Q3 2020 Polaris Inc Earnings Call

October 27, 2020

[music].

Good morning, and welcome to the Polaris third quarter 2020 earnings Conference call.

All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.

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Please note this event is being recorded.

I would now like to turn the conference over to Richard Edwards, Vice President Investor Relations. Please go ahead.

Thank you Gary and good morning, everyone. Thank you for joining us for 2023rd quarter earnings call.

Slide presentation is accessible at our website at IR Dot Polaris Dot Com, which has additional information for this morning's call.

Scott wine, our chairman and Chief Executive Officer, and Mike Speetzen, Our Chief Financial Officer have remarks, summarizing the quarter and then we'll take some questions.

During the call we will be discussing various topics, which should be considered forward looking for the purposes of the private Securities Litigation Reform Act of 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 risk and uncertainties.

All references to the third quarter 2020 actual results are reported on an adjusted non-GAAP basis, unless otherwise noted please refer to our rate do you reckon reconciliation schedules at the end of this presentation to the GAAP to non-GAAP adjustment.

Now I will turn it over to our CEO Scott what Scott. Thanks, Richard Good morning, and thank you for joining us.

Only 10 months into this year that continues to present serious and surprising challenges I remain inspired and impressed by the dedication and execution of this Polaris team.

Their safety is always our number one priority. It is never compromise, we as we say accelerate production to meet rising demand.

Well, mostly review the resulting financial this morning, but the combination of agility teamwork and creativity that is driving those numbers is much more noteworthy.

Consumer interest in power sports stayed at record levels throughout the quarter as our dealers continue to attract new customers winning the competitive battle now is as much about availability as it is innovation. So our emphasis is temporary shifted from demand creation to demand fulfillment.

Oh Polaris businesses are outperforming our internal expectations as our factories and supply chain ramped replenished dealer inventories.

The investments in talent and tools, we made to execute factory choice and supply chain transformation are paying off allowing us to manage not fight. The several dozen suppliers that are still working to recover.

And start crying contrast to a year earlier, we ended the third quarter with total liquidity at an all time high Mike Speetzen and his team have dramatically improved our cash management capabilities, which is a nice boost to a business that historically generates a lot of cash.

Between our strong year to date results, an improving outlook for the fourth quarter, we are raising our full year earnings per share guidance, which now sits above our original targets for 2020.

Third quarter, North American retail sales were up a healthy 15%, but.

Our internal analysis suggests that it could have been double that if we had been able to accelerate production faster.

A good example is our boat business, which achieved 50 plus percent retail growth as they efficiently ramp production and out ship their competition.

[noise] availability hurt our off road vehicle market share, which was down slightly but motorcycles boats and snow each gained share in the quarter.

Indian continues to outperform globally, while posting record market share performance in North America with.

With our recently introduced my.

You're 2021 vehicles and an exciting lineup still become extensive customer focused brand building and improved factory out, but I'm confident that Steve Menneto and his team.

Well get our off road vehicle business back to gaining market share in the fourth quarter and the year ahead.

Strong vehicle demand and overall ridership increases are supporting record sales for Polaris, P.J. and improving growth and profitability at cap.

North American dealer inventory slight decline slightly sequentially, but 55% year over year, leading to off road vehicle D.S.. So at its lowest level in decades.

The coordination amongst our production logistics and sales team to maximize retail sales in this constrained environment is impressive and constantly improving as we strive to reach targeted inventory levels.

This close collaboration is one of many reasons, we are enjoying record dealer sentiment scores, leading the composite ranking and more individual categories than any other OEM.

We expect to begin replenishing dealer inventory in the fourth quarter and continue through the first half of 2021.

We can wrap factory output reasonably quickly because of our flexible assembly lines training and standard work and outstanding production teams.

Not unexpectedly some of our suppliers are not yet capable of meeting the same rapid demand spikes, so Ken Pucel and his team are aggressively working to accelerate their output.

The number of suppliers past due is almost three times, the normal rate and a moderate and a moderately high number of those suppliers are limiting production, but we are tightly managing them to limit impact the path to more normal production rhythm is very clear with our offered vehicle build plan wrapping up nearly 50%.

At year over year in the fourth quarter.

