Q2 2021 Polaris Inc Earnings Call
[music].
Good day, everyone and welcome to the Polaris second quarter 2000.
The 1 earnings call all participants will be in a listen only mode.
The assistance. Please signal conference specialist by pressing the Star T followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then 1. Please note. This event is being recorded.
Now I'd like to turn the conference over to Richard Edwards head of Investor.
The relations. Please go ahead Sir.
Thank you Paul and good morning, everyone. Thank you for joining us for our second quarter earnings call. A slide presentation is accessible at our website at IR Dot players Dot com, which has additional information for this morning's call.
<unk>, our Chief Executive Officer, and Bob <unk>, our Chief financial.
Officer have remarks, summarizing the quarter and our revised expectations for the full year, then we will take 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 in the forward looking statements.
<unk> you can refer to our 2020.10-K for additional details regarding these risks and uncertainties.
All references to the second quarter 2021 guidance and report 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.
Adjustments now I will turn it over to our CEO, Michael Pizza, Mike. Thanks, Richard Good morning, everyone and thank you for joining us I continue to be incredibly impressed with the dedication commitment and execution of the Polaris team as we navigated ongoing supply chain pressures logistical challenges and increasing input costs to deliver impressive second.
Quarter results.
Focused execution is our mantra and it once again paid off as the team expertly navigated the challenges to enable us to exceed expectations I want to again, thank the entire Polaris team for their continued focus and commitment to this great company.
The power sports industry has experienced significant demand and that trend continued into the second quarter.
Non-GAAP demand while down from unprecedented levels in the second quarter of last year was up over pre pandemic levels of Q2.2019 by 14%.
Or the market share gains continued in the second quarter with gains in both the atvs and side by sides. We.
We did however, lose a small amount of share in India.
Particularly in our mid.
Given the supply chain challenges.
That said.
Demand remains strong for these models and we anticipate our share gains will resume as our vehicle supply improves.
Boats also remained strong growing retail sales of market share during the quarter and we have of healthy and significant backlog, although it's off season for snowmobiles with overhead.
Size before snowmobile build this year being represented by our near record high Snow check preorders the sales cadence of our snowmobile business will be even more heavily weighted towards our fourth quarter of this year, given the timing variation of our component deliveries.
P G&A and international businesses also performed quite well <unk> sales were up 35% during the quarter and.
Over half of that were experienced an increase in the attachment rate for P. G&A as more consumers look to personalize their vehicles.
Our international business continued to see strength, we grew sales of 64% as the economies outside North America continued to improve in Q2.
Our earnings outperformed expectations, demonstrating the team's ability to overcome challenges.
With focused execution, not surprisingly production and delivery were and continue to be impacted by global supply chain and logistics challenges as a result of this and continued strong consumer demand our dealer inventories are at the lowest levels in decades I'll talk more about this in a moment give.
Given our first half results continued strong consumer demand.
And our teams hard fought ability to execute I am pleased to report that we are again, raising our full year earnings guidance, Bob will give more details shortly.
On a 2 year basis, our retail was up 14%, reflecting continued growth in power sports driven by strong underlying consumer demand as expected our second quarter, North American retail sales were down 28%.
From the 57% increase reported in the second quarter of 2020.
The gating factor for retail sales today compared to a year ago as low dealer inventory driven by supply chain impacts on delivery retail sales would have likely been significantly higher without these impacts.
Despite the supply impacts.
<unk> retail sales market share again grew during the quarter, our <unk> business gained over a percentage point of market share in both the atvs and side by sides.
The motorcycle retail sales also continued to grow increasing 22% during the quarter. However of Indian loss of modest amount of share during the quarter driven by low availability of bikes, particularly are very.
<unk> of our scout and Chief models.
The strong boat retail also continued in the remained ahead of the industry.
Dealer inventory levels ended the quarter down 57% on a year over year basis and were also down sequentially are pre sold order process continues to be an effective lever that our dealers are utilizing to ensure they don't lose the sale and I'll go more.
Pockets of more detail on the next slide.
Looking at the remainder of the year dealer inventories are expected to remain lean into Q4, which is when we are anticipating the supply chain issues will begin to slowly improve.
Given stronger than anticipated demand coupled with continued supply constraints are expectations for dealer inventory levels to return the RFS profile levels.
And of the now sometime in late 2022 or even into 2023.
As I discussed earlier, the unprecedented demand coupled with the supply chain constraints has created significant disruption of our shipping cadence.
The dealer inventory of record lows, the most effective efficient way for our customers to secure the product they want and for our dealers.
And the <unk> retail and profitability is through our pre sold order process. The advantaged of consumers is the orders placed in the pre sold system received priority in our production and shipping schedule. In addition dealers and consumers can receive P. G&A priority of placed at the time of the vehicle order as.
As a result pre sold orders have increased significantly.
<unk> for the pandemic began pre pandemic pre sold orders accounted for roughly 3% of our retail exiting Q2 or V pre sold orders, where approximately 80% of retail.
While there have been some reports that the pre sold order process can be misused or audits of found that not to be the case we.
Regularly audit the system looking for a name change from the pre salt order at the time of registration. These audits have found less than 1%, where the names changed at registration and where there were changes the majority of had valid reasons for the change I'd also point out that the pre salt order cancellations remain at low single digit percent, which is similar to pre pandemic levels.
Lastly, we have analyzed shipping patterns to our dealers by tiers volumes in regions and were and were all within 1% of pre pandemic levels. The.
The bottom line is that there is high confidence in the pre sold order process, which is why it continues to be a competitive advantage in this very tight inventory environment.
Our manufacturing plants are operating.
Supply chain constrained capacity, our manufacturing supply chain and logistics teams continue to execute at a very high level managing the ever changing production schedule is driven by component availability with the singular focus to meet the demand of our consumers and dealers with high quality of vehicles and components.
Despite our efforts we couldnt meet all of the demand during the quarter as.
At <unk> earlier, our pre sold order levels have increased significantly and it appears those customers are waiting for the high performing high quality of vehicles, we produce.
I'd like to be able to say today that we see the light at the end of the tunnel, but given the ongoing heightened demand for our vehicles and supplier challenges. It appears we along with the entire power sports industry.
