Q2 2020 Polaris Inc Earnings Call
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I would now like to turn the conference over to Richard Edwards head of Investor Relations. Please go ahead.
Thank you Andrew Good morning, everyone. Thank you for doing this four to 2022nd quarter earnings call. A slide presentation is accessible at our website at <unk> Dot players Dot com, which has additional information for this morning's call.
Scott why our chairman and Chief Executive Officer, Mike Speetzen, Our Chief Financial Officer have remark summarizing the quarter and they will take some questions.
During the call we'll be discussing various topics what should be considered forward looking for the purposes or the private Securities Litigation Reform Act 1995 actual results could differ materially from those projections in the forward looking statements you can refer to our 2019 10-K for additional details regarding these risks and uncertainties.
All references to the second quarter 2020 actual results are reported on an adjusted non-GAAP basis, unless otherwise noted.
Please refer to our Reg G. reconciliations schedules at the end of this presentation, but the GAAP to non-GAAP adjustments now, we'll turn it over to our CEO Scott what Scott. Thank you Richard Good morning, and thank you for joining us last quarter I spoke about how thankful I was for the players team's hard work and how confident I was they have positioned us to now.
Advocate and when throughout the pandemic.
With the surge in demand for off road vehicles motorcycles and more recently pontoon boats. The team is demonstrating impressive agility in resourcefulness, they support our dealers and deliver innovative products and solutions to our customers.
We will talk about outperforming expectations. This morning, but admittedly the outlook. We provided in April was off by country mile. The economic walk down of our dealers and suppliers along with concern for the global economy I missed a pandemic, let us to model negative retail sales for the second quarter end the year.
Reality has been much different as many more people sought out the family enjoyment excitement and utility of our vehicles and when coupled with more free time and fewer alternative ways to spend money. This provided a near perfect backdrop for our power sports dealers.
Our priorities remain consistent since the onset of cobot 19.
First implementing protocols and guidelines to keep our employees safe then working across our global supply chain factoring that work to ensure the viability of Polaris.
Winning for our dealers and customers and ultimately doing good for our shareholders.
Even though I've known as a tough greater the team or an extremely high marks in each of these fundamental considerations.
The combination of record off road vehicle retail cobot 19 related temporary plant shutdowns and our erroneous forecast for lower demand brought dealer inventory down below target levels, but our factories are performing well as they ramp up to meet demand and refill the channel.
Liquidity is not a concern currently but the cash war room exercises that Mike Speetzen his team.
I have greatly enhanced our cash outlook and management ability.
Well non cash we did take a 379 million dollar impairment charge for aftermarket business, which reflects the greater impact tap is space from cobot 19 and tariffs.
This is accelerating our strategy to progress predominantly on taps retail channels, which I will cover shortly.
[noise] second quarter, North American retail sales were up 57% behind broad based demand across our dealer network.
A key fact underlying this topline number is that nearly 75% of our off road vehicle in motorcycle buyers in Q2 were new to Polaris.
Well, we love our current customers, we know that new customers are more likely to invite their friends the power sports spend apparel and accessories and buying another Polaris vehicle.
The demand for foresee or crew side by side vehicles reinforces the family dynamic behind this surge, while RPG ne business experience its largest ever quarterly sales confirms our large and growing installed base still has a strong desire to accessorize their vehicles.
Both Indian and Slingshot performed well in the quarter with the new Challenger and Slingshot Auto drive leading notable market share gains.
Boats did not turn positive until June but the subsequent recovery was quite robust.
Despite our impressive retail performance in off road vehicles, our market share did decline in the quarter.
This is never an acceptable outcome and I'm extremely confident that Steve Menneto and his team are driving the necessary actions and improvements to reestablish market share gains.
In the quarters ahead.
I do not want to make any excuses, but this simple fact helps put things into perspective.
In the months of May and June the growth of our side by side business outpaced any of our competitors total sales over the same period.
Kind of cool.
Dealer inventory declined precipitously in off road vehicles and slightly in motorcycles for a net decrease a 47%.
Did bring our plant network down for approximately 10 days, including Monterrey, which was down considerably longer but our significant U.S. footprint was an asset that enabled us to respond quickly once we came back online.
With factories rapidly ramping to full production, we expect to make progress towards replenishing dealer inventory throughout the second half although year end levels are likely to be down substantially.
As noted our growth is largely being driven by new customers, who are increasingly gender ethnic and age diverse.
Changing market dynamics are certainly contributing to this shift, but the customer engagement and demographic outreach efforts that Pam permission or team really didn't give me confidence that we can sustain it.
Expanding the market is uniquely beneficial to the market share leader and we will continue to invest in initiatives to keep this trend going.
The aftermarket impairment charge, we took primarily related to tap did not cause us to change strategies, but it did accelerate the work Craig Scanlon and his team are doing to transition to a much more retail focused business model.
While we still see benefits in the integrated multichannel approach we've been operating we recognize it does not require taps entire existing wholesale business, which has been a consistent drag on profitability.
