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I'm going to start by reading the disclosure. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. So thanks, everyone, for joining. I'm Megan Clapp. I'm the U.S. leisure analyst here at Morgan Stanley. Really glad to be here with Polaris, leading manufacturer of power sports vehicles, the company's CEO Mike Speetzen and CFO Bob Mack. So again, thank you both so much for being here today.
Thanks for having us.
Maybe let's start with kind of a state of the union, if you will. Retail trends in some of your products have softened this year. ORV down, high single digits year to date through the third quarter. Mike, I think you were pretty candid last quarter that you expect the challenging retail environment to continue into next year. We're not flipping a switch as we get to January 1st. So sitting here today, December 4th, we get close to wrapping up the year. How would you, kind of big picture, just characterize the overall demand environment for power sports? Has anything changed in terms of how you're thinking about the market?
Yeah, no, I'd say that the trends have remained pretty consistent with what we were seeing. We talked this morning with some of the groups that the retail performance was slightly better in October and November than what we were expecting, but that doesn't mean it suddenly has moved positive. It just means it might have been less bad, and we're letting that, obviously, pull dealer inventory down even faster than we'd expected through November. Excluding youth vehicles, our ORV dealer inventory is down around, call it, 12%, 13%, so we've made really good progress. The dealers, I think, as the dealer checks are going on right now, the dealers are coming back in a much better place. Part of that is they're seeing us pull the inventory down.
Part of that is they're also seeing the profiles that we've set out through December, and they can see what that inventory projection looks like, and with retail doing just slightly better than what we and they were expecting, I think that's got them feeling a lot better, but to your point, I don't necessarily see things shifting as we get into the first half of 2025. A couple of things. One is, yet again, we're dealing with a very challenged snow market. The mountains are doing great, but the predominant portion of our business is trail, and when you look at, we just flew out of Minnesota yesterday. Thankfully, it's cold, but there's no snow or very little snow. Wisconsin, the same thing, and then certain parts of the Upper East Coast, and that's where we sell an awful lot of sleds for the trail market.
So we think that's going to be a challenge. And then while we've now gotten a couple of interest rate cuts, as we talked about in the call, I mean, consumers are pretty stacked up with debt. Thankfully, they're still mostly paying it, which is a good thing. But we think it's going to take getting inflation where the Fed is targeting it, plus more interest rates before we start to see consumers get more confident.
That's a good segue to my next question, which is you're talking about more rate cuts need to be done to get consumers back into the dealership. 10-year, unfortunately, has moved in the wrong direction. Even as we've gotten rate cuts, I know most of your stuff is based on things like SOFR. But how do you think lower rates or how important, I guess, are lower rates to stimulating demand at this point? And when you talk about lower rates, you spoke about this a little bit, but is it about getting the monthly payment down? Is it a broader macro comment about providing some relief on some of their debt, if you will, and to be able to consider a power sports purchase? How does that overall work?
Yeah, I mean, it certainly has an impact on the payment, but it's also a marker of other things, meaning as the rate comes down, that means inflation's in check. Inflation in check means that less of their monthly inflow of cash is going to pay for groceries and other living expenses. And that gives them more discretionary income to be able to pay their debt down. As I mentioned earlier, they've stacked up debt. I mean, we look at some of our customers who still have FICO scores in the mid-700s. And these people took on a second home. They took on car loans and toy loans and all these different things.
And part of what has to happen here is the servicing of the debt needs to come down, but they also need more discretionary income to be able to pay off some of the loans or feel like they're getting out ahead of that with income growth through merit and COLA adjustments that they get at work. And I think it's a reflection of the underlying economic strength. Because if you're getting inflation down closer to the 2% target, employment needs to hold up. I think part of what you see at play is people getting nervous as they start to hear more and more layoffs, which kind of started midway through last year in some of the manufacturing sectors.
I think people are going to want to make sure that they've got confidence in their job as well as their monthly income is going a lot further than it is today.
You said dealer inventory down 12%-13%. That compares to your expectation, I think, to end the year down 15%-20%.
Yep.
Retail, you said, has been a little bit better, less bad. So does that give you confidence that maybe you can end closer to the high end, the down 20%? And how do we think about whether or not down 15%-20%, whatever it is, that's the right level exiting the year? Or could there be what are kind of the puts and takes to there being incremental destock in 2025?
