Polaris - Q4 2023
January 30, 2024
Transcript
Operator (participant)
Hello, and welcome to the Polaris Q4 and full year 2023 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. To ask a question, you may press star, then one on your telephone keypad, and to withdraw from the question queue, you may press star, then two. I would now like to hand the call to J.C. Weigelt. Please go ahead.
J.C. Weigelt (VP of Investor Relations)
Thank you, MJ, and good morning or afternoon, everyone. I'm J.C. Weigelt, Vice President of Investor Relations at Polaris. Thank you for joining us for our 2023 fourth quarter and full year 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 Speetzen, our Chief Executive Officer, and Bob Mack, our Chief Financial Officer. Both have prepared remarks summarizing the fourth quarter and full year, as well as our expectations for 2024. Then we'll take your questions. During the call, we will be discussing various topics which should be considered forward-looking for the purpose of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements.
You can refer to our 2022 10-K for additional details regarding risks and uncertainties. All references to the fourth quarter and full year 2023 actual results and 2024 guidance are for our continuing operations and are reported on an adjusted non-GAAP basis, unless otherwise noted. Please refer to our Reg G reconciliation schedules at the end of the presentation for the GAAP to non-GAAP adjustments. Now, I will turn it over to Mike Speetzen. Go ahead, Mike.
Mike Speetzen (CEO)
Thanks, J.C. Good morning, everyone, and thank you for joining us today. After what could only be categorized as a turbulent year, we ended 2023 with share gains across all three of our segments. While there was plenty that went right and aligned to the execution of our longer-term strategy, we faced several challenges, particularly in the fourth quarter, as costs continued to run higher than we anticipated, which drove a miss to our margin and EPS guidance. While our performance was below expectations, there was much that went right in 2023. It started with us delivering on our commitment to bring industry-leading innovation to our customers. In off-road, we introduced two brand new category-defining vehicles this year, the Polaris XPEDITION and the RANGER XD 1500.
Together with the launch of the completely redesigned RZR XP last spring, we now have the most competitive lineup of off-road vehicles the industry has ever seen. We also launched the all-new Lock & Ride MAX system with entirely new purpose-built accessories and attachments, resulting in endless customization and a remarkably intuitive platform. In on-road, specifically Indian Motorcycles, we launched the Indian Pursuit Elite and the Sport Chief, which raises the bar for the American V-Twin performance cruisers. In Marine, we introduced the new Bennington S and SV lines this past summer, and early feedback has been positive, indicating that these new models strengthen Bennington's value offering within the pontoon market. It was also a year to celebrate our race teams. When we launched the RZR Pro R in 2021, we were bullish on the quality and performance of the vehicle, and we were right.
The success this vehicle has had in crossing the finish line before all others is a testament to what customers expect from Polaris. Our drive to innovate and push the envelope is what of what is possible, from horsepower to suspension technology, has led Polaris to top the racing world again. Not only did we win the Baja 1000, 500 and 400, as well as the San Felipe 250 in 2023, we just secured a monumental win at the 48th annual Dakar Rally, which is one of the most grueling races, covering over 4,000 mi in two weeks through unforgiving terrain in Saudi Arabia. In some late-breaking news, Polaris swept the podium at the King of the Hammers Desert Challenge.
We also cannot forget about another successful racing year for Indian Motorcycle, where we took first place in American Flat Track and Super Hooligans. Hats off to our Polaris race teams and our talented engineers on such a successful year. In addition to record levels of innovation, we stabilized dealer inventory, removing the challenges of product availability we've been dealing with for several years. Another highlight is the execution of our capital deployment strategy and the health of our balance sheet. In 2023, we generated over $500 million of adjusted free cash flow, and we're putting that cash to work. We returned $326 million of that cash flow to shareholders between dividends and share repurchases.
Our capital deployment strategy has been consistent, and we expect to continue to lean into organic investments, our dividend, and share repurchases, all of which center around our goal to generate shareholder value. While we certainly have a lot to be proud of, execution against our financial commitments fell short of our expectations. Our largest challenge centered around our manufacturing facilities. We did not achieve the efficiencies we'd planned, which resulted in margin pressure throughout the year. It's important to note that operational costs did start to improve later in the year, but not to the level we had expected them to. This, coupled with lower manufacturing volumes and difficulty producing new products, led to significant margin pressure. Add to that higher than anticipated product liability and warranty spend, and our EBITDA margins came in below our expectations, as well as below 2022.
This was disappointing for me and our team, and we are focused on addressing the root causes of the inefficiencies with a focus on driving improved processes within sales, inventory, operations, and planning. North American retail was up 7%, driven by utility and snow. While we expected positive snow performance relative to last year, results were weaker than expected, given the lack of snowfall in most regions. It was encouraging to see our side-by-side retail up low double digits, driven by continued strength in our RANGER vehicles. While utility saw strength, our recreational business continued to see pressure given higher interest rates and economic uncertainty. We ended the year gaining slightly over a point of share in off-road, more if you exclude youth vehicles that have little profitability associated with them.
Share gains are positive season-to-date snow, as we were able to deliver all of our SnowCheck units before the season started. While share in our on-road and marine segments was under slight pressure in the quarter, we did gain share in both segments for the year, driven by better product availability and new products. Our sales results during the quarter were slightly lower than our expectations, given lower retail than we anticipated and lower net price due to an increase in promotional activity. We saw a heavy discounting of non-current inventory by competitors. In November and December, we increased our promotions for current inventory in response, and our strategy seemed to play out well as we saw retail increase meaningfully in both those months. We view this situation as short-term until competitive, non-current inventory is lowered.
We also made the decision within the quarter to lower our recreational off-road shipments, specifically certain models of RZR, given continued lower retail and our goal of maintaining targeted levels of dealer inventory. We feel these decisions are important given the seasonal trends of our product lines and to proactively manage dealer inventory. Consistent with last quarter, we saw an uptick in floor plan finance interest that is a result of increased inventory and higher interest rates. This is expected to remain a headwind into 2024. These pressures on revenue also negatively impacted margins in the fourth quarter. In addition, we saw elevated warranty costs in the quarter, driven by a $23 million warranty expense in our Goupil business within our on-road segment. This charge was associated with a battery component failure, which was caused by a supplier who had previously filed for bankruptcy.
These issues, coupled with elevated operational costs I mentioned earlier, as well as the impact of product liability claims, drove lower than expected margins. Our resulting EBITDA margin was down 377 basis points versus last year in the fourth quarter. We've increased our accrual for product liability claims due to the challenging litigation environment. Most of the increase relates to products produced before 2018. This pressure, along with higher year-over-year interest expense, drove adjusted EPS down 43% to $1.98, falling short of our guidance. The fourth quarter concludes a year that can be defined by a volatile macro environment, inconsistent consumer demand, and a lack of execution on our part.
