the new net impact from tariffs, our mitigation efforts, and the accounting deferral, we estimate the impact from tariffs in 2025 to be less than $225 million. Our teams are working hard on a large funnel of mitigation actions with the goal of reducing the tariff impact even further. While we manage the immediate challenges of tariff, my leadership team and I remain focused on the critical long-term initiatives that are expected to drive value for customers, dealers, and shareholders long into the future. Mark Suarez, our VP of Off-Road Operations, did an excellent job at our Capital Markets Day in March laying out some of the actions his team is taking to build a more efficient operating culture in our manufacturing facilities. So far, his team has executed their agenda, and we're ahead of our plan in our manufacturing facilities. We also continue to push the pace on innovation and have some exciting products launching later this year that are expected to enhance our industry-leading portfolio of vehicles and boats already in dealer showrooms. Some of you saw the new Bennington digital helm at the Miami Boat Show, and many of our analysts were able to experience the dynamic shock technology of our snowmobiles in West Yellowstone. Turning to working capital, we committed to you in January that we were focused on lowering our finished goods inventory, and I'm proud to say the team did a great job of that during the first quarter. This effort helped us achieve our highest Q1 operating pre-cash flow in nine years. There's more work to be done, but the progress is measurable. Lastly, on dealer health, A broader team and I have met with many dealers this year. I'm encouraged by the feedback I get from dealers and the rankings our team receives from dealer surveys. We're again ranked number one in the categories of sales and service. We achieved a net promoter score of over 70, which indicates we're listening and making the right investments in our dealers. This partnership is vital in both good times and bad, and I'm confident that we are a trusted partner to our dealers. So while there's a great deal of uncertainty in the market today, We have a plan in place to help mitigate the impact from tariffs. Additionally, we're executing our long-term strategy built to deliver shareholder value through sales growth, strong earnings power, and higher returns. The current market conditions will not cause us to deviate from our strategy, and I remain confident that Polaris will emerge as a stronger company and will generate above-average return for shareholders. I'm going to turn it over to Bob to provide you with more details on the financials. Bob?

