Polaris Inc

NYSE:PII

Earnings Call Transcript 2020-Q1

[Operator]

Good day and welcome to the Polaris First Quarter 2020 Earnings Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

I would now like to turn the conference over to Richard Edwards. Please go ahead.

[Richard Edwards, Vice President of Investor Relations]

Thank you, Jason, and good morning, everyone. Thank you for joining us for our 2020 first quarter earnings call. A slide presentation of this is accessible at our website at ir.polaris.com, which has additional information for this morning's call. Scott Wine, our Chairman and Chief Executive Officer; and Mike Speetzen, our Chief Financial Officer, have remarks summarizing the quarter and then we'll take some questions.

During the call, we will be discussing various topics, which should be considered forward-looking for the purposes of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. You can refer to our 2019 10-K for additional details regarding these risks and uncertainties. All references to the first quarter 2020 actual results are reported on an adjusted non-GAAP basis, unless otherwise noted.

Please refer to our Reg G reconciliation schedules at the end of this presentation for the GAAP to non-GAAP adjustments.

Now I'll turn it over to our CEO, Scott Wine. Scott?

[Scott Wine, Chairman and Chief Executive Officer]

Thanks, Richard. Good morning, and thank you for joining us. I want to begin with sincere thank you to the Polaris team for stepping up and leaning in, as they always do to support our customers and dealers through the first few months of this COVID-19 pandemic.

Our people and our culture remain our most important strength and their performance in the early days of this crisis is proving that out. The abrupt shutdown of global commerce was certainly a shock to our business, but our aggressive planful response has positioned us to navigate and win through this lockdown and the recession to come.

Our long-term commitment to being a customer-centric, highly efficient growth company is unwavering, but this crisis requires focus, so we defined four priorities to guide us. First and foremost, we are committed to employee safety. Next, we will ensure that Polaris is viable and then support our dealers with the goal of being their preferred partner. Finally, we will continue to be a good steward for our shareholders and stakeholders.

When China locked down in early February, Ken Pucel assumed the mantle of coronavirus czar, and his leadership focus and structured approach has been essential to our ability to stay abreast with and often ahead of this dynamic situation. What began as a major risk with suppliers quickly evolved into employee health and safety concerns and then issues with mandated dealer closures in various state regulations. Ken and his team meet daily to assess the environment and their prompt actions and thorough execution has been immensely helpful.

Mike Speetzen took a similar ownership of our liquidity and cash management and expertly turned a potentially significant concern into a very manageable scenario. He also quickly initiated our recession playbook, enabling us to execute cost down and restructuring activities with speed and precision. Both our retail flow management system and our overall agility were tested by the rapid demand shifts at the end of Q1. And I am pleased with how each performed as we successfully reduced shipments and implemented floor plan support to protect our dealers.

This untimely shipment reduction in the lowest earnings and cash flow generation quarter of the year, coupled with uncertainty around dealer operations and consumer demand put quite a bit of pressure on our liquidity outlook. Through extremely fast action on working capital, cost cuts across the enterprise and strong support from our bank group, we have reduced our liquidity concerns and are laser-focused on managing cash flow.

As in 2008, we are broadly and boldly reducing expenses, but protecting key product and strategic investments. We have already taken out over $120 million of annualized operating expenses of the business, mostly human capital related, and overall OpEx will be cut nearly 25% in the second quarter alone.

Our lean factory operations will reduce hours in line with demand. Earlier this month, we announced the wind down of three of our smaller boat brands, Rinker, Striper and Larson FX, and we will continue to evaluate our portfolio for businesses and brands with the limited path to strong profitable growth. We are protecting our strategic engineering investments, while accelerating our ongoing engineering efficiency projects.

Our protocols for dealing with all things COVID-19 utilize the best information we can obtain from CDC, WHO, local health departments, our retained medical experts, and many other sources. We continue to work tirelessly to keep our employees and their families safe and we are complying with quarantine and cleaning protocols. We have had seven confirmed COVID-19 cases amongst our 14,000 employees and all have either fully recovered or recovering at home.