With new and diverse customers driving the majority of our growth and expanding the categories. They increasingly invite their friends and colleagues to the sport. We are encouraged by the potential persistence of overall demand strength.

Polaris Adventures as evidence of this with rides running at roughly twice the 2019 levels since may.

While Polaris is not unique and benefiting from this new customer growth the approach Pam permission or team are taking to cultivate and engage them should extend our leadership position with these important demographics.

I've, probably opined enough on the partnership with zero motorcycles, but knowing the product plans and the opportunity we have to both disrupt the industry and earn our next billion dollars electric vehicle sales significantly more quickly and enjoy bleed into the first it is worth highlighting again this morning.

When I asked Chris Musso to lead our electrification initiative a year ago, we had bold ambitions, but no clear plan.

He built the team refine the strategy and orchestrated does your relationship that other Oems have tried but failed to cultivate.

With that foundation established Chris has decided to leave Polaris at the end of November to return to Denver, and Mckenzie for an opportunity that is important for him and his family.

We are a better company for his contributions to both electrification in off road vehicles and wish him well in his next chapter.

As our electrification efforts transition from strategy to execution, Mike Donahue, our Chief Technical Officer.

Well add that responsibility Mike's leadership roles at Tesla bright automotive and other electric vehicle manufacturers along with his experience with all to motors provide him with the unique skill set necessary to achieve our goal of leaving the powersports industry electrification.

I will now turn it over to our Chief Financial Officer, Mike Speetzen, who will update you on our financial results and plans. Thanks.

Thanks, Scott and good morning, everyone first I want to Echo Scott's enthusiasm for our third quarter results, which were nothing short of outstanding the Polaris team rallied together to get product out the door as quickly and as safely as possible to meet ongoing concern strong consumer demand during the quarter.

Third quarter sales were up 10% on a GAAP and adjusted basis versus the prior year shipments improved considerably across orbi motorcycles in boats.

Third quarter earnings per share on a GAAP basis was $2.66.

Adjusted earnings per share was $2.85, which was up 71% for the quarter exceeding our expectations. This incredible performance was driven by a combination of revenue growth positive product mix lower promotional costs and operating expense leverage during the quarter.

Adjusted gross margins were up approximately 260 basis points year over year, primarily driven by lower promotion and floor plan financing costs, driven by lower dealer inventory and the lack of a factory authorized clearance in the quarter improved absorption at our factories was muted by higher logistics costs associated with supply constraints.

Operating expenses were down 4% in the quarter as we benefited from the continued postponement of nonessential expenditures along with the timing of expenses, which pushed approximately 15 million of spend into the fourth quarter.

Given the significant operating performance improvement, we have reverse many of the employee related cost actions taken during the second quarter and if approved select strategic projects, which will ramp up in the fourth quarter.

Foreign exchange also had a positive impact on our quarterly results, primarily driven by the euro.

From a segment reporting perspective, Orbi snowmobile motorcycles and boats all reported increased sales for the quarter driven by strong demand.

Orbi Slash snowmobile segment sales were up 12% motorcycles were up 11% in boats increased 30% during the third quarter.

All segments benefited from lower promotional costs, which decreased considerably across the power sports industry given high demand in the lack of product in the channel.

Aside from motorcycles all segments also experienced improved product mix during the quarter Orbi Slash snow mix was driven by strong PGN a sales Q3 motorcycle product mix was skewed more towards our lower margin midsize bikes.

Global adjacent markets sales were down 6% during the quarter as continued outperformance from exome and Polaris ventures was offset by lower sales in our commercial government and defense businesses, given the pandemics impact on government commercial budgets. This year, many capital expenditures, including vehicles have either been postponed or cancelled in 2020.

However, commercial government and defense businesses remain poised to capitalize when capital budgets begin to reopen.

Aftermarket sales were flat to last year with tap sales up 1% and other aftermarket sales down 1% during the quarter.

Retail sales remains a bright spot for tap as sales at four world parts retail stores were up 6% in the quarter the.

The tap team continues to rightsize, the wholesale business for improved growth and profitability.

The remaining aftermarket sales were down during the quarter as a result of low inventory availability.

Our international sales were up 9% during the quarter, mostly driven by strong orbi snow motorcycle and PGN Ace sales about a quarter of the growth came from improved currency rates.