Thanks, Mike. And good morning or afternoon to everyone on the call today. Our first quarter sales met expectations and the decline versus prior year was driven by planned production cuts to help manage dealer inventory. Promotions were higher than we expected, which was somewhat offset by slightly more volume than we had expected as our plants continue to improve build rates. Our international business dropped 16% due to weak markets in off-road and on-road. We believe our international dealer inventory is healthier now and and now positioned to grow once retail demand returns. PG&A sales were flat year over year, with strong parts and aftermarket apparel sales offsetting attachments on lower whole good volumes. The main challenges to our margins were volume, promotions, and FX, partially offset by lower operational and warranty expenses. There was no material impact on our results from tariff costs this quarter, with much of the current tariff costs deferred to later periods. Turning to off-road, sales were down 10% due to lower volume and higher promotions, somewhat offset by a favorable mix. The ORV industry in North America continues to be driven by weakness in consumer sentiment and dealer focus on inventory levels. While inventory continues to improve for the industry, it seems there is still more work to do before dealers feel comfortable with their position in this current environment. That said, we believe inventory levels of our vehicles and dealerships are healthy and both relative to historical norms and in comparison to other OEMs. While the late snow did not have a material impact on our sales, it did provide some relief in dealer inventory after two consecutive weak snow seasons. The strong retail in Q1 resulted in sequential dealer inventory coming down over 20% from Q4-24 to Q1-25. Gross profit margin was down 147 basis points, with much of the drag being driven by promotions and the prolonged downturn in power sports, and the macro economy. I do want to touch on warranty expense as this was a positive contributor to the quarter. We have invested heavily in quality over the past five plus years and believe we are beginning to see positive results from those investments in our model year 25 vehicles. Like our progress with lean and operational efficiencies, we should start to see improvements in warranty positively contribute to our margins in a normalized environment. In addition, customers are taking notice of these investments as indicated by our NPS scores for product, sales, and service, which are at five-year highs. Switching to on-road, sales during the quarter were down 20%, driven by a challenging motorcycle market and the timing of engine deliveries at our Exim business in France. For Exim, we expect this issue to be resolved this quarter and to make up lost sales in the back half of the year. meaningful market share during the quarter driven by our heavyweight business. Adjusted gross profit was down 489 basis points driven by a year-over-year mixed headwind and elevated promotions. Margins were better than we had planned due to operational efficiencies. In marine, sales were down 7% in line with our planned reduction in shipments as we continue to take a build-to-order approach. The latest industry data we have shows the pontoon industry is down 11% year-to-date which is a continuation of the prolonged downturn we have seen in marine since 2023. Within Bennington, we continue to see good traction with our new M series pontoon, which has a rich mix versus the prior model it replaced. Also in Bennington, we recently started to ship a pontoon with standard features at a nationally advertised price, which is being well received by both dealers and consumers. Gross profit in marine was down, given unfavorable absorption from lower volumes. Moving to our financial position, we have instituted our recessionary playbook given the combination of this prolonged downturn in power sports, coupled with the uncertainty ahead of us around trade and economic policy. We did not make this decision lightly, and this operating model could be short-lived if we have favorable clarity after the 90-day pause on tariffs. However, we thought it was prudent to enact these principles proactively to protect cash and maintain strategic flexibility. Our first priority is cash preservation. We made good progress in Q1 reducing working capital and generating stronger-than-normal free cash flow. We have also taken a fresh look at the CapEx budget and have identified a list of actions to defer at this time. These actions are focused more on maintenance versus growth or innovation. Emerging stronger is a key part of this operating model, and while you will see modest reductions in R&D, these reductions will not have an impact on product launch timing. The last big bucket of actions involves managing costs. We have removed approximately 10% of our salaried workforce last year and have paused spending in some areas to help control costs. We are also evaluating a number of opportunities that would be acted upon after we have clarity on tariffs, and it makes sense both financially and strategically. 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 current economic landscape, We do not anticipate concerns with liquidity. We are maintaining our regular dialogue with existing lending partners, including evaluating options for additional flexibility. Therefore, we plan to remain agile in this environment and expect to have more clarity around tariffs in the coming weeks. In the meantime, we are positioning ourselves prudently to withstand the turbulence and come out stronger for our employees, dealers, customers, and shareholders. Given that we have withdrawn full year guidance, we thought it would be helpful to provide more information on our second quarter assumptions with the caveat that these do not incorporate any change in the current global tariff policy as it stands today. We also do not know what the impact the current environment will have on retail demand, and thus our assumptions today assume retail remains modestly lower year over year. First, we expect second quarter sales to be between $1.6 and $1.8 billion. We intend on shipping fewer units than we retail due to software retail environment and our desire to hold dealer inventory close to current levels, coupled with our decision to delay some shipments to Canada and Europe. We are also assuming the current elevated promotional environment continues. We estimate incremental tariffs will impact the P&L between $10 to $20 million for the quarter. Within our tariff mitigation strategy, we think it's important to know we have three buckets of action items. The first are live actions we are already executing. That second includes actions we are reviewing and likely to execute soon. The last bucket of actions requires more clarity on trade policies before we can act. As Mike noted, if the current tariff levels do not change, particularly for China, we estimate the fiscal year 2025 net new tariff impact to our P&L after mitigation and deferral will be less than $225 million. We are in the early stages of these efforts and the goal is to significantly reduce this burden. This does not include the original $60 to $70 million of tariff costs we budgeted for the Section 301 tariffs. We have strong relationships with our dealers, our innovation is winning in the market, and we continue to realize operational efficiencies. We do not see anything in this current environment that derails our long-term strategy to make Polaris a company with stronger earnings power and greater returns. Yes, these are certainly interesting times, but a sound strategy has us aligned so we can manage through this dynamic environment with the goal of emerging stronger. With that, I'll turn it back over to Mike to wrap up the call. Go ahead, Mike.

Thanks, Bob. I'll wrap up with a few comments. First, we have a plan in place to mitigate a portion of the tariff costs impacting our business. We are positioned to execute additional mitigation strategies as we gain clarity on tariff policy, including being prepared for the end of the 90-day reciprocal tariff pause on most countries. We've implemented our recession playbook focused on cash preservation and liquidity. We decided to implement this operating model as our industry has been in a prolonged downturn coupled with uncertainty around tariffs and consumer health. We'll continue to monitor the evolving environment and adapt our approach accordingly. Lastly, we haven't lost sight of our long-term strategy I've been talking about since 2022. We strongly believe in our position as the global leader in power sports. We have clear long-term financial targets that can unlock value for our shareholders. This is taking longer than we expected due to macroeconomic factors, but trust that we can measure meaningful changes happening within our operations and dealer partnerships that give me great confidence that we are making significant progress. We're focused on the items within our control, and I believe with a little clarity, it will become more evident that all the work we've done has positioned Polaris to emerge stronger from this. We appreciate your continued support, and with that, I'll turn it over to Allison to open the lineup for questions.

