Polaris Inc.

Good morning and welcome to the Polaris Second Quarter 2020 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Richard Edwards, Head of Investor Relations. Please go ahead.

Thank you, Andrea, and good morning, everyone. Thank you for joining us for our 2020 second quarter earnings call. A slide presentation is accessible at our website at ir.polaris.com, which has additional information for this morning's call. Scott Wine, our Chairman and Chief Executive Officer, and Mike Speetzen, our Chief Financial Officer, have remarks summarizing the quarter, and then we'll take some questions. During the call, we will be discussing various topics which should be considered forward-looking for the purposes of the private security litigation reform act of 1995. Actual results could differ materially from those protections in the forward-looking statements. You can refer to our 2019 10-K for additional details regarding these risks and uncertainties. All references to the second quarter of 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 we'll turn it over to our CEO, Scott Wine.

Scott? Thank you, Richard. Good morning and thank you for joining us. Last quarter, I spoke about how thankful I was for the players' team's hard work and how confident I was Weigelt, Marc Suarez, led us to model negative retail sales for the second quarter and the year. Reality has been much different as many more people sought out the family enjoyment, excitement, and utility of our vehicles. And when coupled with more free time and fewer alternative ways to spend money, this provided a near perfect backdrop for our power sports dealers. Our priorities have remained consistent since the onset of COVID-19. First, implementing protocols and guidelines to keep our employees safe. Weigelt, Marc Suarez, But our factories are performing well as they ramp up to meet demand and refill the channel. Liquidity is not a concern currently, but the cash war room exercises that Mike Speetzen and his team have greatly enhanced our cash outlook and management ability. While non-cash, we did take a $379 million impairment charge for our aftermarket business, which reflects the greater impact TAP has faced from COVID-19 and tariffs. This is accelerating our strategy to focus predominantly on TAP's retail channels, which I will cover shortly. Second quarter North American retail sales were up 57% behind broad-based demand across our dealer network. A key fact underlying this top-line number is that nearly 75% of our off-road vehicle and motorcycle buyers in Q2 were new to Polaris. While we love our current customers, we know that new customers are more likely to invite their friends to Powersports spend all apparel and accessories, and buy another Polaris vehicle. The sub-demand for four-seat or crew side-by-side vehicles reinforces the family dynamic behind this surge, while our PG&A business experience its largest ever quarterly sales confirms our large and growing installed base still has a strong desire to accessorize their vehicles. Both Indian and Slingshot performed well in the quarter, with the new Challenger and Slingshot Autodrive leading notable market share gains. Boats did not turn positive until June, but the subsequent recovery was quite robust. Despite our impressive retail performance in off-road vehicles, our market share did decline in the quarter. This is never an acceptable outcome, and I'm extremely confident that Steve Minetto and his team are driving the necessary actions and improvements to reestablish market share gains in the quarters ahead. I do not want to make any excuses, but this simple fact helps put things into perspective. In the months of May and June, the growth of our side-by-side business outpaced any of our competitors' total sales over the same period.

Kind of cool.