Navigating this pandemic emphasizes our deep commitment to Geared for Good. From KLIM and 509’s donation to Goggles For Docs to our $220,000 donation of iPads and other devices to facilitate distance learning in our rural school communities, we are putting ESG into action. Even our autonomous partner Optimus Ride, found a way to use our GEM vehicles to fill a need for meal and grocery delivery in Arizona, serving the community and possibly creating an alternative business model.

Overall, first quarter North American retail sales were down 8%, but the salient point is how we got there. We were up 5% through mid-March, then down 40% through the final two weeks, which unfortunately overshadows the strong market share gains and positive retail that Indian motorcycles delivered for the quarter.

ORV lost market share in the quarter, but made numerous advances in marketing and retail execution, which are contributing to mid-teens retail improvement month-to-date in April with likely share gains as well.

We also are seeing strong demand for PG&A and aftermarket parts, which should utilize our large and growing install base to outperform vehicle sales in a down market. Snow gained market share for the season, although retail was down slightly for the quarter and the year. And while the first quarter is relatively small for boats, our Pontoon segment delivered gains in market share and retail.

Dealer inventory rose 8% in the quarter as the sharp drop in retail occurred too late to fully offset with shipment reductions. Motorcycle inventory was up more in support of our strong demand for our new Challenger bike. We are undershipping RFM profiles upon dealer requests and covering flooring costs through the end of May, in addition to sharing our COVID-19 learnings and best practices.

Dealer closures were a huge problem in early April, but this is becoming more tractable as less than 15% of ORV and motorcycle dealers are now closed. Our online presence is becoming a more significant factor in retail sales and customer engagement and we have taken significant steps to bolster virtual accessibility. Our fast innovative launch of Click. Deliver. Ride., and our institution of appointment shopping are both popular with consumers and dealers, and we will continue to leverage digital efforts to enhance our support for them.

We previously communicated that we paused our global plant network in March to assess our supply chain, adjust to lower demand and implement social distancing procedures. Under almost all circumstances, our facilities have met the CISA requirements for essential business, so we have since ramped up operations everywhere except Monterrey.

We are pursuing every option to obtain the CISA equivalent rulings that Polaris and our suppliers need to reopen in Mexico. Fortunately, our legal and government affairs team is adept at making this argument in support of our global network. That team was also instrumental in securing the substantial 301 List 3 tariff relief, which has finally come through. We must now work for extensions. Our strategic sourcing program is adjusted to a new operating rhythm, but remains on track to deliver increasing savings throughout this year and beyond.

I will now turn it over to our Chief Financial Officer, Mike Speetzen to update you on our financial results and plans.

[Michael Speetzen]

Thanks Scott, and good morning. As Scott indicated, these are unprecedented times and we are diligently working to adapt our business to weather the storm. We aggressively activated our recession plan that I have referenced in past calls and we stand ready to adapt as conditions change. Given the current environment, most of my remarks will be targeted at our liquidity profile and what we anticipate in the coming months and quarters.

For the first quarter, sales were down 6% versus the prior year. With the exception of motorcycles, all segments reported lower sales during the quarter, driven by the COVID-19 related economic slowdown that began impacting our industry and business in the second half of March.

Motorcycles growth was driven entirely by new products as the Indian Challenger continue to sell well, and the new Slingshot AutoDrive model began sales in the quarter. First quarter earnings per share on a GAAP basis was a loss of $0.09. Adjusted earnings per share was $0.22, down 80% for the quarter. Adjusted gross margins were down 280 basis points year-over-year, about half driven by volume margin loss and related under-absorption at our factories and the remaining half due to cost actions taken to protect and support employees and dealers as a result of COVID-19.

Operating expenses were up 6% in the quarter due to investments in research and development and enhanced sales and marketing programs we made before the COVID-19 pandemic began to impact demand. Since that time, all nonessential expenditures have been either canceled or postponed until we have better visibility into future demand.

Foreign exchange had a negative impact on the quarter versus 2019 with all currencies being impacted by the global pandemic. In the first quarter, foreign exchange had a negative impact on pretax profit of approximately $8 million or $0.10 per share.