Thank you, and we will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause for a moment to assemble our roster. And our first question today will come from Joe Altabella with Raymond James. Please go ahead.

Thanks. Hey, guys. Good morning. Just want to circle back on the tariff mitigation efforts that you guys are undertaking here. You did allude to potential pricing strategies. And I'm just curious how much pricing might play a role, particularly in off-road. I would think that you guys would be kind of a first mover there. And so I'm curious how much are we thinking about and when might you need to make that call?

Yeah, we provided clarity to our dealers late last week that pricing is going to remain as is through the end of May. I mean, look, the reality is we're going to be bearing significantly more costs than many of our competitors. But we're also dealing with an industry that has, I would say, a fairly inelastic buyer. We've got retail rates that are continuing to be down significantly. You know, we've clearly been in a recession from a power sports perspective. And so, you know, adding adding price at this point becomes a very difficult proposition. So what I've done is I've told the team we're not looking at that as a relief valve. We've got to look inside. It's why we're moving so aggressive around the supply chain. You know, the team's making really good progress. I mean, the fact that, you know, we had moved 15 percent of the content from China out and prior to 2025. And in 2025, we're going to get that number up to 30%. And quite frankly, we've got the team out investigating if they can go even further or faster. And I'm not ready to throw in the towel on the negotiations with the administration. I was encouraged with the news that came out last night, whether it's substantiated or not, it's tough to know, around relief for the automotive sector. I think the administration has a far greater appreciation for some of the, you know, very detailed dynamics that we and others who manufacture in the United States and employ labor that works on high-margin vehicles and the fact that, you know, we're relying on less than 9% of our total costs to get sold coming in from China. So it's very low, and I think there's an appreciation for that, and I think we can find a way to – work through that. So, we've got a lot of different avenues, and, you know, we're not viewing price as some very easily movable item. We obviously will take a look at it. It'll probably be very detailed, segment by segment, country by country, and there'll be more to come on that down the road.

Very helpful. And just to kind of follow up on that, in terms of off-road, you talked about the elevated promotion levels and a lot of your competitors that need to clean up some aged inventory. Where are we in terms of, you know, if you look at it as a baseball game, what inning are we in, uh, in terms of that cleanup process? And when do you think you guys might be able to start, you know, regaining market share again?

Yeah. You know, I think as it relates to off-road, I would say we're, we're probably getting into the, the, the later innings of the game. Um, The good news is that everybody has improved from where they were last year, but we still have some competitors that have DSOs that are 2X where we're at. Granted, they're a much smaller player than us, but the day sales that they have sitting at the dealer are 2X, and other competitors are 20%, maybe 30% above where we're at. And their non-current mix is unfavorable relative to us at the dealer level. And I think the concern is that we continue to see that non-current discounting that's got a heavy impact. And we're just not going to participate in that. Those are likely not buyers of our product anyway. Many of these products are being offered at $5,000, $10,000 off to clear out inventory that's two, maybe three years old. So I think we're There's definitely been progress made, and it's really going to depend on when retail starts to stabilize because the two are heavily correlated. But we're confident that once we get into an environment that the inventory is much cleaner throughout the network, there is some progress against that, and the consumer starts to stabilize, we're going to be in a great spot to win. I talked about it. The new products that we've been coming out with, as well as what we have left to come out this year, And we know from talking with our dealers, they're resonating with our customer set. And, you know, I mentioned the Razor survey. We're doing a lot of work behind the scenes to understand the dynamics with our customers. And the great news is they're sticking with Polaris. The great news is they're still using their product. The bad news is they're deferring repurchase and trade-in because of the current market conditions. So I think Getting market condition clarity is going to be good on many levels, and I think we're well-positioned to take advantage of that.

Got it. Thank you, Mike.

Next question today will come from Megan Clapp of Morgan Stanley. Please go ahead.

Hey, good morning. Unsurprisingly, I wanted to follow up on tariffs. Obviously, a lot of helpful detail in the slides, so appreciate that. I guess you're saying less than 225 million of net new post-mitigation tariff impact this year, most of that in the back half. So if we just say, let's say 200, the simple math of just doubling that would suggest it could be 426, but I guess presumably some of your mitigation strategies also might ramp over the year. So any possibility just to help us with how we should be thinking about at current rates what the annualized impact from tariffs would be in 2026?

