Q1 2022 Polaris Inc Earnings Call
Good day and welcome to the Polaris first quarter 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. This event is being recorded I would now like to turn the conference over to J C. Weigelt Vice President of Investor Relations. Please go ahead.
Thank you, Jason and good morning, or afternoon to everyone I'm J C. Weigelt Vice President of Investor Relations at Polaris. Thank you for joining us for our 2022 first quarter earnings call. We will reference a slide presentation today, which is accessible on our website at IR Polaris Dot Com joining me on the call today are Mike <unk>, our chief.
Executive Officer, and Bob <unk>, our Chief Financial Officer, both have prepared remarks, summarizing the quarter and our expectations for 2022, then we'll take some questions.
During the call we will be discussing various topics, which should be considered forward looking for the purpose 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 2021 10-K for additional details regarding these risks and uncertainties.
All references to first quarter actual results and 2022 guidance are reported on an adjusted non-GAAP basis, unless otherwise noted please refer to our Reg G reconciliation schedules at the end of the presentation for the GAAP to non-GAAP adjustments now I will turn the call over to Mike. Mike Go ahead, Thanks, Jason and good morning every.
Thank you for joining us today, just as the winter temperatures here in Minnesota have yet to relent supply chain pressures persisted during the quarter and negatively impacted our results while demand for our products remains healthy ongoing supply chain disruptions continued constrained vehicle shipments.
As a result, our first quarter sales of almost $2 billion.
Were flat versus last year in North American retail sales were down over 20% against a difficult comparison to last year, where retail was up 70%.
That being said, we continue to see positive momentum repurchase and pre solve rates remain elevated our model year 'twenty three snow check sold out and on road is seeing strong interest with the launch of our new Indian Scout in pursuit motorcycles.
Compared to the first quarter of 2019.
Retail was up 21%.
Which is encouraging and one metric that helps sort through some of the volatility that we've seen through the pandemic.
While our first quarter results reflect share loss. We believe this is largely the result of shipment timing versus fundamental competitive wins from new products.
In this volatile supply chain environment share gains and losses are expected to happen throughout the year and are likely to be highly correlated to a manufacturer's ability to get product out the door.
Margins in the quarter were also negatively impacted by inflationary pressure as well as manufacturing inefficiencies associated with supply chain challenges.
As a result, adjusted EPS declined 44% versus last year to $1 29, we.
We did benefit from favorable pricing in the quarter. A direct result from the actions we took in the second half of last year and early this year.
We saw double digit price increase across all segments of off road on road and Marine.
We expect positive price momentum for the remainder of the year, which will partially offset increased supply chain costs.
I want to take a moment to highlight our five year strategy that we unveiled at our Investor day in February our strategy refocus as our investments in the core both organic and inorganic and drives margin expansion through improved profit productivity.
This coupled with our focused and balanced capital deployment execution. We believe we will grow our leadership position in power sports and drive significant value creation for our shareholders holders over the long term.
Let me briefly review some of our recent highlights during the quarter, we announced a 165000 square foot expansion to our Wilmington P. G&A distribution center, along with plans to upgrade our paint operations in Roseau, Minnesota. These.
These efforts build on last year's capacity expansion in Monterrey, Mexico for our off road business and our expansion in Indiana for our marine business.
This investment in the core gives us the capacity we need for the near term our capacity constraints are completely driven by supply chain challenges and once those debate, we have the capacity to raise throughput and generate improved manufacturing efficiencies in the near term.
We also maintained our focus on Ryder driven innovation with several new Indian motorcycle models and the launch of our model year 'twenty three snowmobiles. We have received positive feedback regarding these products in our portfolio of Indian motorcycles has never been stronger given the recent successful launch of the new Scout Rogue and Scout route $6 60.
In late February we launched 24, new snowmobiles and two new snowmobile engines and all purpose lineup built to deliver the best experience on the snow.
Led by the new Patriot nine our engine. We also introduced a four stroke to our lineup with the <unk> players.
<unk> continues to lead the way with the best lineup in the back country and on the trails.
We were also honored to be recognized as one of SaaS companies, most innovative companies Polaris and zero motorcycles were named to the list of the most innovative joint ventures.
True Testament to our partnership aimed at delivering category defining electric powertrains for power sports. The first vehicle borne of this partnership was the all electric Ranger XP kinetic.
That many of you were able to ride and admired our investor meeting.
We expect to continue leading from the front when it comes to Ryder, driven innovation and electrification.
