Polaris Inc

NYSE:PII

Earnings Call Analysis

Challenging Q2 with lowered guidance for Polaris

Polaris faced a challenging second quarter with a 12% drop in sales due to inflation, high interest rates, and weakened consumer confidence. In response to reduced retail demand, Polaris adjusted shipment plans and increased promotions, aiming to cut dealer inventory by 15% to 20% for the year. Though gross profit and margins were pressured, operational savings of $50 million were realized, with a $150 million target. Full-year guidance now projects a 17% to 20% sales decline and an adjusted EPS down by over 50%, ranging from $3.50 to $4【4:1†source】【4:4†source】【4:5†source】.

Introduction and Challenges

In the second quarter of 2024, Polaris faced a notably challenging environment. Persistent inflation and elevated interest rates led to diminished consumer confidence, particularly impacting larger discretionary purchases like powersports vehicles. As a result, retail sales declined, forcing Polaris to adjust its strategies.

Sales and Inventory Management

Polaris saw a 12% decline in sales during the second quarter. This dip stemmed from a decrease in shipment volumes paired with an aggressive promotional environment. The company responded by adjusting its full-year shipment outlook and reducing dealer inventory. Polaris is targeting a 15% to 20% reduction in dealer inventory by year-end, a more substantial cut than initially planned.

Operational Efficiencies

On a brighter note, Polaris achieved significant operational efficiencies, realizing approximately $50 million in savings year-to-date out of a $150 million target for 2024. These savings came from improved logistics, materials handling, and plant operations, helping to offset the negative effects of lower sales volumes.

Segment Performance Review

Off-Road Vehicle (ORV) sales were down 6%, driven primarily by volume declines in ATVs and RZRs. Meanwhile, the Indian Motorcycle segment experienced a 19% reduction in sales due to softened demand in heavyweight motorcycles. The Marine segment took the hardest hit, with sales dropping 40%, as consumers pulled back on expensive discretionary purchases and dealers struggled with elevated inventory levels.

Strategic Adjustments

Despite a tough market, Polaris remained committed to innovation. It launched new products like the 2025 RANGER, Sportsman 570 2-up, and the redesigned RZR XP lineup. These releases are aimed at bolstering sales and maintaining their market position. Additionally, Polaris provided dealers with several months of free flooring to help manage inventory costs, a move that will negatively impact margins but is seen as a strategic investment in long-term dealer health.

Financial Guidance

Considering the ongoing challenges, Polaris revised its full-year 2024 guidance. Sales are now expected to be down 17% to 20% compared to last year. Adjusted EPS is anticipated to fall over 50%, landing between $3.50 to $4. The company also readjusted its promotional strategies to stimulate demand and help dealers move inventory more effectively.

Long-term Outlook

Polaris remains focused on its long-term strategic goals despite short-term setbacks. The company aims to grow sales by mid-single digits, expand EBITDA margins to the mid-to-high teens, and achieve double-digit EPS growth. Although achieving these targets may be delayed, Polaris is confident that their current actions will yield stronger financial performance when market conditions stabilize.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the Polaris Second Quarter 2024 Earnings Conference Call and Webcast. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to J.C. Weigelt. Please go ahead.

[J.C. Weigelt, executive]

Thank you, Rocco, 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 2024 second quarter earnings call. We will reference a slide presentation today, which is accessible on our website at ir.polaris.com. Joining me on the call today are Mike Speetzen, our Chief Executive Officer; and Bob Mack, our Chief Financial Officer, both have prepared remarks summarizing the second quarter as well as our expectations for the remainder of 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 2023 10-K for additional details regarding risks and uncertainties, all references to second quarter 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.

[Michael Speetzen, executive]

Thanks, JC, and good morning, everyone. Thank you for joining us today. We saw an increasingly challenging environment in the second quarter, resulting in sales and adjusted EPS that came in below our expectations. We will take some time this morning to talk through those results, provide an update on our annual guidance as well as discuss the outlook for our long-term 2026 targets considering the current environment.

First, I want to start with the second quarter results. Sales were down 12%, impacted by actions we took in response to macroeconomic and industry headwinds. These headwinds included persistent inflation in addition to a prolonged cycle with elevated interest rates. We've seen consumer confidence weaken, especially for larger discretionary purchases, and as a result, the industry has seen lower retail.

Additionally, dealers are conservatively managing their inventory due to the higher flooring costs driven by higher interest rates and are reducing orders accordingly. As we said at the start of the year, dealer inventory was our anchor. And if we saw softer retail than we expected, we would adjust shipments accordingly to help protect dealers. We started that process in Q2 and have now adjusted our full year shipment outlook given a lower outlook for retail.

As a result, we have revised our full year 2024 guidance down to reflect the current environment as well as the counter actions we have taken to aggressively manage costs. While this is disappointing, it reflects a more challenging retail environment than we or the industry expected. As I've reiterated several times, we are committed to maintaining dealer inventory at healthy levels, which is why we adjusted shipments and supported inventory in the field with increased promotional activity.

We have also implemented more flooring support for dealers to assist with the cost of inventory they're currently carrying. On a positive note, we saw favorable results associated with our efforts to gain efficiencies within our manufacturing facilities, particularly with logistics and materials and were able to further reduce manufacturing spend in response to lower volumes. These savings partially offset the negative effects of lower net price and the loss of manufacturing cost absorption in the quarter.

We also surgically reduced operating costs recently to rightsize our cost structure to better match the current demand environment and help streamline our business. Year-to-date, our actions have eliminated 8% of our salaried workforce and we have reduced certain discretionary spending areas such as travel. I was intentional with the word surgical. We took great efforts to make sure we were strategic in eliminating redundancies and preserving key R&D investments. We have seen this before and know that staying on the gas with innovation is key to emerging as a stronger company when the market stabilizes.

We estimate these actions equate to over $100 million in structural changes that will be an ongoing benefit and help offset a portion of the headwind associated with lower volumes. Before I move on from this slide, let me close by saying that we were crystal clear at the start of the year. If retail played out below expectations, we would cut shipments to protect dealer inventory. Unfortunately, retail has proven weaker than anyone expected, and we acted to address the market dynamics, which has us bringing our full year guidance down. Bob will cover our guidance in more detail later.

I want to spend some time today talking about the strategy we laid out in early 2022 and the progress that we've made. We continue to believe this strategy will help us generate profitable growth, strengthen our position within the powersports industry and generate positive shareholder returns. In fact, our focused strategy has guided choices from elevating the customer experience through innovation, to improving our operations and more recently, focusing on making our business more efficient.

It has also guided our actions to carefully manage dealer inventory in a way that supports the profitability of our dealers while continuing to deliver the best customer experience. Despite significant progress on these strategic priorities, the timing to achieve our financial targets has become uncertain given the numerous external headwinds driving this downward part of the cycle. At the time we gave our 5-year financial targets in early 2022, we did not anticipate a powersports and marine downturn.

