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spk13: Good day, everyone, and welcome to the Polaris Second Quarter 2021 Earnings Call. 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. Please note that this event is being recorded. I would now like to turn the conference over to Richard Edwards, Head of Investor Relations. Please go ahead, sir.
spk14: Thank you, Cole, and good morning, everyone. Thank you for joining us for our 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. Mike Speedson, our Chief Executive Officer, and Bob Mack, our Chief Financial Officer, have remarks summarizing the quarter and our revised expectations for the full year. Then we'll take questions. During the call, we will be discussing various topics which should be considered forward-looking for the purposes of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. You can refer to our 2020 10-K for additional details regarding these risks and uncertainties. All references to the second quarter 2021 guidance and report are reported on an adjusted non-GAAP basis unless otherwise noted. Please refer to our Reg D reconciliation schedules at the end of this presentation for the gap to non-gap adjustments. Now we'll turn it over to our CEO, Mike Speetson.
spk02: Mike? Thanks, Richard. Good morning, everyone, and thank you for joining us. I continue to be incredibly impressed with the dedication, commitment, and execution of the Polaris team as we navigated ongoing supply chain pressures, logistical challenges, and increasing input costs to deliver impressive second quarter results. Focused execution is our mantra, and it once again paid off as the team expertly navigated the challenges to enable us to exceed expectations. I want to again thank the entire Polaris team for their continued focus and commitment to this great company. The power sports industry has experienced significant demand, and that trend continued into the second quarter. Demand, while down from unprecedented levels in the second quarter of last year, was up over pre-pandemic levels of Q2 2019 by 14%. ORV market share gains continued in the second quarter, with gains in both ATVs and side-by-sides. We did, however, lose a small amount of share in Indian, particularly in our midsize bikes, given the supply chain challenges. That said, demand remains strong for these models, and we anticipate our share gains will resume as our vehicle supply improves. Boats also remain strong, growing retail sales and market share during the quarter, and we have a healthy and significant backlog. Although it's off-season for snowmobiles, with over half our snowmobile build this year being represented by our near-record high snow check pre-orders, the sales cadence of our snowmobile business will be even more heavily weighted toward our fourth quarter this year, given the timing variation in our component deliveries. Our PG&A and international businesses also performed quite well. PG&A sales were up 35% during the quarter. I'd also note that we're experiencing an increase in the attachment rate for PG&A as more consumers look to personalize their vehicles. Our international business continues to see strength. We grew sales 64% as the economies outside North America continue to improve in Q2. Our earnings outperformed expectations, demonstrating the team's ability to overcome challenges with focused execution. Not surprisingly, production and delivery were, and continue to be, impacted by global supply chain and logistics challenges. As a result of this and continued strong consumer demand, our dealer inventories are at the lowest levels in decades. I'll talk more about this in a moment. Given our first half results, continued strong consumer demand, and our team's hard-fought ability to execute, I am pleased to report that we are again raising our full-year earnings guidance. Bob will give more details shortly. On a two-year basis, our retail is up 14%, reflecting continued growth in power sports driven by strong underlying consumer demand. As expected, our second quarter North American retail sales were down 28% from the 57% increase reported in the second quarter of 2020. The gating factor for retail sales today compared to a year ago is low dealer inventory driven by supply chain impacts on delivery. Retail sales would have likely been significantly higher without these impacts. Despite the supply impacts to ORV retail sales, market share again grew during the quarter. Our ORV business gained over a percentage point of market share in both ATVs and side-by-sides. Motorcycle retail sales also continue to grow, increasing 22% during the quarter. However, Vendian lost a modest amount of share during the quarter driven by low availability of bikes, particularly our very popular Scout and Chief models. Strong boat retail also continued and remained ahead of the industry. Dealer inventory levels ended the quarter down 57% on a year-over-year basis and were also down sequentially. Our pre-sold order process continues to be an effective lever that our dealers are utilizing to ensure they don't lose a sale. I'll go into this in more detail in the next slide. Looking at the remainder of the year, dealer inventories are expected to remain lean into Q4, which is when we are anticipating the supply chain issues will begin to slowly improve. Given stronger than anticipated demand coupled with continued supply constraints, our expectations for dealer inventory levels to return to RFM profile levels is now sometime in late 2022 or even into 2023. As I discussed earlier, the unprecedented demand coupled with a supply chain constraint has created significant disruption in our shipping cadence. With dealer inventory at record lows, the most effective, efficient way for our customers to secure the product they want and for our dealers to maximize retail and profitability is through our pre-sold order process. The advantage to consumers is that orders placed in the pre-sold system receive priority in our production and shipping schedule. In addition, dealers and consumers can receive PG&A priority if placed at the time of the vehicle order. As a result, pre-sold orders have increased significantly since the pandemic began. Pre-pandemic, presold orders accounted for roughly 3% of our retail. Exiting Q2, ORV presold orders were approximately 80% of retail. While there have been some reports that the presold order process can be misused, our audits have found that not to be the case. We regularly audit the system, looking for a name change from the presold order at the time of registration. These audits have found less than 1% where the names changed at registration, and where there were changes, the majority had valid reasons for the change. I'd also point out that the pre-sold order cancellations remain at low single-digit percent, which is similar to pre-pandemic levels. Lastly, we have analyzed shipping patterns to our dealers by tiers, volumes, and regions, and we're all within 1% of pre-pandemic levels. The bottom line is that there's high confidence in the pre-sold order process, which is why it continues to be a competitive advantage in this very tight inventory environment. Our manufacturing plants are operating at peak supply chain constraint capacity. Our manufacturing, supply chain, and logistics teams continue to execute at a very high level, managing the ever-changing production schedules driven by component availability with the singular focus to meet the demand of our consumers and dealers with high-quality vehicles and components. Despite our efforts, we couldn't meet all the demand during the quarter. As I indicated earlier, our pre-sold order levels have increased significantly, and it appears those customers are waiting for the high-performing, high-quality vehicles we produce. I'd like to be able to say today that we see the light at the end of the tunnel, but given the ongoing heightened demand for our vehicles and supplier challenges, it appears we, along with the entire power sports industry, will be in a period of tight vehicle supply for the remainder of the year. Our teams are doing impressive work to keep the flow of products moving, including expediting components, adjusting build schedules, substituting materials where appropriate, and buying select materials on the spot market. Focused execution and teamwork will ensure we win the competitive battle. As indicated in our last call, we are also adding capacity later this year and into 2022 that will bring on 30% more production capability between ORV boats and motorcycles. This capacity is needed to meet demand, fill the dealer channel, and allow for the addition of some very exciting new products coming next year. One of the drivers behind the unprecedented demand has been new customers coming into power sports. New customer growth in the first half of 2021, while down slightly from the robust rates in the first half of 2020, remains comfortably ahead on a comparable two-year pre-COVID basis, with approximately 300,000 new customers coming into the Polaris family over the first half of 2021. The mix of new to existing customers has remained high at over 70% of the total customers for ORV, motorcycles, snowmobiles, and boats. Our existing customers continue to grow at a healthy rate. And lastly, it's exciting to see the diversity of our customers also grow, led by Hispanic and female riders joining the Polaris family. Overall customer demand in total remains very strong. We track repurchase rates for our customers, which are increasing on a year-over-year basis. This provides us with the confidence that our customers intend to remain with the sport. I'll now turn it over to Bob Mack, who will summarize our second quarter results and our updated expectations for 2021.