Yeah, we intentionally, Megan, steered away from that because of what you mentioned as you were asking the question. I mean, the team is working the mitigation. I mean, a lot of it is really coming down to resourcing components out of China. And so it's difficult to get at a run rate. You know, your math, the simple math works, but I would argue ignores the fact that we will have taken 30 percent of the China purchase content out as we go through the course of 25. And so you have to annualize that. And then obviously we're looking to accelerate and do more in 25. We don't have a number on that yet, but the team's off working on it. And then obviously we have plans around 26, which would then make further reductions as we layer those resourcing opportunities and through the course of the year. So a lot of detailed math. I mean, to be honest with you, we're just spending our time trying to get our arms around the current year. As you can imagine, it's a highly complex environment. And as you've seen just in the course of the last few days, it tends to change pretty rapidly. And so we're really focused on just understanding the current impact and Where do we think that's going? And we'll have more to say as we get later in the year and have more clarity around tariffs as well as the output from our sourcing initiatives.

I think the other thing to think about, Megan, is, you know, the bulk of our tariff pressure is coming from the increased reciprocal and IEPA tariffs on China. You know, there's been discussion yesterday about potential relief for the autos because they have the same tariff stacking challenge we do. That's obviously a conversation we're having with the administration as well. And, you know, of all the tariffs that are out there, I think the one that's likely to come under the most pressure is the 100. For us, it's a total of about 175 percent when you stack it all on China. because that's creating a lot of pressure on the overall economy. And, you know, the retail CEOs and the rest of the folks have been up in D.C. the last week or so and talking to the administration about what that's going to mean at retail level in places like Target and Walmart and Best Buy and how that's going to impact the consumer. And so, you know, I think we'll see action on that probably ahead of many of the others. And that's the biggest impact for us.

And look, I'll give the administration a lot of credit. I mean, you know, Bob alluded to it. We attended a dinner last week here in Minneapolis and had a chance to talk to the CFO of Target. Obviously, Brian Cornell, who runs Target, was up with Home Depot and Walmart. You know, we were in Washington last week at the White House. We had the opportunity to sit down with the director of the economic advisor to Trump. We're going to be talking to the commerce secretary this week. So they are asking a lot of questions to really understand how this is all embedded in the economy. And so things are developing fast and furious. And, you know, we're trying to stay close to it and make sure that, you know, we have a voice that they understand how it works. The nice part is we're able to draft somewhat with auto because it's a very similar operating model. And so we'll obviously have more to say, but I would steer you away from trying to just annualize what we've got in front of us because there are a lot of moving parts.

Okay. That's really helpful. Thank you. And as a follow-up, I just wanted to ask about the balance sheet and liquidity. Bob, you did mention, like, even modeling downside scenarios, you don't anticipate any concerns with liquidity. I guess I'd just be curious whether those downside scenarios that you're modeling would contemplate any additional actions to preserve cash, whether it be maybe cutting the dividend or taking actions to raise equity. And I guess the reason I ask is even in a base case scenario, I guess assuming that just put that tariff impact into our model, it does seem like leverage could be hitting six, seven times at some point this year. Obviously, a lot of assumptions have to go into that. Would just be curious, you know, in those downside scenarios, you know, how you'd think about additional actions to preserve cash.

Yeah, let me start and then I'll flip it over to Bob. First and foremost, I mean, we've been a dividend payer for 29 years as a dividend aristocrat. That's important. this company has sustained that through a lot of challenging times. That said, liquidity is more important. And so that will factor in heavily in our calculus. We're early days. We're not going to jump to a decision. You know, like I said earlier, I mean, you know, I was preparing for this call and saw the Wall Street Journal article pop across the screen that Trump was contemplating relief for the autos. I would hate to make a decision that takes away 29 years worth of history without having all the facts. So it is an item that is on the list. It's something that we will talk like we do with our board at every board meeting. But our immediate focus is going to be around things like working with our lending group to see what kind of flexibility we have around covenants. And, you know, we're doing everything we can to preserve liquidity. and trying to work to stave off those things that could take the liquidity away, primarily around tariffs. Bob, anything you did?

