PII
#<UNK>, this is <UNK>.
Let me cover at least some of the question.
I think we use the word modest in terms of the underlying organic performance of the business, and certainly foreign exchange which is something that has been moving quite significantly, and as I indicated in my prepared remarks we've seen the Canadian decline quite precipitously coming out of the end of the year.
And that puts some pressure.
But I think we're also trying to calibrate to what we're seeing in terms of more recent retail performance coming out of the month of December and making sure that we've got the range covering that.
When you look at it from an organic perspective, we're essentially calling it flat to up 5%.
So modest kind of gets you right in the middle of that, ex foreign currency.
<UNK>, is this your idea of one question.
So just to answer your last question first, we absolutely believe that 2016 will be a year of growth for Victory.
We have a lot of exciting product news.
We're excited about the marketing position with the American Muscle branding.
And we believe that with what we have coming, it should be a good start to the year and full year for Victory.
With Indian, obviously the production problems that we had in the first half of last year constrained our ability to meet demand, and with broader dealer networks finishing the year at 180, we feel pretty good about it.
But the overall market is weak.
And we don't know that there will be growth in the market.
So what we get will have to be share gains in what you know is a very competitive heavyweight motorcycle industry.
So we feel extremely good about where the business is, but we're trying to guide to what we believe is very achievable performance.
And as you know, we will work like heck to beat that.
<UNK>, I apologize if you heard one of us say we might not be able to gain much market share in motorcycles.
That is absolutely ---+
Overall.
Well, I think what we said is overall in Powersports, including all aspects, we expect to gain share.
ORV's going to be extremely competitive.
We know that.
We've factored that in.
We saw it in the fourth quarter.
And we're modeling that we're going to hold share.
And I think with Matt and <UNK> and the team, the way that they'll battle with better inventory positions and again continued new products, we feel good about our ability to do that.
I think the risk is in the industry.
And that's what we're modeling closely.
It was the weakest the industry's been in quite some time in Q4, and we're just protecting ourselves to ensure that we're not relying on gargantuan share gains to be able to hit our guidance.
<UNK>, this is <UNK>.
On the ORV side, oil ---+ key oil-producing states are somewhere in the neighborhood of just north of 15% of sales.
So there's some exposure.
Obviously as by far the leading manufacturer, we're exposed.
I would tell you if there's any reason for optimism, oil markets were weak year over year pretty much all year long.
We talked about ag weakness, and ag was I think weak most of the year.
But ag had been weaker in 2014.
So frankly we did not see the declines in ag nearly to what we saw in oil.
So if there's such a thing as encouragement in that the year-over-year performance in oil may be less bad in 2016, I think that's very much a possibility.
So we're exposed.
But I don't know that we're going to take a much bigger blow year over year than we did here in 2015.
<UNK>, Bill could provide really good color on this.
But let's, as we talk about share in side-by-sides, let's make sure we're grounded in where our position is.
You realize that we are three times combined the share of the next three players.
So we're coming from a pretty good position.
And the amount of share loss that we're talking about, I don't want to call miniscule, immaterial, not a very large amount.
We're not going to over react, although we are very focused on maintaining and gaining share.
But let's not ---+ we are not panicked over that and we feel very good about how we'll deal with it going forward.
Let me just add on.
Again, I think you get sometimes in quarters, as <UNK>'s alluding to, there can be a little bit of timing.
What was unique in the fourth quarter I think are a couple elements.
As everybody well knows, there was a number of new competitive introductions that frankly started shipping and had probably some initial pent-up retail sales that we saw in the fourth quarter for the first time coming off of zero comparables.
The industry was weak.
So the industry was less able frankly to handle that.
The other thing we had is we had a recall due to some quality issues with vent lines on our RZR product in October, and October was our weakest performing month of the quarter.
We think that had some impact as well.
That's shame on us.
But we seem to have powered through that as we go forward.
Then again, the other thing I said in my remarks is we were coming off some really sporty comparables in the fourth quarter where we were up double digits percent, which again I don't think we see frankly in the 2016 model.
We don't have those kind of comps that we're going up against.
I do think there is some unique aspects about the fourth quarter.
But as <UNK> said, it will be a competitive environment.
And we're going to have to be at our very best, and we're going to have to be better than we were in 2015 if we're going to hold and ultimately do what we expect to do, which is gain some share.
Our base assumptions on oil is, is it's going to remain weak for the full-year 2016.