spk17: Thanks, Mike, and good morning, everyone. The Polaris team is battling each day for the components needed to meet the strong demand of our consumers. And as our results this quarter indicate, we are winning many of those battles. Second quarter sales were up 40% on a gap and adjusted basis versus the prior year. Shipments and sales improved considerably across all segments, ORV, motorcycles, adjacent markets, aftermarket, and boats. Second quarter earnings per share on a gap basis was $2.52. Adjusted earnings per share was $2.70, which was up 108% for the quarter, exceeding our expectations. This strong performance was driven by a combination of revenue growth, lower promotional costs, increased pricing, and operating expense leverage during the quarter, partially offset by higher input costs. Adjusted gross margins were up approximately 310 basis points year over year, primarily due to lower promotional and floor plan financing costs driven by low dealer inventory and strong demand, which requires minimal promotional dollars to drive retail. This was muted somewhat by higher input costs associated with supply chain constraints, including logistics, commodity, and labor cost pressures. Operating expenses were down considerably due to the goodwill and intangible asset impairments recognized in Q2 2020. Adjusted operating expenses were up 33% in the quarter relative to Q2 2020, which was heavily impacted by short-term cost actions taken to offset COVID-19 shutdowns. Q2 2021 operating expenses grew sequentially versus the prior quarter due to the timing of legal, sales and marketing, and engineering expenses, along with staffing additions. operating expenses are expected to be down slightly versus the Q2 run rate in the second half of 2021. Foreign exchange also had a positive impact on our quarterly results, primarily driven by the Canadian dollar. From a segment reporting perspective, all segments reported increased sales for the quarter, driven by strong demand. ORV snowmobile segment sales were up 38%. Motorcycles were up 50%. Adjacent markets increased 98%. Aftermarket was up 15%, and boats increased 49% during the second quarter relative to Q2 2020, which was adversely impacted by COVID-19 closures. Average selling prices for all segments were up. ORV increased about 13%. Motorcycles were up approximately 8%. Adjacent markets increased 10%, and boats were up 14% for the quarter. All segments benefited from continued lower promotional costs given high demand and the lack of product in the channel. Pricing actions taken in the quarter and model mix also had a favorable impact. Our international sales increased 64% during the quarter with all regions and segments growing sales as the heavily pandemic impacted countries began to open their economies again. Currency added 15 percentage points to the international growth for the quarter. And lastly, our parts, garments, and accessories sales increased 35% during the quarter, driven by increased demand across all segments and categories of that business. Moving on to our guidance for 2021. Given the stronger than anticipated performance in the second quarter, we are increasing our full year adjusted earnings per share guidance for 2021 and now expect earnings to be in the range of $9.35 to $9.60 per diluted share. The increase is driven by the expectation that the even lower promotional environment we experienced in the second quarter will continue through the second half as demand is expected to remain high and dealer inventory levels low for the remainder of the year. Additionally, we expect price increases in surcharges for the upcoming model year to provide incremental benefit in the fourth quarter. These benefits are partially offset by the escalating input costs, particularly component cost increases driven by both the global supply chain shortage and higher commodity prices, along with the increased cost for manufacturing inefficiencies, increased expedites, and higher logistics costs. Overall, for the full year, we are pleased that our product pricing and promotional cost reductions are offsetting the expected annualized incremental cost headwinds on a dollar basis. We are narrowing our total company sales growth guidance by holding the upper end of our sales guidance range at 21%, and raising the lower end of the range to 19% given our sales growth performance to date. Our dealers have ample pre-sold orders in hand that combined with additional product would typically allow us to increase the top end of our sales guidance range. However, given the uncertainty around component supply, we are leaving the upper end of our sales guidance unchanged at this time. Moving down the P&L. Adjusted gross profit margins are now expected to be down in the range of 40 to 70 basis points. This is an improvement from our previously issued guidance and primarily due to the higher than expected margins in the second quarter, which was driven largely by lower current quarter promotional costs and the timing of promotions accrual adjustments as dealer inventory continued to decline. Adjusted operating expenses are now expected to improve 90 to 120 basis points as a percentage of sales versus last year, given the higher sales growth expectations. Income from financial services is now expected to be down in the mid-20s percent range, driven by the historically low dealer inventory levels, as well as lower retail financing income due to lower penetration rates of our retail providers as more customers are buying with cash and or have more time to shop their financing needs with other financing sources given the delays in delivery. Guidance for the remainder of the P&L items remains material unchanged from our previously issued guidance. While our full year earnings guidance improved as a result of our year-to-date performance and the pricing actions being implemented at the upcoming model year changeover, our second half performance is expected to be down compared to the second half of 2020 and sequentially from our reported first half results. Let me give some clarity on the second half cadence for earnings. Our first half 2021 EPS finished at $4.99, a 228% increase over the first half of 2020. Given our full-year revised guidance, the second half EPS equates to a range of $4.36 to $4.61 per diluted share, a decrease of 26 to 30% on a year-over-year basis, and an 8 to 13% decline on a sequential basis from the first half of 2021. This reduction in EPS on a sequential basis is driven by a number of positive and negative factors, including increases in input costs in the second half of the year, principally commodities, labor, expedite and rework costs related to supply chain shortages, as well as unprecedented ocean and truck transportation rates and the timing of operating expense spend. These costs are expected to be partially offset by increased product pricing through both low promotions, higher base prices and surcharges. On a two-year basis, our second half EPS results at the high end of the