Big race wins in razor and Indian motorcycle highlight the performance aspects of Ryder driven innovation. The razor team took the overall win at the San Felipe a $2 50, with the razor Pro-war and swept the top three pro UTV classes.
In addition to king of the Baggers Indian motorcycles secured its second consecutive win at the 2022, Texas half-mile flat track race that.
That land place Indian motorcycle and their team in the top two positions on Alere board for the season, both wins showcase the capability of our products and we cannot be prouder of all the hard work by those involved to bring home these prestigious victories.
We continue to see a healthy level of demand and customer engagement as reflected in several key data points or.
<unk> remained near peak levels, increasing sequentially, which supports a healthy demand level short term and long term repurchase rates are up and RV cancellation remains rates remain low even with a price increase.
And delays in delivery.
Players debenture rides were consistent with last year. Despite the fact that we cannot meet snowmobile outfitter demand due to a lack of units being produced the.
The players' adventures team is gearing up for their main riding season Memorial day through Labor day, and continue to engage new customers in power sports. So the recent expansion of our membership program Polaris Adventures select to four more states in the Midwest.
Lastly, P. G&A attachment rates are at a record high indicating that customers are looking upgrade their vehicles and power sports ecommerce continued to see strong growth.
Broadly speaking we remain encouraged given these demand trends. Additionally, dealer feedback continues to be positive around demand and not surprisingly more constructive around availability.
We serve our dealer network each quarter and there was one dealer comment that I felt summed up the current environment well my business is thriving cintas inventory and we will take care of the rest of.
This to me points to a healthy demand environment that is ripe for growth once we work through the current supply chain environment.
North American dealer inventory remains at record lows with healthy demand further constrained by the persistent global supply chain headwinds limiting in any improvement inventory levels further.
Given our strong pre sold order book most of the products. We ship are already spoken for while we expect inventory to remain below optimal levels for the remainder of 2022.
We do anticipate modest improvement in the back half of the year and more profound rebuilding of inventory levels in 2023 of.
Of course that is assuming that we see the supply chain improve in line with our expectations. Given these dynamics, even if demand moderates. We believe there is runway for growth into 2023 as dealers get back to healthier inventory levels.
As I mentioned the supply chain challenges that exist globally from component shortages to logistics challenges are negatively impacting our production and shipping execution.
Today, we have approximately 50 suppliers with component shortages impacting over 100 of our units and while that supplier number has remained consistent over the past year.
The number of units these suppliers have impacted has risen sequentially and year over year.
Specifically semiconductor shocks displays and wire harnesses are the areas, where we're experiencing the most risk and like many other industries. The root cause of these shortages remains logistics materials can labors.
As we work to remediate the current situation, we are refocusing our lens that we look at the supply chain environment through.
Specifically, we're taking a longer term view and suspect that the supply chain will not likely see substantial improvements in the near term as such we are making design changes to work around challenging components. We have also reduced dozens of models to remove complexity to enable better delivery and we are institutionalizing certain aspects of our organization in recognition of the near term.
Permanence of the supplier and logistics triage efforts.
We believe these efforts will improve our ability to deliver and as a result, we will begin to see the impacts materialize in Q2.
Lastly, I want to express my gratitude to all of our employees, who have worked tirelessly to meet the needs of our customers.
I'll now turn it over to Bob who will summarize our first quarter performance as well as our expectations for the remainder of the year.
Thanks, Mike and good morning, or afternoon to everyone on the call today, My comments will be around our first quarter performance and expectations for the remainder of the year.
Before I jump into more detail I do want to emphasize that the negative impacts from the supply chain, where the main driver to these results and as Mike said, our teams are working tirelessly to navigate through the pressures.
We do expect to see modest recovery beginning in the back half of the year as you all know accurately predicting the timing and extent of supply chain recovery is difficult.
Let's start by walking through sales and operating profit for the quarter.
Sales of a $1 96 billion were flat relative to last year with lower unit shipments and favorable pricing almost netting out.
International sales were up by 1% driven by strength in EMEA, and Latin America, while Asia Pacific saw modest declines.
Total P. G&A in the quarter was up 8% with on road P G&A up almost 20%.
Adjusted EBITDA margin was down 446 basis points with lower shipment volume and higher cost premiums being the largest headwinds.
Positive price helped partially offset some of the increased cost around freight raw materials and inefficiencies associated with the supply chain.
With mid single digit price increases effective April one on new and pre sold RV orders, we expect to be in a better position to offset the higher than expected commodity and logistics costs. We saw in Q1 as we go through the remainder of the year.
