Q3 2021 Polaris Inc Earnings Call
Good morning, and welcome to the Polaris third quarter 2021 earnings call and webcast all participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions. Please note that this event is being recorded I would now like to turn the conference over to Richard Edwards head of Investor Relations. Please go ahead.
Thank you Jason and good morning, everyone. Thank you for joining us for our third 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.
Like speeds on our Chief Executive Officer, and Bob <unk>, Our Chief Financial Officer have remarks, summarizing the quarter and our revised X, but expectations for the year, then we'll take some questions.
During the call we will be discussing various topics, which should be considered forward looking for the purposes of the private Securities Litigation Reform Act of 1995 actual results could differ materially from those projections in the forward looking statements you can refer to our 2020 10-K and recent 10-Q for additional details regarding these risks and uncertainties.
All references to the third quarter of 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'll turn it over to our CEO, Mike <unk>, Mike. Thanks, Richard Good morning, everyone and thank you for joining us while demand remained very strong for our products with pre sold orders at record highs and new customers continue to be a large portion of our sales mix, we were negatively impacted by supply chain challenges for the quarter.
We were able to meet earnings expectations in the quarter, but a combination of logistics challenges and supplier shortages impacted our ability to ship and as a result sales finished below our expectations.
This is not unique to Polaris the entire power sports industry is being deeply impacted by the much reported on supply chain challenges. The good news is that Polaris continues to outperform as evidenced by our record year to date sales and earnings performance with sales and earnings up 24, and 59% respectively versus 2020.
We also continue to drive market share gains in the RV and other segments of the business are in line with or are up year to date in market share versus last year.
Additionally, our P G&A and international businesses performed well with P. G&A sales growing 8% and our international business delivering strong sales growth of 21% in Q3.
And while I'll cover more details in a few slides our new product introductions for RV have generated a lot of excitement and energy for dealers and customers.
We continue to manage through a very challenging supply chain constraints issues stemming from port backups escalating commodity prices truck and driver shortages and labor shortages. The list goes on and on we are taking aggressive steps to combat these headwinds, but given we are 10 months into the year the impact of any additional countermeasures may not be realized until sometime next year.
Sure.
Thus were revised revising our full year 2021 guidance down slightly but I will give you more detail shortly while I'm disappointed that we're lowering our full year guidance as a result of the continued supply chain challenges I couldn't be more impressed with the Polaris team for their ongoing dedication and exhaustive effort to keep the flow of our products moving to our customers I also want to recognize our dealer.
For their understanding and dedication to Polaris in these challenging times as well as our suppliers, who continue to work with us to improve upon availability of components.
Moving on to retail sales for the quarter, our third quarter, North American retail sales were down 24% from the positive 15% reported in the third quarter of 2020.
This resulted in retail being down 13% on a two year basis, our retail results were lower than originally anticipated driven entirely by supply chain issues.
We continued to gain market share in <unk>. Despite the supply constraint retail sales getting almost a point and a half of market share with gains in both atvs and side by sides.
<unk> retail sales were also down for the quarter Indian market share is now flat year to date with the midsize bikes being the most supplier constraint category.
Snowmobile retail was down 30% in the quarter, despite that our snowmobile business gained share during the quarter as we perform better than the market.
And lastly boats market share continues to remain up year to date.
Dealer inventory levels ended the quarter down 41, 46% on a year over year basis, and down 75% when compared to pre COVID-19 levels in Q3 of 2019.
We currently have on average less than a month of inventory in the channel.
Resold vehicles continued to be a very effective sales lever for our dealers to maintain consumer interest and is a wafer.
Consumers to stay engaged with them while their vehicles being built.
The given the competitive advantage, we have seen with this process. The team has made some changes which I'll provide more detail on shortly.
[laughter].
Given the current supply chain issues, we don't expect the dealer inventory situation to improve materially until sometime in 2022.
As I discussed earlier continued unprecedented demand coupled with supply chain constraints have created significant disruptions in our shipping cadence with dealer inventory at record lows and not expected to return to normal levels in the near term the dealer pre sold order process has become and will continue to be an integral process part of how we take orders and deliver products to dealers and <unk>.
<unk>.
Given the acceptance of the process and the escalating supply chain challenges. We've made some modifications to the preorder process to improve the visibility and predictability to dealers and consumers. Let me share a few of the changes with you.
A few weeks ago, we adjusted delivery dates on a limited number of pre sold orders to align with our current production schedule.
We are introducing a new industry first online order tracker that will provide customers with order confirmation data plus the ability to find up to date shipping estimates for their pre salt order. This will allow for greater transparency of order status for both the dealer and pre sold customer.
Next we created a new players offered reservations program for select premium models, including the range of full size and multi premium plus models general full size and multi performance models and the razor extreme and multi performance turbo models.