Distinct for to be P. advantages in business to consumer retail with both our national brick and mortar footprint and our significant online presence performing well.
With a more retail focused business, we expect to drive consistent growth and better leverage our investments and our exclusive cat brand offerings.
California store closings and tariffs remained near term headwinds, but the path to improving positive profitability is clear I will now turn it over to our Chief Financial Officer, Mike Speetzen, who will update you on our financial results implants.
Thanks, Scott Good morning, you'll recall during our first quarter call. My comments were centered around maintaining healthy liquidity profile given the economic uncertainty as a result of the pandemic as Scott indicated given the tremendous rebound in retail sales during the quarter, an extremely hard work of the Polaris team I'm pleased to report that our second quarter results significantly.
Outperformed our previous expectations, our liquidity profile has returned to normal levels and our full year earnings expectations have rebounded to near pre cobot levels I'll provide additional detail in our view for the remainder of the your but for some comments on our second quarter results.
For the second quarter sales were down 15% versus the prior year all segments reported lower sales driven by our plants temporarily suspending production for up to a month and a half due to the code endemic.
The state despite many of our plants producing at or above pre cobot 19 levels by the end of the quarter, we were not able to offset the loss production during the shutdown period.
Second quarter earnings per share on a GAAP basis was a loss of 235 million or $3.82 per diluted share, which included a noncash pretax goodwill and intangible impairment charge of 379 million.
Last year's second quarter income was $88 million or $1.42 per diluted share.
Adjusted earnings per share was $1.30 down from the prior year second quarter adjusted earnings of $1.73 per share, but up significantly from previous expectations, given strong retail sales, enabling greater shipments. This coupled with strong cost management drove the over performance in the quarter.
The 370 million noncash impairment charge is related to our aftermarket segment, primarily transamerican autoparts, given the deterioration unexpected short and mid term economic performance of tap due to cope with 19, the company reevaluated the goodwill and intangibles in the aftermarket reporting unit and concluded that the fair value of the reporting unit.
And certain tap trade names were less than their respective carrying values, resulting in noncash goodwill and intangible impairment charges.
As Scott indicated we believe in the fundamental long term attractiveness of the PTAB business as we continue to take corrective actions to navigate the current economic environment and strengthen the business for the long term.
Adjusted gross margins were down 190 basis points year over year, primarily due to kobin related under absorption at our factories from the cobot 19, driven temporary production suspension.
We also incurred cost to ensure the health and safety of our employees at all facilities, we did recognize a modest level favorability and tariffs in the quarter given the lower volumes and continued progress on exemptions as well as refunds of prior tariffs paid.
Operating expenses, excluding the impairment charge, which weve separately categorized were down 15% in the quarter as we cancelled or postponed all non essential expenditures.
And undertook employee related cost actions as a result of the pandemic driven economic uncertainty.
Turning to our segment performance all segments experienced lower sales during the quarter as expected given the reduced shipments as the pandemic began to take hold early in the quarter.
Moving now to our balance sheet liquidity profile for the quarter operating cash flow was 310 million for the six months ended June thirtyth up 53% from the same period last year and up significantly from Q1.
Driven by lower working capital requirements.
Since our Q1 call our cash position has improved significantly we initiated a cash war room approach in Q2 that enabled the company to more effectively and efficiently manage cash flow, which not only benefited Q2, but through process enhancements will benefit the ongoing performance of the company.
As a result of this effort and improving business conditions cash on hand at quarter end was 544 million and our total debt levels finished the quarter at 1.9 billion down sequentially from Q1 by approximately 236 million or 11%.
We currently have approximately $650 million available under our revolving credit line as well as within our loan and we're also within our loan requirements.
Combined with our cash we ended the quarter with approximately 1.2 billion up liquidity, given our current liquidity and near term outlook, we do not anticipate any liquidity issues for the foreseeable future.
Financial services income, which is primarily comprised of wholesale finance income and retail credit income was strong during the quarter up 28% driven by the strength of retail credit income given the strong retail demand.
Euro wholesale finance income was down 48% during the quarter due to dealer inventory levels being at historically low levels as Scott explained earlier.
Moving to full your expectations you will recall that we withdrew our full year sales and earnings guidance back in March given the onset of the cobot 19 pandemic in the immediate negative impact to retail.
Since that time, our visibility has improved somewhat while we don't expect the demand trends seen in Q2 to continue at those rates. We are re initiating guidance given depleted dealer inventory levels, coupled with modest ongoing power sports demand.
Total company sales are expected to be in the range of 6.65 billion to 6.75 billion, which is flat to down 2% for the full year.
While we don't anticipate reaching our pre cobot sales guidance range. It is encouraging that we're projecting to nearly reach our pre coded earnings expectations on lower sales for 2020.
We expect total company earnings per share to be in the range of $646.60 per diluted share, which is near the low end of our initial guidance of $6 in 80 cents to 75 per share that was provided back in January before the pandemic crisis.