And it can be in a period of tight vehicle supply for the remainder of the year. Our teams are doing impressive work to keep the flow of products, moving including expediting components, adjusting build schedule, substituting materials, where appropriate and buying select materials on the spot market focused execution of teamwork will ensure we win the competitive battle.
As indicated in our last call.
Also adding capacity later this year and into 2022 that will bring on 30% more production capability between or the boats and motorcycles. This capacity as needed to meet demand fill the dealer channel and allow for the addition of some very exciting new products coming next year.
1 of the drivers behind the unprecedented demand has.
Has been new customers coming into power sports new customer growth in the first half of 2021, while down slightly from the robust rates in the first half of 2020 remains comfortably ahead on a comparable to your pre COVID-19 basis with approximately 300000, new customers coming into the Polaris family over the first half of 2021 the.
The mix of.
Of new to existing customers has remained high at over 70% of the total customers for ov motorcycles snowmobiles and boats.
Our existing customers continue to grow the healthy rate and lastly, it's exciting to see the diversity of our customers also growth led by Hispanic and female writers joining the Polaris family.
Overall customer demand.
In total remains very strong we track repurchase rates for our customers, which are increasing on a year over year basis. This provides us with the confidence that our customers intend to remain with the sport.
I'll now turn it over to Bob Mack will summarize our second quarter results and our updated expectations for 2021.
Thanks, Mike.
Man for everyone. The Polaris team is battling each day for the components needed to meet the strong demand of our consumers.
And as our results this quarter indicate we are winning many of those battles.
Second quarter sales were up 40% on a GAAP and adjusted basis versus the prior year.
Shipments and sales improved considerably.
And good morning, all segments of RV motorcycles adjacent markets aftermarket and boats.
Second quarter earnings per share non-GAAP basis was $2.52.
Adjusted earnings per share was $2.70.
Which was up 108% for the quarter exceeding our expectations.
This strong performance.
The across was driven by a combination of revenue growth lower promotional costs increased pricing and operating expense leverage during the quarter, partially offset by higher input costs.
Adjusted gross margins were up approximately 310 basis points year over year.
Primarily due to lower promotional and floor.
<unk> financing costs, driven by low dealer inventory and strong demand, which requires minimal promotional dollars to drive retail.
This was muted somewhat by higher input costs associated with supply chain constraints, including logistics commodity and labor cost pressures.
Operating expenses were down considerably due.
Due to the goodwill and intangible asset impairments recognized in Q2.2020.
Adjusted operating expenses were up 33% in the quarter relative to Q2, 2020, which was heavily impacted by short term cost actions taken to offset COVID-19 shutdowns.
Q2, 2021 operating expenses grew sequentially.
Planned the versus the prior quarter due to the timing of legal sales and marketing and engineering expenses, along with staffing additions.
Operating expenses are expected to be down slightly versus the Q2 run rate in the second half of 2021.
Foreign exchange also had a positive impact on our quarterly results primarily driven by.
The Canadian dollar.
For.
From a segment reporting perspective.
All segments reported increased sales for the quarter driven by strong demand or the snowmobile segment sales were up 38%.
Motorcycles were up 50% adjacent markets increased 98% aftermarket.
Was up 15% and boats increased 49% during the second quarter relative to Q2, 2020, which was adversely impacted by COVID-19 closures.
Average selling prices for all segments were up RV increased about 13% motorcycles were up approximately 8% adjacent markets.
10% and boats were up 14% for the quarter.
All segments benefited from continued lower promotional costs, given the high demand and the lack of product in the channel.
Pricing actions taken in the quarter and model mix also had a favorable impact.
Our international sales increased 64% during the quarter with.
All regions and segments growing sales as the heavily pandemic impacted countries began to open their economies again.
Currency added 15 percentage points to the international growth for the quarter.
And lastly, our parts garments and accessories sales increased 35% during the quarter driven by increased demand across all segments and categories.
Increases in this.
Moving on to our guidance for 2021.
Given the stronger than anticipated performance in the second quarter, we are increasing our full year adjusted earnings per share guidance for 2021, and now expect earnings to be in the range of $9.35 to $9.60 per.
The diluted share the.
The increase is driven by the expectation that the even lower promotional environment. We experienced in the second quarter will continue through the second half as demand is expected to remain high and dealer inventory levels low for the remainder of the year.
Additionally, we expect price increases and surcharges for the upcoming model year to.
Of that the mental benefit in the fourth quarter. These.
These benefits are partially offset by the escalating input costs, particularly component cost increases driven by both the global supply chain shortage and higher commodity prices along with the increased costs for manufacturing inefficiencies increased expedites and higher logistics costs.
Overall.
The income full year, we are pleased that our product pricing and promotional cost reductions are offsetting the expected annualized incremental cost headwinds on the dollar basis.
We are narrowing our total company sales growth guidance by holding the upper end of our sales guidance range at 21% and raising the lower end of the range to 19% given.
All for the sales growth performance to date.
Our dealers have ample pre sold orders in hand that combined with additional product would typically allow us to increase the top end of our sales guidance range. However, given the uncertainty around component supply we are leaving the upper end of our sales guidance unchanged at this time.
Moving down the P&L.
Adjusted gross profit margins are now expected to be down in the range of 40 to 70 basis points. This is an improvement from our previously issued guidance and primarily due to the higher than expected margins in the second quarter, which was driven largely by lower current quarter promotional costs and the timing of promotions accrual adjustments as dealer inventory continued to.
Given our.
Adjusted operating expenses are now expected to improve 90 to 120 basis points as a percentage of sales versus last year, given the higher sales growth expectations.
Income from financial services is now expected to be down in the mid 20% range driven by the historically low dealer inventory levels.
<unk> as well as lower retail financing income due to lower penetration rates of our retail providers as more customers are buying with cash <unk> have more time to shop their financing needs with other financing sources given the delays in delivery.
Guidance for the remainder of the P&L items remains of material unchanged from our previously issued guidance.
<unk>.
While our full year earnings guidance improved as a result of our year to date performance and the pricing actions being implemented at the upcoming model year changeover. Our second half performance is expected to be down compared to the second half of 2020 and sequentially from a reported first half result.