Yeah. So, you know, at the end of the quarter, we had $1.1 billion available on our revolver, plus another $300 million in cash, so effectively $1.4 billion of available liquidity. You know, we have been making progress on working capital. We had good strong cash generation for the quarter, so we're very focused on that as a a first level just because it's fairly immediate. CapEx we're reviewing, as we said, you know, we started the year with a plan of about 215. You know, right now we're targeting about 200. I think there's more opportunity there as we continue to go through that. As Mike said, it's early innings here. So we're continuing to scrub that and make sure that we keep it focused on innovation and growth, but look to defer things that aren't critical for this year. We've been focusing on unprofitable business lines. As you've seen, we discontinued production of the FTR and Timbersled, as those were not profitable businesses for us, so wound those up. And we'll continue to look at all the other options that are out there, as Mike talked about, but we're also going to be conservative to not make any long-term decisions that really deal with a short-term problem if we can avoid it. We do have a great bank group. It's been our bank group for many, many years. They've been supportive historically in these type of situations. They were extremely supportive of us during COVID. We've had a lot of discussions with them. They're aware of our projections as we look out through the year. And so we'll continue to discuss with them as we need it, covenant holidays, things like that, and likely an extension of the $400 million term loan that comes up in July. So we're actively looking at those issues and working through how we'll deal with them. But like I said, we have a very supportive bank group, and I don't foresee that being a problem.

Okay. Thanks, Mike and Bob.

Thank you.

And our next question today will come from Alice Wicklund of Baird. Please go ahead.

Yeah, good morning. Thanks, gentlemen, for all the helpful color on tariffs. Obviously dealing with a lot, but maybe just switching gears, want to just dig in on retail a little bit more. I mean, you talked about some pretty wild swings month to month in the quarter. Maybe share a little more detail on that, what you think is driving that, and is there any color you can share on what you've seen so far in April?

Yeah, you know, it's really tough to draw any conclusions. I mean, the problem is there was so much noise. You know, weather wasn't great. You had the fits and starts around tariffs, economic data. I think when we step back, I think it's going to be chalked up to a lot of the same attributes we've been speaking to in terms of you know, persistently high in inflation, interest rates obviously remaining high. But I think what's getting added to that is the uncertainty index has gone through the roof. And you can see that showing up in things like the Consumer Confidence Index, which is now, I think, at a 12 or a 14-year low. You know, I think people are just nervous. And, you know, they're seeing, you know, there's a good portion of our customer base that is invested in the stock market. 401ks, et cetera. And they're seeing these wild swings. And when they look at, you know, products like ours, of which about 40% are highly discretionary, things like razors, snowmobiles, spending a lot of money when you're worried about the, you know, could there be higher inflation in the economy? Is there risk to your job? I think those things are all playing in. And we're seeing that volatility. I would tell you, April, really, we haven't seen anything much different than what we saw in March. You know, the good news is we haven't seen it get significantly weak relative to where we were expecting. But at the same time, we were hoping to start to see some positive green shoots. And I think just the overhang created from tariffs, as well as just the uncertainty that that drives into the broader economic equation, is probably causing a fair amount of consumer reluctance to spend on very large items, purchase items.

Mike talked about promo, and obviously we've seen promo in the market to move older units and prior model year units with some of the Japanese as they look to clean up that inventory. But the other piece of promo that's come in has been a fair amount of interest rate buy-down, and that has been relatively effective in getting retail moving. I think all the manufacturers put more interest rate promo in the market in March this And that sort of turned the tide a bit from February. We continue to see that in April. So, you know, what that shows is that part of the consumer reluctance to buy is driven by, you know, interest rates. And I think now people are pretty convinced that we're not going to see interest rates come down in the near term. So that type of promo has been effective. Unfortunately, it's kind of expensive.

Well, that's helpful, Culler. Thank you. Then just – On the warranty side, it sounds like, you know, great improvements there. Obviously, a lot of moving pieces, but as you look out over the next year, maybe even if you think about a more normalized environment, what type of impact could that have on your margin?

Look, I think the bottom line is it's going to be a tailwind. You know, it's not going to move as fast as we would like because you still are dealing with, you know, older product that was manufactured earlier. under different standards than what we've got in place today in terms of design and lean principles. So it will help us improve margins. I don't know that it's going to be the largest adder. I think all the work that Mark and team are doing around lean and factory efficiency coupled with the work we're doing around sourcing are going to be the primary drivers. More important is it's a huge driver of customer satisfaction. We heard that played back in spades from our dealer council. They're seeing it show up. And many years ago, we were probably rated at the bottom of the pack. And now we're being told by dealers that we're top tier, if not top in this regard. And we want a great customer experience. So We need to do it for the right reasons, and it will have a secondary benefit of benefiting the margins.

Thanks. That's it for me.

Thank you.

Our next question today will come from Noah Zatzken of KeyBank Capital Markets. Please go ahead.

Hi. Thanks for taking my questions. I guess first, I think you mentioned you're kind of thinking about retail down modestly this year. So wondering how you're planning shipment levels and relatedly what you're targeting for inventory levels to end the year. Thanks.

