Q1 2021 Polaris Inc Earnings Call
Good day and welcome to the Polaris first quarter 2021 earnings call and webcast all participants will be in a listen only mode should you need assistance. Please signal our conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your touch.
Home phone to withdraw your question. Please press Star then two please limit yourself to one question and one follow up if you have further questions. You may reenter. The question queue. Please note. This event is being recorded I would now like to turn the conference over to Richard Edwards head of Investor Relations. Please go ahead Sir.
Thank you Chuck and good morning, everyone. Thank you for joining us for our first quarter earnings call.
Slide presentation is accessible at our website at IR Dot players Dot com, which has additional information for this morning's call Michael.
And Mike speeds, and our interim Chief Executive Officer, and Bob <unk>, Our interim Chief Financial Officer have remarks, summarizing the quarter and our revised expectations for the full year 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 1095 actual results could differ materially from those projections and the forward looking statements you can refer to our 2020 10-K for additional details regarding these risks and uncertainties.
All references to the first quarter 2021 guidance are reported on an adjusted non-GAAP basis, unless otherwise noted please refer to our Reg G. Reconciliation schedules at the end of this presentation for the GAAP to non-GAAP adjustments now I will turn it over to Mike <unk>, our interim CEO Mike.
Thanks, Richard Good morning, everyone and thank you for joining us once again, the Polaris team delivered an impressive quarter. Despite substantial supply chain challenges. Our team has remained focused on meeting the needs of our dealers and customers, which allowed us to again beat expectations this quarter.
Before we get started I wanted to thank the entire Polaris team for their focus dedication and execution. This past quarter was truly impressive.
Consumer interest and power sports continued at record levels throughout the quarter with strong growth coming from both existing existing customers and new customers.
And I'm pleased to report that our overview market share gains continued which we expect to be an ongoing trend for the year.
And I'm also pleased to report that motorcycles snowmobiles and boats also had strong retail demand and gained share in Q1.
The strong growth we are experiencing is not only in our north American whole good retail R. P. G and a business grew nearly 50% during the quarter with all segments and categories up significantly year over year.
And our international business was also strong with sales increasing 59% as countries impacted by the pandemic slowly began to reopen.
Q1 results reflect an all out effort by the Polaris team to overcome numerous challenges we continue to operate our plants at maximum supply chain constrained capacity and utilize every available tactic at our disposal to produce the products our customers were demanding.
While our dealer inventory remains below optimal levels, we largely met demand and expertly navigated supply chain constraints to do so logistics commodities and rework costs have increased substantially.
We are managing the cost as best we can and where it makes strategic sense have raised prices to compensate for this inflation.
And yet despite these headwinds given the overall strong and better than expected performance and in Q1 and continuing into April we are raising our full year guidance, Bob will give you more detail shortly.
First quarter and North American retail sales were up a robust 70% continuing the unprecedented levels of growth the comparable where easier and the last two weeks of March when the pandemic drove and abrupt shutdown of commerce and 2020.
Even after adjusting for that impact our retail was up an impressive 50 plus percent per the quarter, we continued to see and expanding customer base with new customers growing 70% and Q1.
We are especially proud to see success and our strategy to further diversify our customer base. While many of these new customers have been and power sports for only a short time.
Our early data indicates a strong intent of these new customers to stay with the sport and a stronger intent to purchase and other vehicle versus what we have historically seen which is a promising indicator to support ongoing strong retail.
And the continued growth and sales to our existing owners, which increased an impressive 40% year over year reinforces our confidence that these customers will return.
As I indicated earlier, our RV business gained over four percentage points of market share and the first quarter, both Indian and Slingshot and first quarter retail was strong as well collectively finishing up over 70% and market share increased about three percentage points.
Boat retail was also strong tracking ahead of the industry based on preliminary data.
Snowmobile sales were strong as well with retail up low 20% range for the first quarter, let me spend a minute talking about the strong performance of our snowmobile business.
While our snowmobile business is one of our smaller product lines today. It is where we started over 66 years ago and northern Minnesota.
The North American snowmobile industry concluded its strongest season and over a decade with industry retail up approximately 16%.
Polaris retail eclipsed the market growing and the mid 20% range, resulting in market share gains of over two points for the season, the best share position and 16 years.
We are seeing tremendous new customer growth and snowmobiles during the 2020 and 2021 selling season, new customers represented over 60% of the sales growth nearly double the rate from the prior season ending March 2020.
During the quarter, we held our annual spring dealer meeting and while virtual it was one of the best attended meetings and over a decade.
Attendance was up almost 80 per cent compared to 2020 <unk>.
During the meeting we introduced 22, new snowmobiles and the revolutionary ride for a writer first matrix platform, which delivers industry, leading ride and handling both on and off trail.
Additionally, we introduced the company's first turbocharged two stroke engine and the Patriot boost this new engine uses proprietary smart boost technology for unrivaled combustion stability, enabling 10% more power and C level and 50% more power at 10000 feet. Then our current 850 Patriot engine.
The strong model year lineup, along with continued demand from new customers entering the sport has generated demand we haven't seen in years and in fact, our snow check orders, which concluded a couple of weeks ago will make up over half of our snowmobile build this year, eliminating much of the uncertainty around and seasoned sales required later in the year.
As you will know strong retail demand and all of our businesses has continued to pressure our ability to fill the dealer channel.
Inventory levels declined further on a sequential basis and were down 71% year over year with RV, realizing the most significant decline.
Supplier constraints and logistics delays remain the ongoing bottlenecks and we're working all available options to ease the supply chain strain as quickly as possible and I'll talk.
And more about our efforts to manage the situation shortly.
As we've discussed in the past pre sold vehicles continue to be a lever that our dealers can utilize to ensure they capture the sale. This is enabled by our advanced manufacturing capability, which provides visibility into and flexibility of our production plan. This is just one of many examples of how the team is net navigating this challenging environment to ensure dealers and consumers get the vehicles.
One.
Given the current environment and our expectations that the supply chain constraints may not improve significantly.
And significantly until late in 2021, we anticipate it will likely take until sometime in 2022 to return dealer inventory to targeted levels that said our ability to continue to expertly manage the supply chain through 2021 positions us well to meet consumer demand.
The number of suppliers impacted by COVID-19 related constraints has been somewhat of a moving target.