Some of the clarity on the second half cadence for earnings.
Our first half 'twenty 'twenty 1 of the EPS finished at $4.99 of <unk>.
228% increase over the first half of 2020.
Given our full year revised guidance for the second half EPS equates to a range of $4.36.
To $4.61.
Let me give our diluted share of decrease of 26% to 30% on a year over year basis, and an 8% to 13% decline on a sequential basis from the first half of 2021.
This reduction in EPS on a sequential basis is driven by a number of positive and negative factors, including increases in input costs in the second.
Half of the year print.
Principally commodities labor expedite and rework costs related to supply chain shortages as well as unprecedented the ocean and truck transportation rates and the timing of operating expense spend.
These costs are expected to be partially offset by increased product pricing through both low promotions higher base prices in.
Second hazardous.
On a 2 year basis, our second half EPS results at the high end of the range are expected to be up over 30% compared to the second half of 2019.
I would also add that the quarterly cadence for EPS in the second half of 2021 is more heavily weighted towards the fourth quarter with approximately 60%.
Percentage of our second half EPS occurring in Q4.
This is driven by a couple of key factors first the majority of our high margins no checks no mobile won't ship until Q4 as compared to a stronger Q3 shipping quarter in 2020.
Second, while we are increasing selling prices and adding surcharges to offset a portion of the cost increases.
Search of prices do not take effect until late Q3, thus, having a larger impact in Q4.
Let me quickly cover our sales expectations by segment.
Or be snowmobiles sales guidance remains unchanged at up high teens percent the.
The only modification is the timing of shipments as indicated earlier with more snowmobiles.
Mobile is being shipped in the fourth quarter of 2021 versus prior year, given the supply chain disruptions and the timing of our pricing actions hitting Q for more heavily than Q3.
Motorcycle sales are anticipated to be up low 30% down slightly from prior guidance. While we continue to expect our motorcycle business to grow and take share for the year.
Supply chain challenges are impacting production enough to possibly shift of some shipments into 2022.
And the remaining segments global adjacent markets aftermarket and boats, we are increasing our sales expectations given the sales growth realized through the first half of 2021.
Year to date second.
Quarter operating cash flow finished at $196 million down 37% compared to the same period last year, driven by an increase in factory inventory due to the supply chain inefficiencies.
Our expected full year cash flow performance remains unchanged of down mid 30% compared to last year.
During the second quarter, we spent 111 million.
On share repurchases, we will continue to prioritize organic investments in our business along with share buybacks throughout the remainder of the year subject to market conditions.
With that I will now turn it back over to Mike for some final thoughts.
Thanks, Bob this quarter's results demonstrated the drive and determination of the players team.
As of ongoing challenges, we will continue to effectively manage a challenging environment to meet consumer demand. The underlying earnings power of the company remains strong as does our financial health demand for our products remains robust and we do not see that changing in the medium to long term our.
Our supply chain remains the top challenge for the company with components.
Supplied not expected to improve until sometime late 2021, or even early 2022 and as a result dealer inventories are not expected to return to normalized levels until sometime in late 2022 or even early 2023.
While much of the focus has been on the supply chain innovation continues to be the lifeblood of flares.
And we have a number of new products coming including the all new electric Ranger, along with exciting model year 2022 launches.
Let me close by reiterating that we're winning in a challenging environment and we remain focused on navigating through the current supply chain challenges and rising input costs to deliver products our customers are demanding while at the same time.
Delivering improved results and value to our shareholders with that I'll turn it over to call to open the line for questions.
Thank you and we will now begin the question and answer session to ask the question you May press. The Star then 1 on you touched on for.
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Press Star then 2 we kindly ask that you. Please limit yourself to 1 question and 1 follow up.
At this time, we will pause momentarily for the first question.
Okay.
And the first question today will come from Robin Farley with UBS. Please go ahead.
Great. Thanks.
Just trying to think about it if there's a way to quantify what retail with losses.
Product availability and when you talk about preorders being out of record level is there a way to quantify what.
What day.
The pre orders had been able to be fulfilled in the quarter what percent of retail.
It would've been in sort of how much higher and I think in some ways, it's still going to understate right. The sales that you would have made if they were actually product on the floor as well, but it's still may help to kind of quantify the demand that wasn't captured by retail. Thanks.
Yeah, I mean, it's hard to put a.
Specific number.
We're on it Robin, but you know I would tell you that we had several thousand of side by side shipments of push out of the quarter.
Given the production limitations and you know I'll tell you the team is.
They are doing incredible work I mean, we have rework operations essentially at each of our factories, because we're keeping our production.
Production lines going and then going back around in retrofitting, if it's shocks of windshields or whatever components have to be put on the vehicle.
To make sure we can keep things moving as quickly as we can.
From a pre sold standpoint as I talked about in my chart, we're now up over 80% of our retail and.
It's even higher than that because by the time of the product is on the trucking on its way.
It's probably already spoken for or is the minute it lands on the ground at the dealer essentially.
So I think it's just safe to assume our retail would have been substantially higher had the product either been delivered as committed.
I would tell they had existing dealer inventories sitting on the showroom floor.
Okay. Thanks, and then just as a quick follow up in terms of your full year of retail expectations, I think a quarter ago alright at some point in the last quarter, you had talked about maybe the full year of retail being down low single digits because of the product availability is that is that.
<unk> still.
What do you think of that in other words, no real change in.
From what you thought over the last quarter about how much you can overcome the logistical issues is it fair that it still isn't that sort of.
Down low single retail for the year.
Yeah.
And as we've talked about you know motorcycles is expected.
It would be up.
The pretty healthily in RV or all of you will be down.
Mid single digits for the year down low single digits is what we're expecting right now, but I'll just remind you that when you compare that against 2019.
So that it kind of patterns out the.
Kind of a substantial lift that we got in 2020, we're still probably going to be up.
High teens on a year over year as compared to 2019, so still pretty healthy growth relative to <unk>.
For a pre COVID-19 levels.
Okay, great. Thank you.
Yeah.