Moving on to our balance sheet and liquidity profile for the quarter. Operating cash flow was a $71 million use of cash in Q1 driven by negative income. I would also point out that our Q1 cash profile is typically low given we payout our profit share/bonus program in Q1. We had been in the market repurchasing shares given the significant share price reduction, but cease that activity when the environment worsened.

As you would expect, we are spending a significant amount of our time monitoring our cash position and debt capacity levels to enable adequate liquidity to sustain the company through the crisis. Our total debt levels finished the quarter just under $2.2 billion. Cash on hand at quarter end was $424 million.

We have taken a number of actions to further solidify our cash and credit availability, including drawing down our additional cash under our revolving credit facility, substantial reductions to operating expenses and postponed capital expenditures that do not impact safety or quality or critical and strategic product programs. Suspended our share repurchase program, optimized working capital needs by quickly adjusting our build plans, resulting in material and component purchase reductions. And finally, on April 9, we executed the accordion feature under our credit agreement and entered into an incremental $300 million, 364-day unsecured term loan facility.

Following these actions along with limited shipments to date, as of April 23, we had cash on hand of $475 million and $250 million available under our revolving line of credit. Total debt outstanding as of April 23 stands at $2.35 billion. Given the actions taken and the measure Scott spoke to earlier, we expect to generate positive free cash flow in the second quarter and feel confident in our financial position and that we have adequate liquidity to manage through this crisis. However, we are only a few weeks into the second quarter and as Scott noted, this is a very fluid situation. It's hard to predict how the restart will go in May and June.

As a result, we intend to be very prudent with capital until we returned to a more predictable environment. But just to be clear, even as we modeled downside scenarios for Q2, given the COVID-19 and current economic landscape, we do not anticipate any concerns with liquidity. We are, however, managing the certain leverage covenants with our lenders. If needed, we believe we can work out additional flexibility with our long-term financing partners.

We know that some of our competitors have suspended or reduced their dividends. We do not think that is necessary at this stage. We understand the importance of the dividend to a considerable set of our investors and want to make the optimal decision for all stakeholders.

At our Board meeting later this week, we are proposing to the Board that we delay the decision on declaring the second quarter dividend until late May. This will allow more time to assess our performance through the end of April and much of May to get even more comfort around financial covenants and still allow us to pay the dividend on the same timing in mid-June. We believe this is a measured and prudent approach in this environment and will enable us to make the best possible decision.

The health of our credit arrangements for dealers and consumers also remains in a very solid position. Financial services income, which is comprised of wholesale finance income, retail credit income, and miscellaneous income principally from the sale of extended service contracts, was up 5% in the first quarter of 2020. Retail credit income was up 28% and dealer wholesale financing income was up 4% during the quarter.

Our long-term wholesale financing joint venture Polaris Acceptance, now in its 23rd-year of existence, continues to supply ample credit to dealers. For the first quarter of 2020, the wholesale portfolio was approximately $1.4 billion and increased over the first quarter of 2019 given the growth in the business last year, but a sequential decline from the fourth quarter of 2019 receivable balance.

Credit losses in the Polaris Acceptance joint venture remained very reasonable, averaging well less than 1%, which is similar to what we experienced during the last recession in 2009. As we progressed through the year, we would anticipate some dealer failures and credit losses, but at this time, do not expect them to exceed the levels we experienced in 2009, which peaked at approximately one half of 1% at the height of that recession.

We believe the dealer support initiatives that Scott mentioned in his remarks will help our dealer base weather the storm in the coming months and quarters, and we believe our dealers are stronger and better equipped now to handle this as compared to 2009.

Moving now to our retail credit finance programs with Sheffield, Synchrony and Performance Finance. During the first quarter of 2020, these three retail credit providers wrote approximately $220 million of new credit contracts to customers in the United States, which represents about 31% of Polaris products sold to consumers in the U.S. The approval rate is similar to the first quarter a year-ago, but given the pandemic impact on demand late in the first quarter, we would expect the level of consumer contracts written to decline in the second quarter.

Financial services income was up primarily due to a change in retail financing programs with one of our retail providers, which allowed the release of certain reserves maintained under the previous program into income. Excluding this adjustment, financial services income would have been lower than last year given lower retail sales. We continue to believe our retail credit relationships are stable.