Given our full year sales and earnings guidance second half sales are expected to increase in the mid to high single digits percent again, driven by low dealer inventory levels and modest ongoing power sports demand.
The second half adjusted EPS equates to a range of four hours and 85 cents to $5.06 per diluted share or a 38% to 44% increase year over year.
For the second half of 2020, we expect our revenue to be approximately evenly split between Q3 in Q4, however, given the mix of products produce and on timing of new product introductions second half earnings are more heavily weighted to the fourth quarter by about 60%.
Though our visibility has improved I won't be giving as much detail as we typically do for guidance today as there are still many uncertainties around how this pandemic will play out for the remainder of the year.
However, I will give you some top level comments around a few key areas beginning with gross margins.
We now expect our gross margins to be about flat compared to last year, despite being down 230 basis points in the first half of the year. The significant second half improvement is driven by improved absorption at our factories, along with lower than expected tariff costs. During the first half of 2020, we applied for almost 20 million of refunds from past tariff payments.
To apply for just under 10 million of additional refunds on exclusions already received in the second half we've received the cash of the bulk of these apply for refunds at this point.
Our full year guidance also assumes that we don't receive extensions for our current terror exemptions, which are set to expire next month.
Operating expenses are expected to be down slightly as a percent of sales and in total dollars year over year, given the cost actions taken in Q2 and continued cost discipline into the second half considering a recovery in our business. We have approved several strategic programs and marketing outlays, we will continue to manage our cost with disciplined mindful of the economic uncertainty.
Financial services income is expected to be flat to last year with higher retail income offset by lower wholesale proceeds from Polaris acceptance.
And finally foreign exchange, while slightly improved from our initial 2020 guidance is anticipated to be slightly negative to pre tax profit.
Moving on to sales expectations by segment again, I will give only directional expectations given the challenges in predicting with precision how the economy will perform the strength of our second half recovery is primarily driven by the Orbi slush snow boats and PGN a businesses. We anticipate continued weakness in adjacent markets given the dependence on government University car.
General and rental sales with that I'll turn it back over to Scott for some final thoughts.
Thanks, Mike.
Our outlook is much improved from a quarter ago, and I, certainly expect our forecast accuracy to accuracy to at least be Directionally correct. This time as consumer and dealer demand has remained strong through July.
We have invested significantly in tools protective gear and social distancing at our plants, an obstacle to guard our employees from the risk of covert 19 exposure and a redoubling our efforts as community spread increases.
Dealer health is also a priority and for the next few months that means accelerating shipments the advantages of RFM are paying dividends as we can shift production and redirect deliveries faster than our competition.
With our awesome team impressive vehicles, and accessories, and engaging creative and rigorous sales execution I like our chances to drive growth and market share gains in the second half.
Aside from a few minor delays of our model year 21 product launches. They are on schedule and will emphasize the innovation is alive and thriving at Polaris.
As we proved in the first six months of the year. This players team is ready to deal with whatever comes our way.
Power sports appears strong, but the overall economic and global outlook is less clear amidst the persistent threat of cobot 19, So we will be prepared to navigate revpor sees if they arise.
While the risks surreal and im not from the optimism I can fairly say that we are entering the second half of 2020 with the best set up for the industry and Polaris that I've seen in my dozen years at the helm.
With that I'll turn it over to Android over the line for questions.
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At this time, we will pause momentarily to assemble our roster.
We're going to Andrey.
Our first question comes from James Hardiman of Wedbush Securities. Please go ahead.
Hi, good morning.
When you make sure I understood. The commentary on July since you put it out there is obviously may and June were unprecedented in terms of orbi strength.
It sounds like based on the prepared remarks, and a press release that that ultimately continued in July is that accurate.
Hi, it's still far above our expectations.
Okay.
That's helpful and then.
Any more incremental color you could give us on that 75% of your sales.
Which came to from new customers that sounded like maybe the most bullish part of all of that and maybe help us think about.
As you know investors are going to look at business say, while it is weve unbelievable.
How are we going to comp against this next year right and so.
Maybe any color you can give us on the sustainability.
Of this unprecedented strength, maybe starting with that new customer fees. It's probably helpful. JV as you can refer back to slide seven where we kind of go through some of the demographic.
Increases that we've seen but really our core customers are are very engaged right now and we're seeing solid growth amongst our our call that our loyal Polaris customers.
But increasingly with more time without again, its without literally baseball without soccer games without being able to take a trip to Disney they have more time and more money and so a lot of people that are new to the sport are coming in and finding a vehicle that's right for their family are right for.
For them and what's nice about it and I referred to in my prepared remarks is that.
Our core customers are great, but theyre somewhat ancillary right they've got their riding bodies and they've got.
Core routines, but as we bring these new customers and they're more likely to invite their friends to come along for a ride they're more likely to be in line for a second.