Dealer inventory declined precipitously in off-road vehicles and slightly in motorcycles for a net decrease of 47%. We did bring our plant network down for approximately 10 days, including Monterey, which was down considerably longer, but our significant U.S. footprint Thank you for joining us. but the customer engagement and demographic outreach efforts that Pam Kermish and her team are leading give me confidence that we can sustain it. Expanding the market is uniquely beneficial to the market share leader and we will continue to invest in initiatives to keep this trend going. The aftermarket impairment charge we took primarily related to TAP did not cause us to change strategies but it did accelerate the work Craig Scanlon and his team are doing to transition to a much more retail focused business model. While we still see benefits in the integrated multi-channel approach we've been operating, we recognize it does not require TAP's entire existing wholesale business, which has been a consistent drag on profitability. Our distinct 4WP advantage is in business to consumer retail, with both our national brick-and-mortar footprint and our significant online presence performing well. With a more retail-focused business, we expect to drive consistent growth and better leverage our investments and our exclusive TAP brand offerings. California store closings and tariffs remain near-term headwinds, but the path to improving profitability is clear. 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. Good morning. You'll recall during our first quarter call, my comments were centered around maintaining healthy liquidity profile given the economic uncertainty as a result of the pandemic. As Scott indicated, given the tremendous rebound in retail sales during the quarter and the extremely hard work of the Polaris team, I'm pleased to report that our second quarter results significantly outperformed our previous expectations. Our liquidity profile has returned to normal levels and our full year earnings expectations have rebounded to near pre-COVID levels. I'll provide additional detail in our view for the remainder of the year, but first some comments on our second quarter results. For the second quarter, sales were down 15% versus the prior year. All segments reported lower sales driven by our plants temporarily suspending production. for up to a month and a half due to the COVID pandemic. Despite many of our plants producing at or above pre-COVID-19 levels, by the end of the quarter, we were not able to offset the loss production during the shutdown period. Second quarter earnings per share on a gap basis was a loss of $235 million or $3.82 per diluted share, which included a non-cash pre-tax goodwill and intangible impairment charge of $379 million. Thank you for joining us. Thank you very much. and strengthen the business for the long term. Adjusted gross margins were down 190 basis points year over year, primarily due to COVID-related underabsorption at our factories from the COVID-19 driven temporary production suspension. We also incurred costs to ensure the health and safety of our employees at all facilities. We did recognize a modest level of favorability in tariffs in the quarter given the lower volumes and continued progress on exemptions as well as refunds of prior tariffs paid. Operating expenses excluding the impairment charge, which we've separately categorized, were down 15% in the quarter as we canceled or postponed all non-essential expenditures and undertook employee-related cost actions as a result of the pandemic-driven economic uncertainty. Turning to our segment performance, all segments experienced lower sales during the quarter as expected, given the reduced shipments as the pandemic began to take hold early in the quarter. Moving now to our balance sheet and liquidity profile for the quarter. Operating cash flow was $310 million for the six months ended June 30th, up 53% from the same period last year and up significantly from Q1, driven by lower working capital requirements. Since our Q1 call, our cash position has improved significantly. We initiated a cash war room approach in Q2 that enabled the company to more effectively and efficiently manage cash flow, which not only benefited Q2, but through process enhancements, will benefit the ongoing performance of the company. As a result of this effort and improving business conditions, cash on hand at quarter end was $544 million, and our total debt levels finished the quarter at $1.9 billion, down sequentially from Q1 by approximately $236 million, or 11%. We currently have approximately $650 million available under our revolving credit line as well as within our loan, and we're also within our loan requirements. Combined with our cash, we ended the quarter with approximately $1.2 billion of liquidity. Weigelt, Marc Suarez, Moving to full year expectations, you will recall that we withdrew our full year sales and earnings guidance back in March given the onset of the COVID-19 pandemic and the immediate negative impact to retail. Since that time, our visibility has improved somewhat. While we don't expect the demand trend seen in Q2 to continue at those rates, we are reinitiating guidance given depleted dealer inventory levels coupled with modest ongoing power sports demand. are expected to be in the range of $6.65 billion to $6.75 billion, which is flat to down 2% for the full year. While we don't anticipate reaching our pre-COVID sales guidance range, it is encouraging that we are projecting to nearly reach our pre-COVID earnings expectations on lower sales for 2020. We expect total company earnings per share to be in the range of $6.40 to $6.60 per diluted share, which is near the low end of our initial guidance Thank you for joining us. For the second half of 2020, we expect our revenue to be approximately evenly split between Q3 and Q4. However, given the mix of products produced and the timing of new product introductions, second half earnings are more heavily weighted to the fourth quarter by about 60%. Though our visibility has improved, I won't be giving as much detail as we typically do for guidance today, as there are still many uncertainties around how this pandemic will play out for the remainder of the year. However, I will give you some top-level comments around a few key areas, beginning with gross margins. We now expect our gross margins to be about flat compared to last year. Despite being down 230 basis points in the first half of the year, the significant second half improvement is driven by improved absorption at our factories along with lower than expected tariff costs. During the first half of 2020, we applied for almost 20 million of refunds from past tariff payments and expect to apply for just under 10 million of additional refunds on exclusions already received in the second half. We've received the cash of the bulk of these applied for refunds at this point. Our full year guidance also assumes that we don't receive extensions for our current tariff exemptions, which are set to expire next month. Operating expenses are expected to be down slightly as a percent of sales and in total dollars year over year, given the cost actions taken in Q2 and continued cost discipline into the second half. Considering the recovery in our business, we have approved several strategic programs and marketing outlays. We will continue to manage our costs with discipline, mindful of the economic uncertainty. Financial services income is expected to be flat to last year with higher retail income offset by lower wholesale proceeds from Polaris Acceptance. And finally, foreign exchange, while slightly improved from our initial 2020 guidance, is anticipated to be slightly negative to pre-tax profit. Moving on to sales expectations by segment. Again, I will give only directional expectations given the challenges in predicting with precision how the economy will perform. The strength of our second half recovery is primarily driven by the ORV slash SNOB We anticipate continued weakness in adjacent markets given the dependence on government, university, commercial, and rental sales. With that, I'll turn it back over to Scott for some final thoughts.