While I'm proud of our ability to take share and generate strong adjusted free cash flow during the year, we need to operate more efficiently if we're to hit our long-term margin targets. Moving forward, I believe our teams are aligned to drive operational improvements in 2024 while delivering share gains. Let's now talk about retail trends as well as the data at the dealer level. Broadly speaking, retail was lower than our expectations in the fourth quarter, driven by recreational portfolio within our off-road, as well as our snowmobile business. Two important things to note here. First, as a reminder, our utility product makes up almost 60% of our off-road sales, with the main product being our RANGER side-by-side. The purchase of these vehicles tends to be less discretionary in nature, as they are primarily used for work purposes.
Recreation makes up the remaining 40%, with the main products being the RZR and GENERAL side-by-side. Recreational off-road vehicle retail continued to see softness in the quarter, which marks the fifth straight quarter of negative retail in our recreational portfolio. These vehicles tend to be more discretionary purchases and are more sensitive to economic conditions and the health of the consumer. We feel higher interest rates, coupled with economic uncertainty, are negatively impacting retail. Second, we expect a positive contribution from our snow business, given an easy comparison to last year and improved product delivery into the channel. While we executed on improved deliveries, growth was lower than expected, given poor snow conditions in the fourth quarter, and we expect this to continue into the first quarter of 2024. As mentioned earlier, our promotional levels were elevated in Q4, given the competitive dynamics I explained earlier.
We do expect promotions to remain elevated into Q1 of 2024. We are expecting industry retail to be down modestly in 2024. While the industry will be challenged, we anticipate being able to grow share given our strong core product portfolio, a full year of retail for Polaris XPEDITION and RANGER XD, as well as additional new products expected to launch in 2024. We recently concluded our biannual ORV dealer survey that includes close to 700 responses. Sentiment from dealers worsened relative to the last time we conducted the survey in the spring. This survey conveyed that while dealers see promotional activity helping, they continue to be concerned about the broader economy, coupled with higher interest rates and the resulting impact on consumer demand. Dealers believe system inventory is still too high.
While our channel inventory is healthier than many others, we have opportunities to improve, specifically in areas like RZR and Marine, where we began making adjustments in 2023, and we've built those continued improvements into our plans for 2024. We believe our channel inventory is within an optimal range for RANGER and Indian Motorcycle, and that we still have an opportunity to build inventory with Polaris XPEDITION and RANGER XD, given dealer feedback. That said, we intend to operate in a disciplined manner to ensure dealer inventory levels remain at optimal levels in 2024.
We will balance how the industry plays out with the need to have the right inventory in the field to maintain our competitive positioning. Wrapping up my comments on the quarter and the year, we won the retail and share battle by playing offense in a complex and competitive environment. While our financial execution fell short, we did continue to make significant progress on executing against our strategic agenda. We enter 2024 focused on execution at all levels to ensure we gain share, expand margins, and execute against our financial commitments. I'll now turn it over to Bob, who will summarize our fourth quarter performance and provide initial guidance and expectations for 2024. Bob?
Bob Mack (EVP and CFO)
Thanks, Mike, and good morning or afternoon to everyone on the call today. Fourth quarter results were driven by lower factory shipments, lower net price, and higher finance interest impacting both sales and margins. We made the decision during the quarter to scale back off-road vehicle shipments, given a choppy retail environment. Promotions were in line with our plans, but continued to be higher year-over-year. Manufacturing costs remained elevated, and as Mike mentioned, we booked a sizable warranty expense during the quarter in our on-road segment. Similar to the third quarter, we continued to see higher product liability costs relative to a year ago as COVID delayed cases progressed through the court system. PG&A continued its pace of record-breaking records with growth of 14% in the quarter and gross profit margin expansion of over 300 basis points.
Our PG&A business continues to be a competitive advantage for us, with the most recent addition of an offering in Marine. Today, sales of PG&A products, which includes accessories installed at the factory, make up approximately 20% of total sales, with very attractive profitability. Looking at 2024, we expect PG&A to continue to be a positive contributor with growth and margin expansion. In our off-road business, revenue increased 3%, driven by double-digit growth in utility, snow, and commercial-related product lines, somewhat offset by a 20% decline in recreational products. We continue to see increased demand for our premium vehicles, including the Polaris XPEDITION NorthStar edition, which helped our crossover category gain almost 10 points of share during the quarter. RANGER XD 1500 had minimal impact on retail during the quarter, given we began shipping in November.
Utility saw mid-teens retail growth, which was a bit higher than previous quarters. We saw strong traction with our agricultural customer base, which tend to have a demonstrated need for the product. Unfortunately, overall snow retail has been softer than expected, given the late arrival of snow across much of North America and uncharacteristically high temperatures in the Midwest. Season to date, we have gained modest share. As we conclude the season, we expect lower shipping volumes for the upcoming season, given elevated inventory at dealers as the industry grapples with the lack of snow. Margins in the quarter were pressured by higher promotional levels, finance interest, and mix, as we sold fewer RZRs and more snowmobiles, which typically have a larger—lower margin profile.
We expect a somewhat challenging first quarter on a year-over-year basis, driven by the lack of snowmobile shipments in the quarter and the channel refill on ORV that occurred in 2023. Recall that in 2023, we shipped a large volume of sleds late in the snow season, and we're also finishing up on some channel refill to get dealer inventory to a healthier place. We do expect share gains to continue, given our strong product portfolio, as well as new products launching later this year. We are also planning for margins to expand as we realize manufacturing efficiencies at our two largest plants. So while it might be a challenging start in 2024, we believe we have the momentum to continue to improve our share position and operational efficiencies, setting us up to emerge stronger as we enter the back half of our five-year strategy.
Switching to on-road, I want to start off with a highlight, and that is Indian Motorcycle marked its first year of profitability in 2023. Mike Dougherty and the team have done a great job building Indian Motorcycle into the number two motorcycle brand globally, and we look forward to its continued success. Sales during the quarter were down 24% as the motorcycle market continued to be challenged, given a difficult macro backdrop and high interest rates impacting monthly payments for consumers. We were also up for the full year against a difficult comparison to 2022, when we were refilling the dealer network with bikes, given supply constraints. Indian Motorcycle lost modest market share during the quarter, driven by competitive pressure in the heavyweight space, which was somewhat offset by continued strength in midsize.
On-road gross profit was down 323 basis points due to the previously mentioned warranty expense booked in the quarter. Gross profit margin for Indian Motorcycle was up nearly 600 basis points, marking the sixth straight quarter, expanding margin over 250 basis points, and helping them achieve profitability this year. In Marine, sales were down 41% as the industry continues to deal with elevated dealer inventory levels and higher interest rates impacting the consumer's decision to purchase. We made the decision earlier in the year to curtail shipments given the trends we were seeing, which resulted in lower volumes in the fourth quarter. Gross profit margin was down 368 basis points given top line pressures. However, our team continues to actively manage the variable components of their cost structure to protect profits.