Flares vehicle overtime, so we really like it and again, it's partly because of demographic shifts, but it's really a are result of the tremendous effort. The pan permission or team are doing to facilitate this kind of.
Growth, but yes, you are certainly right the comp next year is going to be tough.
Got it thanks for the call it.
Our next question comes from Scott Stember CL King. Please go ahead.
Good morning, guys and thanks for taking my questions or.
Do you maybe talk about the inventory situation I know the.
Obviously this is.
Unforeseen demand thats.
Bringing things down to depleted levels, but.
When will you guys gets will point, where you feel that you have 100% of what you need.
At these levels or is there a risk that at some point you could start facing some some serious shortages, particularly on the side by side.
We are seeing some shortages now I will just applied Steve Menneto and the team for really being able to move products around and get it where retail needs to be with.
With Monterrey being impacted as long as they were at really did put pressure on razor production and I think weve rebounded.
As fast as anyone possibly could in Mexico, but that was a bit of a challenge for us and.
Where the plants are really running at at rate right now and we're making good progress, but as I said to James.
The July demand still puts us so we're chasing demand and trying to replenish stock and we're not making a whole lot of progress right now, but it's hurting retail, but I will tell you that.
It's not hurting it such that it's it's not not too bad.
All right and lastly, just digging into this new customer that you talked about Im just talk about the the age profile and also the credit worthiness of these new people.
Mike I'll speak to the age.
I mean, what we've seen is.
In the 26 to 45 would just kind of how we classify the millennials if you will.
They were up 100%.
For us in the quarter compared to the.
53%.
That we.
We reported overall, so with that age group, certainly did well for us and Scott I would say from a credit worthiness I mean, we continue to see very strong performance as we've talked in the past we use our.
A number of third party independent financing partners, and so that that creates a check and balance and what we've seen from the new demographic the new customers coming in is.
They match the profile the existing customers in terms of the income strength of credit worthiness. So that's that's actually been a bright spot as we look at continued growth.
Got it thank you.
Our next question comes from Greg Badishkanian of Wolfe Research. Please go ahead.
Great. Thanks.
In terms of.
Market share.
Industrywide as well as Polaris ORV Rose I think in the low sixtys. According to the slide for North America, and I'm, just wondering your prediction of market share.
And then just as a follow up.
Given the scarcity of product at the dealer level, what's the promotional environment looking like now and would you expect that to be abnormally low.
To start with the latter question. It is remarkably low we're seeing.
Good discipline amongst the Oems, but really amongst the dealers I mean, they recognize that they don't need to sell something that the next personal pay full price for so we're really seeing good discipline and we really like the fact that our dealers are seeing a profitability boost.
Through this it's helpful for us and you'll you'll see it in our reserves coming down but it's also.
Just helpful in.
And the dealers profitability as well.
It was as part of question of architecture market share, Yes, really what we're seeing is who's got products is the one gaining right now and the Japanese competitors tended to be the ones. I mean, they were that they were the share gainers in the quarter.
We saw it.
Don't like it but nonetheless, we we know how to do and again I'm really pleased with the work that the Stephen Addo and his team are doing on sales execution. Our dealer sentiment surveys were the highest that we've seen and.
Actually since we've been doing the surveys so I really think some improvements there, but really it it was a good quarter for the Japanese and it came at our expense and some of our other competitors.
Makes sense. Thank you.
Our next question comes from Joe Altobello of Raymond James. Please go ahead.
Hey, guys good morning.
I wanted to go back.
Can you point out your expectations.
For the power sports market, we seem to be up low single digits seems like that implies a pretty sure.
Second half.
This does that mean that you feel like Q2 included a fair amount of pull forward.
Or am I missing.
Hi, Joe I don't know if I'd say pull forward I think the fact that we've had so many new customers come into the business that clearly has created a.
Surge in demand.
As I pointed out in my prepared remarks, we anticipate continued growth in the second half just not at the same pacing cadence that we experienced in Q2 and.
Certainly were.
Making the investments to try and make that not the case, but at this point, we felt it was prudent to plan for those levels and given where our dealer inventory level is we've we've obviously got the plants running full board to to make sure we replenish that into the second half.
That's helpful, Mike and I know, it's definitely on progress.
Gives a little bit call earlier, but just wanted to clarify what the difference.
Cost this year versus last year hopefully soon.
On August.
Yes, So let me just give you a couple of data points.
We're obviously still working through as we look into next year, what that means and.
We're obviously still working to try and get exemptions extended but as I look at the numbers for this year, we ended up roughly being close to $30 million lower than what we were expecting and a big portion of that as I indicated in my prepared remarks was the refunds that we've received.
If you go back to our original guidance I had mentioned we were around 10 million of refunds that we thought we would have this year and that number is getting closer to 30.
And obviously that won't repeat into into next year and then as I mentioned in my prepared remarks. The exemptions are not assumed to extend for the balance of this year and that's worth about $12 million. So.
