Good day, and welcome to the Polaris First Quarter 2020 Earnings Call and Webcast. All participants will be in listen only mode. After today's presentation, there will be an opportunity Please note this event is being recorded. I would now like to turn the conference over to Richard Edwards. Please go ahead.
Thank you, Jason, and good morning, everyone. Thank you for joining us for our 2020 first quarter earnings call. A slide presentation is accessible at our website 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 of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward looking statement. 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? 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 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 plan for 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 define 4 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 R 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 that issues with mandated dealer closures and 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 consumer demand, but 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've already taken out over $120,000,000 of annualized operating expenses of the business, mostly human capital related and overall OpEx 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 3 of our smaller boat brands, Rinker, Stripe and Larson FX, and we will continue to evaluate our portfolio for businesses and brands with a limited path to strong profitable growth. We are protecting our strategic engineering investments while accelerating our ongoing 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 7 confirmed COVID-nineteen cases amongst our 14,000 employees and all have either fully recovered or are recovering at home. Navigating this pandemic emphasizes our deep commitment to geared for good. From Climb 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, Optimis Ride, found a way to use our gym vehicles to fill a need for meal and grocery delivery in Arizona, serving the community and possibly creating an alternative business model.
Overall, 1st quarter North American retail sales were down 8% but the salient point is strong market during 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 PJ and aftermarket parts, which should utilize our large and growing installed 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 motorcycle inventory was up more in support of our strong demand for our new challenger bike.
We are under shipping RFM profiles upon dealer requests and covering flooring costs through the end of May, in addition to sharing our COVID-nineteen learnings and best practices. Dealer closures were a huge problem in early April this is becoming more tractable as less than 15% of ORV and motorcycle dealers are now closed. Our online presence is becoming more becoming a more significant factor in retail Our fast innovative launch of click ride deliver, click deliver ride, and our institution of appointment shopping are both popular with consumers and dealers, 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 bev Mehta C SER requirements for essential business so we have since ramped up operations everywhere except Monterey.
We are pursuing every option to obtain CC equivalent rulings that Polaris and our suppliers need to reopen in Mexico. Fortunately, our legal and government affairs team has adapted making this argument in support of our global network. That team was also instrumental in securing the substantial 301 List III tariff relief, which has finally come through. We must throughout this year and beyond. I will now turn it over to our Chief Financial Officer, Mike Speetzen, who will update you on our financial results and plans.
Thanks, Scott, and good morning. As Scott indicated, these are unprecedented times and we're diligently working to adapt our business to weather the storm. We aggressively activated our recession plan that I've 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 COVID19 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 continued to sell well and the new Slingshot auto drive model began sales this quarter. 1st quarter earnings per share on a GAAP basis was a loss of 0.09 dollars. Adjusted earnings per share was 0.22 dollars 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 began to impact demand. Since that time, all non essential 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 $8,000,000 or $0.10 per share. Moving on to our balance sheet and liquidity profile for the quarter.
Operating cash flow was a $71,000,000 use of cash in Q1, driven by negative income I'd also point out that We had been in the market repurchasing shares given the significant share price reduction, but ceased 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 2,200,000,000. Cash on hand at quarter end was 424,000,000 We have taken a number of actions to further solidify our cash and credit substantial reductions to operating expenses and postpone 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 9th, we executed the accordion feature under our credit agreement and entered into an incremental 300,000,00364 day unsecured term loan facility. Following these actions, along with limited shipments to date, as of April 23, we had cash on hand of 475,000,000 and $250,000,000 available under our revolving line of credit.
Total debt outstanding as of April 23 stands at 2,350,000,000. Given the actions taken and the measures 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 June.
As a result, we intend to be very prudent with capital until we return to more a more predictable environment. But just to be clear, even as we model downside scenarios for Q2, given the COVID-nineteen 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 2nd quarter dividend until late May. This will allow more time to assess 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 or credit arrangements for dealers and consumers also remains in a very solid position.
Financial Services income, which is comprised of wholesale finance income, credit, 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 last year, but a sequential decline from the fourth quarter of 2019 receivable balance. Credit losses in the Polaris Acceptance joint venture remain very reasonable, averaging well less than 1%, which is similar to what we experienced during the last recession in 2009. As we progress 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 1 half of 1 percent at the height of that recession.