Yeah, I mean, everything that we have right now says we're going to land somewhere between that 15% and 20%. It's always tough to know until the last day of the month of December. But I think it's going to put us in a good spot. I mean, the tough part is, as you go into first and second quarter of next year, if retail continues to decline, you still have to undership retail. The way DSOs, when we talk about how we target inventory, it's day sales outstanding. It's a forward-looking measure. And so if we are projecting demand to continue to, it may not be declining at the same rate we've seen. But if demand's still declining, you've effectively got to undership to ensure you maintain the dealer inventory and the channel at the levels that you have.
Until you start to see a demand uptick, that's when you've got the opportunity to maybe ship ahead of what you're seeing from a retail standpoint. I suspect that could continue to put some pressure in the first, maybe second quarter as we look at that, obviously excluding snow. Depending on how snow conditions play out, we may have to make additional decisions around how many snowmobiles we're building next year to make sure that we're controlling dealer inventory given what could be two back-to-back bad snow years. We'll continue to keep an eye on that.
Can you remind us, maybe on that snow point, the state of your owned inventory from a snowmobile standpoint, given we had a challenging year last year and what another challenging year could mean?
Yeah, I mean, we cut our snow build pretty significantly. We saw last year there just wasn't snow in Minnesota through December. We had expected some snow in January that didn't materialize. And so we started making, we made a very aggressive cut to the snow build that we just finished and shipped as a way to try to drive that inventory down. So I think we'll burn through even in a bad year. We'll get through a lot of what was kind of carried over, but we probably won't get through as much of the current year stuff. So next year, we had expected next year, 2025, to probably be a, we'd have a normal snow year this year, and we'd have kind of normal channel fill next year. I think the reality is snow is going to be probably flat to down in 2025 versus 2024.
It'll be a second year in a row just because of this dynamic of snow. I mean, obviously, it could turn around tomorrow if we get a bunch of snow in the Midwest, and people, because you see it, what we've seen in the mountains, you see Colorado, there's a lot of snow. If there's a good snow day, the next day, retail's actually really good. People are in the dealership buying sleds, picking up the sleds they ordered. We just haven't seen that in the Midwest. I don't think it'll be a dramatic impact because we already were in a down snow year, but it won't be a positive recovery either, which we had hoped it was going to be.
Okay. And Mike, one other thing you both really talked about from an industry dynamic perspective is promotions, and they've been elevated in the off-road segment. You've talked about that being driven by some unsustainable moves by other OEMs. Can you just give us an update as to where we stand today, promotional environment overall relative to a couple of months ago, how some of those OEMs, the progress they've made on their owned inventory, dealer inventory, and whether that's something you'd expect to abate as we look to 2025 or perhaps continue?
Yeah, I mean, it certainly is. I'd say it's subsiding slightly. Clearly, in areas like snow, we're still pretty intense given the weather conditions. But yeah, I mean, the two biggest players in the industry have largely gotten inventory either under control or on a trajectory to be under control. And that's certainly going to go a long way. We still have a few competitors who are really heavy from an inventory standpoint. I mean, literally 2X from a day standpoint where we are at. But they're small players. And so what that does is that creates fringe promo issues that we're still contending with.
The thing that's encouraging to me is the fact that in an environment where you had demand rapidly slow, a lot of inventory in the channel that needed to be cleared, promo as a % of revenue was still at or below where we were pre-pandemic. And so that's encouraging from the standpoint of, I think we've gotten a lot better at being able to target promo. The other thing that helps is innovation. We are competing in a couple of segments, specifically around the Ranger XD, the Extreme Duty Ranger, as well as Polaris XPEDITION. Competitors, there's no competitors in those categories.
And so the importance for us to be the first mover into those new segments, even in a tepid demand environment, puts you in a position where you're not having to discount at the same levels because you don't have a competitor who's got a two or three-year-old vehicle that they're trying to move off the lot and offering $5,000 cash plus financing that effectively brings it to $7,000-$8,000 off a vehicle. I mean, that's tough to compete with. So our focus is really going to be around knowing who our customers are, being really targeted, whether we're trying to bring an existing customer back or we're tracking a customer who's expressed interest in our vehicles and being able to target them. And then innovation.