Yeah, so, you know, we're planning to ship lower than retail to continue to bring dealer inventory down. I would say, you know, right now our targets are for ORV to be down, you know, mid to high single digits. motorcycles to be down low single digits and marine to be down mid to high single digits to low double digits, depending on how their season goes. But obviously, you know, it's a moving target depending on, you know, what we see as future retail strength. I mean, if the back half of the year were stronger than what we're thinking, you know, we'd probably bring dealer inventory down less. And obviously, the reverse is true. bring it down more. We're committed. Mike and I have been out with dealers a lot, as we talked about during the earlier part of the call. And the feedback's been really positive. You know, dealers feel like we've done a great job of getting dealer inventory in line with where it needs to be, get their, they feel good about where their profiles are. It was much less of a discussion in our meetings than it had been the last six months. So that tells me we're pretty close to the mark. But we're committed to keeping it there. And so we'll continue to adjust as

As this year plays out. And I mean, look, I'll reiterate. There's a reason we withdrew our guidance. It was two things. One is, you know, trying to get our arms around where tariffs are headed and things could change by the time we get off this call. The second is, you know, the top line of the business. And that's going to have a direct correlation to what ends up happening with tariffs. And so, you know, at the end of the day, the commitment we have with our dealers is if we see retail softening further from what we expect, we're going to be making adjustments to shipments. And so, you know, I think the key for you all is to just know that, you know, the progress we've made with the dealer network, the shipment levels, or the dealer inventory levels that they have recognized, and we need to make sure that we protect them in volatile times. And if we see things get worse, then we're obviously going to take the right action. If things improve with greater clarity around tariffs, we'll obviously be able to ramp our factories and support improved retail.

Really helpful. Maybe just one more. You mentioned implementing the recession playbook, and maybe some of this is obvious, but just hoping you could kind of help put a finer point on some of the ways that differs from normal operations and how quickly you'd be able to kind of pivot back toward normal operations if circumstances were to change. Thanks.

Yeah, I mean, you know, obviously, when you're in a challenging time, the first thing you focus on is cash and liquidity. And so, you know, that gets to working capital and CapEx. We've been working capital. We were being pretty aggressive on anyway, so that's not a huge change. We needed to improve our working capital performance coming out of COVID. And, you know, a lot of things got built up. There was a lot of stuff in the system, and I think we've made really good strides in that. Mark and his team, you know, the – One of the disappointing things with all this noise in the environment is that what you're not seeing is the great work of the operations team and what they've been able to do around the efficiency of our plants, attainment of our build schedules, and that allows us to better align working capital. So we'll continue to make progress there. We focus on CapEx and making sure we're only spending money where we absolutely need to. We deferred a couple of projects that can go into next year. We'll continue to look to do that. You know, on the operations side, you know, last year, as I said, we had about a 10% salaried headcount reduction. We've been very disciplined about adding, you know, backfills. So we're not adding people after that reduction, but we've been disciplined about backfills. We've been kind of targeting 50% backfill levels last year, and we're continuing to look at that this year. So, you know, prudently managing headcount and then looking at investments, you know, on the innovation side. But as Mike said... You know, we're not going to cut things now in the short term that will help us continue to drive market leadership in the long term. You know, we're in a really good place from a product standpoint. We've got products out there that our competitors don't have. We've got some of the most current product portfolio in the industry. And, you know, we're not going to – we had lost that kind of innovation edge several years ago, and I think we've done a nice job of getting it back. And we're not going to back off of that. So, you know, none of the things we're doing are things we can't reverse fairly quickly. It's really just like you would do in your own personal budget, right, being prudent in challenging times.

Very helpful. Thanks.

Our next question today will come from Alex Perry of Bank of America. Please go ahead.

Hi, thanks for taking my questions here. I guess first, just another follow-up on tariffs. It looks like through mitigation actions and deferrals, there could be a $55 million offset to tariffs this year at current rates, sort of at the midpoint of your tariff guide. Is there a chance that the offset could go higher and what would drive that? Or is it that the supply shifts take a lot of time, which, you know, seem to be the primary mitigating factor and these have pretty, you know, long lead times. But, you know, how sort of sticky is that, you know, offset number that you provided? Thanks.