And our next question will come from Jamie Katz with Morningstar. Please go ahead.
Hi, Good morning, I'm, hoping you can comment on the composition of owned inventories.
Obviously, there is the significant bump up.
Given some of.
Of the supply chain constraints that you mentioned is there any particular day.
Net debt, maybe a disproportionate amount of.
Finished goods inventory on the books and is there a way to quantify the impact of rework for the year.
Sure. So as it relates to finished goods I mean, the primary increase in finished goods is a in our V in motorcycles.
As we have taken the strategic decision to build products when we can.
If theyre short 1 or 2 parts and then put them into rework and.
The rework them and ship them out once the parts come in so that's driving the really the increase in finished goods any any finished goods. We have obviously, we're trying to ship out as fast as we can so the rework is really what's driving that we've also got some.
Some increases in raw materials as we bring in more product both for safety stock and to meet the.
The demand that we're seeing in the in the channel.
In terms of quantifying rework.
It's where we're building to rework and it's high high double digits for.
For for the quarter and for the year of of what's going into the rework.
Okay.
The heart and then.
We look at the capacity slide that you guys had on the debt collection with I think slide.
Slide 8.
It would imply that over the rest of the year.
You would aim to basically.
Our net flattish inventory at the.
Assuming all else equal I think is that the right way to think about it.
Yes.
What we're trying to get across and there are a couple of things 1 is just showing it relative to what we've been conveying that.
We've got an unconstrained environment, we're in a decent spot for them a capacity standpoint, it's really the supply chain.
Got us in a constrained environment.
Okay, and the dynamic that you see happening in the third and the fourth quarter is.
Really the rework the <unk>.
I've just referenced is essentially allowing us to make up for the.
The shortfall that we will have in that dark blue line in the fourth quarter.
So essentially it's we.
And the third quart, we're anticipating will in the third.
Or where the fair amount of rework similar to what essentially was going on in the second quarter and the.
Those vehicles would get completed in and out the door to to help satisfy the retail increase in the fourth quarter.
Thanks, so much.
Uh huh.
And our next question will.
Third quarter, Craig Kennison with Baird. Please go ahead.
Hey, Thanks for taking my question, it's on the dealer network.
<unk> certainly the potential to disrupt your dealer relationships I would think more than ever you are in a position to pick your dealer partners.
I'm curious.
Will come for Youre doing to ensure that Polaris is getting a larger share of the best dealers going forward.
Well, Craig you're right and we've been doing work for for several years now.
In terms of.
Of reducing some of the smaller dealers, where we were a little bit more challenged in.
Making sure that the dealer network was healthy.
Certainly this environment has put the dealers in a position where their margins are doing incredibly better Steve mento.
And I were out and Bob we're out of a number of RV dealers about a month and a half ago and consistent feedback was the margin performance coming from.
<unk> is very high end.
The work that Steve and his team are doing the partner with the dealers to make sure that we're being efficient with the money, we do put into promo.
As well as just how we run our marketing programs to make sure that we're getting the right fulfillment in.
Look you are never going to have of 1.
100% positive reception to something like a pre sold order process, but the vast majority.
Alrighty of the dealers view it as a positive something that we can do different than many others and it puts them in a position to be able to retain sales we have worked with them.
I made a comment in my script about the fact that.
We're.
<unk> take P. G&A orders at the same time in training sequence that with the vehicle because thats an area of where they obviously make.
Even more margin and so we're working that we go through every quarter and.
Dealer sentiment and believe me they are brutally honest with us and we continue to be number 1 as you know the majority.
Of our network overlaps with the competitors so we.
We get a pretty good snapshot of how we're doing and right now it's making sure that we continue to outperform our competitors with the only getting product into the dealers thats. The number 1 objective that we've got.
Got it thank you.
Yep.
We're able to enter the next question will come from James Hardiman with Wedbush. Please go ahead.
Hey, good morning, guys.
Good morning, So I wanted to.
Unsurprisingly I wanted to circle back for the.
Obviously, a lot of information being conveyed here.
The retail numbers that you're showing here.
Uh huh.
I read that as the overall retail demand that's down.
Down in the third quarter.
Despite more manufacturing output then steps up a bunch in the fourth quarter.
The way to read that and why would that be the case.
It's actually more a factor of what we're able to deliver.
So when you look at that third in that fourth quarter bar.
You see that the blue is above retail, but really what that's reflecting as we're likely to be producing a ton of vehicles into rework.
Which won't put us in a position to meet the retail.
We don't anticipate consumer demand for the product to have a substantial step down it's really more of our ability to meet the demand.
So we know because of the checks we do we're not alone in this many of our competitors are signaling.
To the dealer network around order taking in.
Demand push out of delivery dates. So we anticipate that that third quarter is going to be a little bit of a of a challenge. The good news is is that we've got an incredible process to get those vehicles reworked and out to dealers and thats really going to allow us to pick momentum up in the fourth quarter.
Got it and so.
In both.
And.
Whats Youre conveying here is that you're basically going to retail as many units of youre able to get out to dealers. It's just that in the fourth quarter, it's going to be that number's, moving a lot higher than the third quarter.
Yes.
Yes.
Our dealer inventories are going to improve slightly as we move out of Q2, but.
It's really.
Both can move much from there.
And I think that really just conveys that we're essentially trying to keep up as best we can with retail demand with current factory production. So we're just the demand has remained and we anticipate it's going to remain strong and.
At this point look it's frustrating because I.
I wish we could get ourselves to a point, where we can meet all of that and start receding dealer inventory because my sense is that that would drive even more retail given what we're hearing from dealers but.
We're dealing with some substantial issues as is everyone in not only in our industry, but in just about every industry, whether it's plas.
Plastics shocks semiconductors.
And I give the team of lot of credit because they are baton goes down every time, they come up and even though we're pushing some shipments between quarters.
They're doing a really good job of keeping things moving.
Got it really helpful. Thanks, Michael.
Yes.
Yes.
And our next question will come from Joe of Belo with Raymond James. Please go ahead.
Hey, guys good morning.
I had a couple of questions on your full year gross margin outlook.
Moving to get better.
For the second half of all of it.
So I guess the first how much of a bad debt.