These premium models are currently the most popular have the highest demand and are the highest percentage of pre sold orders in our system today.
We believe this allocation method will provide the necessary prioritization of whole good <unk> shipments to drive increased retail velocity and dealer profitability, while improving the customer experience.
All of the models will remain unchanged within the existing RFS and presale process currently in place today.
In summary, these changes are designed to improve communications and the dealer and consumer while improving our ability to manage product flow in a supply constrained environment and setting clear expectations for shipment timing to better serve the dealer and customer.
Our manufacturing plants continue to operate at peak supply chain constraint capacity, while our teams are mitigating shortages and deliver days delays real time, the supply chain disruptions have become unavoidable for a large number of our models. The shortages includes shocks plastics crank cases doors and of course semiconductors to name just a few.
We continue to aggressively work with suppliers across our business, who are behind schedule with RV being impacted the most given its size.
A byproduct of the supply chain shortages as higher input costs each link in the supply chain from shipping lines port bottlenecks shortages with trucks and railcars to the increased rework and disruption in production schedules is create an environment where input costs have increased exponentially.
As an example, since the first of the year cost attributable to supply chain disruptions has increased five fold that's over $300 million of additional costs that we did not anticipate when the year began.
We've attempted to offset these costs through pricing and surcharges, which Bob will discuss shortly again I want to reemphasize. This is not a manufacturing capacity issue. It's a supply chain issue Bob will give you an update on recent capacity additions, which will clearly demonstrate that we have and will have capacity improvements when the supply chain constraints at site.
New product introductions and innovation remain a key component of our growth strategy going forward during the quarter, we introduced 15, new or Remodels product enhancements and limited edition models, including a new mid size Ranger with more comfort storage and a noticeably quieter right. It comes with Ryder and Spider.
Aspired features including a larger dump box more onboard storage more leg room, and new premium contoured seats. Our Northstar trim is also available with a fully enclosed heated cap to keep riders comfortable under the cold seasons sportsman and the industry, leading ATV brand just got better with the addition of the exclusive industry, leading seven inch ride command technology.
<unk> with GPS navigation and communication technology.
And for our younger riders, we introduced a new razor 200, EFI with industry, leading safety and technology features including standard hard doors and high visibility front and rear led lights digital speed limiting to control top speeds and geo fencing to allow parents to control where the vehicles are allowed to go. In addition, we added a number of enhancements and limited edition.
<unk> to the Ranger General Razor and sportsman lineup for model year 2022.
We continue to invest aggressively in research and development and a bold slate of industry first innovations are now entering the introduced introduction phase with an exciting sequence of launches to play out over the next several years.
One of these introductions, which assured a throw are extremely passionate recreational riders is the all new razor that will be unveiled on November 9th if you haven't seen some of the teaser videos you should check them out.
The new razor has been highly anticipated the social media and video Ts last week launched excitement across our rider forums and fan channels, one little nugget I'm excited to confirm today is that we're not just launching one new razor.
We're good at getting ready to launch to the all new razor pro-war and the raise our turbo or are ready to reaffirm our leadership position in the wide open segment with the highest performing recreational vehicle and the industry are incredibly energized to bring these industry leading products to market.
As I've said innovation will always be front and center in our growth strategy. One innovation, we have been talking about for some time now is the all new full size electric Ranger, which is set to launch in December. This is a completely redesigned ranger we've been previewing the benefits of this new Ranger and a number of marketing videos throughout the year, including more torque and power incident.
Acceleration precise control regenerative braking industry, leading ground clearance highest power to weight ratio lowest cost of ownership and the quietest right you can see each of these videos on our website.
We're incredibly excited to bring these game changing this game changing ranger to market as it reflects our commitment to expanding our product offering to meet the needs of our customers with that I'll turn it over to Bob who will summarize our third quarter 2021 results and our updated expectations for the remainder of the year.
Thanks, Mike and good morning, everyone.
Mike highlighted the supply chain headwinds, we faced in the third quarter and expect to continue to face for the remainder of the year, we want to make sure. Our investors understand that we are working diligently to counteract these headwinds while there is pressure in the near term. We believe we are well positioned to capitalize on the sustained demand as the supply chain normalizes, we will have more on the remainder of 2021 later, but let.
First start with a summary of the third quarter.
Third quarter sales were flat on a GAAP and adjusted basis versus the prior year, finishing at $1 96 billion.
Sales improved for motorcycles and global adjacent markets and boats or V snowmobiles and aftermarket sales were down on a year over year basis, while supply chain constraints impacted all of our businesses, we were able to ship more motorcycles and adjacent market vehicles during the quarter compared to the same quarter in 2020 boat sales were positively impacted by improved product.
Mix as we shipped a stronger mix of premium boats in the quarter.