<unk> team has been doing a tremendous job of keeping product flowing to fulfill demand by expediting shipping working directly with.
Suppliers on their staffing and supply base rebalancing and source and outsource manufacturing using alternative logistics lanes to shorten lead times staging Polaris employees at ports to expedite customs clearance and optimizing the flow and location of inventory to fill backlog as quick as possible.
Additionally, we are adding capacity at select locations, including Monterrey, Mexico for razor and general <unk>.
Cart and Syracuse, Indiana for Bennington, and Hurricane Rigby, Idaho for climb apparel, and Wilmington, Ohio for PG and a distribution we.
We will be evaluating additional expansion needs with our board as the year progresses based on the trajectory of current demand.
These capacity additions along with the anticipated supply chain improvements later in the year will allow us to further ramp production in the coming quarters. However, as I said before we do not see dealer inventory returning to targeted levels until sometime in 2021.
Despite these distractions and I'm happy to report that we are still on track with our supply chain transformation and that the savings are being realized and slightly ahead of plan.
This is an incredibly important strategic initiative for us with the goal of identifying suppliers that can provide the best quality delivery service technology and value. We have now made all sourcing decisions for two of the four waves and we kicked off the third wave and February through a virtual supplier conference and are optimistic about the continued success of the program.
By the end of the year, we expect to be almost halfway to our goal of approximately $200 million of gross savings. Currently these savings are partially offsetting increased cost from logistics commodities rework and tariffs. The good news here is when these cost debate are sourcing savings will continue.
Our sports electrification is a very real opportunity appealing to current as well as new consumers as we look into the future EV technology will continue to mature and growth both in terms of performance capabilities and consumer awareness and interest our efforts today will set the stage and enable us to be well positioned for the future are revved up strategy aims to position.
And <unk> as the industry leader and electrification both through the introduction of new vehicles and expansion of current offerings. Our goal is to offer consumers and electric vehicle option within each of our core products segments over the next five years last fall, we partnered with zero motorcycles, and global leader and electric motorcycle powertrains and technology to bring to market and all new 2022 electric.
Ranger by December 2021.
This all new electric powertrain will elevate the ranger platform to a whole new level of capability durability and performance. We're also making investments to grow our current EV offerings with the co development of a fully autonomous low speed shuttle using our gem vehicles, coupled with Optimus rides full stack of sensors and software to enable fully autonomous shuttles the vehicles or <unk>.
<unk> rollout in the second half of 2023, as we move through the year watch for additional details on our ramped up strategy and the upcoming Ranger product launch I'll now turn it over to <unk>, who will summarize our first quarter results and our updated expectations for 2021.
Thanks, Mike and good morning, everyone. As you just heard our first quarter far exceeded our expectations given the given the ongoing strong retail demand across the portfolio.
Polaris team has met the challenges of supply chain shortages logistics delays by working tirelessly with our suppliers executing significant rework and coordinating with our logistics providers to deliver on our dealer and customers expectations.
First quarter sales were up 39% on a GAAP and adjusted basis versus the prior year sales were up significantly for all segments of our business driven by the ongoing strength and power sports, the boating industry and and our adjacent markets and aftermarket segments.
First quarter earnings per share on a GAAP basis was $2 11 and.
Adjusted earnings per share was $2 30.
Which was up significantly over last year's first quarter.
And the results were driven by increased volume across the portfolio lower promotional cost and operating expense leverage during the quarter.
Adjusted gross margins were up 352 basis points year over year, primarily due to the lower promotional costs driven by the strong retail demand and lower floor plan financing costs as a result of the low dealer inventory levels.
Supply chain constraints, where and ongoing pressure point to gross margins and logistics and rework remained high.
And as we've previously indicated tariff costs were higher during the quarter as the onetime exemptions and refunds. We saw in 2020 largely ended.
Operating expenses as a percentage of sales were down 584 basis points as we realized leverage from the strong sales growth and the timing of some R&D expenses and stock based compensation costs being delayed into the coming quarters.
Income from financial services declined 18% during the quarter as income from the Polaris acceptance joint venture, which dealers used to finance their inventory continued to be down due to the lower level of inventory and the channel.
Foreign exchange also had a positive impact on our quarterly results, primarily driven by the Canadian dollar and the euro.
From a segment reporting perspective.
All segments reported increased sales for the quarter, RV and snowmobiles increased 50%.
Motorcycles increased 31% global adjacent markets was up 27%.
Aftermarket increased 14% and boats increased 29% for the quarter.
Our segments benefited from lower promotional cost, which has decreased considerably across the power sports industry, given the high demand and the lack of product and the channel.
And aside from boats all power sports segments also experienced a negative product mix during the quarter and supply chain constraints caused the shift and the types of products, we were able to produce.
Two additional highlights I want to point out our international and parts garments and accessories businesses.
International sales were up 59% during the quarter all segments and regions experienced increased sales during the quarter, mostly driven by strong RV snow motorcycle and P. G&A sales and about 10 points of the growth came from improved currency rates.
And our parts garments and accessories sales increased 49% during the quarter all segments and product categories grew significantly during the quarter driven by strong retail and installed base demand.
Moving on to our revised guidance for 2021.
Given the stronger than anticipated performance and the first quarter. We have increased our total company sales growth guidance and now expect sales to increase and the 18% to 21% range for the year up from the 13% to 16% we guided in January.
We are also increasing our full year adjusted earnings per share guidance for 2021, and now expect earnings to be and the range of $9 to $9 25 per diluted share.
The increase is driven by higher volume increased pricing through growth MSRP changes and continued lower promotional spending and floor plan financing costs. In addition to improved foreign exchange rates and operating expense leverage.
These positives are however, being partially offset by continued manufacturing inefficiencies and higher logistics costs. In addition to commodity and component pricing pressures driven by supply chain constraints.
While we are pleased with the strong demand we are experiencing it continues to stress our supply chain as our supply partners attempt to match our demand trends.
And this is putting additional pressure on gross profit margins for the remainder of the year.
We now anticipate.
Dissipate that gross profit margins will be down 60 to 90 basis points.
Primarily driven by ongoing negative product mix, we saw and the first quarter, along with increased logistics and manufacturing inefficiencies due to the high level of rework and our factories.
Additionally, we are seeing increases in commodity prices that we expect to hit our P&L beginning in the second quarter.
