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spk03: Good day and welcome to the Polaris first quarter earnings call and webcast. All participants will be in listen only mode. Should you need assistance, please signal conference specialist by pressing the start key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to J.C. Weigelt, Vice President of Investor Relations. Please go ahead.
spk06: Thank you, Jason, and good morning or afternoon, everyone. I'm J.C. Weigelt, Vice President of Investor Relations at Polaris. Thank you for joining us for our 2022 first quarter earnings call. We will reference a slide presentation today, which is accessible on our website at ir.polaris.com. Joining me on the call today are Mike Speetson, our Chief Executive Officer, and Bob Mack, our Chief Financial Officer. Both have prepared remarks summarizing the quarter and our expectations for 2022. Then we'll take some questions. During the call, we will be discussing various topics which should be considered forward-looking for the purpose 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 2021 10-K for additional details regarding these risks and uncertainties. All references to first quarter actual results and 2022 guidance are reported on an adjusted non-GAAP basis unless otherwise noted. please refer to our Reg G reconciliation schedules at the end of the presentation for the gap to non-gap adjustments. Now, I will turn the call over to Mike Beetson. Mike, go ahead.
spk12: Thanks, JC, and good morning, everyone. Thank you for joining us today. Just as the winter temperatures here in Minnesota have yet to relent, supply chain pressures persisted during the quarter and negatively impacted our results. While demand for our products remains healthy, ongoing supply chain disruptions continue to constrain vehicle shipments. As a result, our first quarter sales of almost $2 billion were flat versus last year, and North American retail sales were down over 20% against a difficult comparison to last year, where retail was up 70%. That being said, we continue to see positive momentum. Repurchase and pre-sale rates remain elevated. Our model year 23 snow checks sold out, and on-road is seeing strong interest with the launch of our new Indian Scout and Pursuit motorcycles. Compared to the first quarter of 2019, Retail is up 21%, which is encouraging and one metric that helps sort through some of the volatility we've seen through the pandemic. While our first quarter results reflect share loss, we believe this is largely the result of shipment timing versus fundamental competitive wins from new products. In this volatile supply chain environment, share gains and losses are expected to happen throughout the year and are likely to be highly correlated to a manufacturer's ability to get product out the door. Margins in the quarter were also negatively impacted by inflationary pressure, as well as manufacturing inefficiencies associated with supply chain challenges. As a result, adjusted EPS declined 44% versus last year to $1.29. We did benefit from favorable pricing in the quarter, a direct result from the actions we took in the second half of last year and early this year. In fact, we saw double-digit price increase across all segments of off-road, on-road, and marine. We expect positive price momentum for the remainder of the year, which will partially offset increased supply chain costs. I want to take a moment to highlight our five-year strategy that we unveiled at our Investor Day in February. Our strategy refocuses our investments in the core, both organic and inorganic, and drives margin expansion through improved productivity. This, coupled with our focused and balanced capital deployment execution, we believe will will grow our leadership position in power sports and drive significant value creation for our shareholders over the long term. Let me briefly review some of our recent highlights. During the quarter, we announced 165,000 square foot expansion to our Wilmington PG&A distribution center, along with plans to upgrade our paint operations in Roseau, Minnesota. These efforts build on last year's capacity expansion in Monterey, Mexico for our off-road business and our expansion in Indiana for our marine business. This investment in the core gives us the capacity we need for the near term. Our capacity constraints are completely driven by supply chain challenges, and once those abate, we have the capacity to raise throughput and generate improved manufacturing efficiencies in the near term. We also maintained our focus on rider-driven innovation with several new Indian motorcycle models and the launch of our model year 23 snowmobiles. We have received positive feedback regarding these products, and our portfolio of Indian motorcycles has never been stronger given the recent successful launch of the new Scout Rogue and Scout Rogue 60. In late February, we launched 24 new snowmobiles and two new snowmobile engines, an all-purpose lineup built to deliver the best experience on the snow. Led by the new Patriot 9R engine, we also introduced a four-stroke to our lineup with the ProStar S4. Polaris continues to lead the way with the best lineup in the backcountry and on the trails. We were also honored to be recognized as one of Fast Company's most innovative companies. Polaris and Zero Motorcycles were named to the list of the most innovative joint ventures. A true testament to our partnership aimed at delivering category-defining electric powertrains for power sports. The first vehicle born of this partnership was the all-electric Ranger XP Kinetic that many of you were able to ride and admired our investor meeting. We expect to continue leading from the front when it comes to rider-driven innovation and electrification. Big race wins in Razor and Indian Motorcycle highlight the performance aspects of rider-driven innovation. The Razor team took the overall win at the San Felipe 250 with the Razor Pro-R and swept the top three Pro-UTB classes. In addition to King of the Baggers, Indian Motorcycles secured its second consecutive win at the 2022 Texas Half Mile Flat Track Race. That win placed Indian Motorcycle and their team in the top two positions on the leaderboard for the season. Both wins showcase the capability of our products, and we could not be prouder of all the hard work by those involved to bring home these prestigious victories. We continue to see a healthy level of demand and customer engagement, as reflected in several key data points. ORV presold remain near peak levels, increasing sequentially, which supports a healthy demand level. Short-term and long-term repurchase rates are up, and ORV cancellation rates remain low, even with a price increase and delays in delivery. Polaris Adventure rides were consistent with last year, despite the fact that we could not meet snowmobile outfit or demand due to a lack of units being produced. The Polaris Adventures team is gearing up for their main riding season, Memorial Day through Labor Day, and continue to engage new customers in power sports through the recent expansion of our membership program, Polaris Adventures Select, to four more states in the Midwest. Lastly, PG&A attachment rates are at a record high, indicating that customers are looking to upgrade their vehicles, And PowerSports e-commerce continued to see strong growth. Broadly speaking, we remain encouraged given these demand trends. Additionally, dealer feedback continues to be positive