Yeah, I think – You know, as we talked about, it's difficult to give – you don't want to take the guidance and assume that that translates into a full-year run rate. We did take – or we have a plan to take 30 percent of our China sourcing out this year. That's – I plan to take it out this year, so there'll be – you know, some of that inventory that's tariffed would – if the tariffs stay in place, would carry over into 26th. Some of it you'd be able to enact sooner, so it's just going to depend when it happens in the year. We're looking at options to go faster than that and make more progress before the end of the year. As Mike talked about, there's a little bit of drag from non-USMCA stuff that we bring up from our plant and other suppliers in Mexico. We're working on correcting that to make sure we can reduce that tariff. You know, and then obviously there's the what happens with all the other countries. And then there's the deferral, which is part of what you're seeing in the impact of, you know, full year versus what's going to actually hit the financials. About 20% of that, of what we bribe this year will get deferred into next year. So, you know, with all of those things, plus, you know, what's happening in terms of the, you know, discussions with the administration and what they're going to do, it's just very hard to really forecast a full year run rate right now.

Perfect. Really helpful. And then my follow-up is, I guess, higher level. If you look at the three segments, which segments has your view changed the most in terms of top line versus the prior expectations when you provided, you know, one Q segment guide? Are there, you know, any areas where maybe you feel a bit better than when you guided last quarter versus some where you think maybe more pressured? Thanks.

Yeah, tough to answer. Nothing stands out relative to each other. And, you know, I think for the most part, our retail guide is not too dramatically different than what we were thinking. And I think it's early days. I think there's a lot that has to get sorted out from a broader economic perspective before we're going to have a good view as to what the trajectory is likely to be.

You know, as Mike said earlier, we saw a lot of choppiness in the quarter. And so it's, you know, really difficult to take that data and come up with, you know, what a trend is. And that's been really true, I would say, the last five quarters where, you know, the months tend to be somewhat dramatically different, some of it weather-driven, some of it just economic news-driven. And so a little bit tough to say, but like Mike, I don't see anything that's dramatic at any particular product, I would say. Good retail, I mean, tough industry, but good retail in heavyweight motorcycles. We took a bunch of share in the quarter. It's good to see those new products performing well. We've invested. Teams did a nice job of building that portfolio over the last few years, and so it's good to see that start to pay off again.

Perfect. That's very helpful. Best of luck going forward. Thank you. Thank you.

Our next question today will come from Tristan Thomas-Martin of BMO Capital Markets. Please go ahead.

Hey, good morning. Good morning. Question. The alternative non-Chinese sourcing, if we were to kind of remove tariffs and look at it on a like-for-like basis, how does that compare price-wise to sourcing a comparable product to China versus somewhere else in the world?

Yeah, we're not going to get into that level of detail. I mean, the reality is, you know, there's probably a top 20 or 30 supplier list, and the answer to that question is different for each and every one of them. Obviously, getting greater clarity on where the Chinese tariff ultimately is going to end is going to be important to this discussion. There are some areas that were already underway that were obviously beneficial at the old tariff regime. We're not banking on it going back to the old level of 25%, but those areas are being aggressively prioritized and worked. And then when the tariff situation settles down and we know what we're contending with, that'll help us with where we draw the line and work it from there. I think the point I would make is this isn't just as easy as finding a new supplier. I mean, in many instances, we have to cultivate a new supplier. And in many instances, we have to go through a requalification, a retesting of the components. Many of these components are in critical areas like wheels, tires, engine components, electrical components. And so the switching cost of this is not to be taken lightly. But at the current tariff regime, it would say we've got to get everything out and you'll be able to find an alternative supply. I think the reality of when this settles out, there'll still be some level that will make economic sense, but it's early days and too soon to get any more specific around numbers.

Okay. And then just really quick, have you noticed any changes in kind of utility overview demand given China has paused ordering of U.S. agricultural products? Thanks.

Nothing substantial.

Yeah, I would say anything that would be called a trend. Like Mike said earlier, the premium products have performed really, really well, which is good for us because we're strong in that end of the segment. And the non-premium stuff's been a little bit slower, but it's not any kind of dramatic change from what we've been seeing.

Okay, thank you.

Thanks. Thank you.

Our next. And our next question today will come from James Hardiman of Citi. Please go ahead.

Hey, good morning. Thanks for taking my call. So as we think about the withdrawn guidance, I mean, you had $1.10 previously. You've given us a tariff estimate. So $225 million is about $3 in earnings. So that math seems pretty straightforward, and I can appreciate that that is a moving target. But I guess I'm curious about the $1.10, right, the pre-tariff or ex-tariff number. It sounds like, you know, were we not to be factoring in the explicit tariff impact, that that number would be coming down. But maybe give us an idea of how we should be sort of thinking about the ex-tariff number going forward. And, again, I can appreciate all the uncertainty, but, like, would that be coming down meaningfully here? Sure. And I guess – well, I'll ask my follow-up in a second.