As a result, we are implementing price increases to help offset these pressures.
However, we expect it will take several quarters for the two to converge.
And as Mike indicated our supply chain initiative now and its third year will help offset some of the additional supply chain costs.
While our gross profit margins are expected to be down for the year as I stated on our last earnings call. If you exclude the impact of tariffs and supply chain disruptions. Our gross profit margin rate would be up over 200 basis points compared to last year.
Adjusted operating expenses are now expected to improve 80 to 100 basis points as a percentage of sales and sales growth outpaces operating expense growth.
Our guidance for operating expenses in dollars for the full year Hasnt changed.
The improvement and operating expenses as a percentage of sales is entirely driven by the escalating sales growth anticipated this year.
Income from financial services is now expected to be down and the high single digits percent driven entirely by the expectation that dealer inventory levels will remain low.
Retail financing availability remains at acceptable levels.
Guidance for the remainder of the P&L items remains materially unchanged from our previously issued guidance.
Given our strong performance in Q1, our expectation for sales and earnings per share are relatively consistent across each of the next three quarters seasonality of products will have some impact but in general we will produce be producing the maximum number of vehicles our supply chain will allow.
As I mentioned earlier, we expect supplier constraints to continue to negatively impact our sales mix. Additionally, higher commodity costs will begin to materialize in Q2 and are expected to remain for the balance of the year.
Both of these factors will result in lower gross profit margins as compared to the first quarter we.
We expect operating expenses and each of the remaining three quarters to be approximately 10% to 15% above Q1, given the timing of spending.
Moving onto sales expectations by segment the.
The increase and total company sales is driven by the sales increases and all of our businesses given the strong first quarter demand and significant order backlog.
As we have stated the gating factor and meeting the current demand and beginning to fill the dealer channel is the ability of our supply chain and logistics network to be able to deliver materials to the factories are.
Our operations and sourcing teams continue to work diligently to maximize production levels.
First quarter operating cash flow finished at $56 million compared to a negative $71 million and the first quarter of last year.
While our first quarter is typically a heavy cash use quarter, given the working capital timing, our strong cash and earnings was able to overcome the cash needs and provide positive cash from operations.
Our cash flow performance expectations for the full year remain unchanged as we work to rebuild dealer and and factory inventory to more acceptable levels are.
Our bank leverage ratio improved sequentially to approximately one three times as our debt levels continued to decline as anticipated.
Our expectations for use of cash for 2021 outside investing and the business remains a combination of debt reduction and share repurchases.
During the first quarter, we spent almost $300 million on share repurchases.
Of the $300 million spent $130 million was generated from the exercise of options and.
The south and minimize the dilution of our shares we anticipate continuing to buy back shares throughout the remainder of the year subject to market conditions and available authorizations.
Our expectations for capital expenditures of approximately $250 million remain unchanged and on January 28, The board of directors approved a 2% increase and the regular quarterly cash dividend, which is the 26th consecutive year of Polaris increasing its dividend.
With that I will now turn it over to Mike for some final comments.
Thanks, Bob during the quarter, we experienced broad based retail strength across all of our businesses new customers continued to drive significant growth during the quarter supplementing strong demand from our dedicated install base.
Our supply chain ability to keep pace with demand trends will remain an ongoing challenge for longer than originally anticipated, but our size agility and seasoned Polaris team gives me confidence and our ability to match supply with demand better than anyone in our industry.
The company is and the best financial position and years with a strong cash position debt below our targeted leverage ratios and all segments expected to grow sales improve profitability and gain market share and 2021.
Together, we continue to advance toward our near and long term strategic and financial targets and I couldn't be more thankful to be leading such an outstanding and talented team with that I'll turn it over to Chuck to open the line for questions.
Thank you we will now begin the question and answer session.
I ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys withdraw your question. Please press Star then two please.
Please limit yourself to one question and one follow up and if you have further questions. You may reenter the question queue and at this time, we'll pause momentarily to assemble our roster.
And the first question will come from James Hardiman with Wedbush Securities. Please go ahead.
Hey, good morning.
Good morning, and great job on obviously, a tough quarter guys.
So similar to last quarter, my new favorite slide.
Or graph and this capacity utilization and graph.
Maybe walk us through that and then a little bit more detail. This is slide eight I am referring to.
When I look at that.
The critical question of inventory it seems like you think that.
Capacity will expand and the second quarter, and maybe meet demand that you'll be able to build a little bit of of dealer inventory in the third quarter, but then in <unk>, we're going to fall meaningfully short and the bad again, and we will probably finish the year and a worse inventory position and we started.
And so if I'm reading too much into that there's a lot going on of information and trying to convey there, but maybe walk us through the key assumptions there.
Yeah, Thanks, James a couple of things.
And we put that Red line.
On the on the graph.
To highlight the fact that we're running the factories at full capacity, but we use the word supply chain constrained for a reason because.
And we're dealing with producing vehicles, partially complete for example, when phone became a huge issue.
We're rolling vehicles off the line without seats and then we're reworking those vehicles or rework rates are pretty high but the team is doing a really good job of making sure that we're doing that and a high quality manner.
Really the supply chain is what's constraining us right now I.
I will tell you the team as I indicated in my prepared remarks has done an outstanding job supply supplier issues with semiconductors come up and we're knocking them down the team has been incredibly agile and and going after that.
We will make progress on dealer inventory from where we are today.
It will increase as we go through the year based on the retail expectations that we have right now.
And that's really going to be predicated on us continuing to push these supplier issues down in and get the manufacturing.
Ramped up as much as we can.
Some of the capacity that's coming online is going to help us here and the second half in terms of just being able to to manage and digest the volume, but overall I feel I feel really good about where the teams at and we can't see into the future and understand what the issues are going to be around potential supply chain problems, but I will tell you based on what the team has done thus far I've got a lot of confidence.
I made some comments and the first quarter.
And January call around.
We are not going to try and save money in the face of significant consumer demand and so whether it's logistics or.
Supplier work that we're doing we're going to put the investment and the money and and Youre seeing that come through and the margin profile. The good news is that this will abate at some point and time and we'll see that favorability come through from margin perspective.
That's really helpful. And then maybe just a quick follow up if I may.
Selling and marketing.
And at least versus where the street was was it was a big beat.
Some of that is presumably that you have this supply demand imbalance.