Third quarter earnings per share on a GAAP basis was $1 84 adjusted earnings per share was $1 98, which was down from the 285, we reported in Q3 last year as expected.
Adjusted gross margins were down approximately 360 basis points on a year over year basis, mostly due to increased input costs and logistics commodities plant inefficiencies and labor.
The input costs were partially offset by increased pricing and ongoing lower promotional and floor plan financing costs.
Adjusted operating expenses were up 4%, primarily due to increased research and development expenditures and to a lesser degree increased selling and marketing costs during the quarter.
Income from financial services declined 38% during the quarter, primarily due to lower retail credit income retail financing penetration rates continued to be low due to more customers paying in cash minimal promotional programs available from Polaris and consumers, having additional time to shop around for alternative financing options.
And finally, the tax rate finished at 25% compared to 23, 7% in the third quarter last year due to favorable adjustments related to research and development credits taken in the quarter.
From a segment reporting perspective motorcycles global adjacent markets and boats increased sales for the quarter, driven by volume pricing lower promotions and favorable product mix.
For our <unk> snowmobile and aftermarket segments reported lower sales for the quarter driven by the supply chain shortages.
All segments continued to benefit from ongoing low promotional costs, given high demand and the lack of product in the channel.
Pricing actions taken EMEA also had a favorable impact during the quarter, but were muted given the large quantity of customer preorder units, which we did not benefit from the pricing actions.
Average selling prices for all segments were up RV increased about 5% motorcycles were up approximately 10% adjacent markets increased about 1% and boats was up approximately 30% for the quarter mix had an impact on asps and all segments I will talk more about pricing actions. We have recently taken as they are an important CAD.
Measure to the increasingly inflationary environment, we are facing today and going forward.
Our international sales increased 21% during the quarter with all regions and segments growing sales as many economies continued to gain traction as they recovered from earlier Covid shutdowns currency added three percentage points to the international growth for the quarter.
Parts garments and accessories sales increased 8% during the quarter with strong demand across all segments and categories in that business, particularly parts and accessories back.
Back orders driven by the supply chain bottlenecks remained high limiting our growth in P. G&A for the quarter.
Moving on to the to our guidance for the remainder of the year.
As Mike indicated supply chain challenges significantly impacted our ability to ship product in the third quarter and we anticipate continued pressure in the fourth quarter and into 2022.
When we last updated our expectations in July we had been expecting the supply chain constraints to ease as we headed into the fourth quarter. Unfortunately, the supply environment has not improved in the ways. We had anticipated. Therefore, we are lowering our full year sales and earnings expectations going into the fourth quarter.
Total company sales are now expected to finish at approximately $8, one 5 billion for the year.
At this projected sales level full year adjusted earnings per share guidance for 2021 is expected to finish at approximately $9 per diluted share.
While we are disappointed that we have to update our guidance keep in mind. This is <unk> 25 per share higher than the high end of our original 2021 guidance range.
The full year sales and earnings expectations are driven by our ability to source the needed components for our products. Our guidance assumes that supply chain performance will not deteriorate further in Q4, and then our suppliers will be able to fulfill our current expectations for component deliveries for the remainder of the year.
While we typically have a solid view of the puts and takes for a given quarter, which gives us confidence in providing a realistic guidance range in this environment the timing of component shipments could significantly impact the quantity and mix of products, we were able to ship in a given quarter and therefore our results were.
We are doing all we can to deliver vehicles to our dealers and consumers, but have limited ability to quickly countermeasure certain unexpected supply chain disruptions as.
As such we have provided you our balance projection for 2021, which is reflective of our current viewpoint on the component availability and production run rates.
One thing is certain we will always do what is in the best interest of our consumers to get their requested vehicles to them as soon as we can.
Moving down the P&L, we have made the following revisions.
Adjusted gross profit margins are now expected to be down approximately 70 basis points, which is at the lower end of our previous guidance. The escalating increase in input costs as Mike indicated earlier has been significant.
Mike mentioned, the 300 million plus increase in input cost since the beginning of the year, but just in the third quarter alone our input costs from logistics Ocean interest rates commodities labor rates and plant inefficiencies increased over $100 million where approximately.
<unk> 580 basis points, when compared to the prior year third quarter.
Given the magnitude of the input cost increases and the expectation that they are not transitory. We are quickly adjusting our pricing for model year 2022.
In October we announced price increases that will increase the average sales price on most RV and motorcycle models in the mid single digits percent range.
Similar increases were also announced for associated P. G&A.
These increases are in addition to several price increases we have made earlier in the year.
While the cost environment is a headwind that will continue to impact our gross profit margins in the fourth quarter. The benefit of the recent pricing actions taken are announced will not have a significant impact until the first quarter of 2022 as the dealers current preorders are set at the previous pricing levels.