With the season concluded, Bennington, Godfrey, and Hurricane all took share in 2023. We are excited about the future of our marine business as they continue to refresh their portfolio, as well as add new dealers to the network. With boat show season upon us, the early read is that dealers continue to feel they are high on inventory, and retail seems to be trending flat, slightly down versus 2023. Quickly reviewing our full year performance by segment, retail ended up being more challenging. Segment sales were at or above our guidance, and we gained share in each segment with a strong offering of competitive products.... Operationally, we have walked through the challenges in off-road, and again, it was great to see on-road, and specifically Indian Motorcycles, be profitable this year.
Moving to our financial position, we concluded the year with significant year-over-year growth in operating and adjusted free cash flow. During the year, we used this cash to support CapEx investments and returned $326 million to shareholders in the form of dividends and share repurchases. We are in a strong financial position, ending the year with a net leverage ratio of 1.6x, which is in the middle of our 1x-2x range we like to manage the business. During the quarter, we completed our inaugural investment-grade public senior notes offering by issuing long five-year bonds. This brings our mix of variable to fixed rate debt to 68% fixed and 32% variable.
We repurchased 1.6 million shares in 2023, and remain well ahead of our target to repurchase 10% of our outstanding basic shares before the end of 2026. We believe that we are well set up for a variety of scenarios in the broader market with our balance sheet, and believe we can replicate last year's cash generation from a dollar perspective in 2024. Now let's move to guidance and expectations for 2024. We are initiating guidance today, calling for 2024 sales to be down in a difficult retail environment, coupled with a reduction in shipping volumes as we lap dealer inventory fill in ORV and Marine, and the timing of snow shipments, which favored 2023. Most of these headwinds are expected to be realized in the first quarter.
I think it is worth repeating what Mike said on dealer inventory, and that our goal of strong discipline around dealer inventory this year is based off a declining industry retail environment. If retail estimates or our opinion on competitive positioning of inventory changes, we will update our levels of dealer inventory. Promotions and interest and finance interest are expected to remain elevated as we progress through the year, which also adds pressure to our top line and margin. By segment, sales within off-road are expected to be down mid-single digits, driven by a tough comp in the first quarter and lower shipment volumes of snow and some models within ORV. These headwinds are expected to be somewhat offset by retail and channel fill of new products, such as the RANGER XD and products scheduled to launch in 2024.
We expect off-road to take share in 2024, given its strong competitive portfolio. On-road sales are expected to be flat year-over-year as we continue to see a soft market, given higher interest rates. Our expectation is that on-road gain share with some very exciting products launching later this year. Marine sales are expected to be down mid-teens percent as we work to reduce inventory in the channel in the midst of a challenging industry. We believe Bennington's new S and SV lineup give us a great opportunity to continue taking share in the pontoon market. Our margin guidance calls for expanding both gross profit and EBITDA margins. As you can see with our guidance, the expansion happens at the gross profit level, with savings and efficiencies expected to be realized in materials, logistics, and at our plants.
In total, we are targeting over $150 million in operational savings with an even larger funnel of opportunity. Within the plants, we see costs coming down with a renewed focus on lean manufacturing practices, as well as being more efficient with the production of our new vehicles. We also expect savings from the capital investments we made in Monterrey, Vietnam, and Roseau, which include new paint systems and backshop vertical integration. Operating expense dollars are expected to be up 1%-2% relative to 2023, driven by wage inflation and return to target payouts on incentive compensation, being mostly offset by cost reduction actions across the business. We have planned for product liability costs to remain at a similar level to 2023 as we continue to work through case backlogs.
Additionally, a headwind to gross profit in EPS, but not EBITDA, is that depreciation is up approximately 15% relative to 2023 due to tooling associated with the launch of new products introduced last year. A couple other items to note include modestly higher year-over-year interest expense. This impacts our dealer floor planning, finance interest costs, as well as debt costs. We have planned for three rate cuts in the second half. We are planning a higher tax rate, as we do not expect the same amount of R&D credits, as well as the benefit of some other one-time items that helped lower the rate in 2023. Foreign currencies remain volatile and are expected to once again be a headwind. We have planned for the Canadian dollar at 0.72, the euro at 1.07, and the peso at 17.5.
We believe we are well hedged changes in the Canadian dollar and peso below these rates. Accounting for all of these items, we are guiding to adjusted EPS between $7.75 and $8.25, which is a 10%-15% decline relative to 2023. For the first quarter, a few things to note: As I mentioned, we have a meaningful headwind to sales due to the trend in snow shipments last year, as well as channel refill in ORV and Marine. Given such headwinds, we expect sales to be down approximately 20% in the first quarter. Higher promotions year-over-year at a similar run rate to the fourth quarter. We continue to experience headwinds from net pricing, finance interest and stable but inefficient operational costs that we incurred during the fourth quarter.
Lastly, FX and interest expense continue to be unfavorable year-over-year. So putting this together for the first quarter, we have a number of headwinds, predominantly the sales headwinds and pressure on margins, that are expected to result in break-even adjusted EPS. We expect to see closer to flat sales year-over-year in the remaining three quarters of 2024, with share gains from new products offsetting a slower industry. These sales volumes, coupled with meaningful margin expansion as we go through the year and realize the savings and efficiencies from our efforts to fix our plants, will yield year-over-year margin expansion. We expect another year of strong cash flow generation as the team continues to drive working capital down. It is also encouraging to see the early progress we've made at our plants, from building the new vehicles more efficiently to reinvigorating lean processes.
Before Polaris, my career was with the industrial sector, and I am encouraged by the renewed focus I see on lean at our plants. I know we still have work to do, but the opportunity is great. Our teams are aligned on our plan, and we look forward to reporting out on the progress through the year. With that, I'll turn it back over to Mike to wrap up the call. Go ahead, Mike.
Mike Speetzen (CEO)
Thanks, Bob. We launched incredible new products in 2023 that strengthened our competitive position, and we're not coming off the gas. There is much more to come in 2024, where we will once again demonstrate why we are the leader in powersports. Operationally, we must do better, and we will. Improved cost and quality remain a major focus for us. Our teams are poised to execute on the opportunities across our business to lower costs, improve quality, and increase margins. Starting last quarter, our teams began working on many of these initiatives, and I'm confident that we have the focus, momentum, and the best team to execute. While the environment is uncertain, our commitment to maintain an optimal level of dealer inventory is clear.
We've worked hard to ensure the profitability of our dealers is maximized, and our ability to maintain a healthy, competitive, and appropriate level of inventory is an important part of that equation. Our focus and commitment here is unwavering. We remain committed to our capital deployment strategy, which is to invest in our operations, remain a dividend aristocrat, and repurchase shares. With our free cash flow yield hovering around 12%, we continue to see our stock as an attractive investment. 2024 also marks the halfway point to our 2026 targets, and while the first couple of years added additional challenges, we believe there is a path to our 2026 targets.