Thanks, Mike. Our outlook is much improved from a quarter ago and I certainly expect our forecast accuracy to at least be directionally correct this time as consumer and dealer demand has remained strong through July. We have invested significantly in tools, protective gear, and social distancing in our plants and offices to guard our employees from the risk of COVID-19 exposure and are redoubling our efforts as community spread increases. Dealer health is also a priority, and for the next few months, that means accelerating shipments. The advantages of RFM are paying dividends as we can shift production and redirect deliveries faster than our competition. With our awesome team, impressive vehicles and accessories, and engaging creative and rigorous sales execution, I like our chances to drive growth and market share gains in the second half. Aside from a few minor delays of our model year 21 product launches, they are on schedule and will emphasize the innovation is alive and thriving at Polaris. As we proved in the first six months of the year, this Polaris team is ready to deal with whatever comes our way. PowerSports appears strong, but the overall economic and global outlook is less clear amidst the persistent threat of COVID-19, so we will be prepared to navigate rougher seas if they arise. While the risks are real and I'm not prone to optimism, I can fairly say that we are entering the second half of 2020 with the best setup for the industry and Polaris that I have seen in my dozen years at the helm. With that, I'll turn it over to Andrea to open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. We ask that you please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue. At this time, we will pause momentarily to assemble our roster.

We're ready, Andrew.

Our first question comes from James Hardiman of Wedbush Securities. Please go ahead.

Hi, good morning. I just wanted to make sure I understood the commentary on July, since you put it out there. Obviously, May and June were unprecedented in terms of ORV strength. It sounds like, based on the prepared remarks and the press release, that that ultimately continued in July. Is that accurate?

It's still far above our expectations.

Okay. That's helpful. And then maybe any more incremental color you could give us on that 75% of your sales, which came from new customers. That sounded like maybe the most bullish part of all of this. And maybe help us think about, as you know, investors are going to look at this and say, wow, this is unbelievable. How are we going to comp against this next year? And so maybe any color you can give us on the sustainability of this unprecedented strength, maybe starting with that new customer piece.

It's probably helpful, James, as you can refer back to slide seven where we kind of go through some of the demographic increases that we've seen. But really, our core customers are are very engaged right now and we're seeing solid growth amongst our loyal Polaris customers. But increasingly with more time, again, it's without Little League Baseball, without soccer games, without being able to take a trip to Disney, they have more time and more money. And so a lot of people that are new to the sport are coming in and finding a vehicle that's right for their family or right for them. And what's nice about it, and I My prepared remarks is that our core customers are great, but they're somewhat insular. They've got their riding buddies and they've got their core routines. But as we bring these new customers in, they're more likely to invite their friends to come along for a ride. They're more likely to be in line for a second Polaris vehicle over time. So we really like it. And again, it's partly because of demographic shifts, but it's really a a result of the tremendous effort that Pam Kermish and her team are doing to facilitate this kind of growth. But you're certainly right. The comp next year is going to be tough.

Got it. Thanks for the color.

Our next question comes from Scott Stember of CL King. Please go ahead.

Good morning, guys, and thanks for taking my questions. Good morning. Can you maybe talk about the inventory situation? I know that Obviously, this is unforeseen demand that's bringing things down to depleted levels. But when will you guys get to a point where you feel that you have 100% of what you need at these levels? Or is there a risk that at some point you could start facing some serious shortages, particularly on the side-by-side side?

Yeah. We are seeing some shortages now. I will just applaud Steve Minetto and the team for really being able to move products around and get it where retail needs to be. With Monterey being impacted as long as they were, it really did put pressure on razor production, and I think we've rebounded as fast as anyone possibly could in Mexico, but that was a bit of a challenge for us, and The plants are really running at rate right now, and we are making good progress, but as I said to James, the July demand still puts us, we're chasing demand and trying to replenish stock, and we're not making a whole lot of progress right now. It's hurting retail, but I will tell you that it's not hurting it such that it's not too bad.

All right, and lastly, just digging into this new customer that you talked about, maybe just talk about the age profile and also the creditworthiness of these new people.