And lastly, our parts garments and accessories sales increased a whopping, 28% during the quarter driven by strong retail demand primarily for parts and accessories.

Moving on to our guidance for 2020.

Given stronger than anticipated performance in the third quarter, we have increased our total company sales growth guidance and now expect sales to increase versus 2019 in the 2% to 3% range for the year.

You will recall our previous segment sales guidance was flat to down 2% versus 2019 I'll cover the specifics by segment in a few minutes.

We are significantly increasing our full year adjusted earnings per share guidance for 2020, and now expect earnings to be in the range of $7.15 to $7.30 per diluted share in excess of our pre cobot guidance levels. The.

The increase is driven by higher volume lower promotions and floor plan financing costs improved foreign exchange rates and operating expense management. These benefits are partially offset by manufacturing inefficiencies and higher logistics costs related to supply chain inefficiencies.

Moving down the PML, our previously issued guidance ranges remain unchanged as shown on the current slide with the exception of the additional leverage generated at the operating expense line. We continue to monitor our spending in the face of the ongoing pandemic, while adding back select operating expenses based on our current performance and certain strategic projects.

Foreign exchange also is expected to be better than previously anticipated for the year.

Well, we haven't discussed tariffs in detail for some time, it's something we continue to closely monitor while aggressively pursuing ways to minimize their impact year to date, our tariff impact totaled approximately 45 million lower than previously anticipated due to the receipt of additional exemptions and refunds as well as our ongoing proactive mitigation efforts, we now expect tariff cost for the full year.

Year to total approximately $65 million, which is primarily the China three or one tariffs list one through for a small amount of you retaliatory tariff costs all net of the refunds, we received through the exemption process.

While not providing a view on 2021 I would remind you that our exemptions have either expired or will expire by the end of the year and we'll provide an update at our earnings call in January.

Lastly, as you do the math around the fourth quarter keep in mind that while revenue is growing sequentially the mix of shipments coupled with the timing of the promo favorability from Q3 negatively impacts the expected gross margin and as I mentioned earlier, we deferred 15 million and strategic investments to the fourth quarter.

Moving on to sales expectations by segment all of our businesses are expected to generate improved sales and profitability compared to our previously issued guidance. The consumer focus portion of our business continues to perform better than the b to b segments, but even the latter are seeing sequential improvement, albeit at a slower pace.

Year to date third quarter cash operating cash flow finished at $676 million up 55% over the same period last year, driven by lower working capital requirements and business growth.

Given our year to date cash flow performance, we now expect full year cash flow to be up in the mid 30% range compared to last year.

Our bank leverage ratio defined as total debt to EBITDA improved sequentially to approximately 2.45 times. Our liquidity is strong with 821 million of cash on hand at the end of the quarter and just under $700 million of available borrowing capacity on our revolver.

Given continued uncertainty in the broader global economy, we will maintain flexibility with our capital for the remainder of the year with that I'll turn it back over to Scott for some final thoughts. Thanks.

Thanks, Mike.

We enter the final months of the year with a great team improving production capability and comprehensively strong business momentum employee safety as always is our top priority.

It is not lost on me that we are exactly one week away from a very consequential us election, we cannot control the outcome, but we will be prepared to manage and mitigate the potential impact.

We are cautiously optimistic that consumer demand for power sports will remain healthy throughout 2021.

And we have numerous plans and actions to help sustain that momentum.

We will work with our dealers to maximize growth and share gains in 2021.

Our short term short term success is contingent upon our ability to manage our supply chain and accelerate production output and I am very confident our team will do just that.

While much of our focus is on the outperformance of our Powersports portfolio as Mike mentioned improving trends at tap Exome go Peel gem in our other adjacent market businesses are encouraging.

We have been deep and long term planning the past few weeks and the outlook for earnings growth in 2021 is quite good and beyond that significantly better.

With that I'll turn it over to Gary to open the line for questions.

We will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad.

If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two please limit your questions to one and a single follow ups. So we may get to as many questions as possible.

Our first question comes from Greg Badishkanian with Wolfe Research. Please go ahead.

Great. Thanks, just first clarification, when you said doubling the retail sales I assume that's going from 15% to 30% is that what you meant.