around demand, and not surprisingly, more constructive around availability. We serve our dealer network each quarter, and there was one dealer comment that I felt summed up the current environment well. My business is thriving. Send us inventory, and we'll take care of the rest. This, to me, points to a healthy demand environment that is ripe for growth once we work through the current supply chain environment. North American dealer inventory remains at record lows with healthy demand further constrained by the persistent global supply chain headwinds, limiting any improvement in inventory levels. Further, given our strong pre-sold order book, most of the products we ship are already spoken for. While we expect inventory to remain below optimal levels for the remainder of 2022, We do anticipate modest improvement in the back half of the year and more profound rebuilding of inventory levels in 2023. Of course, that is assuming that we see the supply chain improve in line with our expectations. Given these dynamics, even if demand moderates, we believe there is runway for growth into 2023 as dealers get back to healthier inventory levels. As I mentioned, the supply chain challenges that exist globally, from component shortages to logistics challenges, are negatively impacting our production and shipping execution. Today, we have approximately 50 suppliers with component shortages impacting over 100 of our units, and while that supplier number has remained consistent over the past year, the number of units these suppliers have impacted has risen sequentially and year over year. Specifically, semiconductor shocks, displays, and wire harnesses are the areas where we are experiencing the most risk, and like many other industries, the root cause of these shortages remains logistics, materials, and labors. As we work to remediate the current situation, we are refocusing our lens that we look at the supply chain environment through. Specifically, we're taking a longer-term view and suspect that the supply chain will not likely see substantial improvements in the near term. As such, we are making design changes to work around challenging components, We have also reduced dozens of models to remove complexity to enable better delivery, and we are institutionalizing certain aspects of our organization in recognition of the near-term permanence of the supplier and logistic triage efforts. We believe these efforts will improve our ability to deliver, and as a result, we will begin to see the impacts materialize in Q2. Lastly, I want to express my gratitude to all of our employees who have worked tirelessly to meet the needs of our customers. I'll now turn it over to Bob who will summarize our first quarter performance as well as our expectations for the remainder of the year. Bob.
spk13: Thanks, Mike, and good morning or afternoon to everyone on the call today. My comments will be around our first quarter performance and expectations for the remainder of the year. Before I jump into more detail, I do want to emphasize that the negative impacts from the supply chain were the main driver to these results, and as Mike said, our teams are working tirelessly to navigate through the pressures. While we do expect to see modest recovery beginning in the back half of the year, as you all know, accurately predicting the timing and extent of supply chain recovery is difficult. Let's start by walking through sales and operating profit for the quarter. Sales of $1.96 billion were flat relative to last year, with lower unit shipments and favorable pricing almost netting out. International sales were up by 1%, driven by strength in EMEA and Latin America, while Asia Pacific saw modest declines. Total PG&A in the quarter was up 8%, with on-road PG&A up almost 20%. Adjusted EBITDA margin was down 446 basis points, with lower shipment volume and higher cost premiums being the largest headwinds. Positive price helped partially offset some of the increased costs around freight, raw materials, and inefficiencies associated with the supply chain. With mid-single-digit price increases effective April 1 on new and pre-sold ORV orders, we expect to be in a better position to offset the higher than expected commodity and logistics costs we saw in Q1 as we go through the remainder of the year. As we have discussed in the past, we are pricing to at least offset the impact of inflation on our cost base but do not believe the elasticity in the market allows us to put our normal margin on top of that. This dynamic has a negative impact on gross profit and EBITDA margins due to the math of price netting out higher cost premiums with no flow through to profit margins. To put the commodities and logistics inflation in perspective, the cost of steel and aluminum in our products shipping in Q1 were up over 130% and 40% respectively versus Q1 2021. Spot rates for containers from Asia and U.S. trucking were also up 120% versus the same period in 2021. For steel, that is on top of 2021 rates for these commodities that were already up over 20% compared to the five-year average. All in for the quarter, we have seen our cost premiums jump 150% versus a year ago, or almost $100 million. most of which we see as a result of the current environment we are in, and we'd expect many of these costs to subside over time. Below operating profit, our tax rate was lower than we had anticipated, driven by the larger impact of discrete items given lower income in the quarter. Shares were lower by almost 2 million due to recent share repurchase activity. Turning to our segments, let's start with off-road. Sales of 1.3 billion were up 2% relative to last year. Whole goods were up 1% and PG&A was up a strong 8%. Adjusted gross margins were down approximately 720 basis points. Supply chain disruptions had a negative impact on off-roads performance, impacting volume, mix, and margin. Partially offsetting some of these headwinds was strong double digit increases in pricing implemented in 2021. Looking at retail performance, we were down high 20s in North America with modestly better performance in side-by-sides versus ATVs. We believe the industry was down high teens, thus pointing to a share loss for us in the quarter. As Mike stated earlier, we believe share shifts in this environment are the result of component availability and the ability to ship products into the channel versus the launch of new products by competitors. Thus, we continue to expect quarterly share shifts to be lumpy this year. One way to smooth out the shipment dynamics over the past year is to look at this on a 12-month rolling basis. With this metric, we estimate share in ORV was relatively flat to the industry. Overall, we continue to see ourselves in a strong competitive position within off-road. We believe we are more customer-centric than ever and have the global manufacturing capacity to meet these elevated demand levels. However, results in the near term are expected to be driven by the performance of the supply chain. Switching to on-road now. Sales of $219 million were down 4%, with whole goods down 8%, and PG&A up 19%. Remember that our on-road segment now includes Ex-Im and Goupil. Thus, you see a strong mix of international revenue. First quarter results from those two businesses were up high teens. Supply chain shortages were the main driver for our Indian motorcycle share loss in the quarter. We have brought on additional suppliers for some of our most at-risk components and should begin