We believe the dealer support initiative that Scott mentioned in his remarks will help our dealer base weather the storm in the coming months and quarters we believe our dealers are stronger and better equipped now finance programs with Sheffield, Synchrony And Performance Finance. During the first quarter of 2020, these 3 retail credit providers wrote approximately $220,000,000 of new credit contracts to customers in the United States, which represents about 31% of Polaris products sold to consumer 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 primarily due to a change in Excluding this adjustment, ships 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 2 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 terror favorability. I would add that we have seen continued success exemptions being granted, which substantial anticipated full year volume decline. We will not spend time during this call on tariff projections and will provide additional color as we get more comfort 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 use shape where 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 4th quarter sales while still down year over year to be down much less than the 3rd 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, it back over to Scott for some final thoughts.
Significant stoppage of Commerce that became a key part of the virus defense, but we are fighting determinedly to ride our ship and deliver on our 4 priorities. We will work tirelessly to some of the best social distancing there is on trails, roads, water and mountains. We have not found our last idea to reduce costs 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 1st 27 days of April into the quarter, much less the remainder of the year but our surprisingly positive ORB retail offers confidence that our brand and our sport are resonating with consumers who are looking for an adventure or a new tool to use on 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
Thank you.
Questions.
Questions.
The first question is from Robin Farley from UBS. Please go ahead.
I wanted to just clarify that you're calling about the ORV retail. You used the phrase in mid teens retail improvement. Are you saying that actually for the 3 weeks of April, it's 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're sort of going to discuss that more later, but just if you could clarify it in Scott's opening remarks, comments about tariffs. I know you've gotten some smaller amounts of tariff relief in the past. Are you suggesting that there's something new right now terms of that sort of much larger amount that you've still been paying. Just trying to clarify what those comments were.
Okay. Thanks, Robin. Yeah, to be honest and I think I said in my prepared remarks, we were we are surprised as well about how well offer a vehicle. 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. 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 List 3, 301 or 301 List 3.
And again, that's all we'll say now. We'll provide additional color, but as Joe I was just trying to confirm what we said in October has now finally come through. 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 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 at that cash much faster. So it's a net benefit, obviously, from a P and L standpoint, but given current environment just to have that added liquidity is a much appreciated event.
No, that's great. Thank you. And in terms of you mentioned you'll quantify that more. I assume we're not going to you won't 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?
No, I would think Robin, I think we're going to wait until we get to the 2nd 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 into providing guidance for the back half. If we were to do that, we would provide color around tariff impact.
Okay. Thank you.
The next question comes from Craig Kennison from Baird. Please go ahead.
Hey, good morning. Thank you for taking my question. Scott, what are you doing to support your dealer network and how does 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.
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 in where Steve and his team put together plans to talk individually with each dealer about how to mitigate inventory. And quite frankly, now it's they're asking for truckloads of product more often than asking this 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 there through the end of May.
We really have shared all of our advice on how to navigate the various CECSA rulings to make sure that they can stay open. And Ken Pucell and his team have shared all of our best practices with COVID-nineteen related protocols and procedures and whatnot. And really the most important thing we can do provide the advertising support. And again, we're we are not heavily promotional right now, but so that they can have accelerated retail and that, that's really what's been working for us so far. As far as dealer, yes, dealer closures, as you recall, we were mean, I was new to the business at that point.
We were really surprised at 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 view as 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.
Would you expect dealer inventory to be lower at the end of Q2?
Well, lower to what? 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 Monterey ramped up so we can start shipping again. It we are the April retail was not in our forecast. I mean, we had, 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.
Next question comes from Joe Altobello from Raymond James. Please go ahead.
Hey, guys. Good morning. Just wanted to follow-up on the previous questions on the North America retail for RVs in April. Obviously, surprised us as well, although Rememax 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 pumped up demand that was stemming from March? And is there difference in geography in terms of that number?
Yes. I think what it there's a couple of things that we are attributing it to. One is that as I've said before, power sports 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, quick buy deliver program so that they could get access to the products. And, remember, most of the hotspots with COVID-nineteen are not in, what I would call, great off road vehicle riding areas. So I believe that most of our customers and potential customer 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 Meneto, Rodcrois, Pam Kremers, that team is really doing a nice job of executing and I think that we're seeing the results of that.
That'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 a CapEx number in terms of how we're thinking about cash flow this year?
Yes. So I think the way to think about OpEx is we took a pretty heavy reduction in Q2. If you look back 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 will 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.
Okay, great. Thank you guys.