We don't see any miraculous improvement or recovery in oil prices.
And so we expect that those markets will remain repressed.
But what I do think, again as I alluded to is a likely possibility based on what we saw in ag, is we saw big declines throughout 2015, and off of the much weaker comparables it's possible that while we expect them to continue to shrink they won't shrink as much.
Good morning.
<UNK>, this is <UNK>.
Let me just hit some of the key points.
The foreign exchange dynamic, just to kind of give you the high level, most of that lapping occurs in Q1 and Q2 and somewhat in Q3.
So through the course of 2015 the Canadian dollar had held up relatively well until we got pretty much into the third quarter.
And so for the first and second quarter that's going to be a pretty substantial impact.
And as I mentioned in my prepared comments, that's going to be as much as 2% to the top line.
And as I mentioned in my discussion about gross margins, it's a very heavy hit to the gross margin line because we're essentially exporting into that market.
We do have some hedge position that helps us offset the transactional impacts, but it's still going to be pretty heavy.
So that's the first item.
The second is, as I indicated, we're going to be down from an ORV in a snow-shipment perspective.
We're comparing against first quarter of last year where the Company had about 16% growth.
So we're going to be shipping at a much lower level, just given what we're anticipating will be the industry dynamics in terms of weaker retail environment.
And so that's certainly going to put a lot of pressure because that business, ORV and snowmobiles, is our more profitable segment.
Then as I mentioned, our operating expenses, even though from a full-year standpoint we're going to have a very modest increase, when you start looking at the quarters we've got about $20 million-ish of headwind when we compare the first quarter of 2015 against the first quarter of 2016.
So essentially the exit rate we have coming out of the end of last year, taking into account some of the cost reductions that <UNK> mentioned in terms of the headcount and salary reductions that we've made, we're still going to be facing a little bit of headwind when we start looking at that.
So as you look at the year as it plays out, obviously there's an assumption that things improve into the second half.
Some of that is just purely the foreign exchange dynamic, some of that is just purely the comps when you get into the fourth quarter comparing against what we did in terms of the pretty substantial shipment reduction.
There's also an element, too, and we referred to it, I think, several times in our remarks.
The work that <UNK> has been doing for the last year around building these value improvement project plans, they build momentum over time.
So by the time we get to the ---+ really, it's going to build throughout the year.
But really getting into the second half of the year, we will see the lion's share of those projects really taking hold.
Lot of material cost reductions, a lot of ---+ the platforming we've talked about in our vehicles.
And we'll get the benefit of that in conjunction with currency so it's reasonably powerful.
Now, we clearly recognize that we thought the same thing this year and that didn't happen.
So we've calibrated our plans to ensure that it's much more achievable.
<UNK>, the number's embedded in the guidance we just gave.
I think most of what we're doing, honestly, is to offset the currency headwinds we face which are ---+ I mean, honestly, just brutal.
But I don't want to ---+ what I did say in my prepared remarks is that Dave Longren ---+ now remember, Dave is arguably one of the most talented people we have in this business.
The last time we went through a downturn, Dave led the effort to just rip cost out of our vehicles and help us get turned around.
He's taking a much broader approach with this enterprise cost role now.
And with a couple of major buckets we have said he's going to give us an incremental $10 million to $20 million over the next couple of years.
I think the way to think about this is we've said that there's 300 to 500 basis points of gross profit margin that we expect over the next five years, and all of this is going towards that.
The biggest driver of the inventory, we probably should have been more clear on this, is we cut dramatic shipments out at the middle of December.
Those products were built.
So our finished goods inventory was up dramatically.
And that drove most of the increase.
It was just not a good year.
We're doing a couple things as we go into 2016.
We're going to have a significant improvement in our [sy op] process to make sure we get better at this overall forecasting and management of inventory in general.
But we're also adding inventory to one of the incentive comp metrics that our senior executives have.
It won't be just a balance sheet miss.
It will be a personal P&L miss if we don't get significantly better quickly at inventory.
So I think, <UNK>, <UNK> hit on a couple of the key points.
I think the gross margin improvement will start to materialize more in the second half.
One, it's sheerly about volume.
Two, it's about the foreign exchange headwind starts to abate a bit, assuming the rates hold at the levels that we've seen today.
You also asked about the segment performance.
We do have a chart in the deck, but just to kind of recap.