Yes, Greg good you're good with math.

Okay.

And to make sure it wasn't something else.

And then when you think about your promotional strategy.

Feedback on.

First the feedback on the factory authorized clearance and then when you're thinking about future promotions.

Just given that inventory levels are low you are trying to replenish the channel.

But you also want to maybe stimulates demand how are you thinking about promotions going forward over the next few quarters.

I think you heard both Mike and I talk about the confidence we have.

And Steve Menneto, and Pam permission the team to manage the business appropriately certainly with inventories as I referred to a decade multi decade lows. So we're not don't need to do.

Drive a lot of promotions, but whether it's the AG advantage of the military advantage, we're looking for ways to make sure that our brand is the most relevant and we're confident that Steve and the team can do that they've got tremendous experience great analytical tools and we think we can overall prior to the pandemic even we.

Had plans to be more efficient with our promo use and what's happened now is we've taken those plans that had us more efficient and taking advantage of lower inventory and dramatically lowered that but we think overall.

We'll be able to maintain a more efficient promo usage micronet and the only thing I'd add Greg as you know we've talked historically about the split between dealer and consumer facing and I would tell you right now, it's it's far more oriented towards the dealer and the dealers team salesman specced things like that.

Yes, yes, alright makes sense thanks, guys.

Yep.

The next question is from James Hardiman with Wedbush Securities. Please go ahead.

Hi, good morning, guys.

So first.

Mike Im going to ask the boring question about share, but it seems it seems somewhat relevant here you gave us that I think it was a 65 million number that you are assuming for this year.

What does that number look like if you didnt have any of those exclusions, which I think would be the same is asking what is the assumption in terms of the incremental headwind.

For next year.

You said that you expect earnings to grow even factoring in that incremental headwind.

And then my follow up would just be what's your level of confidence that that given all the puts and takes that retail can grow next year.

So I think James from a from a tariff standpoint, we had originally guided the year that we have refunds would be just over 10 million.

There are about $25 million.

So obviously, that's a that's a onetime item associated with the backward looking so you can you can do the math relative to what that $65 million would look like I think from a from a retail standpoint I mean, the backdrop is from my perspective is very healthy I think Steve and the team have done a lot of work obviously the overall.

Environment right now is favorable but when you look at the fact that we're pulling in so many new customers.

We know one thing for sure that those new customers tend to bring even more new customers and we continue to see that trend I mean, you saw that the chart, we had in the deck today and.

The work that Pam and Steve and Mike Dougherty are doing is really paying off and I think thats going to provide momentum.

Into next year, regardless of what's going on in the backdrop.

On Covidien and the broader economy.

Okay, and just to clarify Mike So the 65.

25, a refund, but it's also the exclusion benefit right like I know, sometimes we're counting the place there is a onetime benefit and sort of the ongoing benefit is that 65.

Go to go to 90 or does it go to something higher than that if I look to 2021, if nothing were to change.

Well I don't I don't want to get into speculating.

I think you can you can do the math relative to the.

The overall.

Refund impact and we're still working through what the volume is we did do some advanced buys to train at least mitigate when the tariffs come back on so there's a there's a fair amount of complicated work that has to go into its I'd hate to put a number out there and then have to provide something new and in January.

But at the end of the day you guys think that you can grow even including that that incremental headwind that you're assuming sort of worst case scenario right now yes.

Yes, I mean, the thing you have to think about is number one I mentioned it several times, we've got a fair amount of manufacturing inefficiencies and I. We are expecting those to continue into the fourth quarter and we're working through what we think next year looks like but when we've got the level of increase in our output that we have planned I think it's the prudent.

Thing to do so.

So as we get into next year, obviously as we work those efficiencies down our supply chain transformation program is kicking in substantial savings and we're going to exit the year with a very strong run rate. So those will help us. So all those things together going to more than offset any of the additional headwind that we get from terrorists.

Much appreciated thanks, Mike.

The next question is from Scott Stember with CL King. Please go ahead.

Good morning, and thanks for taking my questions.

Scott.

The fourth quarter looks like you're going to be able to ramp our production pretty dramatically, but it also looks like you're going to have to.

I guess when Kevin in there to make sure that it happens.

The output capacity can you maybe just talk about how you're going to do that the the impact.