As we have discussed in the past we are pricing to at least offset the impact of inflation on our cost base, but do not believe the elasticity in the market allows us to put our normal margin on top of that.
This dynamic has a negative impact on gross profit and EBITDA margins due to the math of price netting out higher cost premiums with no flow through to profit margins.
To put the commodities and logistics inflation in perspective, the cost of steel and aluminum in our products shipping in Q1 were up over 130% and 40% respectively versus Q1 2021.
Spot rates for containers from Asia and U S. Trucking were also up 120% versus the same period in 2021.
For steel that is on top of 2021 rates for these commodities that we're already up over 20% compared to the five year average.
All in for the quarter, we have seen our cost premiums jumped 150% versus a year ago or almost a $100 million.
Most of which we see as a result of the current environment. We are in and we would expect many of these costs to subside over time.
Below operating profit our tax rate was lower than we had anticipated driven by the larger impact of discrete items given lower income in the quarter.
Shares were lower by almost $2 million due to recent share repurchase activity.
Turning to our segments, let's start with off road.
Sales of $1 3 billion were up 2% relative to last year.
Goods were up 1% and <unk> was up a strong 8%.
Adjusted gross margins were down approximately 720 basis points.
Supply chain disruptions had a negative impact on off road performance impacting volume mix and margin.
Partially offsetting some of these headwinds with strong double digit increases in pricing implemented in 2021.
Looking at retail performance, we were down high <unk> in North America with modestly better performance in side by sides versus Atvs.
We believe the industry was down high teens, thus pointing to a share loss for us in the quarter as Mike stated earlier, we believe share shifts in this environment are the result of component availability and the ability to ship products into the channel versus the launch of new products by competitors. Thus.
Thus, we continue to expect quarterly share shifts to be lumpy this year.
One way to smooth out the shipment dynamics over the past year is to look at this on a 12 month rolling basis with this metric we estimate share RV was relatively flat to the industry.
Yes.
Overall, we continue to see ourselves in a strong competitive position within off road.
We believe we are more customer centric than ever and have the global manufacturing capacity to meet these elevated demand levels. However results in the near term are expected to be driven by the performance of the supply chain.
Switching to on road now sales of $219 million were down 4% with whole goods down, 8% and PGA up 19%.
Remember that our on road segment now includes eczema <unk> thus.
Thus you see a strong mix of international revenue.
First quarter results from those two businesses were up high teens.
Supply chain shortages were the main driver for our Indian motorcycle share loss in the quarter.
We have brought on additional suppliers for some of our most at risk components and should begin to see some modest release this quarter and growth into the back half of the year.
Margin was up over 400 basis points due to positive mix and pricing in the quarter.
While dealer inventory levels remain low we continue to see strong demand from our with our pre sold ordering process.
Indian motorcycle retail in the quarter was down in North America by over 30% and down international by almost 30%.
Looking at share on a 12 month rolling basis, we believe we lost approximately one point of share to the industry.
Moving to our marine segment sales of $212 million were up 6%.
We continue to see component shortages, which led to some share loss during the seasonally seasonally low retail quarter.
On a 12 month Rolling average view, we believe our share was relatively flat versus the industry.
Late in the quarter and into April we started to see production and shipping trends slowly improving and continue to believe we will see strong growth in our marine segment. This year.
<unk> were down 137 basis points similar to the other segments marine experienced lower unit shipment volumes and inefficiencies associated with the supply chain.
Price was a positive in the quarter up mid teens, but mix was a headwind.
Looking at aftermarket sales for the quarter were $218 million down, 5%, where we saw tapped down almost 9% due to lower availability of new and used Suvs and trucks for consumers to outfit.
Power sports aftermarket was up 16% on strong in season snow orders.
Challenges within the supply chain had a negative impact on inventory to sell and margins continued to be negatively impacted by inflation.
Summing up our first quarter performance by segment. It is clear that supply chain disruptions were the main driver for our sales share in earnings performance this quarter.
Our ability to execute and deliver in this environment remains our top focus as we progress through the remainder of the year.
Demand remains healthy and we continue to believe we have industry, leading innovation quality and safety to deliver the best products in power sports.
Moving to our financial position, we continue to expect 2022 will be a strong cash generation year with both operating cash flow and free cash flow well above 2021 levels our.
Our capital deployment priorities have not changed we continue to focus on high return organic investments dividends share repurchase and targeted acquisitions.
Most recently, we have learned leaned more heavily into repurchases by buying back approximately $172 million of player stock in the first quarter.