The ORV margins will be down, largely on the back of foreign exchange as well as just some of the mix shifts in the lower volume environment that we have, as well as what we anticipate will be slightly elevated levels of promotional activity.
Motorcycles, we anticipate to continue to see improvement.
As <UNK> alluded, the Spirit Lake facility enhancements is a allowing us to get more motorcycles through.
So the per unit cost is improving there.
And the global adjacent markets is going to be about flat, but isn't as big a impact to the overall Company performance.
It's completely mix, <UNK>.
You built out the Scout.
Now you've got a new Scout 60 at $8,999 that we expect is going to be a significant volume play.
That's really all it is.
We're going to see growth in all of our products within the thing.
It's just no comps on some of the mid-size.
Yes, you're right <UNK>.
The range is purely about the organic.
If you look back at our slide number 20 and we talk about our constant currency revenue performance of flat to 5% ---+ plus 5%.
So we're assuming the same level of currency.
The reality is there are going to be dynamics that happen within that.
But for the ease of modeling this and being able to give ourselves a clear shot at what we want to do organically in the business, we pegged the foreign exchange rate.
As I mentioned, we've got a pretty substantial level of hedge activity in place.
So we think we can mitigate a fair amount of the transactional impacts that we've got, and we continue to increase those positions as we go.
The translation could pose some risk to us.
But at this point it's tough to tell where that will end up.
<UNK>, you just answered your own question.
When we started Huntsville 1.5 years ago, ORVs were still growing at double digits, and we still need to plan.
Obviously as <UNK> I think fairly well articulated the benefits we get from it, but clearly demand is down from when we originally started the project.
So moving Slingshot there makes sense on many, many levels.
We built the plant to have extra capacity because we recognized the strategic location of it with the local supply base, the strong engineering base there, the proximity to our customers.
But really it also augments our ability to continue to fulfill the growth that we know is coming with Indian and Victory.
There's limited human capacity in the Spirit Lake area.
There's limited paint capacity in the Spirit Lake area.
By moving Slingshot out, we get two benefits.
One is eating into the absorption in Huntsville, taking advantage of that labor pool.
But also ensuring that we have a long way to run with our motorcycle business in Spirit Lake.
Let me see if I can get one question there.
With the new segment reporting.
As I said in my remarks <UNK>, it's a pretty tough environment in snowmobiles.
And we're going to do the right thing, as we always do.
And so we're expecting some pretty notable reductions to our build in snowmobiles.
So I think when you see the implied guidance, there's a dampening effect that is certainly snowmobile.
Don't look at the minuses as an expectation of where we see our retail for ORV.
Again, we're modeling a flat industry essentially and that we're going to hold share.
So I think the implied retail guidance on that would be somewhere in the flat range, not down.
And again, I think as we come up against more muted comps in the second half, I do think we expect that our retail performance should strengthen as the year goes on in ORV, at least directionally.
<UNK>, I think it's primarily a demand issue.
Again, we're very pleased with the progress we've seen out of Spirit Lake.
While there are still some backlogs within niches of products, and probably Victory's been the most adversely impacted, really what I think you saw on us missing our retail expectations was that the industry was weaker than we expected, being down high-single digits.
We didn't expect that.
We expected it to be closer to flat or down low-single digits.
That's primarily where the retail miss was.
Again, fourth quarter is fairly low seasonality for us.
So much better that we're positioned as we head into 2016.
As I indicated in my remarks, we're very comfortable with how Steve has that business set up.
<UNK>, this is <UNK>.
I'll take Canada.
Again, Canada was weak, <UNK>, all year long.
And particularly in side-by-sides, it's a much smaller percentage of the marketplace than it is with ATVs.
So we don't see what I would call material headwind year over year in Canada coming off of weak comparables, particularly with us being very heightenedly focused on side-by-sides.
I don't think we should worry about a seasonality impact there in Canada.
You want to comment on that.
As it relates to the automotive, and then you threw in the boat segment being reasonably strong, as you know, boats are notoriously cyclical.
And I think they're just benefiting from an upcycle in that industry.
And we know how that ends typically.
On the auto side, I think <UNK> Jackson, AutoNation, just described the situation in auto retail extremely well.
The record sales, what, $17.5 million, was fantastic.
But the dealer inventory fundamentals aren't good.
The length of the financing is not good.
And we believe that is really not going to last over time.
But it's certainly not helpful to us when we see those products selling and ours not.