We remain committed to our financial objectives to grow sales mid-single digits, expand EBITDA margins to mid- to high teens, grew EPS double digits and deliver attractive ROIC in the mid-20s. What is in doubt is the timing of achieving these goals. We anticipate providing additional information around the timing of achieving these targets when we see more clarity in our end markets and a return to a more normalized environment. We believe the work we are doing today will position us to have higher earnings power and even stronger cash generation when a recovery occurs.

I think it's important to cover some examples about how we are executing change to emerge stronger. First, we made some big decisions early on in my tenure as CEO to prune our portfolio of distractions outside of powersports resulting in the divestiture of GEM, Taylor-Dunn and Transamerican Auto Parts. As a result, we are more aligned and focused on powersports, which has enabled us to be more disciplined with capital allocation and investments, ensuring we have a strong and aligned portfolio and will continue to be a focus for us. Rider-driven innovation is the key driver to winning customers, and we have proven time and time again that we raise the bar with the products that we offer.

From the notable quality, durability and design upgrades, we made recently to our RZR, Ranger and Indian motorcycle lineups to category-defining products like our all-electric Ranger XP Kinetic, the industry's only extreme duty [indiscernible] Polaris XPEDITION. We've worked hard to deliver these products with the highest quality standards in the industry with continued pre- and post-sales surveillance to enable the ongoing performance of our vehicles to enhance the customer experience. This includes leveraging industry-leading connected vehicles through our RIDE COMMAND+ platform. We don't believe anyone's come close to matching the level of innovation we brought to the market over the last several years. Turning to Agile and efficient operations. We have doubled down on our efforts to increase efficiency within our manufacturing, supply chain and logistics in U.S. operations, leveraging new dealer vehicle unloading capabilities to save on specialized equipment charges and improving our suppliers' operational requirements such as on-time ship and packaging standards.

Most importantly, in our 2 largest plants, lean model lines are identifying methods to significantly reduce line downtime and improve productivity. The changes are resulting in dramatic improvements in manufacturing efficiency of 15% or more. We are now achieving well north of 90% of our production schedules, which is a massive improvement on the performance from last year. While there is still much more to do, we are seeing much needed progress and targeted improvements, which gives me confidence that we will achieve the desired level of operational efficiencies. Lastly, we continue to execute against our capital allocation objectives and remain on track to our targeted share buyback goal.

There are several headwinds that factored into our decision to push back the timing of our financial targets. For example, interest rates, along with stubborn inflation, have had a negative impact on consumer sentiment and discretionary spending. The share of customer wallet for discretionary items today is less than it was prior to 2021. Debt-to-income levels have reached a peak and consumers either maxed out or banks are hesitant to lend at these elevated levels. All these factors have negatively impacted the industry retail environment and resulted in a need to lower inventory dealerships. Elevated interest rates are also impacting our dealers.

Higher interest on dealer inventory, coupled with weaker retail and broad macro concerns as many dealers looking to lower their inventory and costs. Even though dealer inventory is below pre-pandemic levels, dealers want to further reduce their inventory given higher per unit interest costs. Not surprisingly, this mix of lower retail and higher inventory has also resulted in elevated promotions across the industry to entice buyers. This is made worse by the number of OEMs dealing with heavy, noncurrent inventory in the channel, driving additional promotional activity.

Consistent with last quarter, Polaris is still one of the healthiest in terms of days sales outstanding and noncurrent when looking at CDK data on the health of dealer inventory in the channel. We believe these headwinds are temporary and the question is timing, which we are watching carefully. I want to be clear, we're not abandoning the strategy we laid out for 2022. We remain committed to the journey and the financial targets we laid out. I have never been more confident in our company and remain optimistic about the future.

Let me go back to the quarter and discuss recent North American retail trends we're seeing. Within Off-Road, Utility was flattish, driven by a decline in ATV, which was offset by strength in RANGER side-by-sides sense. We expect ATV share to pick up in the back half of the year with the recent launch of our all-new 2-up Sportsman and believe RANGER will remain positive for the balance of the year. Recreation remains soft, particularly within RZR. While RZR has been weak, we have seen continued strength in Polaris XPEDITION, especially the North Star Edition vehicles. We believe we took over 5 points of share in the crossover category during the second quarter.

On-Road retail was driven by softness in the heavyweight segment given recent competitive launches and industry weakness. We expect On-Road Retail to modestly improve in the third quarter as we see the impact of the newly launched Indian Scout lineup. In Marine, we continue to see consumers pulling back on more expensive discretionary purchases. Given more of the boat-selling season is behind us now, we await feedback from dealers during the fall ordering season to understand their outlook for 2025. But we do not see a meaningful improvement in marine for the remainder of 2024.

I do want to touch on innovation one more time because we recently started shipping new products that we believe will positively impact our third quarter. The all-new Indian Scout models began shipping late in the second quarter and should help offset some of the pressure we're seeing in the heavyweight side of the business. In Off-Road, we recently started shipping the new 2025 full-size RANGER and the 2025 Sportsman 570 2-up, built for both work and play boasting unmatched comfort, strength and versatility in the 2-up space. The other product worth watching an off-road is the 2025 RZR XP lineup. We completely redesigned the product last year and are bringing trim-level enhancements this year as well as new features and lower pricing across [ all trim models ]. Again, this should be proof that our foot remains on the accelerator when it comes to innovation, product news and talk to dealers about the state of the business and plans moving forward.

As noted earlier, we're working with dealers to decrease their inventory in this current environment and have decided to provide dealers with several months of free flooring to help offset the increased impact of flooring interest on their business. The decision will have a negative impact on margins, but we believe it's a worthwhile investment to help ensure our dealers are successful. We aim to be dealers OEM of choice and believe in the long-term collective success of Polaris and our dealers. Overall, dealer inventory dropped 4% sequentially, and we've updated our SIOP and production plans such that we are targeting a 15% to 20% reduction in dealer inventory versus last year, which is a more aggressive reduction than we had originally targeted for 2024 at the start of the year.

While we recognize this action negatively impacts our full year outlook, we believe this is a prudent decision that benefits the long-term health of the channel and provides dealers a bit of relief from softer retail while we await a cyclical recovery in consumer discretionary spending patterns.

I'll now turn it over to Bob, who will summarize our second quarter performance and provide updated commentary around our guidance and expectations for 2024. Bob?

[Robert Mack, executive]

Thanks, Mike, and good morning or afternoon to everyone on the call today. Second quarter sales declined 12% versus last year due to a decline in volumes and elevated promotions, partially offset by favorable [indiscernible] PG&A continued to post strong results with 7% sales growth due to the greater volume of accessories on products like Polaris XPEDITION and RANGER North Star. Gross profit dollars and margins were primarily pressured by lower net pricing related to a higher promotional environment. .

Removing the impact from promotions, our progress against our target of realizing $150 million in operational savings more than offset the impact of lower volume on absorption. Year-to-date, we have realized approximately $50 million in operational savings related to materials, logistics and plant spend. We continue to work towards the $150 million savings target, which would be expected to have a positive impact on the earnings power of Polaris once industry conditions normalize.