We view, our balance sheet and financial position as a competitive strength as it allows us to invest in our business for the long term.
While also providing the flexibility to deploy excess cash to generate strong returns for our shareholders.
Now, let's discuss some updated thoughts on full year guidance.
For the first quarter was lower than we had expected we continue to see healthy demand and expect supply chain disruptions to ease modestly in the back half both of which should positively impact our performance as we move through the year.
Therefore, we are maintaining our full year sales and adjusted EPS guidance, we still continue to anticipate full year sales to grow 12% to 15% and adjusted earnings per share to grow 11% to 14%.
We expect consumer demand to remain healthy, but overall power sports retail to be down slightly year over year, driven entirely by ongoing supply chain challenges.
We believe this same dynamic will drive share shifts throughout the year as component availability drive shipments in retail.
We also expect to see a modest ramp in volumes in the back half of the year as the health of the supply chain improves and the actions. We are currently working with suppliers take hold.
We believe we have ample vehicle assembly capacity to meet our unit goals in the second half of this year, which should be in line with the unit shipment levels. We saw in the second half of 2020.
Please see slide 19 in the appendix for further details unexpected unit shipment volumes.
As we look at the second quarter compared to the prior year prior year quarter, we continue to expect lower volumes across most of our segments, especially in off road.
Price is expected to be sequentially stronger, which should help offset increased supply chain costs.
As previously discussed we will continue to price aggressively to cover our costs, but are not pricing at a margin to our incremental supply chain costs.
This will continue to result in gross profit margin degradation compared to the prior year.
We believe EPS in the second quarter will be down year over year, which means we will see strong growth in the back half of 2022.
For the full year, although we are pricing for higher cost than anticipated margins are expected to be slightly below prior guidance due to pressures. We are seeing in the business around freight raw materials and additional inefficiencies associated with supply chain challenges.
We now expect.
Adjusted gross profit margin to be down 100 to 120 basis points for the year versus our original expectations of down 80 to 100 basis points.
In addition, we now expect adjusted EBITDA margin to be down 10 to 20 basis points versus our original expectation of flat year over year.
These pressures are expected to be more pronounced in the first half of the year and he's with volume leverage higher price realization and stable cost premiums in the second half of the year.
Some other items to note include higher net interest expense for the year that should be entirely offset with a lower tax rate closer to 22% to 22, 5%.
There were some recent tariff exclusions signed into law, which is a $15 million benefit this year.
We are also taking down our share count assumption for the year to be closer to 60 million shares at year end. This is almost $1 million less than our initial guidance.
Overall global supply chain disruptions continue to have a negative impact on the industry's performance we remain.
Focus not only on navigating the current headwinds, but also building a more resilient supply chain for the future. We believe we are well positioned to deliver strong sales and earnings growth once the supply chain improves and until then we continue to focus on successfully navigating the current environment.
With that I will turn it back over to Mike for some final thoughts Mike.
Thanks, Bob Walsh resort, while our results have been impacted by supply chain pressures, we continue to see strength at the dealer and customer level a signal that demand remains healthy we are expecting a modest decline in retail this year driven by low inventory levels at dealers. These low inventory levels are directly correlated to the supply chain challenges are.
Near term focus remains on navigating the supply chain and while progress might be hard to see now we are working to control our own destiny by reducing complexity redesigning around challenging components, and making more permanent organizational shifts to support improved delivery.
Our expectation is that there is modest improvement in the supply chain environment.
That coupled with our internal action supports the outlook that deliveries improve starting in Q2, we have the team and capacity to make it happen and our focus remains steadfast on delivering high quality and innovative products to our customers and we expect this strategy to deliver another strong year of Polaris with that I'll turn it over to Jason to open the lineup for questions.
Jason Thank.
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.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Craig Kennison from Baird. Please go ahead.
Hey, good morning, Thanks for taking my question I'm sure, they're gonna be questions on the supply issues, you face, but we're getting more questions on the economy.
With the fed potentially finally ready to act to come pad inflation, how do you reconcile the potential for a recession.
With the fact that you are also stockpiles.
On the demand in the form of these pre sold consumer units and then the opportunity to restock dealers I'm just trying to reconcile.
You have this tremendous demand and yet there are plenty of red flags on the economy.
Yes. Thanks, Thanks, Craig I mean, clearly, it's something that we're paying very close attention to I guess I'd point to a couple of things I mean, you have to remember the customer demographic I mean, our customers tend to be on the higher end of the pay and income scales and so that's always helpful.