To margins, if there's any incremental inefficiencies and how we should look at that had.

Heading into the early parts of next year.

Well I mean, you think about it theres puts and takes with ramping up production. One is we get.

Better factory utilization, which is a helpful input to margins, but on the other side, there's additional logistics cost as we expedite suppliers and expedite shipments and.

I've mentioned one of the things the team did extremely well in the third quarter was move shipments around and make sure. They got to the right dealer at the right time, and that's that's an expensive cost, but overall, it's predominantly the expedited expedite cost that we have to do with our suppliers, but you know as I said, Ken and his team. It's it's almost a science.

They know exactly what the suppliers are their monitoring their capacity they know what they need to get to and we're working our production schedules based on that but with all that said, we believe year over year, we're going to ramp up production about 50%. So that clearly indicates our confidence in the team to do that reasonably well and so.

Scott what I would add to that is you know when when we look from Q3 to Q4, obviously when you do the math the margins are coming down pull the promo stuff off to the side that the inefficiencies started in call. It mid to late August and really we're at full force in September and right. Now we're we're banking on that essentially continuing through the fourth quarter as Scott said.

It's the right thing to assume and it's hard to imagine that the logistics cost and other things that we're incurring here it coming out of the third quarter into the fourth quarter are going to continue so that's a little bit of that headwind. Obviously to work. We can do to mitigate that that will help but the priority is to safely get product into the dealers. So we can move it through the channel.

Great and last question, just I guess once we get through the fourth quarter and assuming that retail demand remains very strong next year do you have plans to add additional capacity can you continue to grow.

You have right now.

No our footprint can carry us for a while we've obviously as I mentioned in our prepared remarks, we've done our long range planning and certainly.

Certainly and gets constrained there at some point, we believe we can you make it through 2021, we've added almost 500 employees in our factory network in the third quarter. So we ramped up quickly. So it it really is it up.

We've got additional capacity within our current network, but it just managing the supply base and we're confident we're doing that it's just that with a few suppliers, it's taken us a little bit longer than we'd like.

Okay. That's all I have thank you. Thank.

Thank you.

Next question is from Joe Altobello with Raymond James. Please go ahead.

Thanks, guys. Good morning, Scott I, just wanted to pick up on that kind of.

Made about.

In supply chain as you.

You mentioned earlier today in market share and our view is really more about availability to innovation.

I think that some of your competitors have not been as impacted by the supply communities to the same degree where they have lower volume at these.

Getting better in the winter as I think that slowdown.

I think it's primarily because they started with much higher dsos and we did so they had more availability is they wound down so they they are going to end up in the same place we are.

But it just took a little bit longer to get there because their demand wasn't as high.

But ultimately I mean, as I said, we Steve Menneto and his team Randy analysis and that was the sole limits are and it's why we've got so much focus right now on improving output in the fourth quarter and I'd also say the size differential and when you look at the ramp up of.

That the markets had given the competitors are substantially smaller than us. It's a it's a very different equation for them.

That's helpful. I guess, secondly, I'm curious how retail looked in October and if you're seeing any evidence that.

The election uncertainty is weighing on on retail over the past few weeks.

None.

Okay, great. Thank you guys.

Thank you.

The next question is from Robin Farley with UBS. Please go ahead.

Great. Thank you great results here I, just want to clarify one thing when you when you're talking about consumer demand continuing into next year, you're not specifically, saying that you expect retail to be positive in 21 or are you, saying I just want to clarify obviously, you know with such a tremendously strong year this year.

You could be optimistic about retail next year and still not think it's going to be positive. So I just wanted to clarify that thanks, yes, you're exactly right Robyn I mean, we've had unbelievable actually but we had reasonably good growth in January February before things happened then down in March and April and then picked up beyond that so I think it's going to be spotty throughout the year.

But overall, what we've said and I, we tried to make sure. We were careful with our word is consumer demand to be healthy now and to your point it could be very healthy and still not be positive to a plus 50 comp that we had in the second quarter.

But ultimately.

We do expect a good healthy environment in what we're seeing right now is literally it's just.

Part of the challenge with replenishing the channel is just products going off the shelf almost as soon as we get into the dealership and that.

At some point is going to slow down we just don't know when it's going to be.