Turning to our segment performance. With the exception of motorcycles, all segments experienced lower sales during the quarter due to sharp downward pressure in the final two weeks of the quarter, as the pandemic began to take hold on the country.

Gross profit margins across the segment were negatively impacted by under absorption of fixed costs, along with the cost actions taken to protect our employees and dealers. These impacts were partially offset by modest tariff favorability. I would add that we have seen continued success and exemptions being granted, which include the ability to recover past funds paid for tariffs.

Our tariff exposure has come down as a result of this, as well as a substantial anticipated full-year volume decline. We will not spend time during this call on tariff projections and we will provide additional color as we get more comfort around the full-year forecast.

You will recall that we withdrew our full-year sales and earnings guidance back in March given the dynamic nature of the COVID-19 pandemic limiting our visibility to accurately estimate the impact on our results. Our current view is that the economic recovery will take more of a U-shape were demand in the second quarter will be the weakest, estimated to be down in the 25% to 30% range. We anticipate that the third quarter will improve over the second quarter and likely be down somewhere in the range of about half of the Q2 year-over-year decline.

And finally, we expect that the fourth quarter sales while still down year-over-year to be down much less than the third quarter year-over-year percentage decline. Obviously, there are a multitude of scenarios that could play out over the next few quarters and we are prepared to take the necessary steps if actual results begin to deviate from our current thinking.

With that, I'll turn it back over to Scott for some final thoughts.

[Scott Wine, Chairman and Chief Executive Officer]

Thanks, Mike. We did not anticipate the COVID-19 pandemic or the significant stoppage of commerce that became a key part of the virus defense, but we are fighting determinately to right our ship and deliver on our four priorities. We will work tirelessly to keep our employees safe so they can support our dealers as well as the customers who use our products through some of the best social distancing there is on trails, roads, water and mountains.

We have not found our last idea to reduce cost or create more efficient growth and we will leverage our team and our culture to win through this cycle. Our work to help our communities and others during this crisis will continue as our Geared for Good movement gains momentum.

I will not extrapolate the first 27 days of April into the quarter, much less the remainder of the year, but are surprisingly positive ORV retail offers confidence that our brand and our support are resonating with consumers who are looking for an adventure or a new tool to use on the farm. We will be there for them as they think outside.

With that, I'll turn it over to Jason to open the line for questions.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Robin Farley from UBS. Please go ahead.

[Robin Farley, UBS Investment Bank]

Thank you. I wanted to just clarify that your comment about the ORV retail. You use the phrase mid-teens retail improvement. Are you saying that actually for the three weeks of April, mid-teens increase year-over-year? I just want to clarify that. That's so surprisingly strong.

And then just for my follow-up question. On tariffs, and I know you said you were sort of going to discuss that more later, but just if you could clarify it. In Scott's opening remarks, his comments about tariffs, I know you've gotten some smaller amounts of tariffs relief in the past. Are you suggesting that there's something new right now in terms of that sort of much larger amount that you've still been paying? Just trying to clarify what those comments were. Thank you.

[Scott Wine, Chairman and Chief Executive Officer]

Okay. Thanks Robin. Yes, to be honest, and I think I said in my remarks, we are surprised as well about how well off-road vehicles. Steve Menneto and his team are executing extremely well. And what our finding is that our dealers when they get open are really finding ways to serve their customers. So through yesterday, we are up mid-teens percent year-over-year in off-road vehicles. That's what I said – that's exactly what I meant to say.

As for tariffs, as you recall, we talked a lot about tariffs last year, and in the October earnings call, we talked about the fact that we believe that we would get substantial relief. And what we are seeing now that has come through is that substantial relief that we expected for List 3 301 or 301 List 3, and again, that's all we'll say now we'll provide additional color, but I was just trying to confirm what we said in October has now finally come through.

[Michael Speetzen]

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

[Robin Farley, UBS Investment Bank]

That's great. Thank you. And in terms of – you mentioned – you'll quantify that more. I assume we're not going to even wait to like Q2 results. Will that be something you put in a 10-Q or an 8-K or something when you are ready to quantify it in terms of tariff?