That can give you a sense of what we're looking at assuming nothing changes as we head into 2021, but we're obviously still working the mitigation efforts as hard as we can we have moved some products out of China, and we'll continue to look for opportunities and we're also continuing to work.
Through you STR and the administration.
Got it thank you guys.
[music].
Our next question comes from Tim Conder of Wells Fargo. Please go ahead.
Thank you and gentlemen, first of all congrats to you in the whole team.
Great execution and when that when the goalpost continued to move throughout the whole quarter.
So for the questions have been answered but.
Scott going to slide six.
Again, you said, you're continuing to chase demand. It appears more on the RV kind of there were current demand is on motorcycles, but obviously the other part of that equation is the channel replenishment to adequate levels.
When do you think that latter part getting the channel back to adequate levels.
At this point.
Would be reasonable to expect.
I think we'll get motorcycles there by.
Beginning of the fourth quarter. So you know because demand does fall off for motorcycles seasonality.
Certainly feels like we're going to be chasing yet.
You know for really the remainder of the year with off road vehicles because.
As Mike said, we've been relatively conservative with our expectations for retail in the second half.
But if it exceeds that which it has so far in July.
Can put us in a deficit situation, where our optimal dealer inventory is for us for most of 2020.
Okay and then.
As a follow on here.
Any potential looking to repay liquidity and then on tax law changes. So whoever wants to take this one I know Scott. This is probably not in your optimistic bucket, probably your pessimistic bucket, but proposed changes by some of the candidates out there on the individual in the corporate how do you anticipate that at this.
Point.
Potential impact that that could have on 2021 demand.
You know I'm.
I'm not going to speculate on what's going to happen in the political arena here over the next few months I certainly don't part of the reason, we're being conservative with our guidance is we just not sure what the whole election rhetoric is going to mean due to demand. So we're being a little bit cautious about that clearly.
Change in the administration would be negative for tax policies for both corporations and likely on many of our customers. So.
We're we're mindful and be watching that but nothing we can do except.
Try to get a different outcome.
And then from a from a liquidity standpoint, obviously, we are doing tremendously better than we had expected.
Anticipate that that'll continue through the year, we guided that our operating cash flow will be up mid teens and I think we're going to be in a position. We have a 100 million a notes that come due in December.
That will be easily dispensed of the biggest issue.
I'm working through with my team right now is the 300 million a term loan that we took out there are restrictions as have been publicly disclosed around share repurchase and some other things and I think I'd like to try and get that off of our shoulders as best we can but we'll continue to look at that we want to make sure that our forecast is is settled out and things are working towards what.
We've guided if not better and and will continue to manage that but our goal is to continue to delever the business and we did that in Q2, and we'll do that for the rest of the year.
Okay greatly helpful. Thank you gentlemen.
[music].
Our next question comes from Brett Andrew of Keybanc Capital markets. Please go ahead.
Hi, good morning, So following up on promotion what do you plan to do.
But the fact, we authorized clearances fall given the inventory situation.
Normally this this time of the year, we start here in new products News, you mentioned, some delayed but the timing of those new leases till sometime here in 2020.
Yes, no as I said, we've been the teams really done a nice job and I when I say the team. It's certainly our engineering group, which many of them working remotely have really done a nice job working with our supply chain team and our factories teams to keep our production launch is on schedule I don't.
Thanks anything is moved.
Out of the year now we may choose for commercial reasons to not launched something.
Depending on how it goes in the season, but no certainly everything is is on track to be in the year. If we wanted to be within the year.
The.
Epay see as you can imagine with.
Out any.
Inventory excess inventory.
We won't be running our traditional.
FSC playbook I will tell you, though the teams really come up with a great plan with again as I talked about the the strong demand for accessories. The record PJ quarter that we had we are going to have a.
An event, where we promote our our aftermarket accessories and give people the opportunity to accessorize their vehicles.
Through this the fall thing, but but right now with demand where it is.
It would be foolish to to spend money on an efficacy.
Got it and if I could just.
A follow up with one more on inventory likely to be down substantially by year end, but is there a new normal channel inventory you want to end up that when things start to normalize I guess, what I'm getting at is well dealer terms, possibly be structurally higher coming out of this going forward.
Yes.
One of the investments, we've made and Ken to sell and his team really let it is to get RFM throughout the entire portfolio and so we've been working with our dealers prior to that the pandemic and actually in the early days of the pandemic. They wanted less inventory. So we were helping them to lower their profiles.
We are certainly looking at how much inventory finished goods inventory, we need and how much inventory we need in the channel.
And that's a that's an individual profile with each individual dealer that we will continue to evaluate and no but I don't know that it's a huge step down, but it's likely to be slightly less.
Thank you.
Our next question comes from Jamie caps of Morningstar. Please go ahead.
Hi, Good morning, guys next quarter.
So I'm curious about gross margins on the having it I summarize it the greatest.
Okay, and the second half.
Back to flattish gross margins for every year when.
Our products.
Catalyst, we should really be thinking about that will help that metric and.