Adjusted operating expenses now expected to improved 90 basis points as a percentage of sales versus last year again at the lower end of our previous guidance range driven by the lower sales growth expectations, partially offset by prudent cost management.
We are continuing to invest in the business, while controlling our flexible expenses commensurate with our sales volume.
Income from financial services is now expected to be down in the low 30% range driven by the continued historically low dealer inventory levels as well as lower retail financing income due to lower penetration rates of our retail providers as I explained earlier.
And we're adjusting our income tax provision rate expectations for the full year to be in the range of 22% to 22, 5% an improvement over our previously issued guidance, reflecting the flow through of favorable tax adjustments related to the R&D credit.
Guidance for the remainder of the P&L items remains materially unchanged from our previous issued guidance.
Our sales expectations for our segments have been lowered given the supply chain challenges with the exception of global adjacent markets, which remains unchanged for the year.
While our adjacent market businesses are feeling the same supply chain challenges with our other businesses. They were in a better position with finished goods in dealer inventory given the <unk> market has recovered at a slower rate than the consumer markets.
Our current plant capacity is adequate to meet the current demand and when the supply chain constraints ease we will have the needed capacity in place to ramp quickly and begin to fill the dealer channel with much needed inventory.
We are expanding our Monterey facility by over 400000 square feet, adding approximately 35% more capacity for razor in general over the next year to accommodate the model year 'twenty two vehicles, the new razors coming in Q4 and additional RV model is expected to launch over the next couple of years.
For boats, we added approximately 55000 square feet of manufacturing capacity in Elkhart, Indiana to meet the demand for Bennington and we brought the Syracuse, Indiana facility back online to support strong demand for our hurricane deck boats.
In addition to adding manufacturing space. We have also invested heavily in welding bending injection molding and painting capabilities to support higher assembly volumes.
With these capacity adds we will be ready to meet the anticipated strong demand when the supply chain improves.
Year to date third quarter operating cash flow finished at $153 million down significantly compared to the same period last year. The decrease was driven by an increase in factory inventory due to the increase in vehicles waiting for parts and our pre buying of components to remove as much uncertainty around the component availability as possible.
While share repurchases remains a lever we like to use to return capital to shareholders in the current supply constrained environment, we will concentrate much of our capital towards organic investments until the supply chain improves.
With that I will now turn it back over to Mike for some final thoughts.
Thanks, Bob with all the uncertainty surrounding the supply chain forecasting 2022 is proving to be challenging let me give you. Some preliminary views on next year, given where we stand today.
First the supply chain is likely to be an ongoing challenge into 2022 supply chain issues have been with us for to varying degrees since the pandemic first broke out in March of last year, but in the past quarter the supply chain issues have intensified.
Additionally, we're experiencing much higher costs than we anticipated, we're taking steps to raise prices now that will benefit us next year.
Assured that we're working hand in hand, with our suppliers to improve upon the current situation and I'm optimistic we can continue to outperform the competition as we have so far this year.
Dealer inventories are expected to remain lean through 2022 until the supply chain improves in the meantime, we will continue to prioritize the majority of our production to preordered units until more supply chain flexibility is obtained.
We expect consumer demand to remain healthy through 2022, the number of new customers that have entered the market is staggering and repurchase rate data supports that customers are staying with the brand.
As the supply chain starts to recover we are in a strong position to take full advantage of this given our substantial investments in capacity expansion.
I've talked at length about the steps, we're taking to navigate the current supply crisis, but behind the scenes. We've also been taking a closer look at our portfolio of businesses. When I was first appointed to the CEO position almost a year ago. My mantra is focused execution that applies not only to the day to day operations, but also strategically and where we want to concentrate our time and capital as such we are.
Made the decision to divest our gym and tailored on businesses with the expectation that the transaction will be completed by year end and.
And finally, while we received some favorable news out of the Biden administration around the possibility of tariff relief next year the realities of the process, we're far less compelling.
The initial exemption reinstatement process appears rather narrow and is likely to have an insignificant impact on our financials and 2022.
2021 has been a year of constant adjustments, but we have been winning by remaining agile and adaptable. The players team is hands down the best in the industry coupled out with the best brands and product portfolio in the industry and I believe we have the winning formula for growth and improved profitability for years to come with that I'll turn it over to Jason to open the line for questions.
Thank you we will now begin the question and answer session to 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 to withdraw your question. Please press Star then two please.
Please limit yourself to one question and one follow up.
Our first question comes from James Hardiman from Wedbush Securities. Please go ahead.
Hey, good morning, Thanks for taking my call.
So so.
Supply chain sounds pretty beliefs are pretty clear that it's worse than you would've expected it to be three months ago. I guess, maybe talk about if we can drill down over the past few weeks, maybe maybe a month.
I can tell you from a delivery perspective, and b from an input cost perspective.
