Polaris Inc.

Good day and welcome to the Polaris Sector 20 earnings conference call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to J.C. Weigelt, Vice President of Investor Relations. Please go ahead.

Thank you, Betsy, and good morning or afternoon, everyone. I am J.C. Weigelt, Vice President of Investor Relations at Polaris. Thank you for joining us for our 2022 second 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 Steetson, 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 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 2021 10-K for additional details regarding these risks and uncertainties. All references to second quarter actual results and 2022 guidance are for continuing operations and 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 GAAP to non-GAAP adjustments. Please note that with the completed divestiture of TAP on July 1st, historical results of the business are now reported as discontinued operations starting with the second quarter of 2022. Financial figures and guidance referenced today incorporate this change unless otherwise noted. TAP was historically included in the company's aftermarket segment. However, because of the transaction, we eliminated the aftermarket segment, and the resulting Powersports aftermarket businesses were reclassified to the off-road and on-road segments. Please see the appendix in today's earnings presentation for a historical reference of the reclassified segment data. Now, I will turn the call over to Mike Speetson. Go ahead, Mike.

Thanks, JC. Hello, everyone, and thank you for joining us today. I hope everyone's having a great summer and taking the opportunity to get outside. Our second quarter results are indicative of stable demand and a healthy consumer, offset by supply chain challenges, which continue to constrain inventory at the dealers. Sales of approximately $2.1 billion were up 8% relative to the second quarter of 2021. Our teams continue to perform exceptionally well in a difficult operating environment, and our results during the second quarter reflect our unwavering commitment to remain the global leader in power sports by executing for our dealers and customers. While we are closely watching a number of indicators to understand the resilience of the consumer in this environment, the data continues to show a healthy consumer and stable demand. That said, North American retail sales were down 23% versus 2021, largely driven by supply constraints. Specific to North America, ORV retail was up 13% sequentially. Although these results reflect modest share loss, we continue to see share driven by shipping timing versus fundamental competitive wins from new products. We did see share trends improve late in the quarter as availability improved, and we expect this to continue into the second half of the year. Further, we're seeing modest improvements in the supply chain, which should begin to help build inventory at the dealers, as well as improve market share performance. While we are nowhere near being clear of supply chain headwinds, we are seeing logistics improve, supporting sequential margin improvement in Q2, and experiencing less volatility in some commodity costs. Pricing continued to be strong, offsetting increased year-over-year costs. It's important to understand that the math of strong pricing offsetting costs produces minimal drop through resulting in pressure on margins. We expect this to continue to improve in the second half as we see better realization of our previously enacted price increases. All in, adjusted EPS declined 7% versus last year to $2.42. We had a number of highlights during the quarter, so let me touch on a few. It was exciting to announce the nationwide rollout of our Adventure Select offering. Through the industry's first monthly subscription program, members can now use monthly credits to rent the Polaris vehicle of their choice at Polaris Adventure locations nationwide. Members now have open access to get outside and explore their own cities or bucket list destinations across the country in a new way, exploring the outdoors off-roading, touring the city in an open-air slingshot, or even cruising the open waters by pontoon. Since launching Polaris Adventure Select early last year, 90% of our members are new to the power sports industry. Again, reflecting our commitment to open the industry up to new riders and customers. In the spirit of innovation, which is the DNA of our company, we held our annual innovation awards to celebrate receiving a record-breaking 70 patents this past year. We are nearing the 2,000th patent mark since our inception, and we anticipate we'll hit that milestone this year. We continually strive to push the industry with rider-driven innovation and the bus customer experience. As the market leader in power sports, we believe innovation is key to growing the market. We have a strong track record of innovation and are excited for what we have in store later this year and into next year. During the quarter, we celebrated two important days aimed at celebrating our riders, the industry, and inviting new consumers to discover what power sports has to offer. The first was International Female Rider Day in early May, where people in over 120 countries took their motorcycles, off-road vehicles, snowmobiles, and boats in support of the female riding community. It was great to help celebrate this event and increase awareness with women, particularly because we have seen female ridership increase approximately 30% over the last two years. The second event was National Get Outdoors Day, and what better day to celebrate than with a company that asks its customers and employees to think outside? Our products live outside, and we want people to think about getting out with our products to help them discover fun and unique ways to experience the outdoors. The final highlight I want to mention, and which transitions us to the next slide, is the launch of our 2021 Geared for Good ESG report. We launched this initiative in 2019. One thing remains certain, our products live in the environment, and we need to be good stewards to our land, water, and air. Our 2021 report consists of a tremendous amount of information and some success stories around our ESG strategy. We've done a lot of work to reduce energy use, water consumption, and our carbon footprint. In addition, we have a $5 million investment with the National Forest Foundation to help improve trails and protect our land for our future enjoyment. We also provide support in our local markets to help improve repair and create trails. Our Geared for Good ESG report lays out some of the initiatives we've related to our rider safety. With many new riders coming into the space, safety is paramount, and we aim to support our riders on how to ride safely