The next question comes from Brett Andress from KeyBanc. Please go ahead.
Hey, 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?
Well, I mean, the factors that may, I mean, there's been a big shock to the system. I like to refer to it as a, we stopped commerce in much 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 got problems in Italy that 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 downgrade and we can now, but that those are some of the things that cause us some pause. But again, it's significantly better than we thought, and we're trying to manage through that.
Got it. And just 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 at with that. And are we starting, are those lower inventories presumably starting to impact April sales trends?
No, we do not have any concerns about dealer inventory or factory inventory being too low right now, like zero concerns. Maybe, maybe that'll be a problem at the end of the quarter, but, no, we've still got plenty of inventory in the network.
The next question comes from Gerrick Johnson from BMO Capital Markets. Please go ahead.
Hi, good morning, everybody. I just want to follow-up on on Joe's question about, March April. Maybe if you could combine the last 2 weeks of March 1st 3 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 one time acceleration of reserves or allowances? And how does floor plan support affect gross margin?
Thank you.
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 2 weeks of March 1st 2 weeks of April in any year would be a really down trend because The last March is usually really big and the beginning of April is not. But because March was down, you know, down 40s. I think what we said those last 2 weeks.
And granted it didn't start at 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 2 weeks. And then the 1st week of April wasn't very good. And then essentially, it's improved since then.
Hey, Garik, from a margin standpoint, a couple of things. Scott's right. The floor plan support financial interests 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 decremental margin versus as last year, it was pretty substantial. In my in my prepared remarks, I talked about half of that is 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 shut down, etcetera, making sure that we had all that provisioned 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 margin drop rate to look something more like call it 35% from a full year standpoint.
The next question comes from Tim Conder from Wells Fargo. Please go ahead.
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 1. And then, specifically to ORVs and maybe any other 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 color additional color you can give us there when expect those could be resolved? And any color on China? Thanks.
Matt policy, one of the Yes, Stephen Meadows 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 give them the opportunities to grow their businesses. What we can't do with math is make it restrictive. And I think what Steve's done is taken a print Rockcros.
They've done a good job of looking at what makes sense and where does it not make sense to have maps. So there's this 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 get more comfortable with how to address it and that's starting to come get better management. And right now, as Mexico, but like we've seen in all of these other countries, we expect that they will come around in their thought process and we'll be able to get back to operating, but we're not there yet.
The next question comes from Greg Badishkanian from Wolfe Research. Please go ahead.
Great. Thank you. 2 quick ones here. First one is just 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's best which one is best positioned versus worst position as we move out throughout the year from a retail perspective?
We've done some research and we believe it is, mostly industry, but also some market share gains. In off road vehicles. That's what we believe. I think that side by side still continue to be the best opportunity for growth. Motor Cycles is still negative for the month, but they've had a sequential improvement throughout throughout the months, 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
The next question comes from Dan Cardeman from Wedbush. Please go ahead.
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?
I don't recall. It was sometime in April when it bottomed out, the 1st 10 days of April, I don't know exactly what the date was. And I don't remember what the number was. It 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 just making sure that we understand it. Our dealers understand it.
And can navigate through that. What was the other question?
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? Oh, for sure.
And it was. And I mean, if you think about it, the dealers that are Well, 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. Are those 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.
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 2.
Yes. So James, a couple of things. 1, Scott did mention that the April performance is better than what we were expecting. The 25% to 30 percent is really driven by 2 things. 1, it was our expected demand profile.
And then the second is our capability to actually ship And with the factories having been shut down, as Scott mentioned, we've got the factories coming back online. Obviously, Monterey is not back up and running and that represents a pretty substantial part of our, ability to meet demand. And so we really patterned it after that as well as where we want to see dealer inventory be as we got to the end of the second quarter and obviously leading in to the model year changeover. So, as we indicated, that's why we pulled guidance, is that an evolving environment. We want to see how April plays continues to play out and what the implications are for May 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 still trying to get up and running. We've still got a plant network that's still trying to get completely up and running.
But just to be clear, those two numbers are not connected to one another. In other words, May June would need to be down, I don't know, 40% or 50% to get to that down $25,000,000 to $30,000,000, that's not how you're thinking about it right now, correct?
Yes, I mean, just keep in mind, retail versus wholesale. We're trying to also manage the dealer inventory. You got mix involved. You got the promo actions involved. I mean, it's 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.
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?
Correct.
Next question comes from David MacGregor from Longbow Research. Please go ahead.