Mike, I'll speak to the age. I mean, what we've seen is in the 26 to 45, which is kind of how we classify the millennials, if you will, they were up 100%. for us in the quarter compared to the 53% that we reported overall. That age group certainly did well for us.

Scott, I would say from a creditworthiness, we continue to see very strong performance. As we've talked in the past, we use a number of third-party independent financing partners. That creates a check and balance and what we've seen from the new demographic, the new customers coming in is they match the profile of the existing customers in terms of the income strength, the credit worthiness, so that's actually been a bright spot as we look at continued growth. Got it, thank you.

Our next question comes from Greg Badishanian of Wolf Research. Please go ahead.

Great, thanks. In terms of market share, industry-wide as well as Polaris, ORV rose I think in the low 60s according to the slide for North America. And I'm just wondering your prediction of market share. And then just as a follow-up, given the scarcity of product at the dealer level, what's the promotional environment looking like now and would you expect that to be abnormally low?

To start with the latter question, it is remarkably low. We're seeing good discipline amongst the OEMs, but really amongst the dealers. I mean, they recognize that they don't need to sell something that the next person will pay full price for. So we're really seeing good discipline. And we really like the fact that our dealers are seeing a profitability boost through this. It's helpful for us, and you'll see it in our reserves coming down, but it's also just helpful in... and the dealer's profitability as well. What was the other part of the question?

Market share.

Market share. Yeah, really what we're seeing is who's got products is the one gaining right now and the Japanese competitors tended to be the ones. I mean, they were the share gainers in the quarter. You know, we saw it, don't like it, but nonetheless we know how to do it. And again, I'm really pleased with the work that Steve Minetto and his team are doing on sales execution. Our dealer sentiment surveys were the highest that we've seen since we've been doing the surveys, so really seeing some improvements there. But really, it was a good quarter for the Japanese, and it came at our expense and some of our other competitors.

Makes sense. Thank you.

Our next question comes from Joe Altabello of Raymond James. Please go ahead.

Thanks. Hey, guys. Good morning. So I want to go back to slide 14 for a second. You point out your expectations for the power sports market this year to be up low single digits. It seems like that implies a pretty sharp slowdown in the second half. Does that mean that you feel like Q2 included a fair amount of pull forward, or am I misinterpreting that?

Yeah, Joe, I don't know if I'd say pull forward. I think, you know, the fact that we've had so many new customers come into the business, that clearly has created a – A surge in demand. As I pointed out in my prepared remarks, you know, we anticipate continued growth in the second half, just not at the same pace and cadence that we experienced in Q2. And, you know, certainly we're making the investments to try and make that not the case. But at this point, we felt it was prudent to plan for those levels. And given where our dealer inventory level is, you know, we've obviously got the plants running full board to make sure we replenish that into the second half.

That's helpful, Mike. And then maybe secondly on tariffs, you gave us a little bit of color earlier, but just wanted to clarify what the difference in tariff costs this year versus last year on a full year basis, assuming you don't get the extensions beyond August.

Yeah, so let me just give you a couple of data points. You know, we're obviously still working through, you know, as we look into next year what that means. And, you know, we're obviously still working to try and get exemptions extended. But as I look at the numbers for this year we ended up roughly being close to $30 million lower than what we were expecting and a big portion of that as I indicated in my prepared remarks was the refunds that we've received if you go back to our original guidance I had mentioned we were around $10 million of refunds that we thought we would have this year and that number is getting closer to $30 and obviously that won't repeat into next year and then as I mentioned in my prepared remarks the exemptions are not assumed to extend for the balance of this year and that's worth about 12 million dollars so that can give you a sense of what we're looking at assuming nothing changes as we head into 2021 but you know we're obviously still working the mitigation efforts as hard as we can we have moved some you know products out of China and we'll continue to look for opportunities and we're also continuing to work through USTR and the administration.

Got it. Great. Thank you, guys.

Our next question comes from Tim Condor of Wells Fargo. Please go ahead.

Thank you. And, gentlemen, first of all, congrats to you and the whole team. Great execution when the goalposts continued to move throughout the whole quarter. Several of the questions have been answered, but... Scott, going to slide six, again, you said you're continuing to chase demand. It appears more on the ORV, kind of there where current demand is on motorcycles. But obviously, the other part of that equation is the channel replenishment to adequate levels. When do you think that latter part, getting the channel back to adequate levels at this point would be reasonable to expect?