As long as we're the class leader creating new segments as well as just the best in the category, that's going to be important. One of the questions that we got this morning was around the value or the entry segment. And I think it is true. I think we and a couple of our competitors got really caught up in following the category as the complexity, the size, sophistication of the machines increased. And probably didn't do as good a job staying close to the value or the entry side of the segment. We actually recognized that probably four years ago in all of our businesses. And we have added that as a pillar of what we're doing strategically. You saw us in our pontoon business with Bennington.
The first thing that we went through and did a refresh and really focused in on was the value segment because we knew the marine segment was under pressure and that was going to be important. If you look at the Scout lineup, the refresh that we just came out with, we just launched the Scout Sixty, where you've got now a motorcycle where you can go sub $10,000 and get into the Indian brand. And then we're going to be doing the same thing in our off-road segment as we move into 2025. Because it's not walking away from the high end. That's always going to be an important segment. But making sure that we've got the ability to bring customers into the family.
We're not going to go all the way down and compete with products you might see when you walk through a Home Depot or a Lowe's. Those just aren't going to be our customers. But we could do a better job at the entry segment. And that's really going to be important. I think in an environment where interest rates, they're not going to remain at the level they are now, hopefully, but they certainly are never going to go back to effectively zero. And so we've got to make sure that we've got an array of vehicles that can effectively compete across the category.
Maybe two follow-ups. One, I think is a yes or no answer. The value side of things, are those the same margin as premium or are those margin dilutive?
No.
Okay. Fair.
I mean, you look at our NorthStar. I mean, our NorthStar lineup in our Ranger category is a substantial portion of our volume now. Customers pay a premium to get a world-class vehicle with cab, full electronics, Ride Command, heating, air conditioning, all sorts of accessories that come on that. That is going to come at a higher margin point. Now, value products can still have attractive margins, and they're not going to be a disproportionate part of our business, and what it does is it allows us to bring and cultivate a customer in who is likely then to stick with the brand and start to move up and become a higher margin customer as they stay with the brand for a longer period of time.
And the second follow-up, as you addressed this a little bit, but I think one thing we hear a lot is pushback on affordability of these products. And we've talked about it, but you look at the monthly payment on not just some of your vehicles, boats, anything big ticket. It's still really elevated as a percentage of anyone's disposable income. So is the strategy mainly to focus more on the value entry point side of things? At what point would you look to use promotions as more of a lever to help with some of that affordability? You talked about it's still below percent of sales that relates relative to 2019. So how do you think about kind of the strategy around addressing affordability and what might not be a more favorable rate environment?
Yeah. Well, I think it's a couple of things. One is certainly having that entry, but even looking at the mid-range of our products and making sure that we have those products at price points with the right level of options is really going to be important. And I think when you look at our Ranger category, there's an immense opportunity there for us to probably even be more precise with how we do that. And that does not necessarily mean you have to compromise on margin. That's a very large portion of the market, and that's going to be key. And then obviously, as interest rates start to come down, that's going to be helpful. Bob's done a great job. Back when I was the CFO, we had really one strategic financial partner. We started getting into a second. We now have four.
And so that allows more options for the consumer to be able to rate shop. And with targeted promos that we can do with sharing in the return profiles with those partners on the back end, that gives us an opportunity to have probably some more affordable options.
This is, you maybe answered part of this, but you've been leading off-road for a few months after Steve departed. Any observations you can share? How are you thinking about, I guess, that role going forward?
Yeah. I don't think you're going to see a return of a Steve Menneto role per se. Within our off-road segment, I'm still staying very actively involved with the team that was underneath Steve. So Reid Wilson leads our ORV business.Jennie Nack
I mean, Bob and I, for several months now, have been meeting weekly to go through with the team, everything from plant performance within the ORV space to going through where we're at from a demand planning, retail performance down at the factories, and I just don't see anything more important at this point than staying focused in that level.
Have you made any changes either since you've taken on more responsibility or before to how you manage the relationship with your dealers?
Yeah. We are spending a lot more time talking. Steve departed in July. I went to our dealer meeting in August in Las Vegas, met with our dealer council, met with all the dealers. We've had the dealer council back to Minnesota in October. I'm spending a lot of time interacting with the dealer council, with the dealers. We're getting a lot of information back in terms of how they're responding to programs. I think we've seen a pretty substantial shift in sentiment, and I think a lot of that has to do, I mean, first of all, we've always gotten high marks for the sales team that we have interacting with our dealers. So that was never the problem. Our problem was we were not listening and reacting fast enough and giving the dealers clear indications of our commitment, and I think that has fundamentally changed.