[Michael Speetzen]

Robin, I think we're going to wait until we get to the second quarter earnings. It's my hope, and we'll have to see how things play out, that if things start to stabilize, we'd be in a position to at least start contemplating if we're going to get back and providing guidance for the back half. If we were to do that, we would certainly provide color around tariff impact.

[Robin Farley, UBS Investment Bank]

Okay. Thank you.

[Operator]

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

[Craig Kennison, Robert W. Baird & Co. Inc.]

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

[Scott Wine, Chairman and Chief Executive Officer]

Sure. Good question, Craig. One of the things with RFM, as you know, we've made huge investments in that program. It put us in a position to have better inventory balances going in despite the fact that it was up 8%. It was targeted. We knew exactly where it was. And Steve and his team put together plans to talk individually with each dealer about how to mitigate inventory. And quite frankly, now they're asking for truckloads of product more often than asking us not to ship.

So one of the things just managing dealer inventory well like we always do. Steve and his team were the first ones to provide flooring support and motorcycles did as well. But just making sure that dealers felt comfortable in these early days when things were locked down, not having those interest expense and we've covered the road through the end of May.

We really have shared all of our advice on how to navigate the various CISA rulings to make sure that they can stay open. And Ken Pucel and his team have shared all of our best practices with COVID-19 related protocols and procedures and whatnot. And really the most important thing we can do is provide the advertising support. And again, we are not heavily promotional right now so that they can have accelerated retail and that's really what's been working for us so far.

As far as dealer – dealer closures, as you recall, I mean, I was new to the business at that point. We’re really surprised that how few dealer closures we had. It was in that 1% range, and we've not seen much. As Mike indicated in his remarks, our dealers are stronger. We've taken out the weaker dealers over the years that they’ve either self selected out. So overall, the strength of the dealer network is better. And what we see is our ability to move product from one dealer to another to alleviate pressure points is usually pretty good. And Wells Fargo has been a really good partner with us as we work through this.

[Craig Kennison, Robert W. Baird & Co. Inc.]

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

[Scott Wine, Chairman and Chief Executive Officer]

Well…

[Michael Speetzen]

Lower to what? Lower than Q1.

[Scott Wine, Chairman and Chief Executive Officer]

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

[Craig Kennison, Robert W. Baird & Co. Inc.]

Thank you.

[Scott Wine, Chairman and Chief Executive Officer]

There are like four questions, Craig.

[Michael Speetzen]

Next question.

[Operator]

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

[Joseph Altobello, Raymond James & Associates, Inc.]

Hey guys. Good morning. Just wanted to follow-up on the previous questions on U.S. mega retail for RVs in April, obviously, surprising us as well, although, RE/MAX did say last week that boat sales were up too. So I guess not all big ticket purchases are created equal. But with that said, I mean, what do you guys attribute that to? I mean, how much of that is maybe pent-up demand that was stemming from March? And is there any difference in geography in terms of that number?

[Scott Wine, Chairman and Chief Executive Officer]

There's a couple of things that we are attributing it to. One is that – as I've said before, powersports customers don't hibernate. And I think that even with these stay-at-home orders prevalent throughout the country, people do want to get outside. And our dealers have found a way. We were quick to launch the click, buy, deliver program so that they could get access to the products.

And remember most of the hotspots with COVID-19 are not in what I would call great off-road vehicle riding areas. So I believe that most of our customers and potential customers are in areas that haven't been as hard hit. So that's certainly helpful. And again, just really want to give credit where credit is due to the work that Steve Menneto, Rod Krois, Pam Kermisch, that team is really doing a nice job of executing. And I think that – we're seeing the results of that.

[Joseph Altobello, Raymond James & Associates, Inc.]

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

[Michael Speetzen]

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

[Joseph Altobello, Raymond James & Associates, Inc.]

Okay, great. Thank you, guys.

[Operator]

The next question comes from Brett Andress from KeyBanc. Please go ahead.

[Brett Andress, KeyBanc Capital Markets Inc.]

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

[Scott Wine, Chairman and Chief Executive Officer]

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

[Brett Andress, KeyBanc Capital Markets Inc.]