In Off-Road, sales were down 6%, mainly driven by volume declines in ATV and RZR as well as a headwind from elevated promotions. Share with an ORV was flat year-over-year with gains in side-by-sides, including RANGER and crossover. Polaris XPEDITION continues to provide a tailwind in crossover, helping to drive 5-plus points of share gain in this category during the quarter. We saw heavy promotions in the channel on ATVs as OEMs work to clear inventory leading to share losses in this subcategory during the quarter.

However, our data reflects almost a point of ORV share gain on a dollar basis. While we did see margin pressure in the quarter driven by the factors already mentioned, I remain pleased with the progress we are making within our factories that are driving real changes to our cost structure. These improvements are helping to mitigate the impact from unabsorbed overhead from volume reductions. As we look towards the third quarter, we expect shipment volumes to be down meaningfully given the decisions we have made around prioritizing dealer health and inventory levels in this challenging environment.

Promotions are expected to remain elevated as the industry continues to use promotions to stimulate demand and clear noncurrent inventory. We expect further pressure on margins given these lower volumes and the impact on plant overhead absorption. Switching to On-Road. Sales during the quarter were down 19%, driven by lower shipments, particularly in the heavyweight segment. Indian Motorcycles lost market share during the quarter, driven by weakness in the heavyweight category. We believe fundamental consumer retail was weaker than what the industry experienced in the quarter as industry retail was stimulated by competitive product launches.

We began shipping our new Scout Indian motorcycle in June and expect our share position to improve in the back half of the year as these bikes arrive at dealerships. During the third quarter, we continue to expect lower retail as the industry grapples with a consumer that seems to have cut back on larger discretionary purchases. There continues to be a lot of excitement around the new Indian Scout models. However, this is expected to only somewhat offset industry pressure.

In Marine, sales were down 40% as the industry continued to deal with elevated dealer inventory levels and higher interest rates impacting the consumer's decision to purchase. Our shipments in the quarter continued to decline with dealer inventory down approximately 18% versus a year ago and in line with 2018 levels, which we view as a viable baseline for the industry. SSI data through May reflected a decline in year-over-year retail and while we held share in Pontoons, we ceded some share in Deck Boats. Gross profit margin was down given the top line pressures driving less fixed cost absorption. We continue to be agile with variable costs, which is demonstrated with gross margins remaining above 20% despite the significant reductions in volume.

We are continuing to see a challenging environment across the industry during the third quarter as dealers work through current inventory levels and consumer purchases are hampered by elevated interest rates. The next big data point will come early this fall when dealers begin to make ordering decisions as we head into the 2025 selling season. Moving to our financial position. We are lowering our expectations for cash generation this year due to our updated thoughts on our business performance. With this update, we have realigned CapEx and are driving working capital efficiencies to improve our use of cash during this period. Given the change in volume expectations, it will take us time to flush through working capital. As a result, we expect cash performance in the fourth quarter to be better than cash generation in the third quarter.

We maintain our goal of offsetting dilution from stock-based compensation programs this year, and we remain well ahead of our target of reducing the basic shares outstanding by 10%. During the quarter, we used cash to continue our investments in innovation and key strategic capital projects and returned over $100 million to stockholders in the form of dividends and share repurchases. We remain confident in our financial position and are driving our teams to improve working capital in this part of the economic cycle.

Now let's move to guidance and expectations for 2024. We have lowered our financial targets for the year given soft retail trends across all product lines and a macroeconomic climate that has deteriorated relative to our expectations at the start of the year. With these factors at play, we have decided to rightsize shipments and increase our promotional efforts, underscoring our ongoing commitment to prioritizing the health of our dealer partners heading into the second half of the year. The result of this decision will be lower shipping volumes leading to lower absorption at our plants, which is expected to negatively impact our third quarter results more heavily than the fourth quarter.

These cuts are happening across each segment, however, they are more pronounced in Off-Road given reductions already taken in On-Road and Marine. For sales, we now expect sales to be down 17% to 20% versus a year ago. In addition to lower volumes, we expect headwinds from promotional activity as well as finance interest, both of which are expected to be larger than our original guidance. As Mike noted, the added finance interest is in part due to our decision to help dealers manage the elevated cost they are seeing from carrying a higher value of inventory relative to the past few years.

As it relates to our decision to curtail shipments further, you can see our initial plan to manage inventory on top of our current revised plan. Recall that we started going down this path last year with Marine and RZR due to what we were seeing in the channel as well as trends in retail. We began this year with certain assumptions on retail based off current trends and macroeconomic forecasts. Within this plan, at the beginning of the year, we were targeting a reduction of approximately 10% in shipments versus 2023 to help dealers lower their inventory levels.

Fast forward to today, and we've seen interest rates stay higher for longer, along with elevated inflationary pressures which have impacted consumer discretionary purchase patterns on larger ticket items. This is coupled with the feedback from our dealers on how flooring costs have quickly ramped up and are now one of the dealers largest expenses. Based on this, we have made the decision to step in and hold the value proposition with our dealers by supporting them with additional flooring aid as well as reducing our shipments further in the back half of the year versus our original plan.

We now expect to end the year shipping to levels that can drive dealer inventories down 15% to 20% versus last year, helping to put our dealers and ourselves on a better footing going into 2025. Moving to EPS. We are now expecting adjusted EPS to be down over 50% and in the range of $3.50 to $4. Importantly, the magnitude of the volume drop we are dealing with has an oversized impact on margins due to lower absorption of overhead at our plants and other fixed costs.

The various items impacting sales such as volumes, additional promotions and unfavorable mix represent a $5 EPS headwind. From a manufacturing perspective, we are seeing approximately $0.50 of net headwind with negative absorption accounting for $1.90 of the EPS takedown and overshadowing $1.40 of EPS tailwind from the great work our teams are doing on the targeted operational efficiencies to mitigate these pressures. The bright side is that these operational efficiencies are expected to positively impact the earnings power of Polaris in a normal operating and macro environment.

Additionally, within OpEx, we have cut spending in noncritical areas and completed a headcount reduction earlier in July. We believe these actions were necessary as we rightsize the organization for the current environment. As noted before, these cuts do not impact our investments in growth and innovation, which remain integral to our long-term strategy. From an EPS and net income perspective, it is important to note that percentage reduction is significantly more than the percentage reduction of revenue, gross profit and EBITDA due to the relatively fixed nature of depreciation and debt interest.

For the third quarter, a few things to note. Given how our plan looks today, the result of cutting shipments is expected to have a more meaningful impact to third quarter results versus fourth quarter. Retail is expected to remain down, although we expect to gain modest share with innovation. Before I turn it back to Mike, I want to emphasize that many of these headwinds are not typically seen in a normal operating environment or an industry that has historically grown low to mid-single digits. We would expect volume and plant absorption tailwinds in an environment where we are growing at or near historical levels in shipping to retail. Plus our business typically mixes up with the introduction of new innovation and technology as well as the progression to side-by-side from ATVs. Current promotional levels are elevated for many reasons associated with the macroeconomic factors and specific industry dynamics.