Pretty favorable right now.
And I guess, how do you think about that particular line item for 2021, and then what's sustainable as we as we go forward I don't know whether on an absolute dollar basis or a percentage of sales.
What is that line item look like once we're past this.
This is crazy Crazy phase that we're in.
Sure James Bob.
So I think if you think about Opex really the impact you see and the Q1 is really one of timing. So we're forecasting expenses for the year to be flat and.
And we feel good about that that's a reasonable level to use to run the business.
The.
80 to 100 basis point benefit is really just based on the on the sales leverage the timing issues and the quarter, which which sort of turnaround later in the year are mostly some delayed spending on the engineering side just as <unk>.
Different projects move around and and then some stock based comp that normally would have been recognized in Q1 that hasn't been recognized yet that'll that'll show up later in the year. So they are not things that are.
And we'll we'll repeat themselves and the future. So it's kind of a 2021 anomaly. So I think you should think about the opex being flat for the year and dollars.
Got it but should we assume a step up after this year I mean to some degree for sales to be up as much as they are and and that opex line to be pretty flat.
And I'm, assuming that at least a portion of that is a function of the promotional environment and a favorable promotional environment, we find ourselves and which doesn't seem like it's really sustainable.
No I mean, James the the promotional stuff falls through the gross profit and you know.
And Bob can certainly talk about some of the dynamics relative to that as we look out and in the future quarters. When we think.
Promo will start coming back.
And I think Bob hit it it's timing as we go forward the sales and marketing investment is something that we're going to continue to have is a high priority.
The work we've done around attracting new customers is incredibly important what I will say is the team has gotten even more efficient the investments we made around our customer relationship management system. The data analytics tools I was walking through with the team yesterday that the work that they had done around the new customers and we go back and we.
Measure their repurchase rate and the next three months and we do that on a three month six month, one year five year 10 year basis, and the amount of data and analytics that they have that helps us because now we can take that data and be a lot smarter about where we do target promotion as well as where we're spending money, whether it's media campaigns.
And were advertising on TV, and I think that'll continue to be a and efficiency for us, but I think on an absolute dollar basis. It will continue to grow into the future.
Got it thanks, guys. Thanks.
Thanks.
The next question will come from Craig Kennison with Baird. Please go ahead.
Hey, good morning. Thank you for taking my question I wanted to deconstruct the incredible retail growth in the quarter and I Wonder if you could maybe characterize the mix as it relates to first time buyers.
And your core repeat buyers and then to what extent are there first time buyers from last year that May have said Hey, this is great I want to buy another one and get my family involved things like that.
Yeah, Hey, Craig.
The mix as I indicated I mean, the growth was substantial and both categories and the new customers grew at 70% and our existing customers at 40.
And as I was mentioning and that.
Prior discussion with James.
Went through with the team yesterday the repurchase rates, we started watching this given the surge and demand in 2020 and I think one of the concerns. We had was where are we going to have a bunch of people come in and then they lose interest and the interesting fact is that the repurchase rates as we look at our 2020, new customers versus say 2009.
17, or even 2018, new customers they are actually repurchasing at a substantially higher rate, meaning they are coming back and three six months one year.
And repurchasing or buying another vehicle and and that's very encouraging, especially when you add that to the existing customer base debt.
And that we've had for years is coming back and strength as I mentioned earlier, a 40% year over year.
Improvement and.
It's substantial and.
Know that Theres, a lot of concern around whereas retail headed for the year and I think on a road.
2020.
We think retail is going to be kind of flattish and it'll be down a little bit nor be up a little bit and motorcycles, but down but the point I would raise is we are seeing continued strength through the year relative to 2019, and that's important when you think about where the industry was the surge we saw in 2000 and this is not retreating back we.
<unk> will be up probably 20%, 25% from a retail standpoint relative to where we were in 2019 on a full year basis and that that's not to be discounted and that's why we're working and the capacity additions that are.
And that I mentioned earlier as well as evaluating potential capacity additions into the future.
Thanks, and are you able to.
Measure and any way the impact of stimulus checks as they come into the economy.
It's tough I mean, we've gotten that question a lot I guess I would characterize it is it's just fuel to the economy and to what is already a very strong consumer savings rate and.
And I think if you look at our we've gone through our demographics and our customer profiles with.
With investors over the years and.
For the most part our customers were really stable through the pandemic in terms of their employment level didn't change they were collecting stimulus money stock market's up most of them obviously have for one case and so.
So the financial.
Stability and strength of our customers has certainly been and equation and this but to be able to try and correlate the stimulus check itself back is tough to do.
Great Hey, thank you.
Thanks, Greg.
The next question will come from Brett and dress with Keybanc. Please go ahead.
Okay.
Just a question on some of the selective.
Pricing that you're taking is there any way to quantify how much price.
You are passing on right now and then maybe how much price you need to take or you plan to take in theory.
Offset some of the gross margin pressure.
Sure so the the announced price increase.
In the RV was about two 5% and that's obviously the biggest factor for us biggest part of the market.
And that comes into effect may one.
So we'll start to see that in Q2 and through the balance of the year.
And.
In terms of the offset.
But the offset really is a combination of price lower promo lower finance interest not just price and so right now with that increase we're basically offsetting the <unk>.
Cost of the increased logistics and and the commodities, but it's on a dollar basis. So you lose a little bit in the growth from a gross margin percentage basis. We will continue to look at price I mean, obviously its tough to forecast commodities and logistics for the full year, we're in a little bit of unprecedented times, particularly from a logistics standpoint things are moving around.
Pretty pretty.
Violently.
We will continue to look at pricing through the course of the year, we have model year introductions coming up in August and that should give us another opportunity and so we will continue to consider that as the year progresses, and Brett I would I would just add that the pricing moves have been incredibly strategic I give the team a lot of credit for.
Doing the work rather than just implementing a broad based price increase they've been very specific around.
<unk>. So we have some models they won't get touch web other models that may be higher and.
And whether that's a worry motorcycles or boats and then.
We've also added freight surcharges, which obviously has some of the logistics issues.
<unk> and the future that's obviously, a otago point for us with the with the dealers.
Got it and so that's helpful. Thank you and then.
And maybe building more specifically to I think changes question I think the plan last quarter.
Was the and 2021 channel inventories down.
20% to 30% below optimal levels I guess with everything that we're seeing so far and <unk>.