range are expected to be up over 30% compared to the second half of 2019. I would also add that the quarterly cadence for EPS in the second half of 2021 is more heavily weighted towards the fourth quarter with approximately 60% of our second half EPS occurring in Q4. This is driven by a couple of key factors. First, a majority of our high margin snow check snowmobiles won't ship until Q4 as compared to a stronger Q3 shipping quarter in 2020. Second, while we are increasing selling prices and adding surcharges to offset a portion of the cost increases, These increases do not take effect until late Q3, thus having a larger impact in Q4. Let me quickly cover our sales expectations by segment. ORV snowmobile sales guidance remain unchanged at up high teens percent. The only modification is the timing of shipments, as indicated earlier, with more snowmobiles being shipped in the fourth quarter of 2021 versus prior year given the supply chain disruptions and the timing of our pricing actions hitting Q4 more heavily than Q3. Motorcycle sales are anticipated to be up low 30%, down slightly from prior guidance. While we continue to expect our motorcycle business to grow and take share for the year, supply chain challenges are impacting production enough to possibly shift some shipments into 2022. In the remaining segments, global adjacent markets, aftermarket, and boats, we are increasing our sales expectations given the sales growth realized through the first half of 2021. Year-to-date second quarter operating cash flow finished at $196 million, down 37% compared to the same period last year, driven by an increase in factory inventory due to the supply chain inefficiencies. Our expected full-year cash flow performance remains unchanged at down mid-30% compared to last year. During the second quarter, we spent $111 million on share repurchases. We will continue to prioritize organic investments in our business along with share buybacks throughout the remainder of the year, subject to market conditions. With that, I will now turn it back over to Mike for some final thoughts.
spk02: Thanks, Bob. This quarter's results demonstrated the drive and determination of the players' team in the face of ongoing challenges. We will continue to effectively manage a challenging environment to meet consumer demand. The underlying earnings power of the company remains strong, as does our financial health. Demand for our products remains robust, and we do not see that changing in the medium to long term. Our supply chain remains the top challenge for the company, with component supply not expected to improve until sometime late 2021 or even early 2022. And as a result, dealer inventories are not expected to return to normalized levels until sometime in late 2022 or even early 2023. While much of the focus has been on the supply chain, innovation continues to be the lifeblood of Polaris. And we have a number of new products coming, including the all-new Electric Ranger, along with exciting model year 2022 launches. Let me close by reiterating that we're winning in a challenging environment, and we remain focused on navigating through the current supply chain challenges and rising input costs to deliver products our customers are demanding, while at the same time delivering improved results and value to our shareholders. With that, I'll turn it over to Cole to open the line for questions.
spk13: Thank you. And we will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. We kindly ask that you please limit yourself to one question and one follow up. And at this time, we'll pause momentarily for the first question. And our first question today will come from Robin Farley with UBS. Please go ahead.
spk01: Great. Thanks. Just trying to think about if there's a way to quantify what retail was lost, you know, to product availability. And when you talk about pre-orders being at a record level, is there a way to quantify what they – you know, if your pre-orders have been able to be fulfilled in the quarter, what percent of retail – you know, retail would have been sort of how much higher – And I think in some ways it's still going to understate, right, the sales that you would have made if there were actually product on the floor as well. But it still may help to kind of quantify the demand that wasn't captured by retail. Thanks.
spk02: Yeah, I mean, it's hard to put a specific number on it, Robin. But, you know, I will tell you that we had several thousand side-by-side shipments push out of the quarter recently. given production limitations. And I'll tell you, the team is doing incredible work. I mean, we have rework operations essentially at each of our factories because we're keeping our production lines going and then going back around and retrofitting if it's shocks or windshields or whatever components have to be put on the vehicle to make sure we can keep things moving as quickly as we can. You know, from a pre-sold standpoint, you know, as I talked about in my chart, we're now up over 80% of our retail. And I would tell you it's even higher than that because by the time the product is on the truck and on its way, it's probably already spoken for or the minute it lands on the ground at the dealer, it's essentially sold. I think it's just safe to assume our retail would have been substantially higher had the product either been delivered as committed or if they had existing dealer inventory sitting on the showroom floor.
spk01: Okay, thanks. And then just as a quick follow-up, in terms of your full-year retail expectations, I think a quarter ago, or at some point in the last quarter, you had talked about maybe the full-year retail being down low single digits because of the product availability. Is that kind of still... where you think that, in other words, no real change from what you thought over the last quarter about how much you can overcome the logistical issues? Is it fair that it's still in that sort of down low single retail for the year?
spk02: Yeah. And as we've talked about, you know, motorcycles is expected to be up pretty healthily, and ORV will be down, you know, mid-single digits. So, For the year down, low single digits is what we're expecting right now. But I'll just remind you that, you know, when you compare that against 2019 so that it kind of patterns out the substantial lift that we got in 2020, we're still probably going to be up, you know, high teens on a year-over-year as compared to 2019. So still pretty healthy growth relative to pre-COVID levels.
spk01: Okay, great. Thank you.
spk13: Yep. And our next question will come from Jamie Katz with Morningstar. Please go ahead.
spk12: Hi. Good morning. I'm hoping you can comment on the composition of owned inventories. Obviously, there's a significant bump up given some of the supply chain constraints that you mentioned. Is there any particular segment that maybe has disproportionate amount of finished goods inventory on the books, and is there a way to quantify the impact of rework for the year?