Hi, Jamie it's it's going to primarily be driven by just the surgeon volume when you look at.
From first half to second half our volume is going to be up well over $800 million and we're driving a 40 plus percent drop rate and just given the mix of business I think it's important to point out we've talked in the past our TB.
Portion of Orbi does carry less lower margins and side by side and we've experienced strong growth there as well so that'll that'll dampen that just a little bit and.
There is a little bit of favorability from some of the terrify refunds it'll come into the second half, but really we're actually going to start to face headwinds as we get into the latter part of Q3 and into Q4, given the exemptions will expire and will be bleeding off.
The the lower value inventory, so I mean, that's really the the gist of it.
Our supply chain transformation program is continued in earnest I can tell you that the team has not taken any of the pressure off of that.
Savings as we've talked in the past are ramping as we get into the second half so that certainly providing a little bit a tailwind and but it's really attributable to the volume increase.
Okay. That's helpful and then with the right on our car I think you probably updated youre.
That's right.
Sales potential and maybe profit potential for that segment is there any insight you guys might be willing to offer on that as you are we value that.
Business.
Yes, so the.
Two things, one we reevaluated tap and bodes you'll you'll be able to read it in the queue that comes out today.
The tap business was far more significantly impacted it performs better than automotive, but if I was more of those those trends, which have been quite deep and that really.
Triggered the what we had to do on that business. The boats business has been impacted but it's held up well and.
Jay can the team continue to run that business incredibly well.
And while it did lower the head room versus between the market in book value we still.
Obviously are in a in a good spot there and assuming we don't have any further economic issues. We're we're pretty confident with what we can do that with that business going forward.
Scott went through in the prepared remarks with tap the retail side of that business is doing very well, especially with being slightly handicapped by some of the store closures and things that we've been dealing with but the pickup in store and just the overall retail performance do it yourself really has propelled that business nicely.
Okay. Thank you.
Yep.
Our next question comes from Gerrick Johnson of BMO capital markets. Please go ahead.
Thank you good morning.
All right so into first quarter call guys first quarter call. You commented that cobot hot spots were not necessarily in great offered writing areas that seems to flip hot spots in south and west anterior.
Has that affected retail falls out a concern or was that something in retrospect really wasn't initial in first quarter.
No I think what remember.
Writing it off road vehicles about one of the safest things you could do to not get over 19. Most people are wearing gloves, they're wearing helmets, there and the outdoors. Those three things are about as good as it gets and.
Certainly.
And I think what I said is.
And what I, what I meant when I talked about the hot spots aren't where we sell it wasn't that that's not where we sell during the pandemic thats not where we sell anyway, I mean, San Francisco, New York City, the great markets for something they're just not great markets for snowmobiles and offer vehicle.
And you know Chicago is a good market for motorcycles, but some of the other cities or not so I really think.
As the.
In a weird way garik pandemic drives it limits people's opportunities to do other things, which brings them into power sports and we've seen that continue and you know as a.
As the media talks about the increases in some of these states today said it really is not there has been zero negative correlation with our retail.
Okay, great. Thank you.
Next question. Our next question comes from Robin Farley, Yes. Please go ahead.
Great. Thanks to his comment.
Little bit, but I just wanted to clarify two things on.
Retail expectations for the year, you're saying up low single digits for the market and then I know you said Polaris little bit head of assets.
Given that.
The industry was up 50% to 60% in Q2, how do you get to low single digits for the year.
Claims in the second I know, there's I'd, unless you're just sort of making a.
Conservative statement about the full year, just trying to screw them.
Yeah, we we do have retail I would tell you Robin it's kind of flattish in the second half.
We expect Q2 will our Q3 will continue to be positive, although not anywhere near as positive as what Q2 was.
But Q4 is when we anticipate things will go negative.
I do think we're being conservative given what we've seen in July but you know we've seen how volatile the environment can be and and depending on how things shake out with.
Now covered will be dealt with we've got the election uncertainty theres just a number of different things that could interject a lot of volatility and quite frankly give us uncertainty. So that's that's the way we're looking at it right now and obviously if things start to play out better than that we're in a position just given all the great work that's been done in our factories to be able to try and respond to that.
And then also your.
Your expectation that it's going to kind of take you most of the rest of year to kind of replenished.
Inventory at least in the Harvey segment does that mean I guess, how should we think about.
Yes.
If retail is better than the sort of flattish outlook, you are saying for the second half.
It does your capacity constraints limit your retail in other words what.
Supply ultimately going to be capping growth as well just given obviously how depleted inventories are.
Can we think about like kind of what the supply constraint might be on retail is taking.
Thanks.
You know Robyn I will tell you again I just want to give a shout out to what the work that Steve Menneto and our logistics team that everybody is doing to move stuff route even with inventory down where it is we are seeing incredibly strong retail through July so I'll tell you that where.
We're almost down 50% from where we were at the end of this first quarter and we're still driving very very strong retail so.