I think it shows. We can talk all we want. It's got to show up in what we're doing with the dealers. And I think now that they see us moving in inventory in the right spot, we've engaged them differently than we have in the past. We've brought them in on some innovation that we're working on to get their opinion and perspective much earlier in the process. And I think they appreciated that. And I think we've differentiated ourselves relative to our competitors in terms of how we're interacting with them, the consistency of our message, consistency of our actions. And from my standpoint, that's the way we've got to continue to run the railroad going forward.
Great. Maybe we can come back to the comment around if demand is still down next year or you're still going to be under shipping demand. Assuming you exit 2024 with the appropriate dealer inventory levels, which I think you've made it clear you feel confident in, how do we think about the puts and takes around the ability for shipments to match retail in 2025? Does retail need to be up during the main selling season? What are the big puts and takes?
Yeah. I think some of it's going to depend on timing and mix, right? So if we see the mix fundamentally change, that'll impact just the dollar value of what gets shipped. And so it's both units and dollars. We're not seeing any big changes in mix right now, but certainly at varying points, consumers have mixed back and forth between kind of more sport entry-type models and more ultimate models. I think we've got that in a good place right now. And then really, it's going to be the timing of what happens in retail. And I think there's a very plausible scenario that says the first half of the year is probably the more challenged half of the year.
And so you could end up in a scenario where the first half of the year, the whole year is flat, but you're down in the first half and up a little bit in the second half, which would drive shipments down until you started to see retail really perform. I think the level of dealer inventory we're going to exit the year at is right for the conditions that we're in. That's the feedback we're getting from dealers. There's been some channel checks this week where dealers are feeling the impact of what we've done, and they're starting to see that come through. The dealers we talked to feel good about the profiles we went out with in October and feel like that's getting them to the appropriate level of inventory. I think if the market is stronger, you'll see maybe there's a little room there.
I don't think you'll see dealer inventory grow back up to where it was, right? I think it's going to stay at this level. If the industry gets fundamentally weaker, then I think you'll see dealers continue to push back even more. Now, neither one of those things seems like that's going to be the scenario. I think it's going to be a little bit more flattish. And again, I think tougher in the first half, maybe a little better in the second half as rate cuts and other economic changes take hold. But it's early days to really try to peg 2025. We're still trying to finish 2024. So we're going to play conservatively, though. The worst thing we could do is have a really aggressive retail forecast that all of a sudden this market turns around because that'll bring a bunch of costs back into the system.
You'll ramp up inventory. So we're going to play conservative. We're going to assume it's going to be another challenging year. We'll focus on cash flow generation, make sure we can improve working capital, keep costs out of the business. We'll have a relatively constrained CapEx program going into 2025. We don't have any big factory builds, big paint system upgrades, any of that. In 2025, we've got some IT upgrades, but those are not as expensive as some of those other things we've had the last few years. It'll be a conservative plan focused on cash, and we'll see where the year develops. It's not like dealer inventory is so low. We're not going to go back to COVID, right? You're not going to walk into a dealership.
If retail's a little better, let's say it ticks up a bit in the first or second quarter, it's not like you're going to walk into a dealership. They're going to have nothing. They have plenty of inventory right now. And so we'll have time to react to improving retail. And I think that's a better scenario for the industry than everybody anticipating really good retail and shipping the inventory or building it and having it at the factory.
Yeah. Yeah. None of us have a crystal ball, clearly, on retail, but you do have sizable aftermarket business. You get a lot of data from riders. So maybe you can share some data points around what you're seeing in some of the aftermarket business and what you're seeing from a usage perspective that gives you confidence that this is still a growth industry and maybe beyond that gives you confidence kind of in your market share position?