spk17: Sure. So as it relates to finished goods, I mean, the primary increase in finished goods is in ORV and motorcycles. You know, as we have taken the strategic decision to build products when we can, if they're short one or two parts and then put them into rework, and rework them and ship them out once the parts come in. So that's driving really the increase in finished goods. Any finished goods we have, obviously we're trying to ship out as fast as we can, so the rework is really what's driving that. We've also got some increases in raw materials as we bring in more product, both for safety stock and to meet the higher demand that we're seeing in the channel. In terms of quantifying rework, You know, we're building to rework, and it's high double digits, you know, for the quarter and for the year of what's going into rework.
spk12: Okay. And then if we look at the capacity slide that you guys had in the deck, which was, I think, slide eight, it would imply that over the rest of the year, like, you would aim to basically have sort of slattish inventory at dealers assuming all else equal, I think. Is that the right way to think about it?
spk02: Yeah, I mean, what we were trying to get across in there, I mean, a couple things. One is just showing it, you know, relative to what we've been conveying that, you know, we've got in an unconstrained environment, we're, you know, in a decent spot from a capacity standpoint. It's really the supply chain that's, you know, got us in a constrained environment. And the dynamic that you see happening in the third and the fourth quarter is, Really, the rework that Bob just referenced is essentially allowing us to make up for the shortfall that we'll have in that dark blue line in the fourth quarter. So essentially, we end the third quarter. We're anticipating we'll end the third quarter with a fair amount of rework, similar to what essentially was going on in the second quarter, and that those vehicles would get completed and out the door to help satisfy the retail increase in the fourth quarter.
spk12: Thanks so much.
spk13: And our next question will come from Craig Kennison with Baird. Please go ahead.
spk10: Hey, thanks for taking my question. It's on the dealer network. You know, the pandemic has certainly the potential to disrupt your dealer relationships. I would think more than ever you're in a position to pick your dealer partners and I'm curious what you're doing to ensure that Polaris is getting a larger share of the best dealers going forward.
spk02: Well, Craig, you're right. We've been doing work for several years now in terms of reducing some of the smaller dealers where we were a little bit more challenged and making sure that the dealer network was healthy. Certainly this environment has put the dealers in a position where their margins are doing incredibly better. Steve Minetto and I were out, and Bob were out at a number of ORV dealers about a month and a half ago, and consistent feedback was the margin performance coming from Polaris is very high, and that the work that Steve and his team are doing to partner with the dealers to make sure that we're being efficient with The money we do put into promo, as well as just how we run our marketing programs and make sure that we're getting the right fulfillment in. I think, look, you're never going to have 100% positive reception to something like a pre-sold order process. But the vast majority of the dealers view it as a positive, something that we can do different than many others, and it puts them in a position to be able to retain sales. We have worked with them. I made a comment in my script about the fact that we're able to take PG&A orders at the same time and try and sequence that with the vehicle because that's an area where they obviously make even more margin. And so we're working that. We go through every quarter and get dealer sentiment. And believe me, they are brutally honest with us. And we continue to be number one. As you know, the majority of our network overlaps with the competitors. So we get a pretty good snapshot of how we're doing. And Right now, it's making sure that we continue to outperform our competitors with getting product into the dealers. That's the number one objective that we've got.
spk10: Got it. Thank you.
spk02: Yep.
spk13: And our next question will come from James Hardiman with Wedbush. Please go ahead.
spk05: Hey, good morning, guys. So I wanted to, unsurprisingly, I wanted to circle back to this slide. Obviously, a lot of information being conveyed here. But just the retail numbers that you're showing here, I read that as the overall retail demand that steps down in the third quarter, despite more manufacturing output, but then steps up a bunch in the fourth quarter. Is that the way to read that? And why would that be the case?
spk02: It's actually more a factor of what we're able to deliver. So when you look at that third and that fourth quarter bar, you see that the blue is above retail. But really what that's reflecting is we're likely to be producing a ton of vehicles into rework, which won't put us in a position to meet the retail demand. We don't anticipate consumer demand for the product to have a substantial step down. It's really more our ability to meet the demand. And so we know because of the checks we do, we're not alone in this. Many of our competitors are signaling to the dealer network around order taking and push out of delivery dates. So we anticipate that that third quarter is going to be a little bit of a challenge. The good news is that we've got an incredible process to get those vehicles reworked and out to dealers, and that's really going to allow us to pick momentum up in the fourth quarter.
spk05: Got it. And so in both cases, what you're conveying here is that you're you're basically going to retail as many units as you're able to get out to dealers. It's just that in the fourth quarter, that number is going to be a lot higher than in the third quarter.
spk02: Yeah, and our dealer inventory is going to improve slightly as we move out of Q2, but it's really not going to move much from there. And I think that really just conveys that we're essentially trying to keep up as best we can with retail demand with current factory production. So we're just... The demand has remained, and we anticipate it's going to remain strong. And, you know, at this point, you know, look, it's frustrating because I wish we could get ourselves to a point where we could meet all of that and start reseeding dealer inventory because my sense is that that would drive even more retail, given what we're hearing from dealers. But, you know, we're dealing with some substantial issues, as is everyone. And not only in our industry, but in just about every industry, whether it's you know, plastics, shocks, semiconductors. And I give the team a lot of credit because they're batting those down every time they come up. And, you know, even though we're pushing some shipments between quarters, you know, they're doing a really good job of keeping things moving.
spk13: Got it. Really helpful. Thanks, Mike. Yep. And our next question will come from Joe Altabella with Raymond James. Please go ahead. Thanks.
spk15: Hey, guys. Good morning. I had a couple of questions on your full-year gross margin outlook, which seemed to get better, but the second half got a little bit worse. So I guess first, how much of a benefit is the lack of promotion to gross margin this year? And second, you mentioned the number of headwinds. How much of that might be structural versus temporary, and how should we think about gross margins, I guess, directionally next year, given all the cross-currents between pricing, surcharges, and obviously the higher input costs?