Over time, we see an opportunity for these to come down, which we believe would benefit margins. Additionally, the operational efficiency gains we are making are still expected to have a positive impact on earnings. So while the current environment is challenging, we have a positive outlook on the future of powerports at Polaris. We believe the decisions we are making today are in the best interest of all our stakeholders, including customers, dealers, employees and our stockholders. We intend on emerging stronger with a robust pipeline of innovation, leaner operations and a healthy level of cash with the ultimate goal of delivering strong stockholder returns.

With that, I'll turn it back over to Mike to wrap up the call. Go ahead, Mike.

[Michael Speetzen, executive]

Thanks, Bob. We're expecting the same macro issues that impacted our second quarter performance to persist throughout the year, resulting in subdued consumer demand for powersports and a cautious dealer network. For the second half of the year, we will continue to draw dealer inventory down through a combination of lower shipments as well as seed the market with strategic promotions to help dealers move inventory. .

I'm confident in our strategy and believe that we're on the right path to ensure Polaris' global leadership in powersports, while generating strong shareholder returns. We're working hard to navigate these current trends while remaining vigilant to emerge stronger than ever when retail demand returns. Our recent customer metrics point to continued interest in the category with elevated levels of search and organic traffic to our site. People are shopping for Polaris, and we will be well positioned when those shoppers feel more confident to become buyers.

Innovation remains a top priority, and we have begun to see real transformational efficiencies within our operations. So while the journey might take longer than originally anticipated to realize the financial targets we laid out, our determination and passion are unwavering to grow this business mid-single digits, expand EBITDA margin to mid- to high teens, improve ROIC to the mid-20s and grow EPS by double digits.

I'm confident in this team and the great work we've already begun will set us up to emerge stronger with greater earnings power and cash generation capability while also maintaining our leadership in powersports. We thank you for your continued support. And with that, I'll turn it over to Rocco to open up the line for questions.

[Operator]

[Operator Instructions] And today's first question comes from Joe Altobello with Raymond James.

[Joseph Altobello, analyst]

First question on the outlook of a 15% to 20% reduction in shipments this year. What sort of retail is that baking in? And what product segments do you think require the greatest cuts?

[Michael Speetzen, executive]

Yes. Obviously, we're anticipating the retail environment to be weaker than we anticipated. I don't know that we're going to get into a lot of specifics, but safe to say it's down from where we had thought the industry was going to be. The reduction by segment is somewhat proportional to the segment's proportion of Polaris. Obviously, meaning off-road is the lion's share of the reduction. And within that category, there's a lot of dynamics.

Obviously, the REC space is more heavily impacted. You heard from my prepared remarks that the utility side, specifically around RANGER has held up, although lower than we expected. It is still generating positive retail performance. So obviously, the cuts have been a little bit deeper on the rec side, and we obviously, as a proportion of what we expect retail to be in the second half, we went a little bit heavier to some of our higher ASP vehicles which obviously will provide some relief to dealers having to carry that inventory and the costs associated with that.

[Robert Mack, executive]

Yes, Joe, I mean we started this effort last year with Marine and RZR. So if you look at the full -- if you look at Marine versus last year, the cuts are a little more significant versus our plan, we had expected Marine to be down. So we'd already factored some of that, same thing with RZR. So like Mike said, if you look at it relative to our original expectations, it's pretty proportionate across all the categories.

[Joseph Altobello, analyst]

Got it. Very helpful. And just to follow up on that. As we turn the page on '24 and think about '25, which I think you're probably happy to do. If we look at Slide 13, how much of the EPS guidance cut is sort of onetime-ish in nature? And how much of that would you expect to come back next year?

[Michael Speetzen, executive]

Yes. I mean I'll let Bob kind of get into some of the puts and takes. But first and foremost, we're getting our bearings around the dynamics that emerged through Q2. So having a position on '25, we're a little ways away from that. And as you know, so much of this is going to hinge on what the retail environment is. And obviously, if we're to a more stable retail environment, where we're back to shipping in line with retail, there's positive dynamics because of the reset that we took this year where we're under shipping retail as well as the snow season and how that ultimately works out. .

And then obviously, we put the brakes on a lot of cost. And we've been very successful within the operations. We talked about $150 million at the beginning of the year. Obviously, we're now targeting significantly more than that given how slow the operations are or how low the volume is coming. And so you start to get into a position to be able to annualize the structural improvements that we've made and only benefited from partially this year.

[Robert Mack, executive]

Yes. So Joe, if you're looking at Slide 13, the way I would think about it, I mean, we're not going to get into giving guidance for 2025 yet. We got a long way to go here in '24. But if you -- the main drivers are the volume and mix and it's about 2/3 volume, 1/3 mix. If we were shipping to -- if retail was flat, and we were shipping to retail, some of that would come back because obviously, we took the big cuts this year. .

The lower volume, that would come back depending on where retail goes. The elevated promotions, it's really hard to say what promo is going to look like in 2025. So I don't have much to say there. Flooring interest, the goal of the flooring is to help the dealers as the inventory winds itself down. So how much of that carry forward will depend on where inventory goes and where rates go. And then when you look at it, as Mike said, we were targeting 150. This is a bridge versus our initial guidance. So the initial guidance assumed the 150. So this is incremental additional plant material labor and overhead spend savings.

And so that should carry forward. We're continuing to make good progress there. We feel good about how the factories are operating. Obviously, it's not enough to overcome the $1.90 of [ plant ] absorption hit, but I think a really good effort by the team to offset that. And then as you think about OpEx, about half of this will come back because it's primarily related to the company's various bonus programs, which obviously will be significantly lower this year given the performance. So some of that will come back, but we'll have some carryover from the headcount reductions and other things. There is some temporary stuff in there, travel and the normal things you do when times get tough. And then one thing just to keep in mind for Q3. Q3 has our dealer meeting in it. So Q3 OpEx will be a little higher than Q4 because of the dealer meeting.

[Michael Speetzen, executive]

I think, Joe, what I would want to just come back to because it's really at the base of your, we reacted aggressively in Q2. When you think about the volume that we're pulling out for the year, we pulled about 25% out in the second quarter. That was the chart that Bob went through that's right behind the guidance chart. And we also -- although we took the time to do it right, we went aggressively after our cost structure. And yes, there are certain pieces that will be more short term.

But the point I drove with the team is that we've got to really focus on rightsizing this business. And then as Bob indicated, not only do we have line of sight to getting to the 150 and more given lower volumes. But I'm really encouraged with what I hear from our operations team in terms of -- we really just have not been a truly lean environment, an efficient environment. And we've got significant opportunity. And you can see just from the work we're doing, we're already driving some of that efficiency.

But obviously, when volume comes back into the market and we're in a more positive that gives us the ability to really leverage our cost structure. So whether that's '25, '26, there's a lot of other factors at play, but I feel really good about how we're sizing the cost structure and our ability to finally get after the margin improvements that we've talked about for so long.