Yeah. I mean, part of it is it's also what we're seeing in, I mean, the used market's still relatively small compared to the new market, but we have really good visibility through Polaris Xchange. We are the largest producer, if you will, of used vehicles through Adventures and marketing units. So we're involved in auctioning and all those types of things. And the values, they obviously peaked during COVID because everybody was trying to get a machine, and then they dropped like a rock. They've kind of come back up in line with more historical norms, which is encouraging on a couple of fronts. One is there's always the worry that you're going to have people dropping vehicles and going into the market and saying, "I bought it. I don't want it anymore." And we're not seeing that.
It's good for consumers who do want to trade a vehicle because now they're at a point where they can get a value for it because they probably paid close to MSRP, if not more. And so being able to get a more reasonable value is a good thing. But we track a ton of other data. I mean, when we go through our monthly operating reviews, I mean, we're looking at tire sales. We're looking at oil consumption. We're looking at repair orders. We're looking at average mileage on repair orders. I mean, there's a bunch of data that comes in and generally all good data, meaning people are out using their vehicles. We're seeing it in terms of the repair activity, the parts consumption, miles put on vehicles.
It is obviously nowhere near what it was in 2021 when people were working from home and riding our vehicles a lot. But it's kind of back to more normalized levels, and so from my standpoint, that's a good thing. I think it means that people aren't walking away from the category. They're still using, and the one thing we know is, especially when you start talking about things like RZRs, the more you use them, the more likely you are to replace those vehicles. And given the bow wave of sales that we had back in 2020 and 2021, those vehicles are getting to a point where the innovation that we've put out's new. We've got all new designs, and these folks have been using the vehicles, so they're going to end up needing to replace them at some point.
And so it just really gets into, well, when is that replacement cycle as it relates to inflation and interest rates and those types of things?
What are you doing to make sure that you're the replacement, right, from a market share perspective?
Look, I mean, one, it comes down to what we're doing from an innovation standpoint. Two, it's about the relationship with the dealers. Back to your earlier question and making sure that we are the OEM partner of choice so that when somebody's coming in, we know that they're steering them towards our vehicle. And the innovation piece can't be underplayed. And with innovation comes improvements that we're making in quality, durability. The noise around our products has subsided substantially over the last couple of years. Very evident from a snowmobile standpoint. I mean, we had some pretty significant quality issues that customers were really disappointed with. And we're still doing pretty good in that business despite the fact that we've had really bad snow conditions.
And it really comes down to making sure we get the right influencers out on our product that customers listen to, that can talk to them and convey the benefits that we have. So I mean, it's a combination of all those things that keeps us as the OEM of choice.
We're also focused on better customer engagement across the portfolio. I mean, Indian does a great job with the Indian Motorcycle rider groups and keeping really connected with those customers. Bennington does a nice job as well. We've been doing a lot more of that in off-road and trying to engage owners sort of where they are. We just wrapped up over the Halloween weekend Camp RZR, which is our big customer gathering to the opening of dune season. In what's a pretty tough economic year right before the election, we had record attendance and record engagement with those customers. We actually backed off. We didn't do. Usually we do a big rock concert. We didn't do that this year. But we still had great customer engagement.
So we're trying to do more of those kind of things, really meet customers where they are, whether they're riding, if they've spent money, particularly in the recreational side, right? The RZR customer is pretty loyal and making sure that we're at those events where they are. And we've got, to Mike's point, the right influencers, the right authentic riders. We got a lot of folks that work at dealerships and things that are part of that that really help connect with those riders and help continue that loyalty to the brand.
Let's shift gears to margin. So you've been on a journey to improve your mid-cycle EBITDA margin through a couple of things. We've talked about some of them, but efficiencies in your supply chain and then ultimately optimizing the modular design of your vehicles. In the soft retail environment, it has been maybe challenging for us to gauge the progress you've made. So maybe take a step back, talk a little bit about the work you're doing and maybe what inning you think you're in as it relates to the various buckets.
Yeah. It's interesting because before we hit the difficult demand environment, I would have told you that we've got opportunities to continue to improve efficiencies in the factories and go after the supply chain inefficiencies that crept in during COVID. With demand pulling back, it gave us a little bit of breathing room to really get into the factories. We brought in some really top-notch talent to lead our operations team as well as supplement a lot of the lean resources. And I think the realities of where we were is that, yeah, there were inefficiencies that came in during COVID, for sure. But we probably were never as good as we said we were. Bob and I have spent time. We went to Monterrey. Recently, we went to Huntsville. We were piloting two lean lines, one in Monterrey, one in Huntsville.