Executing in 2024 is critical to meet those targets, and my team and I are focused on what needs to get done over the next 12 months to ensure those long-term targets are met. While 2024 is not setting up to be a robust year from a retail standpoint, we will build on our leadership position within powersports with the most innovative products in the industry, unmatched customer experiences, and stronger operational fundamentals. We have the best team in powersports, and we know what needs to get done this year. We thank you for your continued support. And with that, I'll turn it over to MJ to open the lineup of questions. MJ?
Operator (participant)
Thank you very much. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Today's first question comes from Fred Wightman with Wolfe Research. Please go ahead.
Fred Wightman (Director)
Hey, guys. Good morning. Thanks for the question. Bob, you gave us some high-level thoughts on sort of the sales and earnings outlook for the first quarter, and I know you guys have some moving pieces year-over-year just with snow and ORV restocking, but can you just give us some more detail on either the segment performance or sort of the margin performance that you guys are assuming there, and, and maybe have a think about, you know, that implied improvement for the remainder of the year?
Bob Mack (EVP and CFO)
Sure. So, you know, first of all, if you look at the drop for the year on revenue, I mean, most of it, we're seeing it in the first quarter, and it's the two primary factors are snow and off-road, although both marine and motorcycles are down on unit shipments also. Plus, we have the continued high promo level from Q4, which is higher than, you know, what it was in Q1 of 2023. OpEx is expected to be, you know, flat for the year. It'll be relatively flat sequentially versus Q4.
As I said on the call, we anticipate product liability accrual costs to be higher, to continue at their high level in 2024, and we expect them to be pretty consistent with what we saw in 2023 as we work through some of these older cases related to the past RZR recall, as well as any other cases we have. So, I mean, those are the big pieces for the quarter in terms of what's causing the challenge in Q1. It's really that this adjustment around getting dealer inventory, keeping dealer inventory at, you know, where we see the optimum level, given, you know, what was a little bit slower retail in Q4 than we expected and, you know, what we think will be a fairly tepid retail picture in Q1.
When you get into the rest of the year, you know, the quarters start to look a lot more consistent and, you know, sales will be relatively flat with 2023 and the rest of the quarters, and you'll start to see the earnings improvement from the operational efficiency gains come through. You know, if you think through how the math sort of works, you know, what we see in Q1 is really the inventory we built in Q4. So we are seeing improvement in Q1, sequentially, in terms of cost. It just gets masked by the fact that we're going to be so far down on volume, you know, that you'll see that the factory hours, the impact of not having those factory hours start to hurt.
The margin improvement won't stand out, but it's there. You know, we've been working hard through the Q4 and into Q1 to make sure that we're going to continue to drive that performance through the year.
Mike Speetzen (CEO)
You know, and remember, Fred, that Q1 is typically a pretty low quarter for us anyway. And, you know, for years, we've had the benefit of that snow business delivering late, which obviously is not optimal for customers. So, you know, we've got that business in a much, much better spot. And, you know, as Bob mentioned, dealer inventory is now essentially at a, at an optimal level. I, I look at it as the, it's essentially when our performance is kind of bottoming out. There's a number of factors coming together at one time, and when you look at Q2 and three and four, you're not, you know, this isn't a heavy back-end loaded plan. It's, it's essentially getting back to shipping to retail. You know, we obviously have opportunity in front of us to get costs out through the remainder of the year.
But, you know, this isn't something where we're not generating earnings in Q1 and making it all up in Q4. It's, it's really us getting back to running the business on a more normalized basis, essentially starting in Q2. And, you know, the team came out of the gate strong in January. You know, I can tell you, we are monitoring even more measures and metrics than we have before, specifically around the operations of the business. And, you know, I'm encouraged with what I've seen so far, and we're going to stay on top of it to make sure that the team executes.
Fred Wightman (Director)
Really helpful. And then, Mike, just coming back to the industry retail outlook, I think you made a comment, you're expecting that to be down modestly. Is there anything else you can share just in terms of performance across categories or the cadence of the year? I think you mentioned you were assuming a couple interest rates as well. How does that shake out?
Mike Speetzen (CEO)
Yeah, I mean, I, you know, I'd say a couple of things. I mean, one, you know, obviously, the broader industry is gonna behave as it will, and for us, it's our relative performance. And, you know, we did it this past year in terms of gaining share in all three segments. And I'm really confident, given the new products that we came out with, you know, obviously late in the year and getting a full year of that with, XPEDITION and XD. The work the marine team's done, not just in Bennington, but with Godfrey and Hurricane. And then, you know, in our on-road segment, we've got some, as Bob teased, we've got some, very intriguing news coming this year.
You know, and add on top of that, the dealers obviously have become a lot more discerning in what they want to have in their dealerships. And we know that they're pushing out a lot of those weaker brands, and that really benefits us because we continue to demonstrate that we are the leader, and there's a reason behind that. And I think that the dealers appreciate the adherence we have to making sure that the dealer inventory stayed at an appropriate level. So, you know, as Bob mentioned in his prepared remarks, you know, we're gonna make sure we're watching retail, and we're gonna monitor our shipments, and we're not going to get out ahead of our skis. And we're going to make sure that we have the right inventory at the right dealers, but we're not going to ignore trends.
If trends are better or worse, we're going to adjust our shipping plans accordingly.
Bob Mack (EVP and CFO)
On the rate cut, Fred, we've got, about 70, you know, 325 PIP rate cuts built in in the back half of the year in, late Q3, Q4. You know, it's a bit all over the map right now as to what people think the Fed's actually going to do. So we planned, you know, relatively conservatively there. We'll see how the year develops.
Fred Wightman (Director)
Great. Thanks a lot.
Operator (participant)
Thank you. The next question is from Megan Alexander, with Morgan Stanley. Please go ahead.
Megan Alexander (Equity Research Analyst)
Yeah, thanks for taking our question. Maybe if we could, you know, follow up on the, on the 1Q comments there. Is there any way you can maybe quantify the product liability accrual impact to the fourth quarter? I think that shows up in G&A, and seems like it was maybe a $35 million headwind, just looking at your run rate prior. So maybe we could start there.
Bob Mack (EVP and CFO)
Yeah, that's relatively accurate. I mean, most of our overspend in Q4 in G&A was the increase in the product liability accrual. And, you know, it's really just a confluence of... We had a lot of cases going through the court system in Q3, Q4. We update our analysis on those accruals twice a year, and, you know, both for incurred, but not reported cases, plus specific cases that we are aware of and where there's been discovery and we have knowledge of kind of facts and sometimes rulings from pretrial motions. And so, that update to that accrual was larger than what we were anticipating, larger than it's been historically.
It's really just driven by the quantity of cases that kind of got moved in the last couple quarters and the impact they had on that analysis. So, you know, as you think about 2024 and OpEx, we've kept a similar run rate for legal, not the fourth quarter run rate, but the full year. And then our OpEx is basically flat, and it's a combination of you know, the headwinds are you know, merit and cost of living type increases, returning the bonus pool. We plan it at you know, full payout, which obviously we don't have this year, given that we missed our guidance.