to see some modest relief this quarter and growth into the back half of the year. Margin was up over 400 basis points due to positive mix in pricing in the quarter. While dealer inventory levels remain low, we continue to see strong demand with our pre-sold ordering process. Indian motorcycle retail in the quarter was down in North America by over 30% and down international by almost 30%. Looking at share on a 12-month rolling basis, we believe we lost approximately one point of share to the industry. Moving to our marine segment, sales of $212 million were up 6%. We continue to see component shortages, which led to some share loss during the seasonally low retail quarter. On a 12-month rolling average view, we believe our share was relatively flat versus the industry. Late in the quarter and into April, we started to see production and shipping trends slowly improving, and continue to believe we will see strong growth in our marine segment this year. Margins were down 137 basis points. Similar to the other segments, marine experienced lower unit shipment volumes and inefficiencies associated with the supply chain. Price was a positive in the quarter, up mid-teens, but mix was a headwind. Looking at aftermarket, sales for the quarter were $218 million, down 5%. where we saw a tap down almost 9% due to lower availability of new and used SUVs and trucks for consumers to upfit. PowerSport's aftermarket was up 16% on strong in-season snow orders. Challenges within the supply chain had a negative impact on inventory to sell, and margins continue to be negatively impacted by inflation. Summing up our first quarter performance by segment, it is clear that supply chain disruptions were the main driver for our sales, share, and earnings performance this quarter. Our ability to execute and deliver in this environment remains our top focus as we progress through the remainder of the year. Demand remains healthy, and we continue to believe we have industry-leading innovation, quality, and safety to deliver the best products in power sports. Moving to our financial position, we continue to expect 2022 will be a strong cash generation year with both operating cash flow and free cash flow well above 2021 levels. Our capital deployment priorities have not changed. We continue to focus on high return organic investments, dividends, share repurchase, and targeted acquisitions. Most recently, we have leaned more heavily into repurchases by buying back approximately $172 million of Polaris stock in the first quarter. We view our balance sheet and financial position as a competitive strength, as it allows us to invest in our business for the long term, while also providing the flexibility to deploy excess cash to generate strong returns for our shareholders. Now let's discuss some updated thoughts on full year guidance. While the first quarter was lower than we had expected, we continue to see healthy demand and expect supply chain disruptions to ease modestly in the back half, both of which should positively impact our performance as we move through the year. Therefore, we are maintaining our full year sales and adjusted EPS guidance. We still continue to anticipate full year sales to grow 12% to 15% and adjusted earnings per share to grow 11% to 14%. We expect consumer demand to remain healthy, but overall power sports retail to be down slightly year over year, driven entirely by ongoing supply chain challenges. We believe this same dynamic will drive share shifts throughout the year as component availability drives shipments and retail. We also expect to see a modest ramp in volumes in the back half of the year as the health of the supply chain improves and the actions we are currently working with suppliers take hold. We believe we have ample vehicle assembly capacity to meet our unit goals in the second half of this year, which should be in line with the unit shipment levels we saw in the second half of 2020. Please see slide 19 in the appendix for further details on expected unit shipment volumes. As we look at the second quarter compared to the prior year quarter, we continue to expect lower volumes across most of our segments, especially in off-road. Price is expected to be sequentially stronger, which should help offset increased supply chain costs. As previously discussed, we will continue to price aggressively to cover our costs, but are not pricing at a margin to our incremental supply chain costs. This will continue to result in gross profit margin degradation compared to the prior year. We believe EPS in the second quarter will be down year over year, which means we will see strong growth in the back half of 2022. For the full year, although we are pricing for higher costs than anticipated, margins are expected to be slightly below prior guidance, due to pressures we are seeing in the business around freight, raw materials, and additional inefficiencies associated with supply chain challenges. We now expect adjusted gross profit margin to be down 100 to 120 basis points for the year versus our original expectations of down 80 to 100 basis points. In addition, we now expect adjusted EBITDA margin to be down 10 to 20 basis points versus our original expectation of flat year-over-year. These pressures are expected to be more pronounced in the first half of the year and ease with volume leverage, higher price realization, and stable cost premiums in the second half of the year. Some other items to note include higher net interest expense for the year that should be entirely offset with a lower tax rate closer to 22 to 22.5%. There were some recent tariff exclusions signed into law, which is a $15 million benefit this year. We are also taking down our share count assumption for the year to be closer to 60 million shares at year end, This is almost one million less than our initial guidance. Overall, global supply chain disruptions continue to have a negative impact on the industry's performance. We remain focused not only on navigating the current headwinds, but also building a more resilient supply chain for the future. We believe we are well positioned to deliver strong sales and earnings growth once the supply chain improves, and until then, we continue to focus on successfully navigating the current environment. With that, I will turn it back over to Mike for some final thoughts.
spk12: Mike? Thanks, Bob. While our results have been impacted by supply chain pressures, we continue to see strength at the dealer and customer level, a signal that demand remains healthy. We're expecting a modest decline in retail this year, driven by low inventory levels of dealers. These low inventory levels are directly correlated to the supply chain challenges. Our near-term focus remains on navigating the supply chain, and while progress might be hard to see now, we are working to control our own destiny by reducing complexity, redesigning around challenging components, and making more permanent organizational shifts to support improved delivery. Our expectation is that there is modest improvement in the supply chain environment. That, coupled with our internal action, supports the outlook that deliveries improve starting in Q2. We have the team and capacity to make it happen, and our focus remains steadfast on delivering high-quality and innovative products to our customers, and we expect this strategy to deliver another strong year at Polaris. With that, I'll turn it over to Jason to open the lineup for questions. Jason?