Where does that debt.
Target stand now.
And then any commentary you can share on April retail trends here, yes.
Yes.
I would characterize it is that the fourth quarter dealer inventory is going to it's going to be lower than we were expecting before.
But it will we're going to the plan right now is to improve it from where we stand today about $30 35 per cent and so we will see sequential improvement will start to gain a little bit of momentum, but as I said in my prepared remarks, it's going to take us into sometime in 2022, and obviously, we will continue to refine and work that as we get later in the year.
April.
I think first and foremost the expectation is we'll be down versus last year.
Just given how strong the second quarter I'll remind you we were up 57% and retail last year. So that's a tough comp, but the month of April has been.
Performing better than we expected.
And the retail is holding up and and the team is doing a great job of expertly navigating that and even though we expect a full quarter to be down versus where we were in second quarter of 2020.
Versus where we were in 2019, and we expect retail to be up call. It 15 to 20 plus percent and so.
Tough tough comp to 20, but.
Continued industry growth if you look back to the 2019 timeframe.
Got it thank you.
And the next question will come from Greg, but as Kenny and with Wolfe Research. Please go ahead.
Hey, guys. Good morning, it's actually Fred Wightman on for Greg just wanted to dig into the expectations for the full year power sport market. I think you guys are expecting that to be down low single digits now last quarter that was down high single digits could you sort of touch on what changed how big is it more stronger demand and lasting longer or is it better ability to supply that.
That's driving the improved outlook.
Pay for it yes, I think it's.
And just better demand.
I think I think we had been anticipating that things would start to drop off earlier in the first quarter.
And would see strong retail performance, but it would be on a reducing basis and that really wasn't the case and March actually was incredibly strong months.
Month for us So I think it's just overall.
Industry strength I think.
I don't know if I want a correlated to delay and the reopening of the economies because I have a firm belief that even after the economies open up I don't think you're going to see a substantial change and the fact that people are going to want to continue to enjoy the outdoors and our products offer and incredible way to do that with their friends and family but.
I think it's overall industry health I think the economic backdrop, certainly helps I think the economy is far stronger than anybody was anticipating and I think it's going to continue to be stronger for the foreseeable future. So we're really encouraged by that and if we weren't we wouldn't be making the capacity additions.
And just to shift to that output side of the equation last quarter, you talked about absenteeism and the 20% range you guys called that out and the slides again this quarter can you touch on what Youre seeing from a rate perspective, if that's picked up what the labor backdrop looks like and how that sort of playing into some of the supply constraints.
Yeah, I would say that the factory dynamics or less of our issue.
And that's why we put that Red line on the chart.
Certainly absenteeism rates are still higher than they had been historically I think we're navigating that much better I think with the vaccine rollout. We've had success at a number of our locations hosting clinics, where a substantial portion of the.
Manufacturing population is able to voluntarily get vaccinated and that's certainly abate some of the concerns that we saw.
Kind of late last year as employees were returning to the factory.
The real issue for us isn't the plant it's around the supply chain and as I mentioned and my prepared remarks, and a couple of the other questions were continuing to expertly navigate that and we feel confident we'll be able to meet demand.
Perfect. Thanks, guys.
Thank you.
And the next question will come from Scott timber with C. L. King. Please go ahead.
Okay.
Good morning, guys and thanks for taking my questions.
Good morning, good morning.
Can you maybe I'm not sure if you touched on this already but could you talk about the cadence of guidance for the year I know the back half of the year.
We will have some price increases coming through and some some improvements on the supply chain side, but just for modeling purposes, how we should look at second quarter versus the last two quarters of the year.
Yes, I think.
The way to think about this year, which is which is different than sort of a normal year. We tend to see some seasonality in Q2 Q3 tend to be our bigger quarters. This.
And this year just given the strength of retail in Q1, where we see it going for the year I think there's a lot of customers and people are buying earlier into the season. So the normal timing is moving around a bit.
I would think about the next three quarters, all being very similar to Q1 from a <unk>.
Both revenue and profitability standpoint.
But we're talking in absolute terms or as far as year over year, or just percentages or absolute absolute absolute numbers.
And because what you see and the second half of the year. So most of the commodities cost a lot of that is hitting us starting in Q2, we were already locked in on pricing and Q1.
And so that starts to hit in Q2.
Moves around a little bit in the back half.
Price increases come in and May and then obviously, we'll look at what that looks like for the rest of the year.
But and a lot of the promotions benefit was in the is and the first half of the year. So.
Puts and takes but I think they'll they'll generally look fairly similar on an absolute basis.
And last question just on global adjacent markets.
Quietly.
Proving very nicely and I.
I guess, the power sports market and stake of the Glory and then you're talking about.
Mobile Adjacencies and.
And what's driving that.
Internationally.
Sure so.
And if you look at global adjacent markets, our <unk> business in Europe, which sells <unk> registered vehicles.
And to consumers and Europe, that's recovered really well and has had a strong first quarter and anticipating a strong year, our <unk> business in Europe also has.
And has picked up nicely coming out of COVID-19 and.
It's performing well for the year on the U S side really the strength has been and our commercial utility vehicle market, where we sell ranger derivative products, mostly to the rental industry.
Industry and that those industries are starting to recover as construction comes back and events slowly claw their way back you know people had really taken down there.
Inventory levels at the rental companies and so we're seeing some nice recovery there too.
Okay.
Great. Thank you.
You.
The next question will come from Joe <unk> with Raymond James. Please go ahead. Thanks.
Thanks, Hey, guys good morning.
I won't go back on price increases per second.
Mentioned or up two and 5%.
And the first is there any sense that competitors are doing the same because I would imagine theyre seeing the same.
Cost pressures and as you guys are.
Yeah, I mean, we do monitor I mean, given the fact that we share 60 to 70 per cent of the dealer network and we do get Intel.
And we do know that there are price actions that have happened before us and after us.
And I think each OEM is taking their own <unk>.
Specific approach, but.
I do think it's a mix of MSRP changes as well as <unk>.
Freight or logistics add ons.
Got it okay and in terms of gross margin, obviously, a lots going on right now, but how are you guys thinking about your longer term gross margin do you still see an opportunity to get back to that prior peak margin parents. Aside obviously exiting next year or does that get pushed off essentially.
Well I think there is some complexity around it and.