Are things as we sit today getting getting better or are they getting worse or are they pretty consistent with where they've been.
I would say that they are pretty consistent with where we've been.
There were a couple of specific things that happened coming shortly after we had our call in July.
Semiconductors have become a more pronounced issue.
Obviously the automotive.
Sector is being tremendously impacted by that and that obviously started to have a bigger impact on us and then I think there's things that are specific to our company from a supplier standpoint, but I think if you step back it's the broader supply chain environment. The fact that I think when we had our call. There were probably 40 ships sitting off long beach.
Now it's up in the one hundreds.
The driver shortage the truck chassis shortage, all those things have intensified in.
At this point Theyre kind of just moving sideways now I will tell you that our team.
<unk> is doing great work to make sure that we get our disproportionate share of whether that's trucking or prioritization at the ports.
And then we have a handful of what we call our mega suppliers. The suppliers that can have the biggest impact on us and we're managing that on a day to day basis and when when we see improvements in one we tend to see something happen with another and those are just the realities of the things we're working through right now the good news is we're hearing from suppliers of things should start to get better but that's.
Within the context of the broader supply chain environment. So, we're taking that with bated breath and we'll see how that goes you know I think Bob mentioned it we're poised to react as soon as the supply chain starts to see more flexibility.
James the other piece of input costs is obviously commodities.
At steel as we look out into next year still looks to be headed back.
Down the down the change towards a more normal level, although I think it will take at least the full year to get there but.
But the Q the.
The buys for the early part of the year look to come in to a minute better numbers, but there's some deferral of that impact as it rolls through because we're buying in advance so.
That help won't show up right away. The downside is aluminum continues to get more challenging.
Those things are going to tend to offset each other so it looks like the commodity stuff right now I'd say its going to be relatively flattish at least for a little while.
Got it and then my follow up it's sort of a related question is on the pricing side frankly, the relief that hopefully pricing will bring and I really appreciate the commentary surrounding all the timing, which I don't I don't think the street was necessarily thinking about the right way I guess as we sit here today <unk> had a price increase in the fall.
Quarter.
Do you feel like you currently taking a sufficient amount of price.
Given where we are from an inflation perspective.
And I guess is there a way to think about sort of where the gross margin would be on on currently priced.
Unit I E model year, 2022 units as opposed to the pre ordered units that you sold throughout the quarter that were at those those lower prices.
Yeah sure I'll I'll I'll start at a macro level, we got as it.
Hits to commodities input costs in and all the logistics challenges.
Through 2021 in Q3, Q4 were a little bit behind from a price promo standpoint in terms of getting getting those back as we put in the Q4 price increases.
That dynamic will start to change as we get into Q1, and we will be pricing ahead of where we see the current costs than at least what we know of where theyre going in 2022. So we feel good about where we're headed into next year in terms of price versus the inflation. Obviously, we don't have a crystal ball for what will happen next.
Year, and we will continue to be aggressive as we look at.
Look at those factors and we will be aggressive with price as those things change, yes, I think James you know as you think about is annualizing the costs had been ramping through the course of the year.
And then the additional price actions as Bob said, we were behind in 'twenty, one which is not surprising because I think I think everybody was just trying to figure out where things are headed.
As we look into 'twenty two it should be a positive to margins.
Because the <unk> of the cost is less than the annualized <unk> of the price so that should put us into a more positive balance from a price cost ratio. We made the hard decision that we're going to honor the.
The prices that we've got under our pre sold we didn't think it was fair to change the game on the customers, especially given their patients with waiting for vehicles that are more delayed than then they were expecting.
And so we think that that'll be a favorable tailwind theres a lot of assumptions around that theres assumptions at the supply chain doesn't get <unk>.
Significantly worse, there is an assumption that commodities are going to get dramatically more expensive than they've been but based on what we see right now we feel pretty good about where we stand.
It makes sense good luck navigating a pretty tricky environment here guys. Thanks James.
Our next question comes from Craig Kennison from Baird. Please go ahead.
Hey, good morning, Thanks for taking my questions just to follow up on that last point from James.
How willing are your customers to absorb.
This rising inflation.
You know it's interesting we have really not heard much from customers I think when you look at the price increase on the overall cost of a vehicle and as you heard in my prepared remarks, our premium models are selling at a high rate.
So that percentage increase in dollar terms is really not significant.
And given the supply constrained environment, and the scarcity of being able to find something.
And we know that our competitors as we kind of watch the landscape. We see similar types of moves. So it's we're not an outlier by any stretch and I think the it's not infinite elasticity around price, but given the moves we've made which have been smaller and more deliberate we.
We feel that consumers are going to be willing to take.
To take that and then we'll obviously keep an eye on that.
As we move forward, especially as some of these costs start to subside.
Hopefully, we'll be able to hold onto a good portion of that pricing.