And then, the tailwinds, we've done some cost cutting and work around efficiency in the organization as we head into the year. Obviously, we're being very judicious on hiring and things like that. But we didn't want to cut our focus on engineering and innovation, given that really the challenge for 2024 is really just this first quarter revenue drop. So we've continued to keep those investments in. Obviously, we'll look at all that if the year turns out to be materially different than what we think it is today.
Mike Speetzen (CEO)
And Megan, I just, you know, I, I said it in my prepared remarks, but it, it merits reemphasizing it. You know, the majority of these costs are associated with products that are back before 2018. And, you know, the thing to keep in mind is, you know, during COVID, the, the legal, the court system kind of essentially shut down and has just kind of gotten back into getting up to speed. And so the, the pace and, and movement of these cases has been happening pretty quick. And as you can imagine, we're, you know, obviously trying to do the best that we can to, to, to stay on top of it. You know, Bob mentioned it, we've planned 2024 at a very similar level to what we saw in 2023. And, you know, we're keeping a close eye on it.
Obviously, you know, I think it's not unique to us. You know, the legal environment's pretty challenging right now, and costs overall of settlements and trials and all that are much higher than they have been historically. So, you know, we do have product liability insurance, so we do have that benefit factored in as we think about financial guidance and how we want to handicap potential risk.
Megan Alexander (Equity Research Analyst)
Okay, great. That's helpful. And then maybe the same question on promotions. You know, what, what are you seeing today relative to the fourth quarter in terms of those promotional levels? And, you know, in the context of inventory up 5% versus 2019, I think your expectation was for it to be flat to slightly down. So, you know, how should we think about that promotional impact to the first quarter? And what's kind of your confidence level that this is all contained to the first quarter?
Mike Speetzen (CEO)
Well, I mean, you know, a couple of things. You know, we, we ended up doing probably a bit more in the fourth quarter, as I mentioned, given some of the competitive dynamics around noncurrent inventory. You know, as, as best we can, we can tell that that is coming down, relative to where it has been. But, you know, if you look at the first quarter of 2024 versus first quarter of 2023, you know, our dealer inventory was probably 40 days lower than optimal. So there was very little promo in the channel. We were all still trying to get ourselves caught up, in the first quarter. And so when you do that year-over-year comparison, it's, it's pretty substantial.
You know, look, it's, it's really going to come down to the amount of discipline that, that we and others are going to have around dealer inventory, making sure that there isn't noncurrent inventory sitting on the floor in excess, as well as just making sure that we're watching retail and making the adjustments to the shipments. And we know, you know, we've made that commitment. We've heard others now starting to voice that, which is encouraging. And I think that's going to be an important dynamic to make sure that, you know, promo remains in a, in a relatively contained fashion.
Our team's done a lot over the past few years in terms of the investments we've made in our CRM systems, so that, you know, as we go out with offers, you know, obviously, you'll have blanket offers that are around financing, that we know are, you know, pretty successful and obviously hit a certain, tier bracket of, of credit rating. But a lot of our other offers go through, and are much more targeted to, you know, customers that have been in the Polaris family for a while, and we know it's time to upgrade, and we're really trying to do that, so that we end up with a much more efficient use of that money than just doing a blanket offer.
Megan Alexander (Equity Research Analyst)
Okay, got it. Thanks, Mike.
Mike Speetzen (CEO)
Yep.
Operator (participant)
Thank you. The next question is from Craig Kennison with Baird. Please go ahead.
Craig Kennison (Senior Analyst)
For taking my question. It really goes to the 2026 plan. For investors to believe it, I think they need to believe in significant margin expansion, which, you know, frankly, is harder to believe, given some of the operational challenges that you faced in 2023. I guess, how would you frame the potential to achieve that 2026 margin plan? And what are some of the key drivers to achieving it, and maybe your confidence level in some of those drivers as well? Thank you.
Mike Speetzen (CEO)
Yeah, you know, I think, you know, I feel, I feel pretty good about everything. That the margin, EBITDA margin is obviously the one we're, you know, contending with right now. You know, I'd say it's, it's a couple of things, Craig. I mean, it's obviously why we have, have pushed the team hard to work on the inefficiencies. You know, if you go back in time, our factories were dealing with, you know, a fair amount of, I, I don't want to say chaos, but, you know, there was a fair amount of inefficiency given what was happening from a supply chain standpoint. And, you know, during that time period, I, I tell you, we, we kind of lost our way.
You know, the lean focus, making sure that we were managing down to the, you know, daily cost budgets in the plan. It was all focused on trying to get product out. You know, if you remember the days of dealer inventory having an 80-day deficit relative to targets, you know, I give the team a lot of credit for working hard to get the product out so that we could make sure that, you know, we were getting consumers the product that they needed. The issue really started this past year when we saw the supply chain becoming less and less of a factor, yet the performance in the factory wasn't improving. A lot of the things that happened, you know, during COVID really came back to work against us.
You know, specific examples would be, you know, in our indirect versus direct labor, you know, typically you have more direct labor than you do indirect, and in some of our plants, that balance got out of whack. And that's really driven by, you know, needing extra teams to go out and do rework and supplemental quality checks because you're moving, you know, product through a, you know, essentially a secondary assembly line. Material flow. You know, at one point, we had 1,000 tractor-trailers with parts in them in Monterrey, and that, you know, is really a symptom of an inefficient material flow process. Now, the good news is, yes, we have, we have a lot of work in front of us, but we have a very skilled team. We've brought some new team members in, very steeped in lean principles.
We have engaged some external folks to come in who are more hands-on, not consultants, to help us identify the issues. We've seen the progress starting the momentum shift in Q4. And, you know, we've tailored our internal review process such that, you know, Bob and I are sitting down with the business unit presidents and their operational leaders on a pretty regular basis to review how we're doing, making sure that we're keeping the cadence going and that this isn't short-term fixes. These are really fixing some of the more systematic things that we've got to get after. So I have a, I have a lot of confidence in that, and it's really going to be key for us to have that bending of the curve.
That's why you see us, you know, targeting a positive EBITDA improvement versus 2023, because that'll really start to build the momentum. And as you can imagine, a lot of the enhancements and the changes and the improvements we're making, they're not happening on day one in 2024, and we've obviously factored that into our guidance. They start gaining momentum as we get into the second half. And what happens then is you really get that momentum of those cost improvements into 2025, and then, you know, I'm not sitting here making a call, but if you can get some positive revenue momentum, you know, if the market's just either flat or up slightly, that puts this business in a much, much better position to leverage that growth and get that margin expansion. I think the rest of the pieces play out.