I hate having this discussion because it always feels like theres, a but to the sentence, but there is.
The onetime costs that we're dealing with now and we do think they are one time the elevated whether it's steel resins from a commodity standpoint, certainly the logistics spike that we've seen.
We do think those are going to abate and as I pointed out in my prepared remarks.
Our supply chain transformation continues to progress incredibly well and so we're continuing that upward trajectory. These one time costs are going to start to abate, obviously promo and some things like that will start to come back in but we look at it as an opportunity for us to leverage the existing footprint, we have and I think the biggest unknown that we've got.
That is where tariffs headed which is not something we spend an awful lot of time talking about and you know.
Frankly, I think it's too early in the new administrations and timeline for us to have a viewpoint I mean, we obviously continue to self.
Self advocate and worked through the whether there are political or through the administrative channels.
But I don't suspect we're going to hear a whole lot until the end of the year maybe into next year.
And I think that's going to be one of the biggest unknowns for us to be able to get to that high 20% range, Bob anything you would and.
And yet.
Yeah sure.
Ken and I. Our teams are working really hard to track and work on plans to make sure that the one time costs that are coming in this year around expedites and logistics commodity system as those those challenges abate and Thats, a big chunk of it commodities and we expect to start to trend back more towards normal as we get kind of.
Exiting 2021, I don't think it's going to happen anytime soon but I think as we get back into the fourth quarter, depending on what happens with the rest of the economy that should start to settle down and some more capacity comes back online obviously, the storms and Dallas.
Piled on to a bad situation and so some of that's starting to do.
Flow again, and those costs are starting to mediate a little bit and then really on the long term side to Mike's point, it's really the focus on the <unk> project and make sure we execute on that and drive the value out of that debt.
Targeted to do and what we can do to leverage the footprint.
So I think.
I think youll see us continue to March down that path.
Timing is going to depend on the timing and some of these other things.
Got it great. Thanks, Scott.
Thanks, Joe.
The next question will come from Derek Johnson with BMO capital. Please go ahead.
Good morning. Thank you and you mentioned that mix was negative because of constraints you pursued and demand so you're probably producing more etv's, probably fewer side by sides would that be correct and maybe have a bigger backlog for side by side and then also kind of related to that and on the demand side, what would you see.
The mix towards it.
Retail thank you.
Sure.
Yes. So you are you guessed correctly, there on the atvs versus side by sides and you just look at and ATV from a design standpoint, it's a simpler product.
Has about half the parts of a side by side. So just mathematically your chance of.
Your supplier problems are going and impacted less just because you have less parts to be impacted so we've been able to build atvs at a at a higher rate and we have side by sides with some of the logistics challenges.
From a from a demand standpoint, I think the demand is so strong right now that it's it's a pretty solid across the board. So obviously, we're focused on trying to recover.
Side by side build in the in the later part of the year and we feel like we'll have some ability to do that but that mix is still going to continue to impact us. The other the other side and mix, which you really didn't get into is the international and PG and a P. G&A growing really strong international also growing strong international margins tend to be a little bit lower.
So.
Those two to some degree counter each other.
Okay, and what are you seeing in terms of financial characteristics of the and consumers the credit quality, there and what are your financial partners, saying about delinquencies and and things of that nature.
It's been pretty pretty benign I mean financing has been readily available we're not seeing.
Higher default rates right now and obviously, we're not in the financing business, we do that through partners, but.
Consumers have found available financing at competitive rates and we don't think financing is having a big impact on the industry right now.
Fantastic. Thank you guys.
Scott.
The next question will come from Robin Farley with UBS. Please go ahead.
Great. Thanks, and wanted to just clarify one of your comments about retail expectations for the year, we spent a day.
Low single digit your expectation for the industry or for yourself, specifically or maybe less boats.
And also wanted to.
And Keith you could help us quantify the restocking opportunity that it sounds like <unk> and <unk>.
And 'twenty two.
And when you think about debt whether.
Whether its debt.
All are amount or kind of shipment if you could help us think about it.
Sales were flat next year to this year.
And just that restocking piece of it though would that be equal to kind of.
And what percent of 2019 shipments or what percent of 2019 retail.
In other words that the inventory piece, if you could help us.
Think about that.
And what that has the opportunity to offset and <unk>.
Thanks.
Yeah. So you know from a retail standpoint, I mean, obviously, we don't guide retail, but when we look at our models.
We think we're going to be flattish for the year and.
And that obviously has or be down a little bit motorcycles up.
And that's that's predicated on what we are projecting right now and obviously, we will continue to update that as we go forward net.
As I mentioned, we do see dealer inventory improving through the end of the year, but we're still going to be short of what is ideal last quarter.
Quarter, we talked about the fact that we were probably 30% to 40% below optimal level, and obviously given better demand where even further than that so.
It's a restocking opportunity and into 'twenty two.
Want to throw any numbers out because we're not prepared to do that.
Got a lot of work to do to see.
How demand shapes up here as we continue out through the second quarter, it's been better in April than we were expecting and obviously, we want to see the critical months of of May and June and how they play out because that's going to be really important in terms of how confident we are and the in the back half and whether or not theyre potentially a stronger retail or not.
Okay. Thank you and then just lastly did I don't know if you gave what was wrong change and ASC and Q1.
I don't think we did because we've got so many different moving parts, but.
And we can certainly get that for you.
Great. Thank you very much.
The next question will come from Jamie Katz with Morningstar. Please go ahead.
Hi, good morning nice quarter.
Thanks, and I'll take a little bit more into the profitability and propel.
Given the flexibility and cost structure.
The gross margin came in and better ahead of what we had expected and had a 2019 first quarter sales is that something that can gain.
After the year or was there some part of the next day or some other.
Factors that may be.
And you should consider is different and.
And the first quarter.
No I think the first quarter is relatively reflective of the strength, we see and that business. One of the things we really liked about the business model. When we bought boat holdings was that the majority of it was pontoons.
As relatively flexible from a volume standpoint, and not particularly capital intensive so that team has done a great job of being able to ramp up.
Production in Q1, Q2 will be a little bit more challenging just because of.
Shortages of foam across the whole marine industry.
Proceeding and film for flotation, so you'll you'll see.
Some challenges in Q2 that will pick back up and Q3 Q4, but in terms of gross margins for the year.