[Operator]

And our next question today comes from Megan Alexander with Morgan Stanley.

[Megan Christine Alexander, analyst]

Just wanted to maybe follow up on Joe's first question a bit there. So retail overall, I know it differs by segment, but retail overall, it does look like it's down maybe high single digits so far in the first half. I don't want to necessarily put words in your mouth. But just based on your comments, it seems like maybe some things expected to get a little bit better in the second half from a share perspective, maybe some things stay the same.

But I guess kind of there's still reason to believe retail could maybe be down high-single digits, which would be -- high single digits worse than your original expectations. So in the context of the kind of 10% additional cut to shipments, is it really just the change in your retail expectations? Or is there some implied additional destocking? I just want to make sure I'm understanding the change and maybe it's just that it's kind of -- it depends on the segment. But maybe if you could just help us a little bit to understand that that would be...

[Michael Speetzen, executive]

Yes. I mean, you know it. It's -- each segment has very different dynamics. But the way to think about it is when we came into the year, and I made these comments in my prepared remarks, we were expecting to bring dealer inventory down kind of low double digits. And now we're talking about 15% to 20%, which basically signals that, in addition to the retail reduction that we're seeing, we are taking a more aggressive position because we need to make sure that we've got this business positioned to play a lot more offense and defense as we move forward.

I will tell you that as we look at our second half retail versus first half, we do not have any herculean improvements built in. We have some very specific areas around we know midsized motorcycles will improve because of the launch of the new Scout. We know that the new ATV 2-up, which is the first redesigned vehicle we've had in the market in a long time and something that customers have been looking for. We have some small areas like that, but we are not banking on some massive improvement. We really are expecting the environment that we've been experiencing here in Q2 that really we had a tough April, things got a little bit better in May, a little bit better in June, but still ended up being well below.

And with those being peak seasonality times for us, you missed that window with boats and motorcycles, you're pretty much set at that point as well as in some of our REC markets. We've tried to build that in and calibrate. We've communicated with dealers what those new profiles look like. The team is still working through it. I'm going to be not only at our dealer meeting next week but we have a dealer council meeting the day before, where we'll have some of our top dealers in there that represent the network. And that will give me firsthand view to how they're feeling about things, the reaction to the new profiles, which overall, I think, has been on balance, positive, and we'll continue to adjust the business as we move forward based on how the macro environment is playing out.

[Robert Mack, executive]

Yes. A couple of other timing things to keep in mind as you think about H1 versus H2. First half of the year has really no snowmobile retail because we didn't have any snow. Normally, I mean most of the retail is in kind of -- a lot of it's in Q4. But this year -- and some is in Q1, and we didn't really have any in Q1. And we're expecting a relatively more normal snow season. So there'll be snow retail in Q4 that wasn't there in the first half. And then Marine has been one of the most pressured segments, and the reality is there's not a lot of marine retail in the second half. So that negative impact kind of slows down. But to Mike's point, we're not expecting Herculean improvements other than things where we know we've got new product or some changes in the industry.

[Megan Christine Alexander, analyst]

Got it. That's helpful. And then maybe just a follow-up, maybe to ask a more pointed question. How do you view each end market, each segment, off-road, on-road, Marine, kind of the channel inventory position today versus where you'd like to be at year-end. It seems like Off-Road there's still the most work to do, but definitely would appreciate you confirming that. And then I guess, how does that -- in the context of Bob, your comment on promos, we have no idea next year. Is that more so a comment of not knowing if the channel will be cleaned up or more just about kind of the consumer willingness to purchase the vehicles?

[Michael Speetzen, executive]

Yes. Maybe let me start there and work backwards. I mean, one, it does depend on what the macro is. But it also depends on the competitive environment. I mean, one of the things that we were probably caught even more off guard than we expected in Q2 was the degree of which there was noncurrent inventory still being pushed into the channel. We do believe that a lot of that is getting resolved and was handled through Q2, hopefully. We do have CDK data that covers a significant portion of the market. We know that we are the healthiest by far from current to noncurrent as well as being either #1 or #2 in terms of the days sales outstanding at each of the dealers on a rolling 6 and 12 months.

So there are competitive dynamics that we obviously don't have a direct influence on, but I know that our dealers are putting a lot of pressure as many of you know because of the surveys and the discussions you've had, although with a very -- the dealer network, I think that sentiment is shared. The uncertainty in the marketplace is driving a reluctance to carry any more inventory than they think they need to have. And that's essentially what we're responding to.

I think your point around each of the segments is pretty accurate. Off-road probably needed the most correction, although we did make corrections to motorcycles and marine. We've been working on the marine side in earnest since last year, reacting to the current environment. And I think the dealers have been appreciative of that. Motorcycles, it's weak industry, but some competitive dynamics there with some new products that came in. Off-road is really obviously the lion's share of it given the magnitude of the business as well as with the majority of our dealers, it's the largest line that they've got.

And as a result, that's where we really needed to make the most moves. But I'm going to come back around. I said it last time, I'll say it again this time, we monitor the data. We know that we're the best in terms of the current-to-noncurrent mix at the dealerships. We also know by each of our segments where we stand in terms of the days sales outstanding on the floor. And I can tell you we're either #1 or #2 in the majority of those segments. That doesn't say that we haven't got work to do, clearly, with the guidance change that we have, we're working through that. And I'm going to be in front of dealers next week getting a firsthand view to how that's all going and being perceived.

[Operator]

And our next question today comes from Fred Wightman with Wolfe Research.

[Frederick Wightman, analyst]

Maybe just a follow-up on the last question. Can you talk about the plans for the ORV leadership going forward. Mike, I know the press release last week mentioned you were going to take a little bit more of a hands-on approach to that going forward. But can you just fill us in on maybe how you see that being managed longer term?

[Michael Speetzen, executive]

Yes. I mean, look, we're in a challenging environment. And I think given that it's 75% of our revenue and pretty much all of our income, it's probably not a bad thing for me to spend a little bit of time with that team. What I would tell you is, I've got an incredibly strong corporate team, folks who have been with our company for a long time, very talented that I can rely on at the corporate level.

And then within the off-road business, I've been staying very close over the past several months. We've made a number of organizational changes to really simplify and streamline. We have very -- 4 very strong business leaders for ORV, Snow, commercial and government defense who have a lot of industry experience. And so it will give me an opportunity to work more closely with them. And then we'll decide down the road what that means in terms of ultimately any organizational decisions that we need to make.

But in light of the current environment we're in, I think we all benefit from me being a little bit closer. And like I said, I'm excited to have the opportunity to be with the dealers next week, a meeting that I would normally attend but, obviously, play a larger role in given the changes that we're continuing with

[Frederick Wightman, analyst]

Okay. That's fair. And then you guys also mentioned some planned cuts to [ higher ] ASP product. I think Bob also gave some color on the mix headwinds that are baked into that EPS reduction. I'm wondering if you're seeing any signs of incremental pressure at sort of that higher-end consumer? Or if it's really just a matter of dealers are kind of tapped out from a floor plan perspective and just don't want the higher dollar product on a unit-per-unit basis?