Thanks, and then my question goes to the Taylor Dunn and.
Jim decision can you quantify the impact on profit of that decision and then maybe just cover what's the criteria you're using to define what the future.
Of your portfolio it looks like.
Well you know as we said in the press release, the business was less than $100 million of revenue not making money. So that'll give you a good sense of where that stood.
I think as we've talked in the past I mean, we're going to continue to evaluate the portfolio I think when you look at that business I mean, it clearly does not have a straightforward with what we do in power sports.
And frankly, it will be to do better in other owners' hands, they can spend more time and allocate capital directly into that.
Type of platform, it's got a great management team, we have a lot of confidence that it's going to do well once we complete the transaction here in the fourth quarter and we're meeting with our board here in a couple of days to continue to talk strategy and portfolio and we will continue to evaluate that as we move forward.
Great. Thank you.
Yep.
The next question comes from Joe Alto Pillow from Raymond James. Please go ahead.
Hum.
Question on the guidance for this year it looks like your revenue guidance implies.
The delivery cadence could improve somewhat.
Somewhat in Q4, you talked about the lack of visibility here, how do you see that pick up in October how much confidence do you have that.
Will happen I guess.
Well I mean, a lot of the fourth quarter dynamic is really driven by our snow business.
As I mentioned earlier when James asked the question I mean, we really haven't seen a material change I mean, we're literally battling every day.
To make sure that we've got materials inbound.
We have taken what normally would be an inefficient process around rework and essentially have a secondary factory at each of our facilities, where we're taking completed units off the line that are missing 125 components.
Positioning them and then reworking them as those parts come in real time, and then getting them out and shipped as quickly as we can so.
Again, I haven't really seen much change in that environment, We're still battling every day and really the uptick you see in the fourth quarter is largely driven by the snowmobile business as we try and ramp into the seasonality.
That's helpful and maybe just transitioning over to the cost pressure side, if I interpret your correctly, Mike what you are saying as cost pressures.
Probably peaked here in Q3, but they're likely to plateau for a bit before they get better is that a fair categorization.
Yes. It is.
Generalization I mean, the reality is we've been able to go out and walk steel and at a more favorable price than what we've been experiencing more recently, but as Bob indicated.
Aluminum is becoming a little bit more of a of an issue if youre watching some of the commodity markets. So I think theres going to be you know moves back and forth I I don't know that we're going to see the huge jumps that we've seen historically.
We're going to have as we're obviously lapping 2021, where we saw those costs ramping through the year. So if you assume that they stabilize.
Still going to have an increased cost profile now the good news is we're going to have the same dynamic around all the pricing moves that we've made as well as the pricing moves that are going in pretty much as we speak right. Now. So we think we'll be in a better position in and obviously, if we see something different playing out with cost if we see them continue to rise.
We're in a position to continue to evaluate it were taken a far more proactive.
Review process of our pricing used to be more of a model year or an annual review process. We're now looking at it.
Quarterly, but it's even more frequent than that.
Got it very helpful. Thanks, guys.
So.
The next question comes from Fred Whitman from Wolfe Research. Please go ahead.
Hey, guys, Mike at the end when you were sort of wrapping things up you made a comment that inventories were expected to reset lower was that a comment on dealer inventories are company owned inventories could you just sort of give a bit more color on what you meant there.
Yeah in my closing comments I was talking about dealer inventory levels, we don't expect them to improve.
Dramatically through 2022.
Even even as you think about if the supply chain starts to loosen up and we can deliver more demand is still.
At pretty high levels, and so I suspect, it's going to it's going to take us a while to get the dealer inventory levels back up where they need to be I mean company inventory. Obviously is at a very high level right now two reasons. One we're obviously, bringing our raw components and second is we have a fair amount of finished goods that are waiting on one or two or three components.
We suspect that that logjam will start to break free and that should start to improve the company inventory profile as we get into 'twenty two.
Perfect and then on the gross profit breakdown what happened in the corporate segment GP. This quarter was there something meaningful that to call out.
The only thing that would roll in there would be absorption and that obviously tied to the to the amount of stuff that flow through the factory with all the disruptions.
Okay. Thank you.
Okay.
The next question comes from Jamie Katz from Morningstar. Please go ahead.
Good morning.
Okay.
Expectations for gross margin with respect to that people order program.
The premium panels instead of taking the lead on demand which is possible.
Near term the lift in gross margin.
What are you sort of take priority in the sell process can you walk us through how.
Maybe we should think about that.
Well I mean, I think it's a fair characterization I mean, we've seen that dynamic.
Playing out through the year quite frankly.
The Northstar Ranger for example, or for passenger Ranger and razors.
<unk> had the highest levels of demand and those tend to be the more expensive vehicles.