spk17: Hey Joe, it's Bob. So I would think about gross margins a few different ways. You know, if you look at it on a full year basis, there's about a half a point of negative from tariffs just because we had exemptions in 2020 that we don't, that didn't repeat in 2021. So we sort of started the year with a little bit in a hole. And then, you know, as you think about the price promo, price is a bigger impact than promo for the full year. But promo was a bigger impact in the first half, mainly because of the decline in dealer inventory. We don't see promo levels getting higher in the second half. It's just that they're not going to get lower either. And then, you know, as dealer inventory comes down, the reserves come down, so there's a little bit of impact of that. That was about 50 basis points in the quarter. As you think about the structural, the headwinds, You know, it's a combination of things, right? So there's labor. That will continue, obviously. That's not going to go away. We raise labor rates, but that's not a significant impact. It really comes down to commodities and logistics, and they're relatively equal for the year. So you look at things like steel. You know, steel right now is up, you know, 130%. and 150% versus our, you know, a three-year and five-year average. So, you know, massive increase in steel. You know, aluminum, copper, and resins are all up, you know, 30% to 40% versus those three- and five-year averages. So, that stuff has a fairly significant impact and really has accelerated through the year. So, when we started the year, we thought the impact would be, you know, a level. It's now 4X the level we thought it was going to be from commodities. So... That we expect to normalize. There's nothing out there that says it won't normalize. These are unprecedented levels. The pace at which it normalizes, I think, is the question. And we're about a quarter out in terms of seeing benefit or detriment. And that's part of the dynamic in Q2 is that we are locked on some of our commodity purchases as we commit to volume, really, that also commits to price. And so if price goes up, we don't see it for a quarter. Price comes down, we roughly don't see it for a quarter. It's not exact, but that's the relative math. The logistics side, again, there's the expedite. That'll go away. We're expediting over the top of inventory that's you know, stuck on the water or delayed, that's the bulk of it. We expect that to go away. Things like truck and ocean premiums, you know, ocean containers are an average $8,500 a container right now. Spot rate's $15,000. You know, if you look back at 2019, it was $1,700. Where that plays out, you know, harder to say, but it's also a smaller part of it. So, you know, we think the majority of this will correct itself as the supply chain challenges ease and as commodities normalize. you know, other than labor, and then we'll see what happens with ocean and truck rates.
spk02: Yeah, and I think, you know, Joe, I think that the setup for 22 feels like it's a positive, but I think Bob's point around the timing is key. I mean, you know, we anticipate, as I said in my prepared remarks, that dealer inventory is, you know, still going to be challenged, which means that the promo environment, you know, hopefully will remain, you know, under a better level than it has historically. And if these costs start to abate, you know, we're doing a really good job of tracking that. You know, obviously surcharges and things like that would go back, but we've made and will continue to make pricing moves that, you know, I think we're in a good position to hold on to. So it feels like the setup's good. It's just really more of a question around timing. So we're going to learn a lot as we go through the back half of the year and have a much better understanding once we get into talking about guidance for 22. Got it.
spk15: Okay, great. Thank you, guys.
spk13: And our next question will come from Scott Stember with CL King. Please go ahead.
spk07: Good morning, guys, and thanks for taking my questions as well. Good morning. It clearly sounds that in an unconstrained environment that retail sales in total could possibly be up this year. Can you maybe talk about that, and if that is indeed the case, talk about it by segment? Sure.
spk02: Yeah, well, I mean, first of all, retail will be up for motorcycles, and that is constrained. So I anticipate it would be even better than where we're at. As I indicated in the upfront comments, the demand for the Bobber, as well as for Scout in general, as well as our new Chief model have been off the charts. And so You know, I think in an unconstrained environment, we would see a substantial increase relative to even where we are today in motorcycles. And same goes for Slingshot. From an ORV standpoint, yes, retail would be much better. You know, whether it would get back to flat or be up for the year, you know, I'm not going to make a comment on that because I think it's, you know, there's too much of the year left at this point. But it's safe to say that it would be substantially better than where it is. And, you know, thankfully our team is executing much better than many of our competitors. And that plus the pre-sold order process has put us in a really good spot to continue to gain share.
spk07: Got it. And just last question on tariffs. Could you just remind us what the incremental handling will be for 2021? Yes, sure.
spk17: Incremental for 21 is about $40 million. versus 20. Got it. About 100. Thanks a lot. You bet. Okay.
spk13: And our next question will come from Garrick Johnson with BMO Capital Markets. Please go ahead.
spk09: I have two questions, if I may. First, the price increases. Can you talk about maybe the quantification of your average price increase, and then also the mechanics of the surcharge and how that affects dealers and consumers? And then second is, I get why financial services expectations are where they are, but what I don't understand is how the outlook for financial services changed so quickly. What caught you off guard there? Thank you.
spk17: I'll take both of those. I'll answer the second one first. On financial services, it's really, you know, just the environment. I think as people are waiting, you know, to impact cash, and people are waiting, you know, longer to get their vehicles, so they're shopping credit unions and all of those kind of things. So really across the board, all the third-party partners are just seeing lower penetration. We think that will normalize, you know, as time goes. passes and then things get back to normal and people are walking in and buying at the dealership, that's the real advantage of the in-house financing programs. And so when that normalizes, I think we'll see that go back to pre-pandemic levels. We're not seeing challenges with people getting credits. And then, you know, the other piece of that is what rolled into there is the interest on floor plan. And obviously floor plan is really down because of the fact that there's not a lot of dealer inventory. Can you repeat your first question?
spk09: The first question is on pricing.
spk17: Sure. So on the pricing, yep, we announced last quarter that we were implementing about an average of a 2.5% price increase, and that went into effect May 1st. On the surcharges and price increases on new vehicles at model year, you know, that's all coming in late Q3. and so we're still working through that as to what that will be. We are seeing a lot of people out there in comparable industries and in our industry go out with surcharges related to both commodities and transportation, and so we're going to look at that, and we'll also look at what we think pricing needs to be on a go-forward basis for model year. So we're trying to be balanced relative to what do we price in that we think is going to be permanent versus what do we think is going to be short term with some of the commodities and trade challenges. But we haven't set those numbers yet for later this year.
spk02: And Gary, the thing to remember is, you know, with financial services coming down, that also means we're not promoing for those financial, you know, rate buy downs. So we pick up favorability that essentially offsets a good portion of that.