[Robert Mack, executive]

Yes. I would say it's more the second comment. We launched XD and XPEDITION and obviously had a lot of channel fill. And retail's been good at the high end of those products, but it will be a little slower at the lower end of those products. So NorthStar [indiscernible] units tend to do really well. And I think that's a trend we're seeing across kind of most industries, right? High dollar cash buyers are still buying and they're buying premium product. And so really, our decision was more around those premium products are also expensive for dealers to carry on floor plan.

And so that's a good place to go to correct inventory. And so we chose to do that. But we are seeing decent strength there. And some of it's correcting the mix and just getting the mix to where the stuff that's really selling well is what they have in inventory and some of the stuff that's been a little slower, we cut back shipments on and pull out.

[Michael Speetzen, executive]

And as you can imagine, it's a delicate balance. I mean, what we don't want to do is overcorrect and put ourselves in a position where we start seeding showroom floor and share and the fact that in the second quarter, we held our own from a share standpoint on a year-to-date basis, we've gained share in side-by-sides. So when you think about some of the dynamics in that market, specifically around noncurrent to current inventory and frankly, the significant discounts and financial promos that we're battling against. I'm pretty proud of the team being able to put ourselves in a position like that to say that we held our ground and then side-by-side, it's actually gained share.

[Robert Mack, executive]

Yes. I mean you can see it with XPEDITION. We talked about -- in crossover, we gained 5 points of share, and that's driven by XPEDITION. So certainly, the high end of the XPEDITION product is selling really well, getting great reviews. People are really enjoying the product. And so we'll continue to drive that leadership position, but we're going to be careful to make sure the balance is right to make sure the dealers get the relief on their floor plans that they're looking for.

[Operator]

And our next question comes from Craig Kennison with Bard.

[Craig Kennison, analyst]

It's really a follow-up, Mike, to the last comment you made, but I know part of the cost of reducing inventory is that you could open the door up to competitors that want to show maybe less discipline in how they stock dealers. I'm curious, specifically, how do you protect your flank, for example, do you tie that floor plan coverage promo to reorders. Just curious how you strike that balance.

[Michael Speetzen, executive]

Yes. I mean it's a good -- there's always some level of exposure. What I would tell you is that I think there's a couple of things that kind of self-regulate. I mean, certainly in an environment like this, the dealers are going to play a significant role in making sure that they're putting the appropriate pressure. And I think without going into a lot of details, you've heard that from some of our other competitors, or they will literally discontinue align. We've seen that in the marine space where dealers got stuck with a lot of inventory from short lines.

And they obviously put a focus on it in the near term to move it, but they're no longer carrying those brands. So there is an element of that. In our off-road business, obviously, the North Star program that we have which is essentially how we rate our dealers and then they get rewarded in terms of everything from hold back to other incentives that they participate in. That's going to play a key role. Our team has done a lot of work over the past several quarters, the business reviews that we talked about in the last meeting where they're sitting down, they're talking through market share, market share targets, health of the dealers business. I think those are all going to serve us incredibly well.

And like I said, we're going to have an opportunity to be in front of dealers next week and hear firsthand how they're feeling and make sure that we're addressing those concerns. As I said in my prepared remarks, we want to be the partner of choice, and they should know that they have my commitment, and we're going to be working that. I'm going to be there first hand, and we're going to continue to work that through the balance of the year and into '25 to make sure that we're demonstrating through action consistently with the words I just said.

[Craig Kennison, analyst]

And if I could sneak in another question, just to get your comments on a different topic related to tariffs. But certainly, the political environment is really tough to read. It just doesn't seem like there's an anti-tariff candidate in the race right now. So I'm wondering where you see the most policy risk, understanding you really can't respond to changes that haven't yet been formally made?

[Michael Speetzen, executive]

Yes. I'm going to act like I'm at a debate, and I'm actually going to go back to the prior question for a second because I realized that I was talking specifically about all the tactical things. Ultimately, it comes down to some of the things I talked about in my prepared remarks. It comes down to innovation and products. That's what's going to protect our flank. I couldn't be more impressed and proud of what the team has introduced over the past 3 years across every single one of our categories.

And we're not done. We've got more coming out. I was very clear. We've cut costs in this business, but I can tell you, we are still spending over 4% of our revenue on R&D. We are going to continue to be the leader from an innovation standpoint. And so while those other pieces are interesting in terms of how we run the back end of the business and partnering with the dealers, the innovation is really going to make sure that that's where we keep our foothold in those dealerships.

So I just want to come back to that. As it relates to tariffs, it's anyone's guess. We do know that some of the news that's come out recently. There's nothing that impacts our business. We're obviously going to be watching it. I think there's an awful lot of rhetoric right now around elections. And so we've got to put that in context of that's exactly what it is. But we agree with you that the sentiment is not shifting, certainly, given some of the geopolitical dynamics that we're dealing with.

I've made some comments upfront. We're doing what we can to nearshore where we're pulling things out of China and moving that into either other parts of Asia or into Mexico or North America, where we have less constraints from a tariff inbound tariff. And we've also reshuffled some things between plants that helps us contend with that. So we're obviously planning for things to not get any better from where they are, and we've been in that environment now for some time.

And then obviously, if new tariffs come into place, we'll have to react to that. We've got a great government relations function that stays on top of everything. So as soon as we know where things are headed, we'll react accordingly.

[Operator]

Our next question today comes from David McGregor with Longbow Research.

[Unknown Analyst]

This is Joe Nolan on for David. You mentioned that there will be a more meaningful impact from lower shipments on 3Q, but you also have the benefit of shipping the new Scouts continuing into the third quarter. So just wondering if there's any further detail you can provide on cadence there. And then with the operational savings of $50 million year-to-date, is it fair to assume -- fair to assume that we see a larger balance of that remaining benefit in the third quarter versus the fourth quarter as well?

[Robert Mack, executive]

Yes. So I'll take the first part of the question. So yes, we will have Scout shipping in Q3. We did start shipping them in Q2. But as Mike said, the cuts are a little bit weighted towards ORV. So just given the magnitude of that business relative to motorcycles, that will sort of offset the benefit of Scout. Q3 is not going to be dramatically lower. It's just -- it's going to be the lower of the next 2 quarters.

Some of that's driven by Snow shipments in Q4. In terms of the margin, obviously, the ORV being down hurts more than Scout being up helps. And in terms of the cost savings, we got $50 million through the first half, we're still targeting to get the $100 million that was embedded, the other $100 million of the $150 million that was embedded in the original guidance in the second half, plus the additional overdrive that we talked about on Slide 13 that will be a little more Q4 weighted than Q3 weighted just because all of those actions take time to flow through the system as we work through the factories.

In addition to the headcount reductions we've had from an OpEx standpoint, we've had significant headcount reductions at the factories as we've gotten more efficient, both in direct labor and indirect labor and then obviously, cuts related to the volume as well. So part of it's just the efficiency improvements we've been working on and then some of it is just purely volume takeout.