Where no we're not it's not like there's zero on the floor. It just limits the upside that we're seeing in them certainly if demand continues as it is we will be chasing it longer than we anticipate our factories I'm really pleased with the work going on in our supply chain in factories to be running as well as they can so it.
Literally is just a matter of.
What happens with retail, but we don't think theres a huge hit.
I mean it all we're doing is talking about decreasing the significant positivity of retail I don't think thats a terrible thing.
So you could grow retail double digits third quarter.
Yes.
And given the level you saw in Q2, but you are not capacity constrained to that degree it sounds like right. You can still do some level is double digit retailers, our dealers are not going to run out of inventory.
Okay. Thank you.
Our next question comes from David Macgregor of Longbow Research. Please go ahead.
Hi, Good morning, it's called West on for David. Thanks for taking my question on I guess to start off how has cubit 19 impact way the players conducts business online.
In the long term and are you looking at more direct to consumer channel utilization.
Yes last time, we talked about the launch of quick deliver ride, which has been really helpful and we're seeing more of our customers engage online with trends American auto parts for example, where they've got a great online presence that.
It's really doing well.
And our own accessories, and aftermarket business were increased increasingly craig creating opportunities for consumers to buy from us and pickup at the dealerships. So.
We are doing more to move people in that direction really its enhancing the web site to make it easier for people to do the shopping there and then ultimately coordinate with that delivery to the consumer. So a lot is happening in that environment. We just launched the industry's first customer portal.
We saw the press release, perhaps yesterday with ride ready and the ability to have dealers come to your house and repair your product. So we are certainly preparing to lead the way for a more digital future but.
It it's transpiring now certainly with adventures, we're gaining just tremendous momentum there is more people you know take advantage of the opportunity to find a place to ride and go do it for a weekend.
Ultimately that's going to be helpful to to long term purchases. So yes, the teams really embraced it but not a tremendous ship from shift from first quarter now.
Okay. Thank you and then can you provide some color on challenger and how the progress is going there I believe on the first quarter call you guys coming into challengers, taking share an Indian retail up mid teens percent.
In the second quarter would suggest that you guys are continuing to do so and what does the owner profile look like for challenger specifically.
In a challenger as I indicated my prepared remarks is doing extremely well and we like our heavyweight segment, it's more profitable, but really mid size has done just a tremendous resurgence and.
And our mid size bite scout bobber, and even FDR are performing well, but really it's that the first liquid cooled bike we've ever put out.
Really the it fits the profile for many riders that actually liked victory. It gives them a little more room on the bike and.
Really when compared to the competition is just a your hands down better bike. So we feel really good about what the demand has been both from consumers and now dealers and.
It should be a gift that keeps on giving for awhile.
Alright, Thank you very much.
Our next question comes from Craig Kennison of Baird. Please go ahead.
Hey, Thanks for taking my question and Great call really really helpful discussion here.
My question was on Indian.
Just competitor there is conceding market share to focus on scarcity value and that would seem to leave a nice price umbrella for Indian and really opened the door for further share gains does that change your view at all and the potential for Indian volumes and profitability going forward.
You know.
What what we've seen.
A year ago, you might recall there was some lunacy over there as they were embracing promotions than.
Discounts that at a rate we hadn't seen ever from them. So I think pulling back from that and having a more rational approach makes a lot of sense.
The industry needs better pricing power, our dealers need better that and you got to see some discipline. There is a is welcome news will ultimately it's a it's a good brand they've got a good dealer network and we don't expect to have this gift that they've given us continue but certainly with lower unit volume in their dealers.
Jepson higher prices, it really and really we just got a great lineup of bikes I I tell you what what minority and his team are doing to make sure that that we're getting the bikes, where they need to be but really the lineup is good and getting better and then we're encouraged by that.
Thanks.
Our next question comes from Brandon Rolle.
Northcoast. Please go ahead.
Good morning, I, just had a couple of questions first Ono parts and accessories availability I think everyone understands or be inventories challenge, but could you shed a little light on parts and accessories availability, especially ahead of affect your authorize clearance, we'll be running those special event for parts and accessories and then to just also could you talk about.
The new families that are coming in are they replacing a vacation or do you really think these families are staying in the industry for the local thank you.
Yes, Steve Stevie spend is done on miraculous job with our business since he's been here and really the teams managing inventory reasonably well we were a little heavy.
With PJ inventory, both in our dealerships and within our own.
Warehouses. So this is help clean that up a good bet and they've done a again just like the whole goods they've got a nice job managed and supply chain. So we're not seeing.
Many stockouts and when we do their days not not weeks or months. So that's been very helpful and really FHC is really designed around some of those accessories that are slower moving but really beneficial to consumers and I think Steve Steve and Steve Eastman and that it would work together to come up with a good plan there that I think should work well for our dealers.