We expect to be able to continue to improve as that business growth and we've got a lot of cost improvement initiatives in place.
And obviously it has the same.
Commodities and logistics challenges and the rest of the business.
And even with the delay and film that's not leading to an increase in cancellation and kind of orders or anything like that.
No no and we've been able to ramp up I think as fast or faster than any other manufacturer and the marine industry and.
And keep pace and we focused on customer sold boats to make sure they're getting them before the start of the season. So.
So I don't think we're losing customers and I think we'll be able to continue to perform the rest of the year.
Excellent and then.
On the autonomous vehicles, and I know you guys said day one.
And later in the year, but is there a way for you to just size what that opportunity is for us, maybe and who are the NDA there might be and what what.
And what that total and practical market might be thanks.
Sure.
Challenging question, obviously autonomy and mobility are sort of rapidly changing.
Segments of the economy as the technology continues to improve and what I can tell you you know our partner Optimus ride with.
And with the Gen vehicle there they've got five operating sites, where they're running vehicles with it with a safety driver and they have a pretty aggressive.
Plan to grow that as we can deliver the actual full autonomous vehicles in 2023, but and and their view is it's a very substantial market, we agree with that putting real dollars and units to it is pretty tough because it's all going to depend on the on the timing and the pace of the rollout.
So we see and that's a good opportunity, but a little too early to size it.
Thank you.
The next question will come from David Mcgregor with Longbow Research. Please go ahead.
Yes, good morning, everyone.
Kudos to the team for execution, and just a really brutal environment. So job well done I guess I wanted to ask about market share gains here.
Under more normal circumstances, and consumers going to make their purchase decisions based on branding and product features and everything else I could see where in this environment it might swing a little more towards availability. So I guess I wanted to ask you put your market share gains and do you feel that was just largely based on you just had better availability than your competitors or what do you think was behind that.
Yeah, I think it's David it's tough to parse through it but I would I would tell you that there's a couple of.
<unk> and I do think our availability.
Look at all of the dealer surveys or whether it's the ones that the sell side those are the ones that we do.
Certainly we have been better than many of our competitors, but I will tell you that they have improved relative to where they were so.
I don't want that to sound like Theres, just no competition and the channel because that isn't the case and I think if you walk into any dealership youre going to see that front and center. So.
And our demand is really being predicated on the fact that we've been very targeted around some of the promotional work that we do and when I say promotional it's about.
And we're bringing existing consumers back recognizing loyalty to the brand.
I think the innovation I mean, we launched over 40, new products and the first quarter and that's just the start for the year and.
And the success, we've seen with the snowmobiles and the success, we saw with the New trail razor.
And a lot of those instances the products aren't even available but the demand is through the roof in terms of orders and the fact that we have customers preordering.
In terms of getting their hands on a vehicle as it's going through the factory.
I think speaks to it and I think that just bodes well in terms of all the work we've done in terms of marketing and.
And the innovation that we have around our products.
And it sounds like it's sustainable.
I guess just a question I wanted to ask you was just on oral film and you rolled this out a few years back at a time when the market was actually and the flip condition and we had too much inventory at the dealer levels of course, and how are the other way around at the time. The thought was that it would help you regulate the flow of product to the dealers, but how does it helps you to help you and this kind of environment now where dealers are tight.
And on inventory do you just run RSM wide open and they're just less product go wherever you can.
Wherever you can supply it or does it.
And some other governing manner here and I'm, just trying to understand the role of our firm and that type market.
Well I think its more complicated, but I think the basics are that we went through and did a lot of work around profiles and so as demand is heating up obviously, everybody is trying to get their hands on equipment and the profiles help us keep that and check so.
Dealers and their exuberance, maybe asking for more than what they really should have and a given region of the country and so it helps us as we try and define that it also helps us as we start lining up all the production as I mentioned in my comments the ability to get pre sold.
It's something that I think has really enabled because of the work we did around RF M. The flexibility, we have and our manufacturing in terms of being able to model mix and make changes real time.
As not to be underestimated it and I think it gives us a real competitive opportunity I mean, obviously, there was a little bit of a disadvantage. When this all started because many of our competitors had bloated inventory levels and they were able to bleed those down but that went away pretty quickly and.
And I would argue we're now and a better competitive position because we can react faster with our factories and when you couple that with the.
The spectacular work being done by our supply chain to manage all of the supply disruption I think and creates a very strong winning equation.
Thank you.
Thanks.
The next question will come from Joseph Spak with RBC. Please go ahead.
Hi, Thanks. Good morning, Good morning, I guess I wanted to just go back to slide eight and maybe some some points of clarification.
First why does the.
Unconstrained capacity go down and the fourth quarter I would've thought that just sort of like a theoretical level.
Capacity.
And so there's also you're adding capacity, it's like locations like how and I guess why are you doing that if you still have ample capacity and then finally, the gross cost savings of 200 million ahead of plan can we interpret that as it all come in sooner or the pie is potentially larger.
Yes, so a couple of things the reason the bars, both dip and the back half I mean that is from a production standpoint, it's pretty routine to take your factories down at the end of the year.
Required maintenance and so you've got vacation time with the holidays.
And number of those different things and I will tell you and in the past you know if you look at the end of 2020, we didn't ramp down as much because we essentially.
Paid to continue working through that time period, but I mean, the factories are working at full capacity and you've got to do that.
Right level of required maintenance.
The reason first of all this graph does not have for example, the boats manufacturing included this is really what I would call our core power sports.
Or b motorcycles combined.
The capacity adds so the boat capacity and obviously is not reflected here and that is helping because there is some constraint there even though we are facing some of the same supplier issues.
But were adding because as we look forward, we anticipate the market is going to continue to grow.
And we've got new products coming online that will be able to.
Add that additional volume in while not taking away from the capacity, we need to produce the ongoing vehicles and that's.
A big part of what we're doing down in and Monterrey.
And as it relates to the $200 million I think we used the word slightly ahead I don't want to get too excited because and the Grand scheme of things being ahead is good but it's not enough to necessarily overcome all of these other issues we have.
And we're going to continue pushing forward and as Bob outlined the good news is is that these costs are going to continue to accrue and once the the one off costs that we're doing a really good job of tracking abate, we're going to be left with pretty substantial savings. It won't the 200 million won't all be there by the end of this year, but.
We.