Pretty impressive progress, I guess, around the 2nd quarter operating expense expectations down 25%. How much of that comes back with the volume recovery versus how much that is a permanent structural cost reduction? Most of its permanent structural cost. I mean, there was some cutting of advertising and managing the other operating expenses, but it was mostly a people cost actions and really looking at our business as we've 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, we've got a good now, 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.
Good. Thank you very much. That's it for me.
Next question comes from Jamie Katz from Morningstar. Please go ahead.
Hey, good morning. I have 2 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 did in 2015. Is that fair or have you seen any changes there?
I think over the last couple of years of weakness, the we've gotten to a level of sales in those oil patch regions that up or down doesn't 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, customer 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 they're, I mean, yes, it's going to go down, but it's not going to it's going to go down from such a low base. It really won't matter much.
Excellent. And then for our gross margins at CAF, they got 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.
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.
Next question comes from Joe Spak from RBC. Please go ahead.
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 perilous it got so quickly.
So this may be 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?
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 tight a process.
That will definitely change as we go forward, in the rigor and the, 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 in continue to have, which is to rapidly de lever 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 pay down schedules and things like that, that we'll be as probably as aggressive as we can be. But I think priority number 1 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.
Thanks. 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 drawdown or, or rewind, I guess, over the balance of the year?
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 differences 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 shut down 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 roll what we were expecting in Q2. And then for the balance of the year, we'll 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.
Thank you very much.
Next question comes from Scott Stember from C. L. King. Please go ahead.
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?
It's more promotional, in April. I mean, we're one of the things that we're committed to is not chasing retail down with promotions. So we've, Steve and his team have again, it's 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.
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?
TAPS taken a lot of cost moves. I mean, Craig and the team have really look holistically at how to step down the cost infrastructure there. The big issue at TAF is most their 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 pickup. So they are, again, steadily improving, but, that slowdown in California was impactful to them. Got it. That's all I have. Thanks.
Thanks.
Next question comes from Mark Smith from Lake Street Capital Markets. Please go ahead.
Hi guys. Can you give us some insight into boat dealer trends versus kind of the 85% that you talked about? How many maybe you're open and close today And then any additional trends that you see on April and both?
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 boats. So it was a little bit more of a difficult putt. That said, Minnesota and many other states have recognized even Michigan, recognize that voting is a, an important cause for people, especially as the weather gets warmer. And we are seeing it open up. So it was It was more many more closed, early on, but they are opening up at a pretty rapid pace now.
And then can you give
us any insight? And I'm not sure if you have it on maybe the impact that government Shacks come in sooner's hands have had even if we look at it just within the PG and A segment?
PG and A is performing, extremely well. And, Steve, Stevie Smith does a great job with that business. We did hear anecdotally that there were a lot of $1200 deposits put down on vehicles. So, I'm not sure that that's a big bow wave, but certainly it didn't hurt.
Thanks.
Next question comes from Mike Swartz from SunTrust. Please go ahead.
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
the second quarter and beyond?
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, that Steve and his team have their pulse on that one and, are turning it around, as I mentioned, they're doing in April.
Okay. Just a question quickly on both as well. I think during the quarter, you or in recent weeks, you announced your shutting down a couple brands. How material were those brands to revenue in your boat segment?
Not. Maybe it was not they were, the revenue was very small and the profit was None. So I mean, it really doesn't it's they weren't material to the boat business actually. Next question comes from
Tim Conder from Wells Fargo. Please go ahead.
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 that been reduced quite a bit. Just any update as maybe the end of the year 18 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?
Yes, Tim, we I think at the peak it was about 15%. It is now down more in line around 13%. That's 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, 14, 15 timeframe. Now I think those regions, which we don't track at specifically.
They tend to be more state specific. They tend to just move with the broader economics. And certainly, oil has has reacted to the drop in demand, in the supply levels that are far greater than what the current demand is. And I think that's all tied back to what COVID-nineteen has done to the broader economic cycle. So it's tough to parse the 2 right now.
Okay, okay, great. Thank you, gentlemen.
Okay, last question.
Next question comes from Brett Anders from KeyBanc. Please go ahead.
Thanks for squeezing me back in. I'm sorry if you already mentioned this, but are you planning any changes to your new product launch cadence this year? And then 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?
I think Mike said down 10 for the year. 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 tides of 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? I 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 there that we're managing through right now.
Thank you. 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.
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