The lack of promotion.
The gross margin this year and second you mentioned the number of headwinds how much of that might be structural versus temporary and how should we think about gross margins I guess directionally next year, given all of the crosscurrents between pricing surcharges and obviously the higher input costs.
Yeah.
Hey, Joe.
It's Bob.
So I would think about gross margins of few different ways. If you look at it.
On a full year basis Theres a.
About a half of point of negative from tariffs.
Just because we had exemptions in 2020 debt, we don't that didn't repeat in 'twenty.
The 21, so we sort of started the year of little.
In the hole.
And then as you think about the price promo.
Price is the bigger impact in promo for the full year.
Promo was the bigger impact in the first half mainly because of the decline in dealer inventory, we don't see promo levels getting higher in the.
At the half, it's just that that they're not going to get lower either.
So and then as dealer inventory comes down the reserves come down so there's a little bit of impact of that that was about 50 basis points in the quarter. As you think about the structure of the headwinds you know.
It's a combination of things right, so theres labor that will.
Continue obviously, that's not going to go away, we raised labor rates, but.
That's not a significant impact.
It's really comes down to commodities and logistics and theyre relatively equal for the year.
So you look at things like steel steel right now is up.
130% and of 150% versus our.
You know of 3 year and 5 year average so no massive increase in steel.
Aluminum copper and resins are all up 30% to 40% versus those 3 and 5 year averages. So that stuff has a fairly significant impact in and really has accelerated through the year. So when we started the year, we thought the impact would be.
A level. It is now for X the level, we thought it was going to be from commodities. So.
We expect to normalize and Theres nothing out there that says it won't normalize this is the.
Our unprecedented levels the pea.
Pace at which it normalizes I think is the question.
And we're about a quarter out.
In terms of seeing benefit or detriment and thats part of the dynamic in Q2 is that we are locked.
On some of our commodity purchases as we committed volume really that also commenced the price and so if price goes up we don't see it for a quarter of price comes down we roughly don't see it for a quarter.
Not exactly but that's that's the relative math.
The logistics side again, there's the Expedites that'll go away, we're expediting over the top of inventory that's stuck.
Stuck on the water or delayed that's the bulk of it we expect that to go away.
Things like truck and Ocean premiums Ocean containers are on average $8500 of container right now spot rates of 15000.
If you look back of 2019, it was 1700 Bucks.
Where that plays out harder to say, but it's also a smaller part of it. So we think the majority of this will correct itself as as the supply chain challenges EPS and as commodities normalize.
Other than labor and then we'll see what happens with the ocean.
And truck rates and I think Joe I think the setup for 22 feels like it's a positive but I think Bob's point around the timing is key I mean.
We anticipate as I said in my prepared remarks of the dealer inventories still going be challenged which means that the promo environment hopefully will remain.
Under under a better level than it has historically and if these costs start to abate.
We're doing a really good job of tracking that.
The surcharges and things like that would go back, but we've made and will continue to make pricing moves that I think are we're in a good position to hold onto so it feels like the setup is good it's just really more.
More of the.
The question around timing, so we're going to learn a lot as we go through the back half of the year and have a much better understanding once we.
Get into talking about guidance for 'twenty 2.
Got it okay, great. Thank you Scott.
The.
And our next question will come from Scott <unk> with.
C L. King. Please go ahead.
Good morning, guys and thanks for taking my questions as well.
Good morning.
Quarterly sales in an unconstrained environment that retail sales in total could possibly be up this year can you maybe talk about that and if the.
That is indeed the case.
All.
Talk about it by segment.
Yes, well I mean first of all of retail will be up for motorcycles.
And that is constrained so I anticipated would be even better.
And then where we're at.
As I indicated in the us.
Front comments the demand for the bobber.
As well as.
Out in general as well as our new Chief model have been off the charts and so I think in an unconstrained environment, we would see the substantial increase relative to even where we are today in motorcycles.
And same goes for for Slingshot.
From an <unk> standpoint, yes.
Retail would be.
The much better whether it would get back to flat or be up for the year.
Im not going to make a comment on that because I think it's too much of the year of left at this point, but it's safe to say that it would be substantially better than where it is and thankfully our team is executing much better than many of our competitors.
For Scott plus the pre sold.
The process has put us in a really good spot to continue to gain share.
Got it and just the last question on tariffs for just remind us what the incremental headwind will be for 2021.
Okay.
Yes sure increments.
And then for 'twenty, 1 is about $40 million.
Versus 2000.
Got it.
100 <unk>.
Okay.
And our next question will come from Gerrick Johnson with BMO capital markets. Please go ahead.
I have 2 questions if I may.
First.
The price increases can you talk about maybe the quantification of your average price increase and then also the mechanics of the surcharge and how that affects dealers and consumers and then the second is.
I guess my financial services expectations of where they are but what I don't understand some of the outlook.
Look for financial services change so quickly.
You off guard there.
<unk>.
Sure I'll take both of those.
The answer the second 1 first on financial services.
It's really.
Just the environment I think as people are waiting to impact cash.
Cash and.
People are waiting longer to get their vehicles. So the shopping credit unions and all of those kinds of things so really across the board all of the third party partners or just seeing lower lower penetration, we think that will normalize.
<unk>.
As time passes and things.
Get back to normal and people are walking in and buying the dealership that buying at the dealership. That's the real advantage of the in house financing programs and so when would that normalizes I think we'll see that go back to pre pandemic levels, we're not seeing challenges that people are getting credits.
And then the <unk>.
Other piece of that is rolled into the areas. The interest on floor plan and obviously floor plan is really.
Down because of.
The fact that theres not a lot of dealer inventory.
Of repeat your first question.
Yeah.
Price price. So the first question is on price and Sheraton on the price Inc.
We announced last quarter that we were implementing about an average of of 2.5% price increase.
And that went.
Into effect may 1st on the surcharges and price increases on new vehicles at model year, That's all coming in late Q3, and so we're still working through that as to what that will be we are seeing a lot of people out there in comparable industries and in our industry go out with surcharges.
Weighted to both commodities and transportation and so we're going to look at that line. We're also look at what.