spk09: I just want to clarify on a surcharge. That's not an increase in MSRP. That's an additional charge to the dealer, and the dealer can then do what he wants with it?
spk02: Yeah, and the reason we do it that way is because it can be very easily eliminated, and the customer knows why we're doing it. And so, you know, if it's a freight surcharge, once the freight environment comes back down to a more reasonable level, that can be easily removed, and you're not messing around with the MSRP.
spk09: Great. Thank you.
spk02: You bet.
spk13: And our next question will come from Joseph Speck with RBC Capital. Please go ahead.
spk06: Thanks. Maybe just to get to the gross margin outlook, and Bob, I appreciate the comments on commodities and logistics. as being headwinds. And maybe this is just sort of the timing of when some of those commis hit you, because obviously commis have, you know, they didn't just start going up. They've been up for, you know, since last summer. So can you just, you know, help us with, if we look at the second half gross margins versus the first half on the implied guidance, it's like 250 basis points lower. And so I get the commodities and logistics are higher. Maybe mix is a little bit of an impact. But you also have the pricing offset. I was wondering if you could just help maybe bucket that and sort of help us bridge that to the basis points.
spk17: Sure. So part of what you're seeing in the Q2 – H1 dynamic versus H2 is that the commodities lag a little bit because we are locked out. In most cases, we buy out 30 days in advance to secure volume really more than price. And we don't hedge, obviously, you know that. So what we saw in the quarter was that we were buying out forward on the commodities. We didn't see as much of the commodity impact as as actually hit the market in Q2, and we saw the benefit of the pricing, which started in May, in the quarter. So from that perspective, it lined up really well, allowed us to have really good gross margins in the quarter. You get to Q3, and the pricing's really in the run rate. Promo was a benefit in Q2, both from lower promo and some reserve adjustments. Like I said, that account, the reserve adjustments were about 50 basis points. You get into Q3, promo stays relatively consistent. Pricing is relatively consistent. And the commodities start to ramp up pretty seriously in Q3, Q4. So that's the far and away the biggest driver. Expedites are relatively consistent. Ocean freight is certainly higher in the back half of the year, at least as we see it right now.
spk02: Joe, just to Bob's point, rough math is the commodity impact is 4x what it was in the second half, 4x what it was in the first half. Because as Bob pointed out, we're rolling a lot of stuff through inventory plus shipping. You know, we did do, you know, we don't do hedging, but we do forward locks and things like that. So, you know, we were dampening that impact into the first half. And then when commodities actually went even further up the cost scale, that's obviously put even just, you know, more mounting pressure into the second half.
spk06: Okay, that's helpful. And just secondly, on the electric ranger, that's supposed to be unveiled end of the year, on sale early next year. the industry challenges on both semis and batteries, is that on track or is that being impacted by some of these challenges? And maybe also if you could just add in any type of investments the dealers need to make in order to support electric products.
spk02: Yeah, we've been tracking that very closely. You know, really the, as you mentioned, the electronics and the battery, you know, thankfully we're, you know, going to have started production in 22. So, So given that, we've got time. I would say there's been some small impacts, but at this point the team is still on track. You know, we, much like we did with the rest of the business, when we saw this stuff starting to happen earlier this year, we made sure that the team went out and protected for this program. So knowing how important it is that we wanted to make sure we didn't have shortages or stockouts that were going to impact that.
spk17: The other thing to keep in mind is that we're partnering with Xero on this eRanger, so it's not like we're starting with a brand-new supply base that's not used to producing these components. Xero's got a long relationship with a lot of these suppliers that we're stepping into, so we see that as an advantage, and it's certainly given us good access to work with those suppliers to prepare for our volume.
spk13: Thank you. And our next question will come from Brett Andrus with KeyBank. Please go ahead.
spk16: Hey, good morning. So going back to slide eight, I don't want to overcomplicate it, but if you use 2019 as a baseline, do the retail bars imply that you're expecting 3Q to slow versus that low double digits that you did in 2Q? I just want to make sure we're using the right baseline for that.
spk02: Yeah, I mean, we still anticipate being up versus 2019 in the third quarter, but just not as much as we had been. And that's not, again, I want to reiterate, that's not because we think there's consumer demand shortfalls. It's just the mounting supply chain challenges that the whole industry is facing right now. Obviously, we've got the team geared to do better than that. Obviously, you guys know how we plan and execute against our business, so we're pushing our teams. We'll continue to do what we've done the last three quarters, which is making sure that we're outperforming the rest of the group so that we can continue to grow the share.
spk16: Got it. I think you mentioned 30% capacity increase across the business in 2022. How much is being added to ORV's And then are the investments that you're making more in, you know, labor or adding shifts? And are there any, I guess, you know, new Greenfield builds in that capacity expansion?
spk02: I don't know that I would call it, quote, Greenfield. It's on our existing Monterey campus. I mean, we are facilitating a building that had previously been used for light work as well as warehousing. So there will be facilitation of that existing shelf. And I would, you know, obviously given the size of ORV, the capacity ads are predominantly focused in that arena. But, you know, as we mentioned on the chart, we are making capacity ads pretty much across the business, whether it be boats or PG&A, just given the uplift in demand that, you know, we've seen this year as well as what we anticipate will continue into 22 and beyond.
spk13: All right. Thank you. And our next question will come from David McGregor with Longbow Research. Please go ahead.
spk08: Yes, good morning, everyone. I guess my question is on new incoming retail orders and just what might be changing at the margin there. And I'm just wondering what patterns you may have been seeing in terms of new incoming retail orders through the quarter and kind of how that evolved through the quarter, from the beginning of the quarter to the end of the quarter. I guess that 80% pre-sold number, which I'm sure is an average for the quarter, but how did that number evolve over the quarter as well? Thanks.
