Polaris(PII) - 2025 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Adjusted sales for Q4 2025 increased by 9%, with North American retail also up by 9%, excluding youth [9][15] - Adjusted EPS for Q4 was approximately $0.08, slightly ahead of the implied guidance [11] - Adjusted EBITDA margin contracted year-over-year due to $37 million in tariff costs and normalization of incentive compensation [16][24] Business Line Data and Key Metrics Changes - Off-road vehicle (ORV) sales rose by 11% in Q4, supported by higher shipments and a richer mix of vehicles [16] - Marine sales increased by 1%, with strong demand for entry-level Bennington models and the redesigned Bennington QX lineup [18] - On-road sales were up 4%, driven by positive mix within Aixam and Goupil, despite softness in Indian Motorcycle and Slingshot [18] Market Data and Key Metrics Changes - International sales grew by 9%, with all regions contributing, driven by double-digit growth in parts, garments, and accessories (PG&A) [15] - Dealer inventory was down 9% in ORV, and more than 40% in snow, indicating a healthy inventory position [17] - The industry faced pressure from higher interest rates and macroeconomic uncertainty, but Polaris maintained a strong market position [18][29] Company Strategy and Development Direction - The company aims to reduce reliance on China-sourced components to less than 5% of material costs by year-end 2027, which is expected to lower tariff expenses and improve supply chain responsiveness [7][31] - The separation of Indian Motorcycle is on track to close by the end of Q1 2026, expected to be accretive to EBITDA margins and adjusted EPS [9][20] - The company is focused on maintaining leadership in the powersports industry through innovation and strong dealer partnerships [26][28] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenges faced in 2025, particularly due to tariffs, but highlighted the company's ability to deliver on strategic milestones and share gains [4][24] - The outlook for 2026 includes expectations for total company sales growth of 1%-3%, with a focus on aligning shipments and retail [21][25] - Management remains cautious about the recreational segment but expects utility growth to offset ongoing pressures [29][30] Other Important Information - The company generated approximately $180 million in operating cash flow for Q4, translating into $120 million of free cash flow, and $605 million for the year [19] - The company has removed over $240 million in structural costs from its plants over the last two years, enhancing operational efficiency [27] - The company is committed to maintaining its dividend aristocrat status, having completed its 30th consecutive year of dividend increases [20] Q&A Session Questions and Answers Question: Revenue lift in 2026 from wholesale and retail alignment - The revenue lift increased due to a strong Q4, with flow-through expected to be closer to 40% when excluding tariffs [34][36] Question: Cost savings beyond the $30 million absorption - Excluding Indian Motorcycle, gross profit is expected to be down slightly due to accounting for transition service agreements (TSAs) [38][40] Question: 2026 free cash flow expectations - Free cash flow is expected to be around $120 million, with continued focus on working capital improvements [44][46] Question: Inventory levels across the industry - The company feels good about its inventory position, having reduced aged inventory significantly and maintaining a healthy mix [78][80]