What we think pricing needs to be on a on a go forward basis for model year. So we're trying to be balanced relative to what are we pricing that we think is going to be permanent versus what do we think it's going to be short term with the.
The commodities and freight challenges.
We haven't set those numbers yet for later this year and Gary of the thing to remember is with financial services coming down that also means we're not promoting.
For those financial rate buy down so we pick up share of ability that essentially offset a good portion of that.
Just want to clarify of the surcharge that's not an increase of MSRP, that's an additional charge the dealer and the dealer didn't do what he wants with it.
And the reason we do it that way is because it can be very easily eliminated and the customer knows why we're doing it and so if it's of freight surcharge once the freight environment.
Some of the back down to a more reasonable level that can be easily removed and youre not messing around with the MSRP.
Great. Thank you.
And our next question will come from Joseph Spak with RBC capital. Please go ahead.
Yeah.
Thanks.
Maybe just to get to the gross.
Gross margin outlook.
I appreciate the comments on commodities and logistics.
As being headwinds and maybe this is this is just sort of the timing of when some of those commodities that you because obviously <unk>.
Just start going up there had been up for.
Since.
Last summer. So can you just you know.
It comes up us with.
In the second half gross margins versus the first half upon the implied guidance, it's like 250 basis points lower.
And so again, the commodities logistics for higher maybe mixes of little bit of an impact but you also of the pricing option. I was wondering if you could just help maybe maybe bucket that in sort of.
Help us bridge that net.
Basis.
The points.
Sure.
So part of what Youre seeing in the the Q2.
H, 1 dynamic versus H 2 is that the.
<unk> lag a little bit because we we are locked out in most cases of we buy out 30 days in advance.
<unk> secure.
Volume really more than price and.
And we don't hedge obviously, you know that so what we saw in the quarter was that we were we.
We were buying out forward on the commodities. So we didn't see as much of the commodity impact us as the actually hit the market in Q2, and we saw the benefit.
Something.
Which started in may in the quarter, so from that perspective, it lines up really well allowed us to have really good gross margins in the quarter you get the Q3.
And the pricing really in the run rate.
Promo was the benefit in Q2, both from lower promo and some reserve adjustments like I said.
Of the price the reserve adjustments of about 50 basis points.
You get into Q3 promo stays relatively consistent pricing.
Pricing is relatively consistent and the commodities start to ramp up pretty seriously in Q3 Q4, So that's the far and away the biggest driver.
Expedites are relatively.
The consistent Ocean freight is certainly higher in the back half of the year at least as we see it right now.
Yeah, Joe I mean, just about the point I mean, just.
Rough rough math is the commodity impact as Forex, what it was in the in the second half Forex what it was in the first half because as Bob pointed out we're rolling of lot of stuff.
Through inventory plus we did do we don't do hedging, but we do forward locks and things like that so we were dampening that impact into the first half and then when commodities actually went even further.
Up the cost scale.
That's obviously put even just more of mounting pressure into the second half.
Okay. That's helpful and just secondly.
On the electric range or that's supposed to be unveiled and of the year on sale early.
And the industry challenges on both semi and batteries.
It's on track or is that being impacted by some of these challenges and maybe also if you could just add.
And any type of investments the dealers need to make in order to support the electric products.
Yes.
We've been tracking that very closely.
You know really the as you mentioned in the electronics and the battery.
Thankfully, we're going to have start of production in 'twenty 2 so given.
Given that we've got time I would say there's been some small impacts but at this point the team is still on track.
Much like we did with the rest of the business when we saw the stuff starting to happen earlier this year.
We made sure that the team went out and protected for this program. So knowing how important it is that we wanted to make sure we.
Shortages of stock outs that were that were going to impact debt.
The other thing to keep in mind is that we're partnering with zero on this E range or so it's not like we're starting with the brand new supply base that is not used to producing these components zero is kind of long relationship with a lot of the suppliers that we're stepping into so we see that as an advantage of it certainly.
Given us good access to work with those suppliers to prepare for our volume.
Thank you.
Okay.
And our next question will come from Brett Andrews with Keybanc. Please go ahead.
Hey, good morning.
So going back to slide 8 I don't want to over complicate it but if you use 2019 as the baseline.
Do the retail bars imply that youre expecting <unk> to slow versus at low double digits that you did in <unk> I just want to make sure we're using the right baseline.
Scott.
Yeah, I mean, it will we still anticipate being up versus 2019 in the third quarter.
But just not as much as we had been and that's not again I want to reiterate that's not because we have we think there's consumer demand shortfalls. It's just the mounting supply chain challenges that.
You know for the whole industry is facing right now. So obviously, we've got the team geared to do better than that you know obviously you guys know, how we plan and execute against our business. So we're pushing our teams.
And we will continue to do what we've done in the last 3 quarters, which is making sure that we're we're outperforming the rest of the.
So that we can continue to grow the share.
Got it Okay, and then I think you mentioned, 30% capacity increase across the business in 2022, how much is being added or the and then are the investments that you're making more in labor or adding shifts and are there any I guess.
The group's new Greenfield builds in that capacity expansion.
I don't know that I would call it quote greenfield.
It's on our existing Monterey campus I mean, we are facilitating of building that had previously been used for.
<unk> work as well as warehousing, so there will be facilitation of facilitation.
Of that existing shell and I would you know obviously given the size of or be the capacity adds are predominantly focused in that arena, but as we mentioned on the on the chart.
We're making capacity adds of pretty much across the business, whether it be boats or P. G&A.
And the uplift in demand that we've seen this year as well as what we anticipate will continue into 'twenty 2 and beyond.
Alright, thank you.
Yep.
And our next question will come from David Macgregor with Longbow Research. Please go ahead.
Yes, good morning, everyone.
Just give I guess my question is on new incoming retail orders and just what might be changing at the margin there and I'm just wondering what patterns you can see.
In terms of new incoming retail orders through the quarter and how thats kind of how that evolved through the quarter for the beginning of quarter of the end of the quarter I guess net 80% pre sold number which I'm sure is an average for the quarter, but how.
That number evolve over the quarter as well thanks.
It continued to increase through the quarter and I would tell you based.