spk02: It continued to increase through the quarter. And I would tell you, based on the number of emails that I get, consumers increasingly want product. And so our perspective is that the underlying demand environment has remained quite strong and Obviously, the concern we have, and I'm sure everybody has, is how long will consumers hang in there? We're making sure that we're communicating with them around the lead times for the pre-orders, keeping them updated to the extent that we can through the communications with our dealer, and making sure we're getting product in the hands of our consumers as quick as we can. We are Obviously, as our margins reflect, we are not sparing any expense. Where we have to expedite, we do. If we have to direct ship from our factory to the dealers to get the product into the hands of consumers, we're doing that. So we know that we can recover those costs down the road, and we want to make sure that we're getting as much product into the hands of the consumers, especially those that are putting money down on them in advance.
spk08: Great. Second question. Thanks for that. Second question is just with respect to your motorcycle gross margins, which I guess there's a lot of things moving around in motorcycles this quarter, but the margins were up very nicely. And I'm just wondering, is that just because, you know, those smaller bikes were weaker in the mix? Is it because slingshots contributed more? Can you just talk about as well how sustainable the improvement might be?
spk17: So there's no question the mix, as you stated, helped motorcycle margins in the quarter. with both slingshot and heavyweight being a higher percentage than they had been in prior quarters. But, you know, the focus for motorcycles, as we've talked about, we've been building out the product portfolio. The Chief was the last big sort of bike we needed to add to have a pretty full and robust motorcycle portfolio. So now we'll be focused more on derivatives and, you know, focused on profitability. So that team has pretty tough objectives to to go after, and we're focused on their path to profitability to continue to improve that business.
spk08: Thank you very much.
spk13: And our next question will come from Mark Smith with Lake Street Capital. Please go ahead.
spk04: Hi, guys. Another question just on motorcycles. As we look at competition, maybe primarily in midsize bikes, any impact in the quarter from competition versus just purely supply?
spk02: Well, you know, I do think, you know, obviously one of our key competitors I think has, you know, found their footing, which, you know, certainly is helping them. I think their supply challenges are probably dampened relative to us given a fair amount of insourced components that they do. But what we're hearing from our perspective is the demand for our product, given the brand recognition, is incredibly high. And at this point, the biggest impact we had was just simply our lack of ability to produce those bikes. So we feel really good. You know, we know that there's some competitive news that came out. Our team's done the assessment, and we still think that we've got the best product in the market. Okay.
spk04: And then the second one for me is just circling back to capacity. And as you're adding some capacity here, primarily in Monterey, can you talk about your other facilities and what opportunities there are in adding additional capacity? And longer term, if supply chain issues get worked out and demand continues to be robust, do we reach a point where we start to look at a new facility that's needed?
spk02: Yeah, so, I mean, we are making moves. I mean, Monterey obviously probably gets more attention just given it's our largest manufacturing environment. But, you know, we're adding, you know, we added capacity in Indiana for boats. We actually took a facility we had shuttered when we shut down Rinker and Larson and are repacilitizing that to be able to handle the Hurricane brand. You know, we're adding distribution space in Ohio specifically. to be able to help us serve our East Coast dealers and some of our Southern dealers much better. You know, I do think we're going to be in a position where we're going to have to reevaluate much larger capacity ads. You know, the team's working through that, and it's a discussion that we'll obviously have with the board. But, you know, at this point, we are 100% focused on making sure we're, you know, managing this current environment and trying to make sure we keep our eyes forward to see when that next, you know, capacity – limit is going to be reached. One of the things that we did was we pushed our teams really hard to go evaluate the labor markets because even though labor really wasn't a constraint for us given the supply chain challenges, once those get abated, we wanted to make sure that we were in a strong position. And so the team did a really good job of looking at each of our facilities and did market-specific adjustments to make sure that we're able to retain and attract labor so that when the supply chain challenges start to abate, labor doesn't become the next challenge. So, you know, I have a lot of confidence the team's doing a really good job. So, you know, I think both the near-term capacity moves that we're making as well as the potential long-term will put the business in a really good spot.
spk13: Great. Thanks. And our next question will come from Billy Cabanas with Morgan Stanley. Please go ahead.
spk03: Good morning, guys. In your opening remarks, you mentioned inventory levels could get back to normalized levels by late 22, early 23. Just wanted to confirm, is that the new timeline you think it'll take to replenish inventory, even despite some of the enhanced capacity you have coming on in Q4 and a pretty strong retail sales environment calling for flat growth versus the plus 25% growth in 2020? And then do you worry about losing customers and share given this delayed timeline? Thanks.
spk02: Yeah. Well, you know, as long as we're continuing to perform like we have been, there's really nowhere for the customer to go. We've got the best delivery performance, and you couple that with the best product on the market, it puts us in a pretty good spot. And the team understands that, and that's where our priority is at. The reason we made the comments around dealer inventory levels is, I mean, they're at an incredibly low level, historically low levels. And when we look at that and we do the math going forward, assuming that you return to kind of a low to mid-single digits retail growth rate in 22, even with the capacity ads, we know that it's going to take time to get the inventory levels up. And the reason that we said late 22 or even to 23 is it's anybody's guess as to when all these – supply challenges are going to abate. When we started out the year, we had a view that these would largely be resolved by the middle of the year and we would be back to building dealer inventory in the second half. And that certainly has not worked out. We're not alone. I don't know that there's many markets you can go and buy a product and actually they've got it in stock. Most of it is dealing with a lot of these same issues around steel and aluminum and resins and specialty components. So You know, the team's got to stay focused like we have been. And, you know, I think the pre-sold order process gives us the ability to get consumers locked in and get excited about the vehicle and make sure that they've got it for, you know, the next riding or boating season, which is really important. And, you know, we're going to do everything we can to make sure that we improve upon that.
spk03: Got it. Thank you. And just on the cost pressures, if these don't abate towards the end of 21, would you consider a substantial pricing increase on new models in 22? And would that be able to fully mitigate some of the cost inflation there?
spk17: Yeah, I mean, obviously, we're evaluating weekly what's going on with commodities and logistics costs. We have a review once a week. And, you know, we will continue to look at that as the year develops and as we head into next year. We're going to look at, as we said, surcharges. We're re-looking at model year 22 pricing. We already took one price increase that was an unscheduled mid-year price increase on the ORV motorcycle side. Boats actually has done a couple price increases. So we're trying to be balanced between price increases to offset the costs versus how long we think those costs are going to stay in the system. And that's a bit of a moving target, but we will continue to be as aggressive as we can be.