Also point to the fact that the inflation dynamic has been going on for quite some time now so consumers have been wrestling with higher fuel prices and groceries and all those types of things and our pre sold have held up through that entire timeframe as we've got indicated on the.
Of the one chart.
Interest rate moves that obviously will have some impact on our customers, but when you look at the interest rate component relative to the vehicle cost I mean, it's actually it's pretty small so we're actually paying probably more attention to just the price increases that we've had to make just to keep pace with the inflationary pressures but.
We're encouraged the traffic at the dealers is strong the fact that consumers are pre.
Pre buying pre purchasing it.
At a very strong rate and it's improved sequentially I would tell you that April saw very similar performance. So we see that trend.
Continuing and if you think about the new cycle during that timeframe, it's been pretty negative just with the geopolitical issues as well as the inflation spike and the moves the fed are making is making so.
If we were to go into a recession, we've had a lot of discussions about this internally it would probably look like a recession, we've never seen because if you look at our inventory.
<unk> got highlighted on one of the charts that were down 75% from where we were in Q1 of 'twenty.
Even if demand were to soften for a quarter or two or three we've still got ample runway in terms of getting inventory back into the channel.
Not suggesting we're seeing the demand softened, but the point I'm trying to make is that the inventory is so depleted throughout the channel that.
We feel confident we'd be able to work right through any kind of economic.
Movement that we might see a volatility.
We've got a lot of work to do to get inventory back in the channel. So at this point, we're watching it we watch it daily our biggest challenge in concern quite frankly is around the supply chain and just making sure we're doing everything we can.
To take advantage of our own efforts to improve our throughput we've seen that starting to materialize in April so we're going to keep that as our primary focus.
Thanks, Mike.
The next question comes from Joe <unk> from Raymond James. Please go ahead.
Thanks, Hey, guys good morning.
So again not surprisingly a couple of questions here on supply chain since it does colors your outlook pretty significantly I guess first question.
You mentioned you expect some modest improvement in the back half of the year, but it looks like if anything supply chain got incrementally worse in Q1, So maybe what gives you that visibility or the confidence.
We do see a term starting in late Q2 early Q3 for example.
Yes, I think Theres a couple of things Joe I mean, we highlighted some of the areas that we're seeing pressure in.
While not all of them are perfectly lined up we are seeing as we work through with our suppliers. So things like wire harnesses and shocks as we worked through with our suppliers, we're getting improved visibility around when they will be recovered to the volume levels. I mean, the area that obviously is probably the largest pacing item not just for us but for the entire industry.
And in many other industries is chip availability.
So we're staying very close to the couple of key suppliers, we have to make sure we understand at least the communications that we've had at this point suggests that they are going to be driving improvement in their delivery to us here in the second quarter and when you couple that with the other actions that I highlighted during my comments I mean, we have literally taken.
Dozens upon dozens of models to reduce the complexity I think you've probably seen that across our industry as well as many others.
I can take that complexity out it makes it easier to get the vehicles through the production process.
We can we're redesigning so that we can move between chips or even components that are causing us some some challenges.
And then we've been operating with a temporary set of Swat teams on some of these troubled supply chain areas and the reality is it isn't going to get better anytime soon and so we're making a lot of those organizational moves more permanent and that allows us to make sure. We've got the right staffing in the folks that can drive.
The kind of our to our discussions that we've got to have with <unk>.
With our suppliers so.
We're watching all that we are seeing some minor green shoots out there relative to <unk>.
Trucking availability and things like that it's tough to know if that's a trend or just a data point, but we're going to keep a close eye on that.
The other thing to think about Joe as Youll see through the year I mean, we just put a price increase in April .
On both pre sold and new orders and so that price will continue to be realized through Q2, and the rest of the year and the cost is really when you get into back half of the year start to stabilize because the comps were really high last year as well there were a lot lower Q1 Q2.
In 'twenty one than they were Q3 Q4 and costs right now seem to have stabilized at least for the for the moment again tough to have long term visibility into that but we.
We're seeing some some relative stability there Joe the other thing.
Bob mentioned I, just want to make sure we emphasize the point.
We are expecting to see improved unit deliveries into Q2, and then obviously into the second half, but it's not as large as the numbers may suggest because you've got to really think through the fact that our pricing is ramping. So there is a substantial amount of pricing in the second half as Bob pointed out.
So the unit Hill, we have to climb probably isn't near as challenging as one may think when you do the math around our first half second half not trying to suggest that it's a layup by any stretch, but there's a pretty healthy component of pricing that starts to annualize as we get into the back half.