So I think there is an element of that but I think the other component is the price moves that we've made and as we work through the existing preorders and obviously start to take new at different pricing levels.
That should put us in a better position, especially if the input cost continued to hold at the current levels and we don't see those increasing substantially.
Given the current environment is but.
We're obviously working through all that now I mean, you can imagine the budgeting process for 2022 as I alluded to in my closing comments is a far more complicated process than normally and we're running a lot of different scenarios with the unknown backdrop around how how the supply chain performs through the course of the year.
Okay, and then for pre Salt water I think last quarter I think you were running at about 80%.
And it looks like in the Pie chart shows on slide seven and then it would be even higher than that for Q3 can you update us on what that looks like quarter to date, and maybe whether that's easing or accelerating.
It is performing in about the same area.
It's it's become an important competitive advantage for us.
We made adjustments to the program as I outlined a lot of that was really based on feedback from our dealer channel as well as just acknowledging that the supply constrained environment is going to last much longer than I think anybody expected.
So we've adapted the program, it's working really well, we're getting you know I think in general very high marks from from our partners.
Thank you.
Our next question comes from Robin Farley from UBS. Please go ahead.
Great. Thanks.
Just circle back to some of the comments for 'twenty two.
Delighted to 300 million is kind of higher supply chain and input cost pressures for this year.
Looking at those sort of individually it looks like those factors rate would kind of continue through 'twenty. Two so is the idea that.
The.
Selling price that model.
We'll have more than offset that 300 million for for 'twenty two.
The price increase that you've already announced or can we expect maybe some during the year model price increases in 'twenty two.
Would it take to exceed that 300 million and higher expense.
Hey, Robyn it's Bob.
So as we looked at the.
Increasing input costs for 2021, and how we thought those would factor into 'twenty two.
We do expect them to stay relatively consistent certainly for the first half and.
We're certainly planning scenarios that they can stay consistent for the whole year. The price increases we just put in in the last few days were designed to to offset those going into 2022, and so if commodities and other input costs stay at the current levels. We feel like we will we'll be on top of those.
A pricing standpoint in 'twenty two if they get worse, we'll obviously have to revisit pricing again.
At some point in 2022, and like Mike said, where we're looking at this pretty.
Pretty much monthly and on the cost input side, we're looking at it daily and weekly so.
We're on top of it right now and then.
We will keep on top of it next year.
Great. Thank you. My other question is just on market share and you know theres been some.
Import brands from China that have been kind of making headway in market share and can you just.
Sort of asking me a little bit what that may be doing to the overall market or do you not really you know I know they don't really play in the premium segment, where a lot of clearance product is so is it do you sort of think of them as not being in kind of your.
Your market.
Yes, I mean, it would be easy for us to just make that general assumption and say hey, they don't play in ours, and we're going to ignore them.
But that's not how we operate.
I think the reality is they are not having a huge impact on us right now.
But we are watching carefully and making sure that we're in the right competitive position, but overall, we feel really good.
The team has done an excellent job of managing you think about the size of our business, depending on which competitors you add up you have to add up two or three of them to get to our size. So that the opportunity for us to have disruption and put ourselves in a position to Ms market share as you know it can be a big deal for us and we've had four or five quarters.
Now of demonstrating that we're not going to let that happen. So the team's done a great job of managing through that.
Okay, great. Thanks, very much thank.
Thank you.
Yes.
The next question comes from David Macgregor from Longbow. Please go ahead.
Yes, good morning, everyone.
Just a question on the.
The price increases I, just I guess wanted to get some clarity.
Are these price increases that are expected to continue going forward or are there surcharges embedded in there that might retreat as your costs come back down.
Yeah, I would say.
David through the year, we had a mix of both through price increases and surcharges. The most recent round is our price increases that we expect primarily price increases that we expect to stay.
Through 2022 and into the future.
Okay. So just to follow up on that when you make reference to the prior question the boat.
The ASP that you are launching now are sufficient to cover that $300 million cost inflation next year.
Does that include surcharges or does that not include surcharges.
We put the surcharges separately from an MSRP move.
And the reason, we do that and it's usually stems around logistics because as those freight.
Charges start to move around and we've got the ability to essentially give pretty quick relief to the dealers around that specific component.
Okay. My second question really is kind of a bigger picture and it really deals with the pre sold orders and obviously, you've been investing some time and effort and money into accommodating.
<unk>.
At some point in the future I guess, the world will normalize and get back to a more balanced state and I just I'm just curious what will be the nature of pre sold orders in your business from that point going forward.
Just think about that.
Yeah, no it's going to be an important component I think we've made these comments a couple of times that when we get back to normal whenever that happens.
We don't expect our dealer inventory levels to be at the levels they've been historically.
And we've demonstrated that we can deliver pretty quickly.
Two what dealers are looking for and so we believe that in the future we're going to carry a much lower days sales outstanding at the dealership and.