Based on the number of emails that I get.
Consumers are increasingly want want product and so our perspective is that.
The underlying demand environment has remained quite strong obviously the concern we have and I'm sure everybody has is how long will consumers hang in there. So we're making sure that we're communicating with them around the lead times for the preorders keeping them updated to the extent that we can through the communications.
How did the other with our dealer.
And making sure we're getting product in the hands of our consumers as quick as we can and we are.
Obviously as our margins reflect we are not sparing any expense, where we have to expedite we do if we have to direct ship from our factory to the dealers to get the product into the hands of consumers we're doing that so.
So.
We know that we can recover those costs down the road and we want to make sure that we're getting as much product into the hands of the consumers, especially those that are putting money down on them in advance.
Great.
Question. Thanks for that second question is just the check your modest motorcycle gross margins, which I guess theres a lot of things moving around.
Around the motorcycles this quarter, but the margins were up very nicely and I was just wondering is that just because the.
The smaller bikes were weaker in the mix as it becomes slingshots contributing more.
Can you just talk about as well of houses how sustainable the improvement might be.
Yes, So theres no question the mix as you stated helped motorcycles.
Recycle of margins in the quarter.
With both slingshot and heavyweight being a higher percentage than.
And then they have been in the in prior quarters.
But the the focus for motorcycles as we've talked about we've been building out the product portfolio of the chief was the last big.
Sort of bike, we needed to add to have a pretty full and robust motorcycle.
<unk>. So now we will be focused more on derivatives.
And focused on profitability. So that team has a pretty tough objectives to to go after and work.
We're focused on their path to profitability to continue to improve that business.
Thank you very much.
And our next question.
For Mark Smith with Lake Street Capital. Please go ahead.
I guess another question just on motorcycles as we look at competition you know maybe primarily in midsized bikes any impact in the quarter from competition versus just purely supply.
Well.
I do think.
Obviously, 1 of our key competitors I think is found.
<unk> found their footing, which.
Certainly is helping them I think there are supply challenges are probably.
Dampened relative to us given the fair amount of in sourced.
Components that they do.
We will kind of what we're hearing from our perspective is the demand for our product given the brand recognition is incredibly high and at this point the biggest impact. We had was just simply our lack of ability to produce those bikes. So we feel really good.
Know that there is some competitive news that came out our teams.
But in the assessment and we still think that we've got the best product in the market.
Okay, and then second 1 for me is just circling back to capacity and as you as you're adding some capacity here primarily of Monterrey can you talk about your other facilities and what opportunities there are and adding additional capacity.
Team's done longer term if supply chain issues get worked out and demand continues to be robust do we reach a point, where we start to look at a new facility that's needed.
Yeah. So I mean, we are making moves I mean, Monterrey, obviously, probably gets more attention just given it's our largest manufacturing environment.
But we're adding we added capacity in Indiana for boats. We we actually took the facility we had shuttered when we shut down rinker and Larson.
<unk> that to be able to handle the hurricane brand.
We're adding distribution space in Ohio.
And to be able to help us serve our east coast dealers and some of our southern dealers are much better.
I do think we're going to be in a position, where we're going to have to reevaluate our much larger capacity adds the teams working through that and it's a discussion that will obviously have with the board, but at this point, we are 100% focused on making sure we're.
And of <unk>. This current environment and trying to make sure we keep our eyes forward to say to see when that next.
Capacity.
Limit is going to be reached 1 of the things that we did was we pushed our teams really hard to go of evaluate the labor markets, because even though labor really wasn't a constraint for us given the supply.
<unk>.
Once those get abated, we wanted to make sure that we're in a strong position and so the team did a really good job of looking at each of our.
The facilities and did markets specific adjustments to make sure that we're able to retain and attract labor.
Of that when the supply chain challenges start to abate labor doesn't become.
Hi chain challenge. So you don't have a lot of confidence the team is doing a really good job. So I think both the near term capacity moves that we're making as well as the potential long term.
Put the business in a really good spot.
Great. Thanks.
Okay.
Okay.
And our next question will come from Bill <unk> with Morgan Stanley.
The next please go ahead.
Good morning, guys in your opening remarks, you mentioned inventory levels could get back to normalized levels by late 'twenty..2 early 'twenty..3 just wanted to confirm is that the new timeline, you think it'll take to replenish inventory even despite some of the enhanced capacity you have coming on in Q4, and a pretty strong retail.
The sales environment, calling for flat growth versus the plus 25% growth in 2020, and then do you are not losing customers and share of given this delay timeline. Thanks.
Well as long as we're continuing to perform like we have been.
There's really nowhere for the customer to go we've got the best.
Delivery performance.
And you couple that with the best product on the market and puts us in a pretty good spot and the team understands that and that's where our priority is at.
The reason, we made the comments around dealer inventory levels as they are at an incredibly low level of historically low levels and when we look at that and we do the math.
Forward, assuming that you returned to kind of a low low to mid single digits retail growth rate and 22.
Even with the capacity adds.
Know that it's going to take time to get the inventory levels up and the reason that we said late 'twenty 2 or even the 23 is.
It's.
As guess as to when all of these.
Supply challenges are going to abate when we started out the year, we had a view that these would largely be resolved by the middle of the year and we would be back to building dealer inventory in the second half and that certainly has not has not worked out.
We're not alone.
I don't know that Theres.
There is many markets you can go and buy a product and actually they've got it in stock most of it is dealing with a lot of the same issues around steel and aluminum and resins and specialty components. So.
The team's got to stay focused like we have been in.
The pre sold order process gives us the ability to get consumers locked in and get excited.
Out of the vehicle and make sure that they've got it for.
The next riding or boating season, which is really important.
We're going to do everything we can to make sure that we improve upon that.
Got it thank you and just on the cost price is if these don't abate towards the end of 'twenty..1 would you consider of substantial price increase.
When new models in 'twenty, 2 and would not be able to fully mitigate some of the cost inflation there.
Yes, I mean, obviously, we're evaluating.
Weekly [laughter], what's going on with commodities and logistics.
The costs, we have of review once a week.
We will continue to look at that as the as the year develops and as we.