We're getting ready to start one up in Roseau. And to say that it was night and day between the other parts of the factory was a bit eye-opening in terms of everything from the flow of the product, having material ready at the line, how easy it was for the operator to get to the material on the lean line versus you go over to the line that hadn't been leaned out yet. And we've got operators that are walking all over the factory trying to get to the components that need to go on the vehicle. They have to pull them out of boxes, unwrap them. They got to dig through bins to find bolts and what. It doesn't sound overly complicated, but when you're pushing hundreds and hundreds of vehicles through a factory, the opportunity to get efficiency out of that.
And so we're using this time to really get through and lean out the facility because then as volume does start to come back, you're not adding back a bunch of cost to get those vehicles out. It becomes more of an incremental play. And I think the opportunity, I mean, you look at how much cost we pulled out with the downshift in revenue and how we were able to hold those decrementals at the levels we did really speaks to us getting after. We started with the stuff that was most evident. I mean, during COVID, because of the supply chain issues and things like that, I mean, we had warehouses that we didn't need, now don't need. We had semi-truck trailers all over the place with inventory. Anytime you do that, now you've got to bring in more indirect labor to be able to manage all that.
We have largely gotten that out of the system, which is now giving us that opportunity to really go into each of the factories and get after the lean flow. It's going to take us a two- to three-year journey to get it through all of the factories, through all of the lines. But it was eye-opening in terms of the opportunity we have in front of us. We didn't stop there. I mean, the discussion we just had around the off-road structure, we have leaned out the company, taking out the layers, trying to get faster decision-making, and we've done that because we wanted to make sure we preserved our ability to still invest around 4.5% of our revenue into R&D because we're not going to back off from an innovation standpoint.
Getting the rest of the company operating lean is really going to be important so that when we get on the other side, all the benefits of the things we did with the portfolio, the things we're working on from a design standpoint to get more modularity into the products, and then how we run the business, all of those come together, and you don't need a huge amount of volume to start to see that margin improvement.
You answered this to some degree, but you did also say last quarter that the headwinds don't just flip to tailwinds in 2025. But presumably what you're saying is that when we do get volume growth back, the incrementals should be above average, perhaps, given all the structural work you've done. Is it just the timing of volumes? Because I think you've been clear too that production doesn't just flip a switch when volumes come back as well. So how much of a lag is there to seeing higher incremental margins once volumes do return?
I mean, I actually think you'll start to see them materialize the minute we can get into a sustained level of volume improvement. We got asked the question in one of our sessions earlier, how many months of positive retail performance would you have to see to get confidence to start to lean in and invest more or push inventories a little bit more? I think the reality is we're probably going to want to see six months of sustained performance because we've gotten bit before by seeing a couple of months in a row of things moving in the right direction, and then they drop off. We're going to want to see that play out. I think given where we're at from a factory performance standpoint, I think we would start to see the margins.
I think they start to compound from there, but I do think you'd start to see that improvement.
I'd be remiss to not ask about tariffs.
Almost made it through without tariffs.
Can you remind us what your exposure is to China from a sourcing perspective? Maybe talk a little bit about what you're sourcing from there. And then Mexico, who knows, but talk about your manufacturing position in Mexico. And then bigger picture, your position versus the rest of the industry as well.
Yeah. So first of all, who knows what's going to happen? We're not going to spend a lot of energy trying to worry about what could be. I mean, there's a million different scenarios. I do think that it's probably more likely. Bob and I spent time with our team yesterday, government relations, our sourcing team, not only going through the data, but just kind of running through what do we really think he might do. I think the reality is if you go back in time, this started with national security. And so the easiest thing to do would be to double down on what you've already got because there's already an existing process and a methodology and a rationale. So we think it's likely that he goes back to list one and two. For us, list three was the bigger component.
So hopefully he stays in that one and two category because he's got a lot of other priorities to go work on in terms of border security and conflict overseas. That said, we've got about 10% of our cost of goods sold comes out of China. And that goes about 50/50 into the U.S. and into Mexico. And obviously, anything going into Mexico, we're not paying a tariff on. Stuff going into the U.S., we are. Until now, we've been disadvantaged. BRP manufacturers in Mexico and Canada. The Japanese do manufacture and assemble in the U.S., but they're largely sourcing out of Japan. So there's really no tariff implications above and beyond what normally duties would be in there.