Yes, I think the the question around the new families and how permanent I I think when you're when you're making a commitment to the the price tag of vehicles. We have I think it's safe to assume that this is going to become part of of what they do and they're going to realize that it becomes a great family activity as Scott said in his prepared remarks.
The number of foresee vehicles are crew vehicles that were selling is highly indicative of this being more of a family activity in.
While it may not fully displaced people, taking vacations I think that.
Brings a new aspect of being outdoors and enjoying that with not only their family, but with friends and we.
We think that Thats something that can continue into the future. It's something that we've been focused on.
It was a big part of the rebranding of the company that we did.
And so we think it is sustainable obviously the growth rates will will be tough to mimic but we do think that we're bringing these folks and permanently into the family.
Great. Thank you.
Our next question comes from Mark Smith of Lake Street. Please go ahead.
Hi, guys can you talk about with new customers coming into the space, primarily as we look at off road vehicles.
Just a little bit about your mix did you see more let's call them entry type vehicles, maybe some older nine hundreds and one thousands versus xps and pro xps or perhaps out 80 abuse trended during the quarter.
Certainly that's you kind of nailed it I mean, we certainly saw exactly that happened now part of it again was due to availability.
But I think first priority we saw people wanting crew vehicles that just.
Where they are but then the next thing down 80. These were very very strong in the quarter and ultimately I think newer families as Mike just talked about they come in they don't want to buy that premium vehicle. They just want something to be able to get on the trail and enjoy time with the family. So.
[music].
I will tell you, mostly what's driving the mix is availability right now and.
But those new customers are wanting to to try it out and not the premium side of the market.
Okay and follow up to that does that give you a perhaps opportunity for upgrade as we look maybe next summer and then also with that just anything you can talk about on stimulus and how you think that impacted sales and as you look at maybe another round coming out to any potential positive impacts from that.
I don't I.
I don't think next year all of these new customers coming in they are not likely to upgrade a year from now I mean, I think some will.
We love those people that do but I don't think we should count on that what is more likely though is again as I said the likelihood of them inviting their friends and so they have someone else to ride with having those people ultimately by vehicles is much more likely than that that individual upgrading.
The vehicle.
I think.
From a stimulus standpoint, we've actually spent a lot of time with our partner retail financing banks as well as external advisors and.
The U.S. savings rate went up.
We saw consumers actually prepaying loans. There was there was some taking advantage of deferral of loan payments and things like that but those seem to be returning to normal levels. It.
It doesn't look like people were using that as just the way to get to a new vehicle.
As I mentioned earlier, the credit worthiness of these folks coming in they typically have dual income family they weren't necessarily heavy it heavily impacted by.
The unemployment.
Activity that happened coming out of Q1 and into Q2.
And we think that they saw this as a way to use money that they had allocated for other things vacations crews as you name it so.
At this point, we don't foresee that the stimulus necessarily had a gigantic impact now if there were more stimulus that were to come in the system. I think it just gives people that much more confidence and could create more stimulus for demand going forward.
Excellent. Thank you.
Our next question comes from Joe Spak of RBC capital markets. Please go ahead.
Thank you very much Scott I missed sports for many reasons, but one of them is certainly.
You are running out a little anecdotes to compare the business too.
Bigger bigger picture question just away from all the other positives for the near term trends.
It's and it's really somewhat of a strategic question. So.
In the past you've talked about electrification and I know you have some product there still prohibitively expensive.
And I think if you look at the list price from some new competitors, taking preorders for vehicles that are not available until 21, if ever prove that but I am wondering if there is a lesson there for you because the cost will come down you know the RV customer better than anyone.
And so have you thought about that sort of model about putting out vehicle design, taking preorders seeing what demand really is trying to retain your leadership for what could be a growing part of the market over the years.
And maybe you could you remind us would you always do something the powertrain for those alternative vehicles in house or would you ever partner, yes. Good. Good. Good question, Joe I'll tell you that I'm counting on Navy Notre Dame playing.
The labor day weekend to kind of get back into the whole sports analogy opportunity for me, but we'll we'll see what happen certainly began to a bit dismal of late.
When we made the leadership change last year, we put Chris Musso ended this electrification role for us and.
While we haven't been issuing press releases there have been has been tremendous progress.
Made by the team.
Understanding what the opportunities are and how we might approach that market. So.
I'm not I will tell you that my thinking.
About electric has changed certainly the concern all long for me was this the triangle between range cost and and performance and right now we believe that triangle, starting to narrow end and be something that we can bring to the power sports consumer that is not only as good but potentially better.
Than some of our.
Our current industrial I mean in internal combustion engine operation. So we see the opportunity.
We expect to to be I'm amongst the leaders the lunacy that you talked about with some of these preorders of vehicles that don't exist.
We're probably not going to do that but.
You know what do I know their valuations are so high but certainly expect more from us around electrification.
And then not too distant future.
Thank you.
Okay with that.
That's all the questions. We have we want to thank everyone for participating. This morning, we look forward to talking to again next quarter, Thanks, again and goodbye.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.