spk03: Thank you. We'll now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Craig Kennison from Baird. Please go ahead.
spk05: Hey, good morning. Thanks for taking my question. I'm sure there are going to be questions on the supply issues you face, but we're getting more questions on the economy. You know, with the Fed potentially finally ready to act to combat inflation, how do you reconcile the potential for a recession with the fact that you've also stockpiled a ton of demand in the form of these pre-sold consumer units and then the opportunity to restock dealers? I'm just trying to reconcile... You have this tremendous demand, and yet there are plenty of red flags on the economy.
spk12: Yeah, thanks, Craig. I mean, you know, clearly it's something that we're paying very close attention to. You know, I guess I point to a couple things. I mean, you have to remember the customer demographic. I mean, our customers tend to be on the higher end of the pay and income scales, and so that's always helpful information. I'd also point to the fact that, you know, the inflation dynamic has been going on for quite some time now. So consumers have been wrestling with higher fuel prices and groceries and all those types of things, and our pre-solds have held up through that entire timeframe, as we've got indicated on the one chart. You know, the interest rate moves, you know, that obviously will have some impact on our customers, but when you look at the interest rate component relative to the vehicle cost, I mean, it's actually – It's pretty small, so we're actually paying probably more attention to just the price increases that we've had to make just to keep pace with the inflationary pressures. But, you know, we're encouraged. The traffic at the dealers is strong. The fact that consumers are, you know, pre-buying, pre-purchasing at a very strong rate and it's improved sequentially. I'll tell you that, you know, April saw a very similar performance, so we see that trend increasing. And if you think about the news cycle during that time frame, it's been pretty negative just with the geopolitical issues as well as the inflation spike and the moves the Fed is making. So I think if we were to go into a recession, we've had a lot of discussions about this internally. It would probably look like a recession we've never seen because if you look at our inventory, we've got highlighted on one of the charts that we're down 75% from where we were in Q1 of 2020. Even if demand were to soften for a quarter or two or three, we've still got ample runway in terms of getting inventory back into the channel. I'm not suggesting we're seeing the demand soften, but the point I'm trying to make is that the inventory is so depleted throughout the channel that we feel confident we'd be able to work right through any kind of economic movement that we might see or volatility because we've got a lot of work to do to get inventory back in the channel. You know, at this point, we're watching it. We watch it daily. Our biggest challenge and concern, quite frankly, is around the supply chain and just making sure we're doing everything we can to take advantage of our own efforts to improve our throughput. We've seen that starting to materialize in April, so we're going to keep that as our primary focus.
spk05: Thanks, Mike.
spk03: The next question comes from Joe Altobello from Raymond James. Please go ahead.
spk02: Thanks. Hey, guys. Good morning. So, again, not surprisingly, a couple questions here on supply chain, since it does color your outlook pretty significantly. I guess first question, you mentioned today you expect some modest improvement in the back half of the year, but it looks like, if anything, supply chain got incrementally worse in Q1. So maybe what gives you that visibility or that confidence that we do see a turn, you know, starting in late Q2 or early Q3, for example?
spk12: Yeah, you know, I think there's a couple things, Joe. I mean, you know, we highlighted some of the areas that we're seeing pressure, and while not all of them are perfectly lined up, we are seeing, as we work through with our suppliers, so things like wire harnesses and shocks, as we work through with our suppliers, we're getting improved visibility around when they'll be recovered to the volume levels. I mean, the area that obviously is probably the largest pacing item, not just for us, but for the entire industry, and and many other industries is chip availability. So we're staying very close to the couple of key suppliers we have to make sure we understand. And, you know, at least the communications that we've had at this point suggest that they are going to be driving improvement in their delivery to us here in the second quarter. And when you couple that with the other actions that I highlighted during my comments, I mean, we have literally taken out dozens upon dozens of models to reduce the complexity. I think you've probably seen that across our industry as well as many others. To try and take that complexity out, it makes it easier to get the vehicles through the production process. Where we can, we're redesigning so that we can move between chips or even components that are causing us some challenges. And then we've been operating with a temporary set of SWAT teams on some of these troubled supply chain areas. And the reality is, it isn't going to get better anytime soon. And so we're making a lot of those organizational moves more permanent. And that allows us to make sure we've got the right staffing and the folks that can drive the kind of hour-to-hour discussions that we've got to have with our suppliers. So we're watching all that. We are seeing some minor green shoots out there relative to you know, trucking availability and things like that. It's tough to know if that's a trend or just a data point, but we're going to keep a close eye on that.
spk13: The other thing to think about, Joe, is you'll see through the year. I mean, we just put a price increase in April on both pre-solds and new orders. And so, you know, that price will continue to be realized through Q2 and the rest of the year. And the cost, really, when you get into the back half of the year, start to stabilize because the comps were really high last year as well. They were a lot lower Q1, Q2 in 21 than they were Q3, Q4. And costs right now seem to have stabilized at least for the moment. Again, tough to have long-term visibility into that, but we're seeing some relative stability there.
spk12: You know, Joe, the other thing that Bob mentioned, I just want to make sure we emphasize the point, You know, we are expecting to see improved unit deliveries into Q2 and then obviously into the second half. But it's not as large as the numbers may suggest because you've got to really think through the fact that our pricing is ramping. So there's a substantial amount of pricing in the second half, as Bob pointed out. So the unit hill we have to climb probably isn't near as challenging as one may think when you, you know, do the math around our first half, second half. I'm not trying to suggest that it's a layup by any stretch. But, you know, there's a pretty healthy component of pricing that starts to annualize as we get into the back half and more than offset the cost as well as, you know, it makes the hill look larger into that second half from a calendarization standpoint.