We head into next year, you know, we're going to we're going to look at as we said surcharges were re looking at model year 'twenty 2 pricing. We already took 1 price increase that was unscheduled mid year price increase on the RV motorcycles side boats actually has done a couple of price increases so we're.
We're trying to be balanced between price increases.
To offset the costs.
Versus how long we think those costs are going to stay in the system and that's a bit of a moving target but.
We will continue to be as aggressive as we can be.
Thank you very much.
And the next question will come from James Hardiman with Wedbush. Please go ahead.
Yeah.
Hey, good morning.
Thanks for the follow up I just wanted to clarify.
Mike I think earlier in the call you said, you still expect retail to be up high teens versus 2019.
I believe the comparable estimate of a quarter ago was 20% to 25%.
Just want to make sure of those 2 numbers are apples to apples and if so is that basically an estimate of of how much retail you feel like you've lost as a result of itself.
Apply chain issues.
The versus where you you know.
For versus where we were 3 months ago.
Yeah the.
I probably was mixed in a couple of things.
The.
The high teens was more of an O RV expectation.
For the total company is it still in that low to mid 20% range.
Okay. So it's ultimately unchanged for both versus versus how you thought about it 3 months ago.
Yes.
Okay and then.
Obviously, there's going to be no great answer here when you were talking about politics, but maybe speak to the tariff legislation.
Obviously, some differences between the incentive in the house bill that of that have come through.
But just how are you thinking about the likelihood of of getting these the exclusions.
The team.
I wish I was more optimistic.
I think there's there was good rationale.
The the.
Janet Yellen has been on the record as <unk>.
Not supportive of the tariffs I think it's going to take some movement around.
The USTR.
Specifically around how we want to deal with China, I think there's a view that we any kind of backing off the tariffs is going to be viewed as going light and frankly with some of the moves that have been going on with China. I don't think now is going to be the time.
So we continue to drive the business the way we had we look for opportunities if we can source.
Outside of China.
I don't know that China's really got impulse to get to the table.
Of the trade imbalances widening so it certainly has not had a huge impact on them and I think the administration is going to have to figure out what tactic they want to take so.
We're not going to sit back and count on it.
So we've continued to push the team to manage the supply chain side as much as we can but quite frankly.
It's taken a backseat relative to all of these supply chain challenges because obviously as Bob covered they are far more expensive at this point than what we are continuing with tariffs. So we continue to monitor it.
We've got folks that advocate for us.
On the hill and when the Time's right, we'll make sure that we're pushing the rate of agenda.
Makes sense thanks for the color.
A couple of more calls the coal we got.
Yes, Sir our next question will come from Shawn Collins with Citigroup. Please go ahead.
Great Hey, guys good morning, Michael.
My question is on the electric range of coming out in the fourth quarter and next year. The electric vehicle Revolution is really picking up steam in autos, So I <unk>.
Wanted to ask what reaction you've seen so far on the soon to be released Ranger and any thoughts on your best.
On how electric plays out.
The power power sports World in General.
Yeah the.
Of the reception around the electric range or at least the feedback we've gotten is people have looked at.
The teaser videos and the value proposition around it being the.
Of the highest performing ranger that will have.
Yes, he has been positive and we've had historically people who've bought our electric Ranger in the past and this obviously will perform immensely better.
And so we think thats a positive.
We do think that there is other areas in off road vehicle.
That could be attractive.
Obviously, there's portions of our youth.
<unk>, where electric makes a heck of a lot of sense.
And then there's going to be other areas that we're going to continue to explore net.
At the same time, there's a lot of challenges when you start talking about products like razor in the areas of their used charging infrastructure as well as the use case and how those vehicles are used.
The run times of short and the opportunity to charge them is tough. So we're not just going to use that as an excuse not to go do anything we've got some ideas around partnerships and how we look at.
The charging infrastructure.
That others will be likely investing in and we're likely to be a fast follower.
I mean things like that but we.
So we've got a playful with what we've got going on with the range or it's an excellent product and the team is in full force to make sure we get that launched at the end of the year end and into the hands of consumers in 2022.
Great that's helpful. Thanks, Mike.
You bet.
And our next question will come from <unk> with Exane BNP Paribas. Please go ahead.
Hi, guys. Thanks for the question.
So 1 of the challenges that you highlighted on slide 8 was total.
Of the Crushers in places like India, and Southeast Asia I know for example in southern Vietnam. There were some lockdowns recently.
All of our revenue to you just give us an update on the situation. There for you guys. If you could maybe remind us of.
How exposed are each of these regions.
Yes, I mean, we have components supply of that comes out of all of those regions and much much like we've had with.
Other elements of the business, we try and manage.
Finally, the as best we can and where we've got the opportunity to either source from an alternative location we will.
Do advanced buys or frankly produce the vehicle with the components missing and then go back and do the rework once we're able to get the continuity of supply so.
We are literally.
Those are lot of different variables, it's whether theres shutdowns on the specific.
<unk>, the availability of shipping containers availability of trucks or rail.
It is literally 1 thing after another and the team as we've demonstrated has done a great job of managing that so.
Manage I think the backdrop hasnt necessarily improved and you could argue with.
With the Delta variant, becoming a bigger bigger discussion.
That's obviously going to continue to be a challenge not just for us, but I think for the entire manufacturing industry.
Okay, Thanks, and just the.
For the pre sales.
Preorders.
Of the order or like in the order of you'd know how long.
The consumer has to wait for delivery just trying to get and how long people are willing to wait yes, I mean.
It really depends on the vehicle the you're ordering but.
I'd say its going to be anywhere from 6 to.
Quick 1 weeks.
And there could be variation on either and just depending on the type of vehicle and.
Where we're at at that moment relative to supply and the good thing is is that we're doing we're doing a good job of communicating with dealers. So they can keep consumers.
Up to date and as we point.
Tim out the debt.
Fallout rate for preorders has been incredibly low so consumers are definitely wanting to wait to get their vehicle.
Yes, no that strength, okay. Thank you guys.
Yep.
Okay I want to thank everyone for participating this morning, the and your interest in Polaris and we look forward to talking to you next quarter.
And have a good day goodbye.
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