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

[Michael Speetzen]

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

[Brett Andress, KeyBanc Capital Markets Inc.]

Understood. Thank you.

[Operator]

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

[Gerrick Johnson, BMO Capital Markets]

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

[Scott Wine, Chairman and Chief Executive Officer]

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

[Michael Speetzen]

Hey, Gerrick. From a margin standpoint, a couple things. Scott is right, the floor plan support financial interest that we cover for the dealers relative to the size of the company is not material. It does hit the gross margin. It's part of what we deem promo cost. And then as far as – if you look at our Q1 detrimental margin versus last year, it was pretty substantial.

In my prepared remarks, I talked about half of that is the typical drop rate, the other half is, as we started looking at promo, COVID pay, where we had factories that were starting to have to shutdown, et cetera, making sure that we had all that provision for. As we look through the balance of the year, assuming that sales profile and all the actions that we've taken, we would expect our gross margins drop rate to look something more like, call it 35% from a full-year standpoint.

[Operator]

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

[Timothy Conder, Wells Fargo Securities, LLC]

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

[Scott Wine, Chairman and Chief Executive Officer]

MAP policy, one of the – Steve Menneto has got rich deep, deep history with our channel and understands extremely well. And so what he's brought to it is just a look at MAP policy. We still believe in doing everything we can to protect dealer profitability and giving them the opportunities to grow their businesses. What we can't do with MAP is make it restrictive. And I think what Steve's done is taken – Rod Krois, they've done a good job of looking at what makes sense and where does it not make sense to have MAP. So there's been slight adjustments to the policy, but no grand architecture change at all.

The other question is that the global supply chain, when this thing started in China, we were hyperventilating, but ultimately we managed through that and then it moved, we had problems with suppliers in California, and then it was suppliers in New York, and then it was suppliers in Italy. Italy is coming back reasonably well. Even India, which was a complete lockdown for a bit, very scary, give it a couple of weeks and they would get more comfortable with how to address it, and that's starting to come get better management.

And right now the concern is Mexico, but like we've seen in all of these other countries, we expect that they will come around in their thought processes and we'll be able to get back to operating, but we're not there yet.

[Operator]

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

[Gregory Badishkanian, Wolfe Research, LLC]

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

[Scott Wine, Chairman and Chief Executive Officer]

Yes. We've done some research and we believe it is mostly industry, but also some market share gains and off-road vehicles. That's what we believe. I think that side-by-side still continue to be the best opportunity for growth. Motorcycle is still negative for the month, but they've had a sequential improvement throughout the month, so they're getting less worse, if you will. Boats, the demand for boats has been reasonably good, but again, we were trying to bring down dealer inventory there so it's going to take a lot to bring that back. But good weather and better consumer sentiment as it relates to getting outside could certainly help that.

[Gregory Badishkanian, Wolfe Research, LLC]

Thank you.

[Operator]

The next question comes from Dan Hardiman from Wedbush. Please go ahead.

[James Hardiman, Wedbush Securities Inc.]

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

[Scott Wine, Chairman and Chief Executive Officer]

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

[James Hardiman, Wedbush Securities Inc.]

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

[Scott Wine, Chairman and Chief Executive Officer]

Sure. And I mean if you think about it, the dealers that are most aggressive are the ones that probably were the ones that found a way to be open sooner. I mean, it just kind of feeds itself right there. I mean the network is doing a really good job of managing the protocols, creating a safe environment, using the opportunities to schedule appointments. I mean, they're really doing a nice job.

[James Hardiman, Wedbush Securities Inc.]

Got it. And then help me bridge the up mid-teens or the up in April overall with Mike's comments about the expectation is for 2Q demand to be weakest, and I think you said down 25% to 30% range. You may have answered this, was the latter assumption made before you saw how strong April was? I'm just trying to bridge those two.

[Michael Speetzen]

Yes. So James, a couple of things. One, Scott did mention that the April performance is better than what we were expecting. The 25% to 30% is really driven by two things. One, it was our expected demand profile. And then the second is our capability to actually ship. And with the factories having been shutdown, as Scott mentioned, we've got the factories coming back online. Obviously, Monterrey is not back up and running, and that represents pretty substantial part of our ability to meet demand.