I think we'll get motorcycles there by the beginning of the fourth quarter or so, because demand does fall off for motorcycles, the seasonality. It certainly feels like we're going to be chasing for really the remainder of the year with off-road vehicles, because as Mike said, we've been relatively conservative with our expectations for retail in the second half, but If it exceeds that, which it has so far in July, it could put us in a deficit situation where our optimal dealer inventory is for most of 2020.

Okay, and then if I may have the follow-on here, any potential looking to repay liquidity and then on tax law changes? So whoever wants to take this one, I know, Scott, this is probably not in your optimistic bucket, probably your pessimistic bucket. Proposed changes by some of the candidates out there on the individual and the corporate. How do you anticipate that at this point, the potential impact that that could have on 2021 demand?

I'm not going to speculate on what's going to happen in the political arena here over the next few months. Part of the reason we're being conservative with our guidance is We're just not sure what the whole election rhetoric is going to mean to demand, so we're being a little bit cautious about that. Clearly, a change in the administration would be negative for tax policies for both corporations and likely many of our customers, so we're mindful and be watching that, but nothing we can do except try to get a different outcome.

From a liquidity standpoint, obviously we're doing tremendously better than we had expected and anticipate that that will continue through the year. We guided that our operating cash flow will be up mid-teens, and I think we're going to be in a position. We have $100 million in notes that come due in December. That will be easily dispensed of. The biggest issue that I'm working through with my team right now is the $300 million in term loan that we took out. There are restrictions that have been publicly disclosed around share repurchase and some other things, and I think I'd like to try and get that off of our shoulders as best we can. But we'll continue to look at that. We want to make sure that our forecast is settled out and things are working towards what we've guided, if not better, and we'll continue to manage that. But our goal is to continue to delever the business, and we did that in Q2, and we'll do that for the rest of the year.

Okay, greatly helpful. Thank you, gentlemen.

Our next question comes from Brett Andrus of KeyBank Capital Markets. Please go ahead.

Hey, good morning. So just following up on promotions, you know, what do you plan to do about the factory authorized clearance this fall, you know, given the inventory situation? And then normally this time of the year, you know, we start to hear new product news, you mentioned some delays, but is the timing of those releases still sometime here in 2020?

Yeah, no, as I said, the team's really done a nice job. And when I say the team, it's certainly our engineering group, which many of them have been working remotely, have really done a nice job working with our supply chain team and our factories teams to keep our production launches on schedule. I don't think anything is moved out of the year. Now, we may choose for commercial reasons to not launch something, depending on how late it goes in the season. But no, certainly everything is is on track to be in the year if we want it to be within the year. The FAC, as you can imagine, without any inventory, excess inventory, we won't be running our traditional FAC playbook. I will tell you though, the team's really come up with a great plan with, again, as I talked about, the strong demand for accessories, the record PG&A quarter that we had We are going to have an event where we promote our aftermarket accessories and give people the opportunity to accessorize their vehicles through this fall thing. But right now, with demand where it is, it would be foolish to spend money on an FAC.

Got it. And if I could just Follow up with one more on inventory, you know, likely to be down substantially by year end. But is there a new normal of channel inventory you want to end up at when things start to normalize? I guess what I'm getting at is, you know, will dealer turns, you know, possibly be structurally higher coming out of this going forward?

You know, one of the investments we've made, and Ken Poussel and his team really led it, is to get RFM throughout the entire industry. Weigelt, Marc Suarez, Matt Winings, that we will continue to evaluate and note. But I don't know that it's a huge step down, but it's likely to be slightly less.

Thank you.

Our next question comes from Jamie Katz of Morningstar. Please go ahead.

Hi. Good morning, guys. Nice quarter. So I'm curious about gross margin gains ahead. And I surmise that the greatest gains that we're going to see in the second half as we get back to and many others.

We're driving a 40-plus percent drop rate, and just given the mix of business, I think it's important to point out, we've talked in the past, our ATB portion of ORV does carry less lower margins than side-by-side, and we've experienced strong growth there as well. So that'll dampen that just a little bit, and there's a little bit of favorability from some of the tariff refunds that'll come into the second half, but really we're actually going to start to face headwinds as we get into The latter part of Q3 and into Q4, given the exemptions, will expire and we'll be bleeding off the lower value inventory. That's really the gist of it. Our supply chain transformation program has continued in earnest. I can tell you that the team has not taken any of the pressure off of that. The savings, as we've talked in the past, are ramping as we get into the second half, so that's certainly providing a little bit of tailwind, but it's really attributable to the volume increase.