Okay, Great and then and then.

The corollary to that I guess would be given how much dealer inventories depleted even if retail is down next year. If you will would shipments I know you're not guiding to next year, but if we just look at your.

Chart, showing that the dealer inventory is about a third of what it should be.

What is that just restocking dealers to where you would like them to be for off road or where they would want to be for off road would reps.

Represent kind of what percent of that's equivalent to kind of what percent of retail sales.

2019, just to think about.

Restocking.

We able to drive your growth, even if even if retail is not positive.

Yes.

I don't know if I can answer it in that context, but what I would tell you is as we're doing the projections around where we want to get from an optimal dealer inventory dsos.

It's going to take us through call. It the first half to essentially get dealer inventory back on a consistent basis and that that's assuming retail plays out as we're expecting in the fourth quarter and and through the first half.

Okay, great. Thank you very much.

You bet.

Next question is from Craig Kennison with Baird. Please go ahead.

Hey, good morning, Thanks for taking my question slide eight it shows a really impressive growth in the total addressable market up around 6%.

Year to date with still few months to go I guess I'm curious about your core customer not that incremental customer, but the core customer is that customer upgrading at the same rate or are they sort of deferring some of those upgrades given it's tough to find inventory.

We're seeing consistent demand from our core customers.

So I would.

Small single digit growth, it's just the incremental demand that almost all of the incremental demand is from those new customers in those new demographic, so, but certainly it's a good environment for our core customers, but it's a great environment for new ones and I'd argue they're spending money on PGM today, you look at the significant performance, we've had where they.

I can't get a vehicle I know I have some personal friends that they can't get their hands on a vehicle so they're doing upgrades to their existing vehicles.

And then I don't know if you can put a number on it but I would think a power sport vehicle has a higher attachment rate to it when it comes to buying that second or third unit if somebody in the family buys when somebody else me by one liter. That's certainly not true for both for example is there any way to quantify what you think that follow through demand might look like.

It's hard to quantify Craig, but it certainly indicative of the growth that Steve Eastman and his team are seeing and you know we like as we demonstrated record PGK results and.

It's really what we've seen it at half, where we do see that second and third buyer doing incrementally more and as we broaden our portfolio not just with more attachments, but with more innovative attachments.

We're certainly seeing that that happened in some of it ride command is a great example, where you know it's a it's a benefit that people want so we're seeing that happen that I can't quantify it for you.

Yeah. Thank you.

Thanks.

The next question is from Jamie Katz with Morningstar. Please go ahead.

Hi, good morning, guys nice quarter.

Hi, Chris.

And I guess on the proximity to the election since you brought it back you Karen.

Care to opine on maybe what your top issues might be.

Okay, troubleshooting what might come up.

Depending on which candidate gets into office.

Tariff taxes and regulatory.

Okay for about.

That yeah that.

Obviously tariffs have been a headwind with the current administration taxes could be a headwind if it changes and you know the regulatory environment certainly has been good with the Trump administration. So we just we have to manage that as I said in my remarks, we can't control it, but we'll be ready to deal with it.

Okay, and then I know global adjacent markets is small, but it looks like there is going to be some decent growth in the final quarter of the year was there a timing shift on from deliveries or something with the supply chain that was delayed that's being pushed into the fourth quarter I guess with lapping weak results. How can we think about what is driving that.

Yes, there is some to get remember that our defense business has some timing associated with it and.

That coupled with the fact that it's the law of small numbers and and.

That will be the main driver there.

Thanks.

You bet.

The next question is from David Macgregor with Longbow Research. Please go ahead.

Hi, good morning, Congrats on a good quarter.

Well, it's just you give US you mentioned, Mike the gross profit is up 260 basis points.

Much of the margin contribution or do you think is from lower promotional activity.

Yes, it's probably just under a 100 basis points, they would've been from promo and you know.

The way to think about that as a portion of it probably should have been skewed into Q2 and a little bit into Q4, just in terms of the way we do the promo reserve and once we have.

Linus site that we're not going to need those reserves given what's going on in the marketplace. We we have to make the adjustments right away right.

Great.

Then or B is there any way you can talk about some of these sort of traditional sub groups like AG and LNG and just the impact they may have had on the numbers for the quarter.