And more than offset the cost as well as it makes the the he'll look larger into that second half from a calendar <unk> standpoint.
That's very helpful. I know this is just a follow up on that.
Your business is very seasonal right.
We can hear offered vehicles motorcycles pontoons in particular.
If that turn happens in August September versus June is there a risk that you missed the season this year from a demand standpoint.
I don't think so and not that seasonality is an important but I mean, if you look at the demand.
And pre sold for our business really are correlating with seasonality I mean people are trying to get in line to get vehicles, knowing that it's difficult to get anything.
More broadly in the economy today.
In our boat business is a prime example of that in terms of the portion of last year, where you would typically see.
Demand wane, it actually spikes because people were trying to make sure that they were able to get a shot at getting a boat for this season and I suspect the same will be true as we exit a seasoned people are still going to want to have access to a vehicle and when you couple that against the fact that our inventory in the channel is down so substantially we would have a restocking even if that <unk>.
And where to temporarily take a pause.
Okay, great. Thank you guys.
The next question comes from James Hardiman from Citi. Please go ahead.
Hey, good morning.
So couple of questions from me.
I guess, what can you tell us about retail momentum.
Over the course of the quarter and I guess, Mike since you opened the door to April extend that into into April .
There is clearly the narrative out there that.
However, you want to look at it on a on a comparable basis, but versus 19 that every month. This year has gotten sequentially worse.
Maybe speak to that obviously people would one of them connect the dots.
The consumer is salary to some degree, but maybe speak to the sequential momentum.
Yes.
Don't know that we saw what you suggested.
Our retail momentum has remained pretty strong pretty solid.
As I as I mentioned I mean, we go out and we survey our dealers and I can tell you that we get.
Dozens and dozens of pages of commentary from them.
And.
I really didn't see anything in there that has dealers worried about slowdown it was almost entirely focused around I've got so much business coming at me I just need more product.
And as you know, we share 70% give or take of our dealer network with our competitors.
And those comments weren't just unique to Polaris so.
At this stage I don't necessarily see that I'm, not suggesting that there couldnt be a slowdown at any point, but.
All of the statistics, we have I mean, we are watching as we've got highlighted on that one page much more than just our pre sold rates. We're looking at engagement on the website e-commerce attachment rates everything and.
Everything is still pointing to a continued.
Strong market, especially relative to 2019.
Got it and then along those same lines.
If I'm doing the math right here or V retail accelerated in the first quarter versus <unk>, if we're again comparing to 2019.
But then you lowered the retail guidance for the year is that.
Help me understand that do we assume that RV retail turned negative again or is especially in an environment, where it sounds like you expect availability to improve so maybe.
Connect a couple of those that.
I mean, we're expecting availability to improve sequentially, but relative to the expectations. We had for the year. It's obviously, having an impact a small impact on our <unk> deliveries.
That is really the pacing item when we step back we're not looking at it saying, we're expecting some big demand drop off to drive retail down it is 100% being driven by availability of product and obviously, if if our efforts combined with a supply chain environment that improves better than we were expecting we would obviously be able to.
Improve upon that because as you can see in any given quarter. The majority of the retail is pre sold which means we've got the ability. If we can get the parts to get these vehicles through we got more than enough capacity. We're.
We're not facing labor challenges. This is purely about getting the components in and getting the vehicles out so.
That's the view, we have tied to the guidance that we are putting out today, but we're obviously doing everything in our power to try and improve upon that.
Makes sense thanks, Mike.
Yes.
The next question comes from Fred Wightman from Wolfe Research. Please go ahead.
Hey, guys, maybe just to follow up on that full year retail outlook I think in the past, we're sort of expecting pretty similar performance from off road and then on road is that still sort of the case in this new full year outlook or is off road a little bit weaker.
No.
That's still the case I mean off road.
Up a little bit more momentum going into the second half of the year on road stays a little more steady, but we're expecting them to have similar performance.
Okay, Great and then if we just think back to last quarter, you had given us a little bit of color just as far as first half second half expectations. It seems like you came in a little bit below that just based on the first quarter are you still sort of comfortable with that prior cadence is it going to be even more back half weighted based on sort of what youre seeing and expecting today.
Or how should we think about that.
Yeah.
As I think I mentioned Q2 will be will be lower than.
Prior year end and lower than what we had previous lower in for the full half than what we had previously communicated I think a good way to think about Q2 is from a revenue standpoint relative to Q1.
Youll see a low to mid double digit growth in revenue.