and responsibly. In fact, August kicks off National Motorsports Safety Month, and we have plans to leverage the timeliness of the month to promote safe riding practices with all our riders. While we remain genuine and authentic with this strategy and will continue to do the right thing for our stakeholders, it is always nice to see external parties recognize the work you're doing. We have seen recent improvements in Rater scores and accolades from a variety of publications. Our Geared for Good strategy will continue to play a critical part in the direction of the company, and I'm proud to lead a culture that embraces this commitment. Shifting to consumer demand, we are continuously looking at a variety of indicators to understand true demand and the health of the consumer. While this is art more than science, in aggregate, we believe our data shows a resilient consumer and stable demand, with the vast majority of these indicators positive during the quarter, with some others reflecting moderating demand. Looking at North American ORV, retail was up 13% sequentially. This data point, in combination with the fact that we shipped approximately 10,000 more units sequentially, led to a modest decline in presolds as a percentage of retail. As our shipments have increased, we are also seeing dealers able to retail more units on the floor or in transit, which is another step in the right direction to get back to a more normal environment and one factor that will naturally lower presolds going forward. This phenomenon was more pronounced in lower-end models versus higher-end or more complex models, where component availability is still challenged. Shipment levels continue to dictate retail performance as our days to retail continues at an incredibly fast pace. During the second quarter, days to retail was in line with that of 2021, which was one-fifth of the time we saw in 2019. This means there's a high correlation between what we ship and what is retailed, which has given us little opportunity to restock dealer inventory. Some other demand indicators and what they're signaling include short and long-term repurchase rates remain elevated or within the historic range. Off-road and on-road pre-sold order cancellations remained low. PG&A attachment rates remain near record levels, indicating that consumers are looking to upgrade their vehicles with high-margin accessories. Web traffic remains well above the 2019 in areas like website vehicle builds, as well as inventory and dealer searches. And lastly, customers new to Polaris continue to dominate retail purchases. Broadly speaking, we believe our demand trends are stable and the consumer remains healthy, especially when compared to 2019 levels. Additionally, dealers continue to be positive around demand and more constructive around availability, which we appreciate, but know we have more work to do to improve availability even further. While other factors such as rising interest rates, inflation, and higher gas prices are certainly a concern, our data continues to show a resilient customer. Remember that our average consumer is fairly affluent, consisting of a dual-income household, and has good credit. We'll continue to evaluate these metrics and communicate with our dealers regarding demand, but as it stands today, we see consumers that continue to be interested in power sports. Filling the channel remains one of the biggest opportunities for us in the near to medium term. With robust demand extending over the last several years, Inventory levels have not been able to keep pace due to supply chain challenges. Where we sit today, inventory is down approximately 70% from pre-pandemic levels in 2019. While demand has been strong since 2019, supply chain challenges have constrained the industry's ability to deliver, and as a result, Polaris has only grown at a 2% CAGR over the 2019 to 2022 period. So despite strong demand, we and the industry have not seen outsized growth. So what does this mean? From an inventory build opportunity, the chart on slide 8 shows our expected year in inventory position versus where it theoretically would be using the 2019 day sales metric. We've talked before about a new optimal level of inventory given what we've learned over the last several years, what we're hearing from dealers, and how we've been able to operate in this constrained environment. We believe this new optimal level of inventory represents an approximately 2.5 times increase from current inventory levels, which we estimate could total almost $750 million. This opportunity is separate from demand trends and could represent a meaningful buffer for sales if demand wanes, or it could also represent upside if demand remains elevated and the supply chain can support production to fill the channel. Switching gears to the supply chain. Challenges remain globally. However, there are signs of improvement from logistics to the number of component shortages negatively impacting our production and shipping execution. Today, we have approximately 25 suppliers with component shortages impacting over 100 units. This represents an improvement of over 50% sequentially, and suppliers with part shortages impacting over 1,000 units has fallen 35% sequentially. Despite those improvements, we are still dealing with shortages in key components that continue to limit production, such as chips, shocks, and wire harnesses, particularly for our higher-end vehicles. While some of this is a trend in the right direction, production remains hampered by challenges within the supply chain. We continue to expect modest improvements as we progress through the second half of the year. We've seen improvement in logistics relative to what we saw in the beginning of the year, with very few delays at major points of entry. This has allowed us to reduce expedite costs, which had a small positive impact in the second quarter and is expected to be another positive factor in the second half of the year relative to last year. Reviewing our five-year strategy, we are now closer than ever to being a core power sports company. The sale tap earlier this month demonstrates our ability to execute on our stated goals and refocus the organization on being the global leader in power sports. For our continuing operations, the five-year financial goals we laid out at our analyst meeting earlier this year remain the same, with mid-single-digit sales growth, mid-to-high-teens EBITDA, mid-20s ROIC, and double-digit EPS growth. We view this focus on power sports and the financial metrics we laid out as a significant value creation opportunity for our shareholders, and our teams are committed to the strategy. Let me now turn it over to Bob, who will summarize our second quarter performance, as well as our expectations for the remainder of the year. Bob?