Investing.com -- Minnesota-based power sports vehicle manufacturer, Polaris (NYSE:PII) Inc., is anticipated to underperform previous revenue and EBITDA predictions for 2025. This is due to a decrease in planned off-road vehicle shipments, weak retail demand, and reduced margins. It is unlikely that the company will generate enough revenue and EBITDA in 2025 to keep leverage below the 3x downgrade threshold. This is due to a slump in purchases of discretionary leisure products, including power sports.
Consequently, the rating outlook for Polaris has been revised to negative from stable at S&P Global, while the ‘BBB’ issuer credit rating and the ‘BBB’ issue-level rating on the company’s senior unsecured notes have been affirmed. The negative outlook is based on the expectation that S&P Global Ratings-adjusted debt to EBITDA will slightly exceed the 3x downgrade threshold in 2025. While Polaris is expected to use excess free cash flow to repay debt, future deleveraging will partly depend on a recovery in the power sports industry and stable macroeconomic conditions.
In 2024, Polaris and the Powersports Industry faced a challenging retail environment, with year-over-year declines in total revenue of about 20%. North American powersports retail sales also fell by 8% in 2024 due to higher interest rates and a delayed replacement cycle. This trend is expected to continue through at least the first half of 2025. The company's 2025 guidance anticipates a decline in total revenue by a low single-digit percentage due to weak retail sales across the industry.
Polaris' reduced revenue and profitability are expected to result in lower cash flows and weaker credit metrics than previously forecasted. In 2025, total revenue is expected to decrease in the low single-digit percent area. This is due to lower demand for recreational off-road vehicles, motorcycles, and snowmobiles, despite stable demand for utility vehicles and modest share growth in marine from new product launches.
The company's EBITDA margin is expected to compress by about 170-200 basis points due to decreased shipping volumes and the reset of its profit-sharing program. These trends are likely to lead to an increase of leverage to the low-3x area in 2025.
Polaris has a publicly stated net leverage target of 1x-2x, which supports eventual deleveraging and the ‘BBB’ rating. However, following lower-than-anticipated retail purchases of power sports products in 2024, Polaris ended the fiscal year with S&P Global Ratings-adjusted leverage of about 2.9x, above the high end of its stated policy range.
Polaris' significant exposure to China for procurement of raw materials and to Mexico, where its largest factory is located, could lead to pressure on margins due to material tariffs. Although Polaris has the industry’s largest manufacturing footprint in the U.S., the relocation of production and procurement of materials in response to material tariffs could take some time.
Despite these challenges, Polaris maintains a global leadership position in the power sports recreational market, reflecting successful innovation across its segments. The company's product portfolio provides good diversification, balancing the seasonal nature of some of its products.
Polaris' history of successfully launching new products, spurred by its substantial investment in product innovation, is expected to position it well against competitors when the power sports industry recovers from its current downturn. The company's divestitures of unprofitable segments and plant efficiencies are expected to help improve margins once the power sports industry recovers.
The negative outlook reflects the forecast for S&P Global Ratings-adjusted debt to EBITDA to increase above the 3x downgrade threshold through at least 2025. Any material deleveraging in 2026 is expected to be partly dependent on an increase in shipments spurred by a recovery in the power sports industry and stable macroeconomic conditions.
The outlook could be revised to stable once Polaris can reduce leverage below the 3x net leverage downgrade threshold. An upgrade is viewed as unlikely, given Polaris' financial policy of targeting net debt to EBITDA in the 1x-2x range with the possibility of temporarily increasing its leverage to as high as 3x to fund growth through acquisitions.
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