Obviously, if there's a play to try and go after inbound components from China into Mexico, yeah, that would impact us, but it would also impact several of the other players, including CFMOTO. CFMOTO has moved from just importing out of China to now they've got a facility 20 or 30 minutes from where ours is in Mexico where they're doing light assembly to the best of our knowledge. But certainly, that would ensnare them as well. So tough to know where we're going to end up. The good news is we've done a lot of work, so we know exactly what we have. One of the things we talked to our team about yesterday is what we've moved stuff out of China where we could.
There's still more that we've got that we could work on that at a minimum will help us with the tariffs we're paying today into the U.S. and certainly would help us if that were to extend beyond, and we're going to continue to be focused on that, but for now, we've got a pretty good idea of where that's all coming from. I mean, we've talked about it a number of times. The numbers moved from $70 million to $100 million. Right now, we're dealing with about between $70 million and $80 million worth of tariff weight in the business, primarily coming out of that 301 tariff category.
A couple of minutes left. I want to see if there's any questions in the room. Nope. Okay. Bob, you touched on this a little bit, but talk about how you're managing working capital, free cash flow in 2025. You talked about, let's just assume, flat EPS for now in 2025. Can you grow free cash flow in that scenario? And you talked about it a little bit, but how are you thinking about embedding flexibility just to the extent that retail maybe is a little bit better than you're anticipating?
Yep. Yeah. So a few things. We kind of went into Q3. We knew we had this curtailment of shipments coming. We borrowed $400 million to be ready to deal with that just so we had liquidity. Didn't turn out to be quite as dramatic as we had thought because it takes a while to slow down production, slow down incoming inventory. So we ended up building some finished goods. We had a lot of raw materials coming in in Q3 that we couldn't stop. We've managed to push that stuff off in Q4. So we're working through the raw material. We'll work through the finished goods over the next couple of quarters to get that back down to where it normally is, balancing that with production and shipment and everything. So I think we've kind of worked through the first part of this cycle.
We've been very focused on payables, both direct and indirect, and trying to push terms on payables to drop better working capital. Again, it's just one of those things during COVID that sort of was a muscle that sort of got left behind because at that point, you were paying people in advance sometimes even just to get product. So it's sort of unwinding that COVID cycle on the payables side. Inventory, we've made some fairly good systems investments over the last couple of years. We've implemented a new sales inventory and operations planning software in both our off-road business and now the PG&A business. It gives us a much better ability to forecast and manage what production and what demand is going to look like, which pulls through for obviously to MRP and how much you order.
As the other benefit of some of the movement of inventory or supply base out of China into places like Mexico and other areas as you get closer to factories, which helps from an inventory carrying standpoint also. So a lot of focus on working capital. During COVID, we had a cash war room. We used to meet once a week. Mike started that. And that kind of went to once a month. That's back to once a week. So there's a lot of discussion on cash every week. And then on the CapEx side, we look at the rest of capital allocation. Our first thing is we're going to invest in our business. And we went through a building cycle that kind of culminated in 2024. So I think you'll see CapEx come down fairly materially next year as we don't have to have any of those big projects.
And then obviously, dividend is the next focus. It'll stay relatively consistent, goes up a little bit each year. And then we'll have to toggle back and forth between debt pay down and share buyback. But I mean, obviously, we'd love to be in the market aggressively right now, but from a cash standpoint, that's not what's really in the cards. And so we've got to focus on paying off this $400 million term loan and driving the cash to do that. And then we'll see how the year develops. But the goal will be to have a conservative plan that is very cash-focused as we come into 2025, just not knowing what the year is going to look like. And then that'll give us opportunities. If cash is really good, it gives us opportunities to invest in other places and continue to do share buyback.
What you won't see us do is run out and do any kind of large-scale M&A or anything like that, right? We're focused on continuing to improve the house we live in and the industries we're in. We've divested a lot of the stuff that's challenged, but we're continuing to dig through the P&L and really understand profitability of every part of the business and make aggressive changes where we see profitability, not where we want it. And so we'll continue to be very focused on driving improvement that way too.
Great. Well, we're at time. So thank you, Mike and Bob, for being here, and thank you for having us.
Thanks for having us.