And so we really patterned it after that as well as where we wanted to see dealer inventory be as we got to the end of the second quarter and obviously, leading into the model year changeover. So as we indicated, that's why we pulled guidance, is that this is an evolving environment. We want to see how April plays, continues to play out and what the implications are for May and June and we're working daily with Steve Menneto and his team to assess that. But it's not as easy as just pulling a trigger. We've got a supply chain that's still trying to get up and running. We've still got a plant network that's still trying to get completely up and running.

[James Hardiman, Wedbush Securities Inc.]

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

[Michael Speetzen]

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

[James Hardiman, Wedbush Securities Inc.]

Okay. I apologize. I thought the 25% to 30% was a demand comment. You're saying that's a reported sort of wholesale assumption that you're making.

[Michael Speetzen]

Correct.

[James Hardiman, Wedbush Securities Inc.]

Got it. Okay. Thanks guys. Appreciate it.

[Operator]

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

[David MacGregor, Longbow Research LLC]

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

[Scott Wine, Chairman and Chief Executive Officer]

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

[David MacGregor, Longbow Research LLC]

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

[Operator]

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

[Jaime Katz, Morningstar Inc.]

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

[Scott Wine, Chairman and Chief Executive Officer]

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

[Jaime Katz, Morningstar Inc.]

Excellent. And then for gross margin [indiscernible] out or for aftermarket parts, that segment got squeezed pretty well. I'm curious if there are any steps you guys have taken to mitigate the margin degradation going forward? Thanks.

[Michael Speetzen]

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

[Operator]

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

[Joseph Spak, RBC Capital Markets]

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

[Michael Speetzen]

It's a good question, Joe. I think one of the things that we probably had not spent enough time in the business was just managing the daily cash flow. We have the benefit, which is much different than a lot of companies with our wholesale finance structure that we get paid relatively quickly after we ship. And most companies have to focus on managing the receivable side as well as the payables, the output side.

We've been very fortunate to have such strong liquidity that we probably didn't have as tighter process. That will definitely change as we go forward in the rigor and this cash war room approach that we put in place very quickly will continue as we go forward. I think from a debt standpoint, I mean it wasn't optimal to be at the level that we were. I think the strategy we had and continue to have, which is to rapidly delever the company and pivot towards that.

We will certainly take a look at this once we get through. Just to make sure that as we look at leverage levels that we're comfortable with and paydown schedules and things like that, that we'll be as probably as aggressive as we can be. But I think priority number one right now is just to ensure the short-term liquidity understand the longer-term profile, make sure we sustain through that. And then I think we'll do a lot of look backs to really assess how we run the company going forward.

[Joseph Spak, RBC Capital Markets]

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

[Michael Speetzen]

Yes. It's been priority number one focus really for us has been around dropping the inbound material. As I mentioned, most companies when the slowdown happens, they have a bow wave of payables, but they also have a bow wave of receivables. And so from a cash position they tend to be offsetting or slightly positive. Our company is structured differently. Our cash was collected in Q1 on the materials that we're paying for in Q2. And so the timing difference is paramount to us.

I give a lot of credit to the organization around being able to go back and rerun our SIOPs, which is where we link the demand planning back through the supply chain and rapidly shutdown the inputs. We've seen it, we track our cash on a daily basis now, we can watch how those inputs are coming down. I would anticipate that our inventory relative to what we were expecting in Q2 and then for the balance of the year will be down, and we're continuing to push that. And that will really help from a cash standpoint and be something that the team has probably executed faster than I clearly was expecting.

[Joseph Spak, RBC Capital Markets]

Thank you very much.

[Michael Speetzen]

You bet.

[Operator]

Next question comes from Scott Stember from CL King. Please go ahead.

[Scott Stember, CL King & Associates, Inc.]

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

[Scott Wine, Chairman and Chief Executive Officer]

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

[Scott Stember, CL King & Associates, Inc.]