spk02: That's very helpful. And just to follow up on that, I mean, your business is very seasonal, right? I'm thinking here offered vehicles, motorcycles, pontoons in particular. If that turn happens in August, September versus June, is there a risk that you miss the season this year from a demand standpoint?
spk12: I don't think so, and not that seasonality isn't important. But, I mean, if you look, the demand in pre-solds for our business really aren't correlating with seasonality. I mean, people are trying to get in line to get vehicles, knowing that it's difficult to get anything more broadly in the economy today. And, you know, our boat business is a prime example of that in terms of, you know, the portion of last year where you would typically see demand wane. It actually spiked because people were trying to make sure that they were able to, you know, get a shot at getting a boat for this season. And I suspect the same will be true as we exit a season. People are still going to want to have access to a vehicle. And when you couple that against the fact that our inventory in the channel is down so substantially, we'd have a restocking even if that demand were to you know, temporarily take a pause.
spk03: Okay, great. Thank you, guys. The next question comes from James Hardman from Citi. Please go ahead.
spk11: Hey, good morning. So a couple questions for me. I guess what can you tell us about retail momentum over the course of the quarter? And I guess, Mike, since you opened the door to April, you know, extend that into April. There's clearly the narrative out there that, you know, however you want to look at it on a comparable basis, but, you know, versus 19, that every month this year has gotten sequentially worse. Maybe speak to that. Obviously, people would want to then connect the dots that, you know, the consumer is souring to some degree, but maybe speak to the sequential momentum.
spk12: Yeah, I don't know that we saw what you suggested. Our retail momentum has remained pretty strong, pretty solid. As I mentioned, we go out and we survey our dealers, and I can tell you that we get dozens and dozens of pages of commentary from them and I really didn't see anything in there that has dealers worried about slowdown. It was almost entirely focused around, I've got so much business coming at me. I just need more product. And as you know, we share, you know, 70% give or take of our dealer network with our competitors. And those comments weren't just unique to Polaris. So, you know, at this stage, I don't necessarily see that. I'm not suggesting that there couldn't be a slowdown at any point, but, All of the statistics we have, I mean, we are watching, as we've got highlighted on that one page, much more than just our pre-sale rates. We're looking at, you know, engagement on the website, e-commerce, attachment rates, everything, and everything is still pointing to, you know, a continued strong market, especially relative to 2019.
spk11: Got it. And then along those same lines, if I'm doing the math right here… ORV retail accelerated in the first quarter versus 4Q, if we're, again, comparing it to 2019. But then you lowered the retail guidance for the year. Is that – help me understand that. Do we assume that ORV retail turns negative again or is, you know, especially in an environment where it sounds like you expect availability to improve? So maybe connect a couple of those dots.
spk12: Well, I mean, we're expecting availability to improve sequentially, but relative to the expectations we had for the year, it's obviously having an impact, a small impact on our ORV deliveries. That is really the pacing item. You know, when we step back, we're not looking at it saying we're expecting some big demand drop-off to drive retail down. It is 100% being driven by availability of product. Now, obviously, if If our efforts combined with a supply chain environment that improves better than we're expecting, we'd obviously be able to improve upon that because, as you can see, in any given quarter, the majority of the retail is pre-sold, which means we've got the ability, if we can get the parts, to get these vehicles through. We've got more than enough capacity. We're not facing labor challenges. This is purely about getting the components in and getting the vehicles out. You know, that's the view we have tied to the guidance that we are putting out today, but we're obviously doing everything in our power to try and improve upon that.
spk11: Makes sense. Thanks, Mike.
spk03: The next question comes from Fred Whiteman from Wolf Research. Please go ahead.
spk14: Hey, guys, maybe just to follow up on that full-year retail outlook, I think in the past we're sort of expecting pretty similar performance from off-road and then on-road. Is that still sort of the case in this new full-year outlook, or is off-road a little bit weaker?
spk13: No, that's still the case. I mean, off-road picks up a little bit more momentum going into the second half of the year. On-road stays a little more steady, but we're expecting them to have similar performance.
spk14: Okay, great. And then if we just think back to last quarter, you had given us a little bit of color just as far as first half, second half expectations. It seems like you came in a little bit below that just based on the first quarter. Are you still sort of comfortable with that prior cadence? Is it going to be even more back half-weighted based on sort of what you're seeing and expecting today? Or how should we think about that?
spk13: Yeah, you know, as I think I mentioned, Q2 will be lower than prior year, and and lower than what we had previous lower in for the full half than what we had previously communicated. I think a good way to think about Q2 is from a revenue standpoint relative to Q1. You'll see a low to mid double digit growth in revenue. You know, think about a kind of regular drop rate on that and a little bit more OPEX in the quarter Q2 than Q1. And that's where we think Q2 will land. And then the quarters get sequentially better from there, Q3, Q4. So it will be more back half loaded as we start to see the impact of the April price increase flow through and what hopefully is a stable cost base and some unit shipment improvement given the supply chain work we're doing that Mike's been talking about.
spk14: Perfect. Thanks, guys.
spk03: The next question comes from Garrick Johnson from BMO Capital Markets. Please go ahead. Good morning.
spk04: I have two, please. Thank you. First, you produce product in Mexico, some in the U.S. You've also got Europe and Vietnam. What kind of differences are you seeing in supply between those regions and manufacturers?
spk12: It's pretty consistent. As you know, our Poland facility is really sourcing largely consistent with the rest of our supply base. We've seen some transitions with suppliers moving, not necessarily moving out of China, but they're creating a secondary supply hub in Mexico. And so that obviously helps from a logistics standpoint, but that's more of a one-off. It's been pretty consistent across the board to all those different facilities. Now, given the facilities are far more focused factories, the specific challenges are what drive more of the unique nature. You know, for example, our Roseau, Minnesota facility is largely a snowmobile factory. And so, you know, last year we had some issues with a bearing supplier, which obviously that doesn't impact any of our other sites. So, you know, it's more around that component availability than it is, you know, for the specific products made than it is a difference in supply base.