spk03: Thank you very much.
spk13: And our next question will come from James Hardiman with Wedbush. Please go ahead.
spk05: Hey, good morning. Thanks for the follow-up. I just wanted to clarify, Mike, I think earlier in the call you said you still expect retail to be up high teams versus 2019. I believe the comparable estimate a quarter ago was 20% to 25%. I just want to make sure those two numbers are apples to apples, and if so, is that basically an estimate of how much retail you feel like you've lost as a result of these supply chain issues versus where we were three months ago?
spk02: Yeah, I probably was mixing a couple things. The high teens was more of an ORV expectation. For the total company, it's still in that low to mid-20% range.
spk05: Okay, so it's ultimately unchanged for both versus how you thought about it three months ago. Yeah. Okay, and then obviously there's going to be no great answer here when you're talking about politics, but maybe speak to the tariff legislation, obviously some differences between the Senate and the House bills that have come through. But just how are you thinking about the likelihood of getting these exclusions reinstituted?
spk02: I wish I was more optimistic. You know, I think there's good rationale. You know, Janet Yellen's been on the record as not supportive of the tariffs. I think it's going to take some movement around the USTR, specifically around the how we want to deal with China. I think there's a view that, you know, any kind of backing off the tariffs is going to be viewed as going light. And frankly, with some of the moves that have been going on with China, I don't think now is going to be the time. And so, you know, we continue to drive the business the way we had. We look for opportunities if we can source outside of China. You know, I don't know that China's really got an impulse to get to the table. You know, the trade imbalance is, you know, widening. So it certainly has not had a huge impact on them. And, you know, I think the administration is going to have to figure out what tactic they want to take. So, you know, we're not going to sit back and count on it. So we've, you know, continue to push the team to manage the supply chain side as much as we can. But quite frankly, it's taken a backseat role to all these supply chain challenges, because obviously, as Bob covered, they're far more expensive at this point than what we're continuing with tariffs. So we continue to monitor it. You know, we've got folks that advocate for us on the Hill, and when the time's right, we'll make sure that we're pushing the right agenda.
spk05: Makes sense. Thanks for the call.
spk14: Okay, a couple more calls, Cole. We got it?
spk13: Yes, sir. So our next question will come from Sean Collins with Citigroup. Please go ahead.
spk11: Great. Hey, guys, good morning. My question is on the electric Ranger coming out in the fourth quarter and next year. The electric vehicle revolution is really picking up steam in autos. So I wanted to ask what reaction you've seen so far on the soon-to-be-released Ranger and any thoughts on your best guess on how electric plays out in the ORV and power sports world in general. Thanks.
spk02: Yeah, the reception around the electric Ranger, at least the feedback we've gotten as people have looked at the teaser videos and the value proposition around it being the highest performing Ranger that we'll have, has been positive. And we've had historically people who've bought our electric Ranger in the past, and this obviously will perform immensely better. And so we think that's a positive. We do think that there's other areas in off-road vehicle, you know, that could be attractive. Obviously, there's portions of our youth portfolio where electric makes a heck of a lot of sense. And then there's going to be other areas that we're going to continue to explore. Now, at the same time, there's a lot of challenges. When you start talking about products like Razor and, you know, the areas that they're used, charging infrastructure and as well as the use case and how those vehicles are used, means that the run times are short and the opportunity to charge them is tough. So we're not just going to use that as an excuse not to go do anything. We've got some ideas around, you know, partnerships and how we look at, you know, the charging infrastructure that others will be likely investing in. And, you know, we're likely to be a fast follower around things like that. But, you know, You know, we've got our plate full with what we've got going on with the Ranger. It's an excellent product, and, you know, the team's in full force to make sure we get that launched at the end of the year and into hands of consumers in 2022.
spk11: Great. That's helpful. Thanks, Mike.
spk13: You bet. And our next question will come from Cian Su with Exane BNP Peritos. Please go ahead.
spk18: Hi, guys. Thanks for the question. You know, so one of the challenges that you highlighted on slide eight was, you know, COVID pressures in places like India and Southeast Asia. I know, for example, in Southern Vietnam, there were some lockdowns recently. Maybe if you just give us an update on the situation there for you guys, and if you can maybe remind us of, you know, how exposed are you to these regions? Thanks.
spk02: Yeah, I mean, we have component supply that comes out of all those regions. And, you know, much like we've had with, other elements of the business, we try and manage those as best we can. And where we've got the opportunity to either source from an alternative location, we will do advanced buys or, frankly, produce the vehicle with the components missing and then go back and do the rework once we're able to get the continuity of supply. So, you know, we are literally managing a lot of different variables. You the availability of shipping containers, availability of trucks or rail. It is literally one thing after another, and the team, as we've demonstrated, has done a great job of managing that. So I think the backdrop hasn't necessarily improved, and you could argue with the Delta variant becoming a bigger, bigger discussion. you know, that that's obviously going to continue to be a challenge, not just for us, but I think for the entire manufacturing industry.
spk18: Okay, thanks. And just a quick one. For the pre-sales or the pre-orders, if I were to order, like, an ORV now, how long would a consumer have to wait for a delivery? Just trying to get a sense of how long people are willing to wait.
spk02: Yeah, I mean, it really depends on the vehicle that you're ordering. But, you know, you could say it's going to be anywhere from, you know, six to ten weeks. And there could be variation on either end, just depending on, you know, the type of vehicle and, you know, where we're at at that moment relative to supply. And, you know, the good thing is that, you know, we're doing a good job of communicating with dealers so they can keep consumers up to date. And as we pointed out, you know, the fallout rate for preorders has been incredibly low, so consumers are definitely wanting to wait to get their vehicle. Yeah, no, that's great to hear.
spk18: Okay, thank you, guys. Yep.
spk14: Okay, I want to thank everyone for participating this morning and your interest in Polaris, and we look forward to talking to you next quarter. Again, have a good day. Goodbye.
spk13: the conference is now concluded thank you for attending today's presentation you may now disconnect your lines at this time
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