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

[Scott Wine, Chairman and Chief Executive Officer]

Well, TAP is taking a lot of cost moves. I mean, Craig and the team have really looked holistically at how to step down the cost infrastructure there. The big issue at TAP is most there – I don't know, almost a third of their retail stores are in California. And as you know, that's about as locked down as tight as anything in the United States. So that's been a bigger problem. As you know, they've got a big online presence and we're seeing that pick up. So they are again, steadily improving, but that slowdown in California was impactful to them.

[Scott Stember, CL King & Associates, Inc.]

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

[Scott Wine, Chairman and Chief Executive Officer]

Thanks.

[Operator]

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

[Mark Smith, Lake Street Capital Markets, LLC]

Hi guys. Can you give us some insight into boat dealer trends versus kind of the 85% that you talked about? How many maybe are open and close today? And then any additional trends that you see in April in boats?

[Scott Wine, Chairman and Chief Executive Officer]

Yes. We don't have as granular of data on boats, but what we do know is that while most off-road vehicle dealers did fit into the clear CISA eligibility to remain open, that is not true for both. So it was a little bit more of a difficult pot. That said, Minnesota and many other states have recognized, even Michigan recognize that that boating is an important cause for people, especially as the weather gets warmer and we are seeing it open up. So it was more – many more closed early on, but they are opening up at a pretty rapid pace now.

[Mark Smith, Lake Street Capital Markets, LLC]

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

[Scott Wine, Chairman and Chief Executive Officer]

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

[Mark Smith, Lake Street Capital Markets, LLC]

Thanks.

[Operator]

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

[Michael Swartz, SunTrust Robinson Humphrey, Inc.]

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

[Scott Wine, Chairman and Chief Executive Officer]

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

[Michael Swartz, SunTrust Robinson Humphrey, Inc.]

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

[Scott Wine, Chairman and Chief Executive Officer]

The revenue was very small and the profit was none. So I mean it really doesn't – they weren't material to the boat business, actually.

[Richard Edwards, Vice President of Investor Relations]

Okay. Next question.

[Operator]

Next question comes from Tim Conder from Wells Fargo. Please go ahead.

[Timothy Conder, Wells Fargo Securities, LLC]

My question on the oil patches. Well, let me just rephrase it, I guess, on the oil patch. The percentage of your revenues now, Scott, you said that they've been reduced quite a bit, just any update as maybe the end of the year 2019? Or where that stands as a percent of revenues from the oil patch in North America or however you want to frame it for ORVs?

[Michael Speetzen]

Yes. Tim, I think at the peak, it was about 15%. It is now down more in line around 13%. Scott had made the comment that the revenue movements are probably less and less correlated with just oil. That was something that had driven outstrip demand back in, call it 2014, 2015 timeframe. Now I think, those regions, which we don't track it specifically. They tend to be more state-specific. They tend to just move with the broader economics and certainly oil has reacted to the drop in demand and the supply levels that are far greater than what the current demand is. And I think that's all tied back to what COVID-19 has done to the broader economic cycle. So it's tough to parse the two right now.

[Timothy Conder, Wells Fargo Securities, LLC]

Okay, great. Thank you, gentlemen.

[Michael Speetzen]

You bet.

[Richard Edwards, Vice President of Investor Relations]

Okay. Last question.

[Operator]

Next question comes from Brett Andress from KeyBanc. Please go ahead.

[Brett Andress, KeyBanc Capital Markets Inc.]

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

[Scott Wine, Chairman and Chief Executive Officer]

I think Mike said down 10% for the year.

[Michael Speetzen]

Yes.

[Scott Wine, Chairman and Chief Executive Officer]

And we are not pushing out – we are not planning to push out our product launch cadence. Remember, a couple of years ago, we kind of went to a more around the calendar launch. So it wasn't all tied to that summer launch. Right now, we are managing a few supplier risks. So can we launch on time based on our supplier and supply chain execution. And we'll manage through that. There doesn't appear to be anything that is going to get completely out of bounds, but there's a couple of weeks here or there that we're managing through right now.

[Brett Andress, KeyBanc Capital Markets Inc.]

Thank you.

[Richard Edwards, Vice President of Investor Relations]

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

[Operator]

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