spk04: Okay. Thank you. My next question, you know, from our research, it seems exclusive dealers are taking more pre-solds or pre-orders, whereas multi-line dealers, multi-brand dealers, less so because if they don't have a Polaris, they can just put them in a BRP or a Honda or something else. Does that affect how you ship units going forward, pre-solds for stock units?
spk12: No, I mean, look, we're trying to improve the availability. You know, as we talked about in the prepared comments, we're doing everything we can to, you know, ship beyond just the pre-solds, which gets those stocking units in. But, you know, when you look at 70% of our retail is going through pre-solds, our direct Polaris dealerships are a small, small percentage of the base. So we're still seeing good penetration at our multi-line dealers. And we know that, you know, right now, The competitive battle is about availability more so than anything else. And so the fact that we're getting as many pre-solds as we can, we held on to those. The cancellation rate actually was cut in half despite delays in delivery and price increases. We view that as encouraging. And we know that we've got a window here to try and make up for the misses that we've had and make sure we're getting product in the hands of our customers as quick as we can.
spk04: Okay.
spk03: Thank you, Mike.
spk12: Thank you.
spk03: The next question comes from Robin Farley from UBS. Please go ahead.
spk07: Great. Thanks. I have two questions. One is, can you just clarify for Q2, you talked about lower volume across our product lines, but you also said higher price. And so where does that net out in terms of sales year over year being up or down in terms of your shipment sales?
spk13: So, Robin, so Ship in Q2 will be up relative to Q1. We're expecting Q2 to come in, like I said, low to mid single digits from a revenue perspective above Q1-22. Relative to Q2 last year, yeah, units are up. The mix is a little bit different. because we'll have a little bit higher percentage of snow. I'm sorry, a little bit lower percentage of snow, but units will be up slightly.
spk07: So units up slightly year over year, but dollar sales? Sales will be up because of price and volume. Right.
spk13: Yes.
spk07: Okay. That's helpful. Thank you. And then my other question is on margins and with the guidance for gross margin to be down 100 to 120 bits, can you just kind of break out for us? Because there are some pieces of that that you have really good visibility on, like your price increase or like tariffs being lower versus the prior year. And then some pieces like obviously with less visibility because of the supply chain. Could you kind of break out a couple of those pieces for us just so we can think about, you know, like every piece of margin guidance is not at risk here, and there are some, you know, think about the pieces that you do have really good visibility on, if you could just help us quantify that. Thanks.
spk13: Yeah, obviously challenging in the current environment, but, you know, volume mix is a little bit of a tailwind for us right now. I'm sorry, I mean a headwind, just because, as Mike said, we're limiting some of the numbers of units, and the more complex units are obviously harder to make, harder to get all the parts for. So we get a little bit of headwind from volume and mix from a GP perspective. From a price, obviously, we know what's locked in. through April 1st. You know, we don't have a specific plan on when the next time we would go with prices. We do have model year later in the summer, and we've changed our profiles with our dealers, and we can raise price, you know, kind of with a month's notice. So obviously we're staying on top of that. You know, as you look at the supply chain cost side of it, you know, like I said in my earlier comments, you know, we're starting to see some stability, and as we get into the third and fourth quarter, you know, our comparables get to be pretty similar to the levels we're at right now. So, you know, we think the risk of continued increase in supply chain costs to be, you know, relatively limited in the back half of the year versus the prior year and versus where we are right now. In fact, you know, hopefully we'll start to see some things improve. As Mike said, you know, we've seen some green shoots in trucking and container availability and the pricing on some of that. Hard to say, you know, whether that's a trend or not. You know, it's a pretty dynamic environment. But, you know, we think we have some opportunity for some improvement there. So, you know, I think we have good visibility on the price, decent visibility on the mix. You know, the cost premiums, again, I think we're loaded in pretty high right now. And, you know, we've We don't see something today that makes that change dramatically, but obviously it's a dynamic environment.
spk12: Hey, Robin, one way to think about, if you're looking at margin rate, given the fact that we're doing far more frequent reviews of cost and associated price actions, if, for example, we saw commodities or logistics or whatever spike, say, in the second half relative to what we think, you might see margin erosion as a percentage because what would happen is we would very quickly enact price or surcharges to offset that, but we're not building in a 30% margin when we price. You know, the price moves we've made over the past couple years, they're substantial. So, you know, trying to preserve the margin versus just trying to cover the cost is really the, you know, our strategy is we've just got to cover the cost. It may erode the margin percent But from a dollar standpoint, we'll remain intact. So it's really going to come at the execution of our volume levels as we move forward.
spk13: The other thing to keep in mind, Robin, is we're doing our best to manage operating expenses. We improved our estimate at 10 basis points in terms of OPEX as a percentage of revenue when we updated the guidance here today. And, you know, we're going to continue to focus on that as an offset to any increased, you know, supply chain costs or other business disruptions.
spk07: Thanks. And then can you just say anything on margin – I'm sorry, on tariffs in terms of the – Sure.
spk13: So tariffs, you know, we were looking at about $105 million for the year. We've got about a $15 million benefit from the exclusions that were recently enacted, so we expect that'll – be at $90 million unless something changes from a legislative standpoint, which we're not anticipating right now.
spk07: Is that $90 million total, or you're saying delta versus last year?
spk13: No, $90 million total.
spk07: Okay, great. Thank you.
spk13: Thanks, Robert.
spk03: Our next question comes from Joseph Spack from RBC Capital Markets. Please go ahead.