You know, I mean, our capital deployment, return on invested capital, those things, you know, I feel really good about. It's really going to be predicated on, one, our execution of the cost improvements internally, and then two, you know, does the, the broader, macro start to improve late in 2024 and into 2025?
Bob Mack (EVP and CFO)
Yeah, I think one thing to keep in mind, too, Craig, is, you know, when we put these targets out, if you, if you look at where we are for 2024, you know, we've got 1.5 of headwind from FX and interest rates on, you know, the finance interest side. And so, you know, we would be mid-13s on a constant currency, constant interest basis. So we have made actual improvement from 2021. It's just we've had these headwinds. That's not an excuse. We said we've got to overcome those, but we are making some progress. And, you know, I think you'll see if you look at where we're targeting for the year, that's coming with a pretty flat Q1. And so the you know, Q2, Q3, Q4 will certainly be significantly better.
I think you'll start to see, you know, what the real potential is and that we're, we're closer to our targets maybe than it appears on a full year basis. The other thing is, you know, the factory in Vietnam is just coming online for motorcycles, you know, right around now. Some of the Mexico facilities have started limited production. So just like Mike said about the exit rate on the improvements in the plants, also the exit rate on the new facilities as we leave 2024 will be a lot better than it is to start 2024, because they're just starting production in those, and it takes a while to ramp up and get the factories full.
Craig Kennison (Senior Analyst)
Great. Thank you.
Bob Mack (EVP and CFO)
Thanks.
Operator (participant)
Thank you. The next question comes from Joe Altobello with Raymond James. Please go ahead.
Joe Altobello (Managing Director and Senior Analyst)
Thanks. Hey, guys. Good morning. First question was on gross margin, the 70-100 basis points improvement you're looking for this year. You talked a lot about, you know, the FX and a cool headwind, the lower shipments and then that pricing. It sounds like, you know, in terms of good guys, if you will, most of that $150 million of cost savings will hit cost of goods. And it also sounds like you're expecting to recoup a lot of that $70 million of incremental manufacturing costs that you incurred in the second half of last year. Do I have, do I have that math right?
Bob Mack (EVP and CFO)
Yeah, I mean, when we talked about $150 million of improvements, that's all going to hit in GP. It's really split between material, logistics, and plants. Materials and commodities would be the largest piece. Logistics the smallest, and then the plants is in the range of getting at that $70 million that we talked about.
Joe Altobello (Managing Director and Senior Analyst)
Okay. And the incremental manufacturing costs, you expect to recoup all of that?
Mike Speetzen (CEO)
Well, I guess the way I'd come at it, Joe, is to say we didn't get after enough of it in 2023, and so, you know, the piece that we missed is definitely coming out in 2024. We did get costs down in 2023. We just didn't get it down near as much as we had targeted. And, you know, there's, aside from the actions that we've been taking, there's also momentum around certain commodities already starting to, you know, come down sequentially, and that obviously takes some time to roll through inventory. So, you know, Bob and the team have this pretty well pegged out in terms of the buckets that need to happen, and that's what we're basically reviewing on a weekly, monthly basis.
Joe Altobello (Managing Director and Senior Analyst)
Okay. And just one quick housekeeping question. The incremental impact from the snowmobile shipments and the ORV and marine restock in Q1 of last year, I think, I think it combined for about $250 million of incremental revenue. Is that right?
Bob Mack (EVP and CFO)
Last year?
Joe Altobello (Managing Director and Senior Analyst)
Yeah, Q1.
Bob Mack (EVP and CFO)
No, you mean the impact of Q1?
Joe Altobello (Managing Director and Senior Analyst)
Yeah.
Bob Mack (EVP and CFO)
No, I'd say it's much higher than that, Joe.
Joe Altobello (Managing Director and Senior Analyst)
Okay.
Bob Mack (EVP and CFO)
We said we'd be 20% down from last year.
Mike Speetzen (CEO)
It's almost. There's some impact in marine and motorcycle, but the bulk of it is snow and ORV.
Bob Mack (EVP and CFO)
Joe, that's... You know, I made the comment on the question earlier around, you know, it's essentially the bottoming out of our performance, because if you look at it, you know, you're getting essentially the majority of the revenue decline is in the first quarter, and it's two things, well, three with promo, but, you know, it's that snowmobile fixing the business so we don't have that hangover of late deliveries, as well as the fact that we don't have the 40 days of DSO inventory opportunity in front of us. So, you know, once you get into Q2, you're kind of back into-
... shipping to retail. So the stability with an industry that we're assuming is, you know, down slightly, but we're outperforming, giving our product setup, you get into a far more normalized set of quarters, Q2, Q3, and Q4.
Joe Altobello (Managing Director and Senior Analyst)
Got it. Okay. Thank you.
Operator (participant)
Thank you. The next question is from Tristan Thomas-Martin with BMO Capital Markets. Please go ahead.
Tristan Thomas-Martin (Equity Research Associate)
Hey, good morning. Continuing on the margin thread, how are you thinking about segment margins, gross margins next year?
Bob Mack (EVP and CFO)
I mean, we'll see. The bulk of the segment gross margin improvement will be in off-road because the two factories that have been underperforming are really Monterrey and our two largest factories. And so those are primarily focused on off-road. So you'll see the bulk of that in off-road. In on-road, it's a pretty flat year. Indians continue to focus on margin. It'll mostly depend on what the kind of heavyweight versus mid-size mix looks like, and that'll just depend on how the industry plays out. But obviously, heavyweights carry a little more gross margin than mid-size. And then in Marine, you know, they're continuing to do a really nice job of managing margins given lower shipments.
You know, the great thing about that business is it's a pretty variable cost structure, so we've been able to get at the cost structure to help maintain overall EBITDA margins, even though gross margins were a little bit down. So I think you'll see where most of the improvement comes is in off-road.
Tristan Thomas-Martin (Equity Research Associate)
Okay, thank you. Then just one more. Given the XD 1500 XPEDITION, the initial shipment, I think, was pushed a little bit later than you thought, is there a chance that 2024 shipments for this new kind of unannounced product is actually higher than the incremental new product shipped in 2023?
Mike Speetzen (CEO)
Yeah, that's... I mean, it's tough to say. I mean, I think the opportunity we have with XD and XPEDITION, given the positive reception, I suspect that that's gonna be- You know, if you think about it, those are not completely but highly incremental in terms of, you know, new segments. You know, we certainly will cannibalize some customers off of GENERAL for XPEDITION and, you know, the core RANGER business for XD. But, you know, the- given the bulk of that is incremental, it's probably going to outpace any other potential new products that we would have, just given the size of those markets.
Bob Mack (EVP and CFO)
Yeah, and there'll be a little bit of, you know, we were shipping XPEDITIONs pretty well in Q4. There'll be some incremental on XPEDITION, but then, you know, as Mike said, most of XD will be incremental to the XD that shipped in 2023, which was pretty low.
Tristan Thomas-Martin (Equity Research Associate)
Okay, thank you.