Okay, that's helpful. And then with the write-down on tap, I think you've probably updated your prognosis for both sales potential and maybe profit potential for that segment. Is there any insight you guys might be willing to offer on that as you re-evaluate that tap business?

Yeah, so two things. One, we re-evaluated tap and boats. You'll be able to read it in the queue that comes out today. The tap business was far more significantly impacted. It performs better than automotive, but it follows more of those trends, which have been quite deep, and that really triggered what we had to do on that business. The boats business has been impacted, but it's held up well, and Jake and the team continue to run that business incredibly well. And while it did lower the headroom versus between the market and book value, we still obviously are in a good spot there. And assuming we don't have any further economic issues, we're pretty confident with what we can do with that business going forward. Scott went through it in the prepared remarks with TAP. The retail side of that business is doing very well, especially with being slightly handicapped by some of the store closures and things that we've been dealing with. But the pickup and store and just the overall retail performance, do-it-yourself, really has propelled that business nicely.

Okay, thank you.

Bob?

Our next question comes from Garrick Johnson of BMO Capital Markets. Please go ahead.

Thank you. Good morning. So in the first quarter call, you commented that COVID hotspots were not necessarily in great off-road riding areas. That seems to have flipped, you know, now the hotspots from the south and the west and interior. Has that affected retail at all? Is that a concern or was that something that in retrospect really wasn't an issue in the first quarter?

No, I think what, remember, riding in off-road vehicles is about one of the safest things you can do to not get COVID-19. Most people are wearing gloves, they're wearing helmets, they're in the outdoors. Those three things are about as good as it gets. And, you know, certainly, and I think what I said is, and what I meant when I talked about the hot spots aren't where we sell. Thank you for watching. See you next time. It limits people's opportunities to do other things, which brings them into power sports. And we've seen that continue as the media talks about the increases in some of these states. There's been zero negative correlation with our retail.

Okay. Great. Thank you.

Next question.

Our next question comes from Robin Farley of UBS. Please go ahead.

Robin Farley Great, thanks. You've commented on it a little bit, but I just want to clarify two things on your retail expectations for the year. You're saying up low single digits for the market, and then I know you said it flourished a little bit ahead of that, but given that the industry was up 50 to 60 percent in Q2, How do you get to low single digits for the year without declines in the second half? In other words, I don't know if you're just sort of making a conservative statement about the full year, just trying to square the mat of that.

Thanks. Yeah, we do have retail. I would tell you, Robin, it's kind of flattish in the second half. We expect Q3 will continue to be positive, although not anywhere near as positive as what Q2 was. but Q4 is when we anticipate things will go negative. I do think we are being conservative given what we've seen in July but we've seen how volatile the environment can be and depending on how things shake out with how COVID will be dealt with, we've got the election uncertainty, there's just a number of different things that could interject a lot of volatility and quite frankly give us uncertainty. So that's the way we're looking at it right now and obviously if If things start to play out better than that, we're in a position, just given all the great work that's been done in our factories, to be able to try and respond to that.

That's great. And then also your expectation that it's going to kind of take you most of the rest of the year to kind of replenish dealer inventory, at least in the RV segment. Does that mean, I guess, how should we think about, you know, if retail is better than the sort of flattish outlook you're saying for the second half, Do capacity constraints limit your retail? In other words, is supply ultimately going to be capping that growth as well, just given, obviously, how depleted the inventories are? Can we think about what the supply constraint might be on retail in the second half?

You know, Robin, I will tell you again, I just want to give a shout out to the work that Steve Minetto and our logistics team and everybody's doing to move stuff around. Weigelt, Marc Suarez, That we're seeing and certainly if demand continues as it is, we will be chasing it longer than we anticipate. Our factories, I'm really pleased with the work going on in our supply chain and factories to be running as well as they can. So it literally is just a matter of what happens with retail. But we don't think there's a huge hit. I mean, all we're doing is talking about decreasing the significant positivity of retail. I don't think that's a terrible thing.

So you could grow retail double digits in the third quarter, you know, and again, not at the level that you saw in Q2, but you're not capacity constrained to that degree, it sounds like, right? You could still do some level of double digit retail in Q2?

Our dealers are not going to run out of inventory. Okay.

All right. Okay, thank you.

Our next question comes from David McGregor of Longbow Research. Please go ahead.

Hi, good morning. It's Colton Weston for David. Thanks for taking my question. I guess to start off, how has COVID-19 impacted the way that Polaris conducts business online in the long term, and are you looking at more direct-to-consumer channel utilization?