But that impact will be a little bit more beneficial in Q4 than Q3, which is why Q3, we think it's going to be the lower quarter.

[Operator]

And our next question comes from James Hardiman with Citi. Apologies, it looks like James left the queue. Our next party is Alex Perry from Bank of America.

[Alexander Perry, analyst]

Just had one. Any way to sort of contextualize how sort of retail played out throughout the quarter? Is it fair to say it may have decelerated through the quarter? And then any significant sort of deviation by segment that is worth calling out. And then is it fair to say that the guidance sort of assumes the run rate of retail continues, but some upside in On-Road due to the incremental launch.

[Michael Speetzen, executive]

Yes. Q2 was interesting. April was pretty weak. And we've seen that before. We've seen -- sometimes it's weather, sometimes it's just a late start to the season. And obviously, we were watching May intently. And our retail improved in May and improved, again, in June, but obviously, well short of where we wanted it to be, and that was really because the underlying industry worsened through the quarter.

So obviously, we were playing a lot of offense in there to improve retail. I think it's a big part of why we ended up in the share position that we did, but we certainly saw a weakening. We obviously, as we got into late May and into June, that's when we started looking at the production plan and some of the decisions we needed to make. We were making real-time adjustments to promo. There was a pretty heavy correlation with the industry starting to turn down in Q2 to what was going on with consumer confidence, consumer sentiment.

And so there were just a lot of factors. I think it's also important to go back in time and realize that, that was also when the reality around inflation was still persistent. You remember, we were getting north of 3% prints with the Fed having a targeted 2% and the reality around any kind of interest rate move expectations starting to dwindle. The mantra of higher for longer really started to come back into view. And I think the reality that customers were stretched from a balance sheet standpoint. So all those factors kind of came together through the course of Q2.

I think I give the team a lot of credit, we reacted quickly to be able to get shipments out of the system and to start heading down the path of cost corrections. As we look into Q2, yes, I mean, we talked about it earlier we were answering the question, I mean, dynamics around snow create a second half difference to first half where there was really no snow retail. Midsized motorcycles being driven by our Scout business that we didn't get those into market until late in June. And then the ATV dynamics that I talked about in terms of some of the new products that we've got out, those are really the largest factors that would create any difference between first half and second half retail.

[Operator]

Our next question today comes from Noah Zatzkin with KeyBanc Capital Markets.

[Noah Zatzkin, analyst]

Maybe one that's maybe hit on a bit less frequently, but just wondering if you could kind of speak to how retail is trending internationally and kind of provide any updates on kind of the state of channel inventories overseas?

[Michael Speetzen, executive]

Yes. I'd say weak inventories were probably in a little bit better position. We haven't fully recovered from some of the dynamics we had with the broader business. But I would tell you that it's pretty weak internationally. Not every country is exactly the same, but we've seen pretty much, I would say, across the board, not necessarily consistent but a fair number of dynamics.

The good part is that the international component of our company is still less than 15%. So the vast majority of the correction that we've seen has really come out of North America, but we certainly have seen international have to downshift as well.

[Noah Zatzkin, analyst]

Very helpful. And maybe one that's kind of slightly a housekeeping question. But on the $1.40 and kind of the EPS walk versus the $150 million that you've kind of laid out, how should we think about kind of the differences there in terms of maybe categories or buckets?

[Robert Mack, executive]

Yes, the categories are pretty similar, actually. The incremental $1.40, which is kind of roughly $100 million, $105 million is really split pretty evenly between material and logistics, plant over -- plant overhead spend and direct labor, obviously, the direct labor in the first $150 million that was really driven on efficiencies and lean and the things we're doing in this incremental.

It's more driven by volume and just taking out direct labor because you have less volume going through the factory. But we've made good progress on materials, and we think we'll be able to -- in logistics will be able to overdrive some there. And then the plants have done a really nice job on overhead spending and controlling that as volumes have come down. So I would say the first $150 million is more efficiency related and the additional is probably got a little bit more volume impact built into it, just taking those costs out in line with the volume drop.

[Operator]

And our next question is from James Hardiman with Citi.

[James Hardiman, analyst]

So you may have already answered a portion of this. I wanted to focus on ORVs just because that's the most important segment. And my brain can't keep up with all the moving parts with all these different segments to be honest. But retail wasn't that bad, right, down 4% for the second quarter. Maybe speak to the exit rate. Did it get meaningfully worse? And should we be thinking about July as any better or any worse?

[Michael Speetzen, executive]

No, our ORV business, actually, picked up a little bit of momentum through the quarter. But I would tell you, it was short of our expectations, and it was consistent with what the comments we made, which was the REC side continued to see weakness. We were encouraged with what we saw from XPEDITION, and we were encouraged with what we saw from RANGER.

Obviously, RANGER remaining positive through the quarter was a bright spot, but it was still below our expectations. So as we look into the back half, I mean, it really is as simple as the things we laid out. I mean we kind of assume it's a little bit more of what we've seen with the exception of a couple of products around snow and midsized motorcycles and the new ATV launch. They're going to move numbers, not substantially, but they're going to move numbers relative to how they performed in the first half.

[Robert Mack, executive]

Yes. I mean, James, really go ahead. As you think about the retail, I mean, it's a 2-part story, right? It's retail being down and down relative to our expectations with the whole industry being down. But also it's this adjustment of dealer inventory is a big driver in the second half. And when we were looking at taking dealer inventory down, 10%, for the full year and now we're going to take it down an incremental 5 to 10 points in the second half of the year that has a bigger impact on second half shipments.

[James Hardiman, analyst]

Got it. And that's a perfect segue to my second question. So for ORVs, should we be thinking about inventories also being down in that 15% to 20% range? I know that was a whole company sort of target. And is there any way to think about just -- it sounds like inventories are going to be down a lot more than whatever you're assuming for ORV retail. I guess is that accurate? And is there any way, if we zoom out to then think about those numbers versus pre-pandemic, right? Inventories are down x and retail is whatever it is versus that time. Just want to make sure that as we exit this year, we're in a healthy place relative to history.

[Michael Speetzen, executive]

Yes. I mean, look, we're already below pre-pandemic. We will be at the lowest point that we've been, I think, probably since I've been with the company. We are pulling inventory down further than what we expect retail to perform in that business. And it's for the reasons you outlined. We're making sure that we're getting this positioned. I think if you talk to the dealers, they would say, we like the plan, we'd like them to go faster. So we're obviously trying to make sure we can try and adjust as best we can.

But we're reacting in a down market a lot faster than we reacted in an upmarket because we largely can control a significant number of the factors now that we've made a call on where we see the retail environment going. But our goal is to get this thing back to a point where we've got dealer inventory on a days sales outstanding perspective. Obviously, I'm not going to give that number, but we're going to have that at the lowest point it's been in a long time to make sure that dealers are healthy, and we're in a position to play a lot more offense and defense moving forward.