Operator (participant)
Thank you. The next question is from Sabahat Khan, with RBC Capital Markets. Please go ahead.
Sabahat Khan (Managing Director)
All right, great. Thanks. Good morning. Just, I guess, you know, maybe we're back to the margin side, but more on the promotional angle. I'm obviously taking into account that you do have a bit of cost savings in this gross margin expectation. You know, what kind of competitor promotional activity are you baking into this number? Sort of what did you underwrite, in terms of your 2024 guidance? You know, could folks get a bit more aggressive to clean out inventory, and how would you respond to that, in market? Thanks.
Bob Mack (EVP and CFO)
Yeah, I think what, what we're expecting, you know, as Mike said, in his remarks, you know, we saw some competitors had a fair amount of 2023 model year carryover. Our inventory was cleaner. That really ramped up the promotional spend, and we had to respond. Even though we had current inventory, we had to respond so, you know, to not lose share to people buying 2023s with a lot of promo on them. That was effective in Q4. That inventory is winding down, so we expect that 2023 versus 2024 dynamic to start to abate in Q1.
But like we said, we do think Q1. First of all, we're lapping a kind of a low promo quarter because we had all the channel fill in Q1 of last year, so promos across the industry were the lowest point of 2023 in Q1. So we're lapping that with, you know, Q4, which was the most aggressive. As it plays through the year, I think as Mike said, you know, we're many of our competitors in the industry are having the same message we are, that we're gonna try to keep dealer inventory at reasonable levels and ship to retail, and take some dealer inventory out through the course of the year.
I think, you know, based on kind of what we've seen so far, it looks like people are all following a similar path to us, that they'll be pretty conservative with shipments in the early part of the year, you know, which should help the inventory be in a better position across the space, you know, as we get into the second quarter. So you know, we're planning on promo being relatively in line with this year, and it's gonna be highly dependent on what happens with dealer inventory.
Sabahat Khan (Managing Director)
All right, great. Then I guess just one on just kind of the overall industry dynamics. One of the questions we've been getting with the industry softness over the last, call it, three to four months is, you know, could 2024 be sort of a step backwards towards industry volumes pre-pandemic? Is there some sort of broad industry normalization happening in units and/or margins? Just want to get, I guess, from your vantage point, and you did call out that most of the weakness this year is going to be in Q1 and then normalization. How do you view sort of overall industry volumes? What do you consider to be normal for, you know, your unit volumes as well as margins? Just any perspective on what you're hearing from dealers and seeing out there?
Mike Speetzen (CEO)
Well, I mean, you know, like I said in my prepared remarks, we anticipate the industry is going to be down. You know, and, and, you know, for some reason, I, I think there's been a view that the industry got some massive uptick as it related to what happened with COVID. And, you know, essentially, if you go back in time, really what happened was we had, you know, a year where just a ton, not just us, I mean, or we, the industry, everything was sold off of dealers' floors, and then we've spent the last few years just trying to get caught up. So, you know, with industry being down a little bit next year, you know, we think that the volumes are, you know, still hovering, you know, at or below where they've been historically.
From my standpoint, it's really two things are going to have to get resolved. I think the uncertainty around the economy as it relates to our discretionary products, the rec products, marine, things like that, as well as interest rates. I mean, look, people, even though the financing isn't a the impact of the interest rates isn't some significant monthly impact to their payment, people just generally don't want to finance at the top of the market. And so we do think that, you know, and you can see it every time the Fed talks about or hints at what they're going to do with interest rates, you see things start to shift. And I think once the rates do start to move, I think that is going to be positive for the industry. You know, people want to be in.
We're not seeing some surge of used vehicles where people are just saying, "Hey, we want out." You know, one of the interesting facts that we've seen, you know, we've talked about it on prior calls, we track repurchase rates. You know, everything from customers who bought some three months ago to people who were in the market a year ago, five years ago, 10 years ago. And those repurchase rates actually got stagnant during the pandemic surge because new people coming into the category were willing to pay a lot for vehicles. And what we've seen is since that fever's kind of lowered, the repurchase rates pretty much across every category we track have actually started ticking back up. And I think that's good for the industry because we know that people are out there, they've got aging product.
We've got a ton of new product and innovation out in the marketplace, and I think we just need to see some things settle out during 2024. I'm optimistic as we get out of 2024, that the setup is much better headed into 2025, both for us as a company as well as potentially for the industry.
Sabahat Khan (Managing Director)
Great. And maybe if I could, sneak in one on the marine side. One of the marine firms that has a year-end in June is pointing to pretty significant, revenue decreases, you know, well, well above, kind of what you're pointing here for 2024. I guess, you know, just maybe if you could talk about where you're playing in marine, you know, in terms of, is it a bit of an expectation that with those rate cut expectations, maybe the marine business picks up in the back half of the year? Just how are you thinking about that business over the course of 2024 and the comfort level with the mid-teens, down guide? Thanks.
Mike Speetzen (CEO)
Well, I mean, look, it's tough to always know, but, you know, we took a pretty firm stance through the course of 2023, working with Ben Duke and his team, as we saw the retail environment slowing, you know, feedback from dealers, around, you know, dealer inventory levels and the interest costs associated with those. And it's why we made a series of cuts to our marine production through the course of the year. And so as we, you know, head into 2024, you know, we're still being very cognizant of that. The first and second quarter are really going to be key, as dealers get a sense of what the boating season looks like, how much inventory they want to take a position on.
You know, the dealers are obviously taking a far more aggressive stance because the OEMs essentially have all caught up. You know, I can't think of the last time we've had a supply chain issue within our Bennington, Hurricane or Godfrey businesses. And so they know the manufacturing system can move pretty quickly. And so, you know, we've taken a conservative approach to what we think is going to happen this year, and if things end up a little bit better, we can react. And obviously, as we demonstrated in 2023, if things don't play out as anticipated, we'll make those reductions to make sure we keep dealer inventory in check. Bob made that point.
You know, one good thing about our boat business in a downturn is they can react quickly, and we actually were able to improve EBITDA margins in that segment, despite having lower than anticipated volumes.
Bob Mack (EVP and CFO)
The other benefit we're seeing in marine, you know, Mike talked about it a little bit, but as the marine market's been challenged, you know, dealers during COVID, when they couldn't get the boats they want, it picked up a lot of side brands, smaller brands, niche products. And, you know, as they focused on their floor plan interest and the cost of carrying inventory, they pushed a lot of those brands out, which has created some more space for us. We've also been pretty successful, you know, upgrading dealers and adding dealers, which is something, particularly in Bennington, we haven't been able to do in a long time, because we hadn't had the inventory, so to supply a new dealer. So, both of those things, I think, are helping us a little bit, offset some of the weakness.