You know, last time we talked about the launch of Quick Deliver Ride, which has been really helpful, and we're seeing, you know, more of our customers engage online with Trans-American Auto Parts, for example. They've got a great online presence that is really doing well. Our own accessories and aftermarket business, we're increasingly creating opportunities for consumers to buy from us and pick up at the dealership. We are doing more to move people in that direction. Really, it's enhancing the website to make it easier for people to do the shopping there and then ultimately coordinate with that delivery to the consumer. A lot is happening in that environment today. We just launched the industry's first customer portal. We saw the press release perhaps yesterday with Ride Ready and the ability to have dealers come to your house and repair your product. So, you know, we are certainly preparing to lead the way for a more digital future, but it's transpiring now. Certainly with adventures, we are gaining just tremendous momentum there as more people take advantage of the opportunity to find a place to ride and go do it for a weekend. Ultimately, that's going to be helpful to long-term purchases. The team's really embraced it, but not a tremendous shift from first quarter to now.

Okay, thank you. Can you provide some color on Challenger and how the progress is going there? I believe on the first quarter call, you guys commented that Challenger was taking share in Indian retail up mid-teens percent. in the second quarter would suggest that you guys are continuing to do so. And what does the owner profile look like for Challenger specifically?

You know, Challenger, as I indicated in my prepared remarks, is doing extremely well. And, you know, we like our heavyweight segment. It's more profitable. But really, midsize has done just a tremendous resurgence. And our midsize bike, Scout, Bobber, and even FTR are performing well. But really, it's the first liquid-cooled bike we've ever put out. Really, it fits the profile for many riders that actually liked Victory. It gives them a little more room on the bike. And really, when compared to the competition, it's just a hands-down better bike. So we feel really good about what the demand has been, both from consumers and now dealers. And it should be a gift that keeps on giving for a while.

All right. Thank you very much.

Our next question comes from Craig Kennison of Baird. Please go ahead.

Hey, thanks for taking my question, and great call, really helpful discussion here. My question was on Indian. Your largest competitor there is conceding market share to focus on scarcity value, and that would seem to leave a nice price umbrella for Indian and really open the door for further share gains. Does that change your view at all on the potential for Indian volumes and profitability going forward?

You know, what we've seen, I mean, a year ago you might recall there was some lunacy over there as they were embracing promotions and discounts at a rate we hadn't seen ever from them. So I think pulling back from that and having a more rational approach makes a lot of sense The industry needs better pricing power. Our dealers need better that, and to see some discipline there is welcome news. Ultimately, it's a good brand. They've got a good dealer network, and we don't expect to have this gift that they've given us continue, but certainly with lower unit volume in their dealerships and higher prices, and really, we've just got a great lineup of bikes. I I tell you what Mike Doherty and his team are doing to make sure that we're getting the bikes where they need to be but really the lineup is good and getting better and we're encouraged by it.

Thanks.

Our next question comes from Brandon Roll of North Coast. Please go ahead.

Good morning. I just had a couple questions. First, on parts and accessories availability, I think everyone understands ORV Inventory's challenge, but could you shed a little light on parts and accessories availability, especially ahead of a factory-authorized clearance where you'll be running a special event for parts and accessories? And then, two, just also could you talk about the new families that are coming in? Are they replacing a vacation, or do you really think these families are staying in the industry for the long haul? Thank you.

Steve Eastman has done a miraculous job with our business since he's been here, and really the team's managing inventory reasonably well. We were a little heavy with PG&A inventory, both in our dealerships and within our own warehouses, so this has helped clean that up a good bit. And they've done, again, just like the whole goods, they've done a nice job managing the supply chain, so we're not seeing... Many stock outs and when we do, they're days, not weeks or months. So that's been very helpful. And really, FAC is really designed around some of those accessories that are slower moving but really beneficial to consumers. And I think Steve and Steve, Eastman and Minetto, have worked together to come up with a good plan there that I think should work well for our dealers.

Yeah, I think the question around the new families and how permanent, I think when you're making a commitment to the price tag of the vehicles we have, I think it's safe to assume that this is going to become part of what they do and they're going to realize that it becomes a great family activity. As Scott said in his prepared remarks, the number of 4C vehicles or crew vehicles that we're selling is highly indicative of this being more of a family activity and While it may not fully displace people taking vacations, I think that it brings a new aspect of being outdoors and enjoying that with not only their family but with friends. We think that that's something that can continue into the future. It's something that we've been focused on. It was a big part of the rebranding of the company that we did. We think it is sustainable. Obviously, the growth rates will be tough to mimic, but we do think that we're bringing these folks in permanently into the family.