Yeah. I mean, we were we had most of our weakness in product availability in the Ranger category.

And ultimately that is more related to AG. So.

Interestingly, we've got with the AG program being a successful as it's been a great.

Great demand there, we just were not able to fulfill it and ultimately we're seeing good we've.

We've got a great leadership in that team down in Huntsville, and they're ramping up production quickly.

But that was more where we had the constraints in the quarter.

So that was the biggest issue for us.

Last question for me just a slingshot you talked about high Fiftys, how much of that is the auto drive response.

You know, it's hard to say obviously with.

Such a de Minimis portion of the population being able to drive a stick shift you'd have to say that a good bit of it as but the.

Is it really the refinement of that vehicle is so good that I think a lot. We're seeing a lot of people trade up. So we're it's really good demand for slingshot and the auto drive is going to give us a much larger opportunity than we had previously with only stick shift.

Congratulations thanks.

Thanks.

The next question is from Derrick Johnson with BMO capital markets. Please go ahead.

Great. Thank you good morning.

Mike you guys mentioned that the supply chain transformation program was beneficial.

Challenging.

Maybe you could talk a little bit about that call.

Corporate goal.

The person fewer suppliers to intuitively make me think that you might be in a disadvantage.

Tejas position, so tell me, how that's benefiting units.

Okay.

Yes, I'd say a couple of things one you know if you go back to when Kobin first came on the scene client of ours came on the scene.

Ken and his team mobilized around the Asia based suppliers and what the impact was we because of wave one and essentially we're through wave two.

Our knowledge of that supply base, coupled with what we were doing during the tariffs was very high and so we were able to get him very quickly prioritize we've got a team that can go in and help from a production standpoint, where need be I would argue because of the work we've done.

We've made sure that we've got stronger supplier, so fewer doesn't mean weaker fewer actually means stronger and our knowledge of them is as much.

Call it much more intimate.

We're only through now the second wave starting the implementation. So there's still a fair amount that has to go and I would argue where we trimmed off suppliers, probably actually helped us during this because those tend to be weaker suppliers with.

Poor performance and probably would not have been able to keep up.

As we went through this substantial volume ramp up.

Okay that makes that makes a lot of sense. How are you guys planning on us on.

Profiles for off road next to for your North American dealers.

Well, we are planning to meet them.

Yes.

No, but I know in all seriousness, Steve and his team are really looking at.

Can we run the business with slightly less DSL then.

Than we did previously as we help our factories continue to get better at replenishing product. So we've got what we constantly work with our dealers to help them manage their.

What their profile looks like and.

I will tell you that it was an interesting phenomenon because when we started in January and February we as you might recall in the first quarter. We are trying to bring down dealer inventory and we add dealers lobbying for for lower profiles and now we've got every single deal are asking for more so we're going to balance that out, but I think imbalance will have just slightly lower DSL than we.

Bad debt coming into this.

All right. Thank.

Thank you guys. Thanks.

The next question is from Joseph Spak with RBC. Please go ahead.

Thanks, Good morning actually wanted to.

A follow up on that comment was made Scott I know.

You made it clear that you think.

Inventory is current demand and obviously the levels inventories is certainly extremely low but with gross margins are the highest in over five years or about five years does this really make you rethink your inventory.

Strategy somewhat and maybe even further do you think it may have caused the industry to finally find some religion on inventory and promotion.

Well clearly.

We're confident that what you know, Ken and Steve and the team have done to manage the whole value chain gives us the opportunity to manage.

Our.

Our network with a lower net inventory it really unfortunately, I do think you're you're right. The pandemic help them find religion, but you know it really takes the some discipline across the competitive set.

Set and I don't have any confident that thats true once we get back to normal operating procedure. So we've all seen it benefits our dealers their margins are better.

Ams or all of our margins are better, but I think it's a false promise to think that everyone's found religion at that the world is going to go back and be a completely different place going forward.

You know, there's hope, but hopes not a strategy, but you know.

I think it will be a little bit better as a as a as an industry, but probably not a lot.

Okay.

Second question is just on the 10 year partnership with zero.

Thank you indicated with that you want to have a intellectual product in each of your core segments. By 2025 can you just explain the partnership a little bit more and I don't think there was an investment and maybe why why that differs from.