[Robert Mack, executive]

Yes. I think this environment is an area where our RFM model versus most of the rest of the industry that just ships in sort of takes orders and ships in truckloads. We hear the feedback from the dealers. They like our model better, it just better once we get the profiles right. So really, what you're seeing is us in discussion with the dealers, resetting the profiles to get dealer inventory down to, as Mike said, what would be the lowest levels, excluding the pandemic, obviously, in quite a while and then the impact of that on what we think we can ship in the second half of the year.

But that should allow us to exit the year with the profiles and the dealer inventory set up at a level that everyone is comfortable with. And even if retail is, there's muted growth or no growth next year, we'll be shipping to retail, and we'll be in a good position.

[Operator]

And our next question comes from Sabahat Khan with RBC Capital Markets.

[Sabahat Khan, analyst]

So you shared a lot of color on sort of the puts and takes you're seeing. Maybe just more from a philosophical perspective. I guess how much buffer do you think you may be baked into this? We've seen a bunch of guidance cuts across the space. So obviously, not a unique phenomenon. But just trying to get an understanding, when you're having these discussions on the back half of the year, how much of a sort of a buffer do you think you've built in given sort of the uncertain macro backdrop in the consumer here?

[Michael Speetzen, executive]

Well, I mean I guess I'll come at it a different way. We tried to take a very realistic assessment of where we believe the market is headed. We're going more deeply after dealer inventory, which gives us a little bit of room if we see a small amount of variation from a retail. We've been very deliberate where we see a second half versus first half improvement that it's got to be clear and simple. We've articulated that around snow, midsized motorcycles and ATV. And we've rightsized our cost structure.

So I mean, look, I'm not going to sit here and try and provide a forecast of what's going to happen with interest rates and where the economy is headed. We are trying to deal with the trends that we've seen. We believe we've got the business in a good position, but we're going to stay true to what I said at the beginning of the year. It's what guided us in Q2 to do the actions that we had that we're going to work tirelessly to make sure that we're protecting dealer inventory, and we're going to continue to keep the gas on from an innovation standpoint.

And between the combination of those 2, it should put us in a really good position once this market stabilizes, it starts to get back to a little bit of growth.

[Sabahat Khan, analyst]

Okay. Great. And then I guess on the -- some of the focused cost reduction initiatives that you undertook. And I guess, is there a sort of room to sort of add those back as the market returns? Or are some of these changes where you think about we can permanently operate without some of these costs. Just trying to understand how much buffer there is to both sides given the evolving macro? Like can you add some back quickly if need be and/or optimize a bit further if needed.

[Robert Mack, executive]

The original guidance included the $150 million of operating cost efficiency improvements. And those will continue in the guidance -- original guidance and in the revised guidance and those would continue forward. The 105 of ops efficiency in the plants, some of that is permanent. Some of it is just volume-driven where you have less labor and less overhead spend because you're running less through the factory.

So some of that will stay, some will not. And then I talked about OpEx where there'll be the carryover from the restructuring, but then there will be more profit share next year, which will be a headwind.

[Operator]

And our next question today comes from Robin Farley with UBS.

[Robin Farley, analyst]

I wanted to go back to Slide 13. Just to think about because I think it would be helpful to kind of manage expectations a bit beyond just the next 2 quarters. And you talked in the opening remarks about your long-term growth rate for the top line being kind of low to mid-single digits. So if you're cutting 15% to 20% this year and maybe we get back to that long-term rate next year, I don't know, maybe that's too optimistic, but just a normalized year at some point.

Does that mean that when we look at some of the expense drags here like the plant absorption, the reality is that like if you go back to 3% to 5% growth after the 15% to 20% drop that actually you won't get most of this back? Like in other words, these are not just sort of onetime cost buckets for -- is that just sort of thinking about a reasonable expectation that if you're only getting back 3 to 5 points of 20 points of cut that a lot of this kind of volume mix, plant absorption, you don't necessarily get back. Is that reasonable to think that just to kind of keep expectations in check?

[Robert Mack, executive]

Well, I think, Robin, so if we got back to 3% to 5% growth that would be off of this year's retail, that would assume that next year, absent some other change in dealer inventory thinking we would be shipping flat to -- we'll be shipping to retail. And so this year, we're shipping well below retail to pull dealer inventory down. So if we're shipping to retail, and we have 3% to 5% growth, then yes, a lot of this would come back in terms of the volume mix and the absorption because we would be shipping at levels that were consistent with prior years.

The piece that is hard to guess is where promo goes longer term. Some of that, as Mike said earlier, is going to depend on what competitors do and just where things go in the market. So I think that that's -- it's not unreasonable to expect that the majority of those volume-driven costs will come back if we are shipping at more historic levels. The challenge is, we don't know what's going to happen and what the timing of that is really going to look like. I mean, obviously, the industry has grown at 3% to 5% historically. And we expect that to return once things normalize. The question, as Mike said in his remarks, is we don't know when that happens.

[Michael Speetzen, executive]

Yes. I mean I think, Robin, would -- some of the points we're trying to drive is we were targeting substantial operational improvements. My eyes are a lot wider now relative to the opportunity that we have in our factories in terms of really to be able to lever them as we get into a growth environment. So these cost reductions plus the volume leverage that we will get when the market returns, coupled with the fact that the reductions that we made to our operating expenses, I'll come back to the word surgical. We were very specific.

I think you see evidence of that in the response I had around the off-road business that we've taken a lot of complexity out of that organization really tried to streamline and simplify things. And we believe that when we get back to growth, we will be able to live with that cost structure. That doesn't mean you don't have small things you do here or there, but we've essentially reset the cost structure for this company as we move forward.

And I think that's going to put us in a spot to really demonstrate volume leverage and get back to showing a pretty steady cadence of EBITDA improvement as we get towards that mid- to high teens EBITDA target that we've got.

[Robin Farley, analyst]

Okay. And then just as a quick follow-up. In terms of promotional levels, obviously elevated versus last year. But it seems like they're kind of similar to 2019 levels. So should we think about this level of promotions as actually kind of a normal level going forward since it's similar to pre-pandemic? I mean that wouldn't necessarily revert to sort of, what we saw, during the pandemic, right? It seems like this is the level of sort of promotions that have been normal before the pandemic?

[Robert Mack, executive]

Yes. I would say that the promotion levels are getting closer to '19. They're not fully back to '19, but they're getting a lot closer, at least they were on a percent of sales. I think going forward, I do think that as the industry -- assuming the industry all adjust to operating at a lower level of dealer inventory, which had been the goal coming out of the pandemic, I think that you'll see promotions start to moderate.

Right now, there's a lot of promo out there to clear 2023 models. There are certain manufacturers that still have a lot of noncurrent inventory. Some have cleared a lot out. We believe we have the cleanest inventory. I think as that stuff subsides and dealer inventory comes down, is there an opportunity for less promotions? Sure. Do we know what's going to happen? No, because it's obviously a pretty dynamic environment, and we're only one player in the industry.

But I think to your question, I do think that they are relatively close on a percent of [ sales to '19 ]

[Operator]

And ladies and gentlemen, this concludes today's question-answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.