spk09: Thank you very much. Mike, Bob, it sounds like internally, you know, you've at least had some talks about what a recession could mean. And, you know, you've talked about in the past about this restock extending well into at least next year, I believe was your prior comment. So have you done the work? Like if a typical recession were to occur and you saw a demand hit, like how quickly does that restock happen? in that environment versus sort of going through next year?
spk12: Yeah, I mean, we're working through some of that, Joe. I mean, there's a lot to it because you'd have to, you know, determine are people going to cancel on pre-solds and then specific vehicle mix. But, you know, it would accelerate that potentially. But, you know, what I would remind you is, I mean, first of all, the last recession we had during COVID, we saw demand go up. So that was obviously a unique environment. But even if you go back to 2008, 2009, which, again, was a very different recession and driven from very different characteristics than what we're contending with now, we saw our business drop off for a couple of quarters and then come right back. And that was in an environment where we still had a pretty healthy level of inventory. So at this stage, I think we'd have to see a protracted slowdown to have any kind of a material impact. And we're just not seeing that in front of us right now. Obviously, the longer the inflationary environment persists, the more risk there is. As Bob and I both have pointed out, we are seeing some logistics markers that are at least indicating improving availability. We're not sure. One data point doesn't make a trend, and we're trying to decipher how much of that's driven by any kind of a drop-off in more in demand more broadly versus just the logistics channels are improving because they've brought in more capacity and are getting more efficiency. So we're going to be watching that really closely here for the next couple of months. But, you know, I think from my standpoint, it's hard for me to imagine that we end up in an environment where all of a sudden we're going to, you know, do an about face and start looking at taking costs out of the business. I mean, we've got a lot of important strategic initiatives, and with the channel refill opportunity in front of us, even if we were to see a demand drop off for a couple of quarters, you know, I think we're still going to stay the course from a, from a, you know, a business perspective.
spk09: Yeah, that, that, that's very helpful. I mean, maybe almost taking, you know, sort of a different, completely different scenario. Like you mentioned a number of times you've taken and will continue to take substantial price here and that's helping to cover some of the inflation, but you know, clearly the inventory situation is, is probably making that a little bit easier to swallow. So if we think further out as inventory, not only for you, but your competitors normalize, I guess I'm wondering how you think this plays out because MSRP is sticky, but to get industry volumes higher, it would seem like you're like the industry setting itself up for a higher promo per unit in the future. Is that, is that your view or is there sort of like a new normal here with, with the mix of maybe, you know, keeping, you know, lower inventories than normal, but higher than, than today?
spk12: Yeah, I mean, I think it's something we've spent time and continue to talk through. I think it's going to be a little bit of what you just articulated. You know, our goal is, when we get on the backside of this, we're not going to be carrying anywhere near as much inventory. Now, obviously, we can't, you know, forecast what our competitors will do, but dealers... are making a lot of money right now. And with our ability in a normalized supply chain environment to deliver products quickly and customize for what customers are looking for, that gives the dealer a really good opportunity to make more margin. If they're not carrying as many stocking units, they're obviously not paying the interest for the floor plan. and they're not going to be induced by consumers to have to put as much promo against it. Now, I'm not suggesting promo won't come back. It will be back. It never completely went away. I mean, we still have some levels of special programs for the military, the ag markets, interest rates, things like that. So it will, but our strategy all along was not to try and be egregious with price because we want to be able to retain as much of it as we can. And that's why, you know, we've seen the dilution to our margins because we're essentially just covering the cost increases with the price moves. And we do suspect that when inventory gets back into a more normalized and, you know, the economy is back to normal, whatever that might mean, that, you know, we'll see a little bit of promo come back, but we're also going to see these costs coming out of the system. And net-net, we think that's going to be a net positive for margins, and we think the dealers will continue to benefit as well.
spk09: Thanks very much.
spk12: Thank you.
spk03: The next question comes from Zion Hsu from BNP Paribas Exane. Please go ahead.
spk10: Hi, guys. Thanks for taking the question. I think last quarter you talked about how you expect market share gains to continue into 2022. Is that expectation still intact with the new updated resale guidance?
spk13: Yeah, I think as we think about market share for the year, as we've said, it's going to be, you know, lumpy quarter by quarter. I think really driven by people's ability to ship into the channel. Right now, you know, I think we think market share will be relatively flat with the industry, but obviously it's going to depend on, you know, our ability to ship. So, you know, being the biggest player in the industry. So, you know, I think if we can continue to see some improvement from a supply chain standpoint. You know, we have got a good opportunity to take share. We've got a huge amount of pre-solds that are holding firm. So if we can ship those, I think we've got a good opportunity. But, you know, we're being realistic in our view right now, looking at what we think we can really ship and obviously having to take a bit of a view on what the rest of the industry is going to ship, which we don't have perfect visibility to.
spk10: Yeah, understood. And then on the inventory, you know, inventories are up. I just kind of want to understand how, I guess, supply chain is impacting that. Do you have inventory in transit in terms of, you know, maybe at the L.A. ports or, you know, you talked about China. Or is it like a lot of partially built units? Is it just raw materials on the books? Just maybe if you can help unpack the inventory.
spk13: Sure. So, you know, inventory – It's actually all of the things you mentioned. So increased product in transit, mostly on the water, longer transit times from Asia, longer time stuck in the port, you know, inventory being expedited on top of that to help meet production. So that's increased in transit. Raw materials are up. Some of that is, you know, you get build fallout and you've already brought the materials in but you're missing some certain key components. Uh, we're working hard to, to balance that out and make sure we're bringing in the things we really need and, and not, uh, continuing to, to bring in things that we've already, uh, you know, accumulated through the course of all this supply chain disruption. So the teams are on that every day. Um, so I think you'll start to see that improve on the raw side. And then, you know, really it's, uh, on the finished good side, you know, the biggest driver is the, um, inventory that's being held for rework. We're taking an approach of holding the majority of our inventory that needs to be what we would call reworked or needs components added to it that were short when it was originally built, holding it in our warehouses and doing that rework in-house versus shipping it out to the dealers. Obviously, from our view, we're doing that for a quality perspective and also not trying to burden the dealers. You'll see finished goods ramping up a bit because of that inventory that's held waiting for rework. And again, as the supply chain improves, we look to sequentially take that down quarter over quarter through the rest of the year.