Some of the other electrification strategy done in the past, where you've actually acquired technology.

Yeah, well as you correctly pointed out with owning brand most motorcycle business for a while and you know all of the experience we've had with good people and jam and Taylor Dunn than the electric space and even with the best selling electric product in the industry with our Ranger easy we've got a lot of experience.

But as we approach this.

This time around with Moussatos leadership, we really looked at who has the best not before we looked at available technology and I think if you look at others in the industry. They found available technology, and that's where they're going with.

We chose but we're confident it is the best technology for our types of products and what they've proven with 15 million miles of on road experience with.

With zeros motorcycle business and the leading industry sales of electric motorcycles. They.

They know how to make electric power trains that fit in a constrained environment again, if your bill you know this because you cover the space. If you build an electric pickup truck you got to ship loader space to put batteries, we don't have that real estate. So what's zeros figured out is a with a great battery supplier and a great power management system how to.

Integrate that into a motorcycle and with.

It's not plug and play, but it's not that far from it where we can take that powertrain capability and put it into our off road vehicles and the teams are off and running but the reason we chose them is because we believe that they are the best in the world to help us electrify powersports.

Thank you very much.

The next question is from Shawn Collins with Citigroup. Please go ahead.

Yes, great. Thank you Hi, Scott, Mike and Richard Good morning, Thanks speak with you.

<unk>.

So so we feel is more than healthy across all your segments.

I wanted to ask about motorcycles.

Industry is down about two or 3% in the third quarter, maybe it's up two or 3%. If you include three wheels yet.

Indian is up 42%. So the impressive growth continues to run such high Fiftys can you talk about recent trends Indian and if there is anything different most recently with the impact of coal.

And also maybe touch upon the competitive environment and landscape for Indian that you're seeing.

Jenna Thank you yes.

You know I'm, probably one of the few people that watch did but they had the.

Bagger races. This weekend in Indian you don't want against the field of.

Most all competitive bikes and that's kind of what's going on globally right now, we're doing really well in Europe, really well and Australian Asia, but to U.S. market, which is the biggest for us and for our competitor is.

Really exceptionally well upwards. The challenger has been a great bike for us I'm I talked about slingshot and what the auto drive has done for us, but you know fcr is doing well the Indian Scout and Scott Barber continued to do well and really minority in the team with with Indian globally are driving a great performance and you know.

Not only we driving growth.

We're accelerating you know margin expansion as well and that's going to continue into next year. So we're really encouraged about where we are with the motorcycle business.

Great that is helpful. Thank you for the time and insight.

Thank you.

Next question is from Mark Smith with Lake Street Capital Markets. Please go ahead, hi, guys I wanted to ask about average selling price in any shift during the quarter did you see new new consumers coming in and looking for kind of entry level lower price things where were those all sold out and they would buy basically anything that was added dealer.

You know I think it's a mix of both the obvious.

Obviously, if you look at our ASP during the quarter. It is skewed by the fact that we had to reverse the promo.

Out.

I think if you look at the rest of the year, it's call it more flattish once.

Once you adjust for that I mean, we certainly have seen I mean, clearly with how well our HCV business is doing that you know people are coming in it at all ranges of the spectrum I don't know that it's easy to characterize that they're all coming in at the value segment. We're at the high end I think it it depends it depends on the consumer it depends on the geography into.

To your point it also depends on availability of the product.

And that leads to the next question, which is you know.

As you ramp production here or are you really focused on these higher priced maybe higher margin products versus you know line dedicated to four wheelers, rather than XP pros.

No I would tell you it's pretty much across the board I mean, when you look at our our dealer inventory you know I mean, I don't want to say, it's all down equally.

But there are certain spots, where we have bigger deficit that we're working through but you know I don't know that its disproportionate either way.

Okay, great. Thank you.

Yep.

Again, if you have a question. Please press Star then one the next question is from Brandon Rolle eight with Northcoast Research. Please go ahead.

Good morning, and congratulations on the strong earnings results.

I just have one question largely just on the recalls announced this month or to stop sale stop ride on prior years, sometimes there were more recalls in the pipeline that hadn't been announced yet and I guess my question is are.

Our the recalls over with these two in October or should we be expecting more.

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