Think about it kind of regular drop rate on that and a little bit more opex in the quarter Q2 than Q1.
And that's that's where we think Q2 will land and then the quarters get sequentially better from there Q3 Q4, so it will be more back half loaded as we start to see the impact of the April price increase flow through and what hopefully is a stable cost base.
And some unit shipment improvement given the supply chain work, we're doing that might have been talking about.
Perfect. Thanks, guys.
Yes.
The next question comes from Gerrick Johnson from BMO capital markets. Please go ahead.
Hi, Good morning, I have two please thank you.
First you produce product in Mexico, and the U S. You've also got Europe and Vietnam.
What kind of differences are you seeing in supply between those regions the manufacturers.
It's pretty consistent I mean, as you know our Poland facility is really sourcing largely consistent with the rest of our supply base.
<unk>.
We've seen some transitions.
With suppliers moving.
Not necessarily moving out of China, but they are creating a secondary supply hub.
Hub in Mexico, and so that obviously helps from a logistics standpoint, but that's more of a one off it's been pretty consistent.
Across the board to all of those different facilities now given the <unk> are far more focused factories the specific challenges.
Are what drive more of the unique nature.
For example, our.
Roseau, Minnesota facility is largely a snowmobile factory and so last year, we had some issues with a bearing supplier, which obviously that doesn't impact any of our other <unk>.
Right so.
It's more around that component availability than it is.
For the specific products made than it is a difference and supply base.
Okay.
Thank you my next question.
From our research it seems exclusive dealers are taking more pre sold some preorders, whereas multi line dealers multi brand dealers.
Less so because if they don't have a players who can just put them in a <unk> or something else does that affect how you ship units going forward preschool for stock units.
No I mean look we're trying to.
Prove the availability as we talked about in the prepared comments, we're doing everything we can to.
To shift beyond just the pre sold which gets those stocking units in.
But when you look at 70% of our retail is going through three sold our direct Polaris dealerships or a small small percentage of the base. So we're still seeing good penetration at our multi line dealers.
And we know that right now the competitive battles about availability more so than than anything else and so the fact that we're getting as many pre sold as we can we hold onto those.
The cancellation rate actually was cut in half despite delays in delivery and price increases we view that as encouraging.
And we know that we've got a window here to try and make up for the misses that we've had and make sure we're getting hana.
<unk> in the hands of our customers as quick as we can.
Okay. Thank you Mike.
Thank you.
The next question comes from Robin Farley from UBS. Please go ahead great.
Great. Thanks, Tom I have two questions. One is can you just clarify for Q2, you talked about lower volume across all product lines, but you also said higher price and so where does that net out in terms of sales year over year being up or down in terms of your shipment sales.
So robyn.
<unk> shipped in Q2 will be up relative to Q1.
We're expecting Q2 to come in like I said low to low to mid single digits from a revenue perspective.
Above Q1 'twenty two.
Relative to <unk>.
To Q.
Two.
Last year.
Yes units are are up the mix is a little bit different.
Because I have a little bit higher percentage of snow I'm, sorry, a little bit lower percentage of snow, but but units will be up slightly.
Yeah, it's up slightly year over year, but.
Dollar sales.
Sales sales will be yet because the price is right.
Great.
Yes, okay.
That's helpful. Thank you and then my other question is on.
Margins and with the guidance for gross margin to be down 100, 220 bps can you.
Okay.
Kind of break out for us because there are some pieces of that that you have really good visibility on your price increase or like Paris.
Sure.
And then secondly, obviously with less visibility because of the supply chain could you kind of break.
Break out a couple of those pieces for us just so.
We can think about.
Like every piece of the margin guidance is not at risk here and there was some thinking about the pieces that you do have really good visibility on if you could just help us quantify that.
Yeah.
Obviously challenging in the current environment, but.
Volume mix is a little bit of a tailwind.
For us right now.
Im sorry.
<unk>.
Just because as Mike said, where we're limiting some of the numbers of units and the more complex units are obviously harder to make harder to get all the parts for so.
So we get a little bit of.
A headwind from.
Volume and mix from a GP perspective.
From a.
Price, obviously, we know what's locked in through April 1st.
We don't have a specific plan on when the next time, we would go with the prices we got model year.
Later in the summer and we've changed our profiles with our dealers and we can raise price.
Kind of a month's notice. So obviously, we're staying on top of that as you look at the supply chain cost side of it.
Like I said in my earlier comments, we're starting to see some stability and as we get into the third and fourth quarter.