Mike Speetzen (CEO)
And I mean, you know, go back and look at the data. I mean, last year, we pulled revenue down in our marine business over 20%, and then we've got guidance that says we'll be down another mid-teens in 2024. So, you know, we're responding appropriately to the category, and it's going to be important to see what happens, and hopefully, we're going to have a good boating season.
Sabahat Khan (Managing Director)
Great. Thanks, thanks so much for all that color.
Mike Speetzen (CEO)
You bet.
Operator (participant)
Thank you. The next question comes from Robin Farley with UBS. Please go ahead.
Robin Farley (Managing Director and Leisure Analyst)
Great, thanks. Most of my questions have been answered. Just wanted to circle back to your 2026 goals that you're maintaining. And just to clarify, is that on the revenue side as well, that you're kind of maintaining that? And what do you think will be the biggest, or the drivers of that top line? I know you mentioned the idea about, you know, interest rates and economic uncertainty, you know, kind of clearing up, but it seems like it would take more than just kind of getting back to, you know, previous economic outlook.
Is there, I guess I just want to clarify, is the revenue goal without any type of acquisition, or is there something new in terms of product line that we don't know about yet, that we'll see between now and 2026? Or just looking for, you know, kind of what those drivers might be. Thank you.
Mike Speetzen (CEO)
Yeah, you know, we've obviously, we've done a lot of math around, and I can talk to it in more detail about, you know, what the, you know, to get to those numbers, what 2025 and 2026 really need to look like. You know, it, it's not super sporty. I mean, obviously, we can't have another couple of years like we've had from a broader economic perspective. What gives me confidence is, you know, I do think we're at the end of a, what was probably, I think, a record tightening cycle, as well as, you know, coming out of an environment that I don't think anybody could have ever predicted in terms of COVID and getting everybody back to work and, you know, just some of the other geopolitical things that were going on.
And, you know, it's not to say that there won't be more issues in front of us, but, you know, I do think we're getting into a more stabilized environment. And when you couple that with what we've done, you know, if I go back years ago, you know, the knock on us was, you know, we're losing share. We didn't have the new products coming out. I mean, we have fixed that, and we fixed it significantly, and we're not done. And the team's got more product coming out. We're obviously not gonna spend time talking about that now, but, you know, rest assured, when I look at what happened to us, you know, starting back in that 2015, 2016 time period from a share standpoint, it's great that we gained share last year.
It's great that excluding youth, we gained more share than anybody else. But we still have a lot more that we're gonna get back, and we're gonna go after that. We are not building in acquisitions. Given where our stock's trading, I made some comments about our free cash flow yield. There is hard to imagine a better investment than Polaris stock right now, from my perspective. And so I'd be hard-pressed to be convinced that we need to go out and buy some other company to try and meet a revenue growth objective. I think for us, the biggest challenge is gonna be around margins, and I talked about it earlier in terms to Craig's question.
The things that we're doing and, you know, the things that are under our control, I feel confident that we're gonna be able to get after them, and we're pushing the team hard. The team understands what's at stake, and, they're highly committed and driven and, and, I wouldn't bet against them.
Robin Farley (Managing Director and Leisure Analyst)
Okay, great. Thank you very much.
Mike Speetzen (CEO)
Thank you.
Operator (participant)
Thank you. The next question comes from David MacGregor with Longbow Research. Please go ahead.
David MacGregor (President)
Yeah. Hi, everyone. Thanks for taking the questions. Mike, I wanted to ask you about tariffs, and there's a pretty good chance we'll end up with a Republican White House. And, you know, last time around, these tariffs were pretty disruptive to the P&L. Can you just talk about progress you've made in terms of reshoring or nearshoring back to the North American Free Trade Zone, and are you able to put any numbers around that progress?
Mike Speetzen (CEO)
Yeah. Yeah, I mean, you know, it certainly isn't the topic that it used to be around here. You know, I think we've resigned ourselves that these things feel like they're probably gonna be permanent. Lord knows what's gonna happen here in 2024, but we can't control any of that. I mean, we have a great government relations team, and, you know, they're constantly advocating for us, you know, even though there aren't a ton of them, but the exemptions, making sure that those get renewed and those types of things, and pleading our case, because we do think we're being incredibly disadvantaged. You know, as the global leader in powersports, the real you know, the truly only U.S.-based company, and we're the only ones really paying tariffs, seems a little wrong, to say the least.
The nearshoring opportunity is something we've continued to push. You know, I would say we've made inroads, but there's still a lot more to do. Frankly, I think there's a lot more to do in terms of shoring, not shoring, but locating our sourcing within Mexico, given how large our footprint is, so that we make sure that we've got continuity of supply and we've got things being produced in the region, as opposed to coming from, you know, continents away and being subjected to the vulnerabilities and the risk of the supply chain. Obviously, that does give us potential tariff benefit. But, you know, we haven't built in some substantial improvement. We know, we know really well what those tariffs are and how to calculate them.
You know, look, if we get some level of good news, that'd be great. I'm not counting on it. I think even if there's a Republican in the White House, I think the pressure relative to China is still so great that it's gonna take a while if those things go away, for them to be acted on. So we're gonna continue to do what we do and act like they're permanent and do what's right for the business.
David MacGregor (President)
Great. Thanks. Top of the hour, I'll pass it on. Thank you.
Mike Speetzen (CEO)
Thank you.
Operator (participant)
Thank you. The next question is from Jaime Katz with Morningstar. Please go ahead.
Jaime Katz (Senior Equity Analyst)
Hi, good morning. Thank you for all the color you guys have offered this morning. Two quick ones. First, any update to what you're seeing with lending standards, from your finance partners? And then if you can share maybe how you guys are thinking about price versus mix in the ORV, segment and how that trends over the next few quarters, that would be really helpful. Thanks.
Bob Mack (EVP and CFO)
Sure. I'll take the financing question first. Really been pretty consistent. Our pen rates have improved as we've seen smaller, kinda niche lenders leave some of the markets. You know, some of the credit unions and things have backed off some of their financing, so that usually plays well for us. So our pen rate's up about 100 basis points in the quarter and for the year. Approval rates have remained consistent, and FICO are up about 8 points in Q4 versus the rest of the year. We don't see major trends there. I think what we have seen is lenders pushing a little bit harder on debt to income and borrower cash flow, as opposed to just relying on, you know, kind of credit ratings and FICO.
But, you know, I think in terms of credit quality and availability, that hasn't really been the hindrance. The rate has been more of a driver in terms of people's willingness to finance. You know, price promo, I think, you know, I think across the industry, you're gonna see pricing itself, MSRPs to be relatively flat. I don't think anyone sees a great opportunity to take a bunch of price this year. And, you know, promo, we talked about being relatively flat other than the lapping of kind of Q1, where we'll have, you know, higher levels in Q1 relative to what we had last year.
Jaime Katz (Senior Equity Analyst)
Thank you.
Operator (participant)
Thank you. This does conclude our question-and-answer session, and the conference is now concluded. Thank you for your participation. You may now disconnect your line.