I mean, James, you're asking me to provide guidance around our withdrawal of guidance, and we're not going to do that. And the reason I can't give you that is because they're interrelated, right? If the tariffs remain at the level they are, my opinion, my opinion alone is that I think that has an economic impact, and I think consumer spending will slow even further. And so you can't look at them independently. And at this stage, it's too early. I mean, this stuff is developing every single day. We know firsthand from having been in Washington, as well as spending time with representatives and senators from each of the key districts that we have manufacturing, that these discussions are rapidly evolving. And so putting a pin in this I mean, that's why we and I think a lot of others that already have and will withdrew guidance. You know, right now, my focus is not trying to, you know, use a crystal ball to get where this thing's going. It's to deal with the here and now. It's why we're, you know, working so hard on the sourcing side of this equation, because we know that it takes time, as well as spending our time making sure that our representatives who have been very willing and very open to talk with us, listen to us, dialogue with us, that we continue to keep those efforts up. So, you know, what I would remind everybody is, you know, if you look back two or three years ago, some of the basic operations of this company where we were struggling, that isn't the case anymore. Basic operations are in a great spot. Innovation is in a great spot. We've done a lot to get the liquidity and balance sheet of this company in a good spot. So we're in a good position to weather a near-term storm, and that's what we're really focused on is making sure that we navigate this in a very thoughtful manner.

That's totally fair. And maybe as I think about offset, just from a near-term perspective, one of the things that I think is difficult for us to model is the incentive comp piece, right? So, you know, that was a big tailwind last year. You talked about it being north of $1. of a headwind initially this year, help us understand incentive comp based on some of the various scenarios. Does that, does that $1 plus then swing back into your favor? And then as we try to put together numbers for next year, right. And obviously there are a million unknowns as we think about next year, but you know, does that then become another headwind for next year? And I guess it's another way of asking the question of like, Is it just based on your initial guide, no matter how low that is, or longer term, how should we think about that incentive piece if this tariff situation proves to be a longer term issue?

Yeah, I mean, look, it's a discussion that we have with our compensation committee every quarter in terms of the underlying performance of the company. What I would tell you, though, is that the vast majority of that, I don't refer to it as incentive comp, it's profit share, and it's an important part of the compensation package for employees. And as we've talked about, that compensation goes all the way down to the factory floor, not completely in every facility, but in most. Um, and you know, we got employees that are working incredibly hard right now and everything that we were contending with is outside their control. Uh, so would not be my desire to impact that number, uh, negatively, but you know, that isn't just my call. I've got to have that discussion with the board. Um, and again, we're, we're more focused on trying to make sure the environment we're working in is managed and contend with, uh, The challenge is right in front of us, and those types of decisions will be made on down the road.

Totally fair.

Thanks.

Our next question today will come from Sabah Khan of RBC Capital Markets. Please go ahead.

Hey, good morning. This is Arthur on for Sabah. Just want to touch on retail sales quickly. Within ORV, utility was down more meaningfully than it has been in recent quarters. Is there anything you would call out across the customer base here, given this has historically been a more resilient business line?

Yeah. I mean, if you look at utility, I would say it was, if not for February, it would have been relatively flat. February was a bit of an anomaly. There was a lot of new promo came in the market. Weather was bad in a lot of key states, you know, where you typically have good performance for utility. Trend seems to be more normalized as we get into April. And, you know, the weakness was more pronounced in ATV. As Mike said earlier, premium ranger continued and expedition continued to perform really well. So, you know, a little bit of a, A little bit more down than it had been, but I don't think necessarily a trend, and it did feel like a one-month anomaly.

Well, you also have to think through the comps. You know, Q1 of last year for ORV was still pretty strong. We were up three. And then the subsequent quarters, we were down. So you're lagging probably the last strong comp that we really had.

Okay, that's helpful. And then you mentioned that Japanese OEMs are continuing to be aggressive on promotions. Has this dynamic changed at all in the past few months here, especially with the yen strengthening more recently, or do you still expect this, I guess, to be a factor for the foreseeable future going forward?

Hasn't changed. I think the only thing that's going to change it is if their inventory practices improve.

Yeah, I mean, for two of the three Japanese, their inventory levels have come down, but they're still – meaningfully higher than the rest of the industry. So I would say we've seen a little bit of progress, but not enough to tell us that this dynamic is going to change in Q2.

That's all for me.

Thank you. Great. Thanks.

Ladies and gentlemen, this will conclude our question and answer session and conclude the Polaris conference call. We thank you for attending today's presentation and you may now disconnect.