Great. Thank you.

Our next question comes from Mark Smith of Lake Street. Please go ahead.

Hi, guys. Can you talk about with new customers coming into the space, primarily as we look at off-road vehicles, just a little bit about your mix. Did you see more, let's call them entry-type vehicles, maybe some older 900s and 1000s versus XPs and Pro XPs, or perhaps how ATVs trended during the quarter?

Certainly. That's You kind of nailed it. I mean, we certainly saw exactly that happen. Now, part of it, again, was due to availability. But I think first priority, we saw people wanting crew vehicles. That's just where they are. But then the next thing down, ATVs were very, very strong in the quarter. And ultimately, I think newer families, as Mike just talked about, they come in, they don't want to buy that premium vehicle. They just want something to be able to get on the trail and enjoy time with the family. So I will tell you, mostly what's driving... The mix is availability right now. But those new customers are wanting to try it out and not the premium side of the market.

Okay. And follow up to that, does that give you perhaps opportunity for upgrade as we look maybe next summer? And then also with that, just anything you can talk about on stimulus and how you think that impacted sales? And as you look at maybe another round coming out, any potential positive impacts from that?

You know, I don't think next year, all of these new customers coming in, they're not likely to upgrade a year from now. I mean, I think some will. We love those people that do, but I don't think we should count on that. What is more likely, though, is, again, as I said, the likelihood of them inviting their friends in so they have someone else to ride with and having those people ultimately buy vehicles is much more likely than that individual upgrading opportunity. The vehicle.

I think from a stimulus standpoint, we've actually spent a lot of time with our partner retail financing banks as well as external advisors. The U.S. savings rate went up. We saw consumers actually prepaying loans. There was some taking advantage of deferral of loan payments and things like that, but those seem to be returning to normal levels. It doesn't look like people were using that as just the way to get to a new vehicle. As I mentioned earlier, the creditworthiness of these folks coming in, they typically have dual-income family. They weren't necessarily heavily impacted by the unemployment activity that happened coming out of Q1 and into Q2. And we think that they saw this as a way to use money that they had allocated for other things, vacations, cruises, you name it. So at this point, we don't foresee that the stimulus necessarily had a gigantic impact Now, if there were more stimulus that were to come in the system, I think it just gives people that much more confidence and could create more stimulus for demand going forward.

Excellent. Thank you.

Our next question comes from Joe Spack of RBC Capital Markets. Please go ahead.

Thank you very much. Scott, I miss sports for many reasons, but one of them is certainly you're running out of little anecdotes to compare the business to. Bigger picture question, just away from all the positive sort of near-term trends. And it's really somewhat of a strategic question. So, you know, in the past, you've talked about electrification, and I know you have some product there. It's still prohibitively expensive. and I think if you look at the listed price from some new competitors taking pre-orders for vehicles that are not available until 21, if ever, prove that. But I am wondering if there's a lesson there for you because the cost will come down. You know the ORV customer better than anyone. And so have you thought about that sort of model about putting out a vehicle design, taking pre-orders, seeing what demand really is and trying to retain your leadership for what could be a growing part of the market? over the years. And maybe you could just remind us, would you always do something, the powertrain for those alternative vehicles in-house, or would you ever partner?

Yeah, good question, Joe. I'll tell you that I'm counting on Navy Notre Dame playing on Labor Day weekend to kind of get back into the whole sports analogy opportunity for me, but we'll see what happens. Certainly been a bit dismal of late. You know, when We made the leadership change last year. We put Chris Musso into this electrification role for us. While we haven't been issuing press releases, there has been tremendous progress made by the team, understanding what the opportunities are and how we might approach that market. I will tell you that my thinking... about electric has changed. Certainly the concern all along for me was the triangle between range, cost, and performance. And right now we believe that triangle is starting to narrow in and be something that we can bring to the power sports consumer that is not only as good but potentially better than some of our current internal combustion engines. So we see the opportunity. We expect to be amongst the leaders. The lunacy that you talked about with some of these pre-orders of vehicles that don't exist, we're probably not going to do that. But what do I know? Their valuations are so high. But certainly expect more from us around electrification in the not-too-distant future.

Thank you.

Okay, with that, that's all the questions we have. We want to thank everyone for participating this morning. We look forward to talking to you again next quarter. Thanks again, and goodbye.

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.