Anticipate over the next several years, we're going to get ourselves there and probably ahead of schedule.
Okay, and then just maybe just on electrification and I know you have the.
10 year exclusive with zero on <unk> is there scope to expand that to motorcycles, maybe non exclusive because I know they do their own their own bikes and and if not how can you just remind us of your planned electric plans within the motorcycle segment.
Well I mean, you saw some of it I mean, we obviously targeted at the youth, but yes.
I would tell you we learned a lot.
And the past when we had and electric motorcycles through the victory brand.
We do think it's an attractive segment and we're taking a hard look at it and.
I would just say that as we look forward, we continue to look for opportunities with our existing partner as well as any potential new partners.
And we think it's a big opportunity, Bob obviously participated and led to the process with with zero. So Bob do you want to add a couple of comments sure obviously the <unk>.
Initial partnership is focused on off road.
But we have regular conversations there's opportunities to expand it into the other product lines as we jointly feel it makes sense and motorcycles is an obvious one is also obviously the most challenging because.
<unk> primary product as motorcycle, but we see opportunities with both zero or potentially other partners as we as we see that market starting to grow and the future.
Thank you very much.
Thanks, Joe.
The next question will come from Mark Smith with Lake Street Capital. Please go ahead.
Hi, guys I just wanted to look into P. G&A, just a little bit more you talked previously about kind of the re buy cycle and what you're seeing could you talk about kind of the incremental buy within P. G and H and any lag that you see from new customers for instance are they buying apparel.
And the door six months after.
And we've seen more parts that are needed as new customers may be your rough around some of these vehicles and.
Existing customers.
Yes, I would I would say that we probably don't have those stats, but when we look across the different components of P. G and a as I mentioned in my prepared remarks, we're seeing growth pretty much everywhere I mean parts are up over 30%, which I think is a good signal that folks are using their equipment.
Doing the repairs, we've done a lot with <unk>.
Why videos, so that folks if they can't get into a dealership to the dealerships are pretty jammed right now.
They can do the work themselves given their relative skill level accessories were up 60%. That's a good indicator that folks are accessorizing their vehicles.
After they bought and we actually view that as a big opportunity as.
As we're going through the sale process at the dealership, we're a little challenged because of the backlogs that we're dealing with and our PGA and a supply but over the long term we think that.
There's a big opportunity to continue to increase the amount of content that we have on the vehicles as they come off the showroom floor and I think the fact that our accessories are up 60% is just an indicator that consumers do look for ways to make the vehicle unique for themselves. So.
The growth is great. It's obviously highly profitable for us.
And we're seeing it pretty much across every every element of PG and Ed.
Great. Thank you.
Yes.
The next question will come from Billy Covance with Morgan Stanley. Please go ahead.
Hi, guys, Congrats and a great quarter, just wanted to summarize a lot and.
Commentary in this call and tell me if I'm right here, but inventory levels are currently down 71% and you are going to build some inventory through the rest of the year, even if we assume sort of 'twenty 'twenty two retail sales are down.
Give you a pretty good set of production runway up until mid to late 2022 can you just correct me if I'm wrong there.
First question I think the only thing I would correct you on is using the word late 2022, because I don't know that we have that clarity yet.
And we were very deliberate around our word sometime in 2022 and I think that's important and we're going to continue to watch because it really does depend on how things cadence out and I mentioned it I think what I was responding to Robin's question.
April is important but may and June are just as important I mean, we saw tremendous growth that led to the 57% year over year increase and the second quarter last year and really understanding how thats patterning out I mean right now.
And you know if april's rent and cater it's stronger than we expected and so that's obviously going to influence.
How we characterize the 2022 timing of the channel refill.
Awesome. Thanks, and then just shifting to electric real quick any customer feedback that you can share with us and your initial motor releases and is there any plans and potentially bolt on any company that you think would give you some edge and electric manufacturing thanks guys.
Yes, I mean, we really we don't have anything out in the market per se, we have our existing products out there.
What I can tell you is if you haven't seen that the video that we put out on the new electric Ranger.
We're dimming demonstrating its capability here and are very cold, Minnesota backdrop and.
I can tell you I mean, it's just a phenomenal vehicle and you know the teams continuing to refine it and the best part about our strategy.
We're working with zero Who's got the powertrain expertise and understands the components and how to configure and we're dedicating our time and energy to what we do best which is really around the design of the vehicle and the chassis and.
And when you marry those two together I think it's going to be and incredibly powerful combination and I think that's what you see coming out.
With the teaser videos that we have on the Ranger.
And so we'll know as we get into 2022, and we launched that vehicle, but I I fully expect it's going to be and incredible reception.
Thank you.
Our next question will come from Shawn Collins with Citi. Please go ahead.
Great Hey, guys good morning.
Good morning.
And so and I wanted to ask about the motorcycle industry Hum huge retail quarter, and Indiana hub and <unk>.
<unk>, Yes, your U S peer had retail up 30%, it's certainly nice to see the industry growth growth following.
Huge growth and off road Rvs and boats.
Can you, possibly provide some qualitative color on kind of what youre seeing and hearing from consumers and and if you think the motorcycle industry and Indiana shop for a better industry tailwind for the rest of 'twenty, one and Mike I think you had said that you expect the motor and motorcycle industry to be up momentum if I'm not incorrect.
<unk>.
Yeah, I mean look I think the backdrop is the industry is poised to do better.
I think we've talked a number of different times that the industry given the dominant player.
And is really predicated on how they did last year, which wasn't great.
The industry is doing better partly because of that but because we're outperforming I mean, our market share gains continue.
We introduced the new chief, which essentially kind of fills out the union platform and I would tell you I mean, we are seeing strength across the board and whether it's FTR the bobber.
The demand for the new chief as well as our heavyweight bikes and I think it's just the uniqueness of the brand and our bikes are beautiful, they're engineered incredibly well.
And we think we're going to continue to win that competitive battle for the foreseeable future.
Great.
Helpful. Thank you very much.
Okay.
The last question just one follow up on the ASP.
Awful vehicles ASP was up approximately 6% motorcycles ASP was down about 2% that was really the mix between the.
Full size motorcycles and the midsize motorcycles.
And then for the total company it was up about 4% on the ASP.
With that we'll end the call and wanted to thank everyone for participating and we look forward to talking to you next quarter Goodbye.
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