And with our capability to deliver a customized vehicle to a consumer.
In a pretty quick period of time, we think that's going to be very attractive. It's good for us and it's really good for the dealers in terms of helping them.
Manage their margins and profitability, we have seen that come through loud and clear.
I think <unk> heard the same coming from a lot of the large automotive guys, where they see this this has permanently changed what they think the dealership model will look like in terms of how much inventory is sitting on the lot versus can be customized in order by a customer and so we're using this as an opportunity to hone those skills and we think it's going to be a really good competitive advantage moving forward.
Great. Thanks, a lot Mike good luck. Thanks.
Thanks.
Thanks.
It comes from machines to you from Exane BNP Paribas. Please go ahead.
Alright, thanks for the question.
So last quarter, you showed a slide with the supply chain talking about how maybe some rework vehicles could that were produced in <unk> that satisfies understand <unk> guests with supply chain, where it is or I guess, where reworks going is it higher now and so when you look at the slide eight that you have now.
<unk> to.
The 20% lower unit.
Can you disaggregate the reworks.
As you know lower production underlying.
Yes, I mean, it's safe to say the reworks are higher when we had when we had come out in <unk>.
Last quarter, we were assuming that.
We weren't expecting a supply chain to get dramatically better, but we certainly weren't expecting it to get worse, which is in fact, what happened and so the the amount of rework we have is higher.
It moves around I mean, it's not it's not a number that we want to put out there just because.
It moves week to week, depending on the delivery of components that were short for those units.
And the team is doing a really good job of prioritizing where those inbound components go whether they go straight to the production lines. So we can produce a clean unit or if they go into the rework depending on how late those those particular units are so it's a.
It's a pretty sophisticated operation and.
The team is doing a great job managing it.
Okay got it and then on the retail sale of another question on the market share that you talked about how <unk> retail sales were down mid 'twenty, you know gaining share versus the industry.
On a two year stack it seems like you know.
Retail sales were down and lower than the industry.
And you know I know there is supply chain constraints, but.
Can you talk about what's going on there on the on a two year stack.
In terms of market share and positioning.
And we are I mean, we started gaining share in the fourth quarter of last year and if I look at each one of the quarters, we've been gaining about a point point and a half two points of share. So I think I think we're back to being in a pretty good spot I mean, theres always going to be elements of the different categories that we have.
And certainly for RV, we feel good for motorcycles, we feel really good and boats, we feel great. So.
I think overall, we're in a good spot.
Okay, great. Thanks, guys. Good luck.
Again, if you have a question. Please press Star then one.
Our next question comes from Billy <unk> from Morgan Stanley. Please go ahead.
Hi, Thanks, Tesla's unveiled clients or lease an electric ATV do you see this as a validation and potential expansion of the palace boats time or do you see it as a potential risk to Polaris and how you're planning ahead of this thanks guys.
Well I mean, we've been talking for a while I talked about it in the prepared remarks, I mean, the the Ranger we have coming out.
As just a phenomenal vehicle I had the opportunity to write it again, a couple of weeks ago.
With some of the recent changes that they've made and updates and it's.
Boy, it's going to be.
Tackler vehicle I mean look I do I think it reaffirms sure.
We know the space probably better than most.
And I think what youre going to see from US is vehicles that are going to be built to address customer needs.
And at the end of the day I think the.
Competitive environment is going to play out over the next couple of years I'm really excited about what we have in our electric vehicle lineup.
It starts with the Ranger, but youre going to see us quickly coming out with other vehicles and they're going to meet the needs that our customers have as opposed to being a show a vehicle.
Got it thank you.
The next question comes from Mark Smith from Lake Street Capital markets. Please go ahead.
Hey, guys I just wanted to ask on P. G&A business. It looks like that's holding up pretty well could you just talk about kind of attachment rates on new products and what's your inventory looks like in any supply chain issues that you have in P. G&A.
Sure I think we've seen attachment rates have remained pretty consistent little bit of improvement depending on the on the product our bigger challenge really is around just clearing the backlog, particularly in some of the RV.
Product lines.
You know, where it's not degrading significantly, but we haven't been able to make as much progress in clearing the backlogs on P. J as we'd like to given the supply chain constraints, you think about the backdrop for <unk>, it's actually really good because the attachment rates are strong and given vehicle availability. We've got a lot of consumers are writing and repairing our upgrading exist.
And given the size of our installed base.
It really gives us a greater aftermarket opportunity. So the team is executing really well given that backdrop.
Great. Thank you.
Yes.
Sorry.
Thanks, Thanks, Jason Thats all the questions. We have we just want to thank everyone for participating this morning, and look look look out for the new razor coming on November 9th in the New Electric Ranger in December and we look forward to talking to you next quarter. Thanks again goodbye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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