spk10: Okay, got it. Thanks, guys. Thank you.
spk03: The next question comes from David McGregor from Longbow Research. Please go ahead.
spk08: Yes, good morning, everyone. My first question was really with regard to retail credit. I'm just wondering if you can comment on what you're seeing in terms of retail credit availability for consumers. And with all the talk and concern these days about a potential recession dead ahead, are credit providers maybe pulling back a little bit? And anything you can give us on that would be helpful.
spk13: Yeah, we haven't seen any pullback from a retail credit availability – or approval standpoint. Our pen rates are down a little bit because of the time consumers have to wait to get a unit. So it gives them more opportunity to shop the credit unions and other things. So it disadvantages dealer financing a little bit. So we're obviously watching that to try to help our dealers work through that. But we haven't seen any increase really in defaults. Defaults are at all-time historic lows in the portfolios that our partners have. So, you know, as of right now, we're just not seeing those issues.
spk12: And, you know, David, I'd remind you that, you know, the – The retail construct, retail finance construct is, you know, we've got separation between us and the provider, which means that they're the ones carrying the bulk of the risk. And that means that, you know, the folks that are getting credit through those retail providers are usually, you know, high FICO's, strong credit history. And, you know, at least what we've seen, and we even saw this during the 2020 timeframe around the, you know, the pandemic impact. our customers tend to stick with making their payments. So, you know, at this point, I don't think there's a whole lot of risk in that area.
spk08: Right, right. Good to hear. The second question is just with regard to the PG&A business, and it seems to be an important growth provider for you right now. How are field inventories in PG&A? I realize there's probably a big difference between parts versus garments and accessories, but Do you have the depth of inventory in the field right now to continue that growth?
spk12: Yeah, it's improved. We went through a period where we had some pretty high back orders because obviously we're sourcing from many of the same suppliers. The difference is that you've got a lot less parts that have to come together. If someone's buying a winch or a bumper or even a cab system, that compared to building a side-by-side that requires 3,000 parts and components to to come together at one moment to complete the vehicle. The complexity is just not there. So the availability has been much better. And frankly, just the innovation we've got. You know, you look at the number of offerings that we've come up with and the attachment rate for each one of our vehicles, it has increased. And, you know, I give the team with Indian Motorcycle a lot of credit. You know, we've seen really strong PG&A growth as they've continued to look at more and more offerings to really build that portfolio out. So it's encouraging. You know, our power sports aftermarket, so the non-PG&A piece that businesses like Crow Arm or Climb, Colpin, 509, obviously saw continued strong growth. So the teams are doing a good job in working the availability. You know, we do have areas of stock outs, but, you know, we're pretty quick to get those addressed and get, Whether it's parts or garments or apparel into the hands of our customers, we're doing a pretty good job. Great.
spk08: Thanks, Mike. Good luck.
spk12: Thanks.
spk03: The next question comes from Jamie Katz from Morningstar. Please go ahead.
spk00: Hi. Good morning, gentlemen. Thanks for taking my question. I guess, first, can we talk a little bit about aftermarket, the aftermarket segment and what you are – forecasting for the auto industry, I guess, for the remainder of the year, given that the back end of the year looks like it's going to have to be significantly improved. And then will you talk a little bit about the cost structure improvement that you are making in this segment? Thanks.
spk13: Sure. So, you know, you have to think about the aftermarket segment, obviously, in two pieces of the trans-American piece and the power sports piece, and they operate fairly differently. The trans-American piece has been negatively impacted by just the availability of new cars or new trucks and Jeeps, effectively, and even the tightness in the used market. So, you know, consumers tend to buy a new vehicle or a new-to-them vehicle and then take it into our 4WP stores for upfit. And, you know, just that lack of vehicles in the market, you know, that's been a headwind for the business. You know, for the rest of the year – Many of you follow the auto markets more than we do, but we're not anticipating dramatic improvement from an auto availability standpoint. There is seasonality built into that business, so you tend to see Q2, Q3 tend to be just better seasons because people are out using their vehicles more, and we tend to have more volume in those quarters. So we do anticipate those quarters being improved from Q1. We're also, you know, been focused on – we've added some new stores, and so those will sequentially come into the run rate as the year rolls out. So that will help from a retail revenue standpoint also. On the power sports aftermarket side, you know, that business has been really strong. If anything, it's been limited by just availability and timing of shipments of both product and apparel. You know, a lot of the apparel is made – outside the U.S., particularly on the kind of Gore-Tex waterproof side. And so, you know, logistics and shipping have been a challenge there, but had a strong Q1, and we anticipate a good year with those businesses.
spk00: Okay. And then I just have one follow-up on the inventory discussion you were having earlier. The way that – it was being described implies that working capital demand should theoretically be significantly lower as we go through the year. Is that the right way to think about it?
spk13: Yeah. I mean, assuming, you know, we start, we continue to see, uh, or we, we start to see modest improvements in the supply chain and, uh, increase our ability to, to ship. Um, we should start to see improvements in working capital as inventory comes down. Um, obviously, uh, We've got to get through that to see it happen, but we're very focused on trying to limit what's coming in and focus on getting units out the door. So we should see better working capital in the second half of the year.
spk08: Thank you.
spk03: This concludes our question and answer session, and the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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