There is an element, I have to admit, as much as I like to talk about the work value of our products, there's a little bit more of a necessity need to an automobile than a RZR.
We'll live with that.
Excluding currency, from a ORV standpoint, incremental margins are probably going to be in the, call it, 40% range as we grow a very high profitable business and <UNK>'s organization continues to execute on the Lean initiatives.
Motorcycles is a tough one.
We're registering right around 13%, 14% margins right now.
The incremental will be not quite at the Company level, but we're going to continue to see that improve.
So you're probably talking about numbers that would be up in the 20% range.
And then global adjacent markets is going to be slightly north of the overall gross margin level that they have.
No.
Todd gave us plenty of notice that he was planning to leave.
So we had a lot of time to prepare for that.
One of the many things that he did is he built a really good team underneath of him.
We've got a strong pipeline now.
The transactions are continuing to flow through.
And there's actually zero impact on the business.
Because Todd gave us so much notice, we've had a lengthy search going on.
We believe we can attract a really strong candidate to help us continue to drive our strategy through M&A.
So don't read anything into that at all.
That includes Slingshot, <UNK>.
That essentially is anything that its segment we compete in.
So mid-size and up, cruisers, bagger, touring, and three-wheelers.
In our segments, no.
In the broader based motorcycle market, I won't specifically comment.
I think they did just fine in that.
Frankly, some of the lower end motorcycles were relatively a little bit better than the big stuff.
So we definitely saw an elevated level throughout the course of 2015.
And you can see in the press release the balance that we have exiting 2015 versus last year.
We're at an elevated level.
As we get into 2016 we anticipate that, that will continue.
It will have an impact on gross margins, but when I stratify it against all the other things like foreign exchange and the other impacts that we have, it's relatively small in the overall scheme of things.
That's part of the plan is that we will sequentially start insourcing Slingshot paint once we get it down to Huntsville.
It may not be all of it, but it would be a substantial portion of that going forward.
Yes, we have not changed our $300 million to $500 million outlook for that business.
Year two is pretty exciting with what <UNK> and the Team have planned.
I think, <UNK>, that as the economy gets a little tougher and as we've raised the ASPs, particularly on some of the high-end stuff, we're watching that very, very carefully.
I would tell you, we had what I would call significant bets on the high end of our line.
So that's why you saw ---+ that's why primarily took the reductions in those products.
But we're watching that dynamic here as we go forward in a tougher economy.
And I think you can expect to see us in 2016 be sharper on our value-premium plays as we go forward.
The 15% does relate to North America.
So that's essentially key states and provinces in North America.
Yes <UNK>, on the currencies, I had mentioned in my prepared remarks the Canadian moving about CAD0.01 is going to be about $5 million to the top line.
It's close to $5 million to the gross margin line.
For the euro, about $0.01 move is going to be about $3 million to the top line and about $1 million, $1.5 million of income.
Yes, but I mean, they're small enough that they're not the ones moving the needle.
The CAD is the number one and then the euro obviously presents a pretty big challenge from a translation perspective if we get significant movement there.
I think, <UNK>, this is <UNK>, snow is improving as we've gone through the first quarter.
Fourth quarter there was just not a lot of snow.
And I would tell you generally the inventory that we're most concerned about is in the flatland areas.
We had a poor snow year last year in the Midwest, good snow in the Northeast, and then we had poor snow in both areas in the fourth quarter.
So we're watching the flats very, very carefully.
We have great product in everywhere, but particularly in the mountains.
We feel good about where we are there.
That's a good question, <UNK>.
I would tell you, we've seen the phenomenon with currencies helping our competitors for well over a year.
I think as we made the remark, this is the second or third year in a row of significant currency swings.
We've been facing that problem for some time.
It's certainly helpful for them.
I think as the economy toughens, there is heightened focus on value.
And we have a number of value offerings, and I think you'll see us sharpen that.
And I think we're going to watch, to the earlier question that <UNK> had about making sure we have our price sensitivities right on the high end.
I will tell you on the side-by-sides, when you think about entering the crossover segment with General, which is a $30,000-plus segment where we have 0% share, and that is a very compelling product and it's been well received, along with a full year of Turbo and a number of other things, we feel ---+ we got ammo on the high end and we expect those products to do well.
I mean, I'll put those products up and they'll kick everybody's butt, not to sound cocky.
We still feel good about the strength of the Polaris Armada, and we'll take our chances.