Our comparable is get to be pretty similar to the levels. We're at right. Now. So we think the risk of continued increase.
In supply chain cost to be relatively limited in the back half of the year versus the prior year and versus where we are right now in fact, hopefully we'll start to see some things.
Improve as Mike said, we've seen some green shoots in trucking and container availability and the pricing on some of that hard to say, whether that's a trend or not.
A pretty dynamic environment, but.
We think we have some opportunity for some improvement there. So I think we have good visibility on the price decent visibility on the mix the cost premiums again I think we're.
We're loaded in pretty high right now and.
We don't see something today that makes that changed dramatically.
But.
Obviously, it's a dynamic environment.
Hey, Robin one way to think about the if youre looking at margin right.
Given the fact that we're doing far more frequent reviews of cost and associated price actions. If for example, we saw commodities.
Or logistics or whatever spike say in the second half relative to what we think you might see margin erosion as a percentage.
What would happen is we would very quickly enact price or surcharges to offset that but we're not building in a 30% margin when we price.
The price moves we've made over the past couple of years they are substantial.
So trying to preserve the margin versus just trying to cover the cost is really the.
Our strategy is we've just got to cover the costs. It may it may erode the margin percent, but from a dollar standpoint will remain intact. So it's really going to come.
The execution of our volume levels as we move forward.
The other thing to keep in mind Robin is where we're doing our best to manage operating expenses.
We.
Improved our estimate of 10 basis points in terms of Opex as a percentage of revenue.
When we updated the guidance here today, and we're going to continue to focus on that as a as an offset to any increased.
Supply chain costs or other business disruptions.
Thanks, and then can you just anything on margin I'm, sorry on tariffs in terms of the share. So tariffs we were looking at about $105 million for the year, we've got about a $15 million benefit from the exclusions that were recently enacted so we expect that'll that'll be at $90 million unless something changes.
From a legislative standpoint, which we're not anticipating right now.
Is that $90 million total or you are saying.
Delta versus last year.
$990 million.
Okay, great. Thank you.
Thanks Robyn.
Our next question comes from Joseph Spak from RBC capital markets. Please go ahead.
Thank you very much.
Mike Bob It sounds like internally.
You've got at least had.
Some talks about.
What a recession could mean and you know.
You've talked about in the past about this restock extending well into at least next year I believe it was your prior comments so.
Have you done the work like if a typical recession were to occur and you saw demand hit like how quickly does that stock occur in that environment versus sort of going through next year.
Yes.
We're working through some of that Joe.
There's a lot to it because you'd have to determine our people going to cancel on pre sold.
And then specific vehicle mix, but it would it would accelerate that potentially but what I would remind you is first of all the last recession, we had during COVID-19 .
We saw demand go up so that was obviously a unique environment, but even if you go back to 2008 2009.
Which again was a very different recession.
Driven from very different characteristics and what we are contending with now.
Our business drop off for a couple of quarters, and then come right back and that was in an environment, where we still had a pretty healthy level of inventory. So.
At this stage I think we'd have to see a protracted slowdown to have any kind of material impact.
We're just not seeing that in front of US right now obviously the longer the inflationary environment persists.
More risk there is.
Yeah.
As Bob and I, both have pointed out we are seeing some logistics markers that are at least <unk>.
Indicating improving.
Availability and were not sure one data point doesn't make a trend and we're trying to decipher how much of that is driven by any kind of a drop off in more.
And demand more broadly versus just the logistics channels are improving because they've brought in more capacity and are getting more efficiencies. So we're going to be watching that really closely here over the next couple of months, but I think from my standpoint, it's hard for me to imagine that we end up in an environment, where all of a sudden we're going to do an about face and start looking at taking cost out of the <unk>.
<unk> I mean, we've got a lot of important strategic initiatives and with the channel refill opportunity in front of us even if we were to see a demand drop off for a couple of quarters.
I think we're still going to stay the course from.
From a business perspective.
Yes, that's fair.
Very helpful. I mean, maybe almost taking you know sort of a different completely different scenario like you've mentioned a number of times, you've taken and will continue to take substantial price here and that's helping to cover some of the inflation, but clearly the inventory situation is probably making that a little bit easier to swallow. So if we think further out as inventory.
Not only for you, but your competitors normalized.
I guess I'm wondering how you think this plays out because MSRP is sticky but to get industry volumes higher it would seem like your like the industry is setting itself up for a higher promo per unit in the future does that is that your view or is there sort of like a new normal here with the mix of maybe you know keeping.
Lower inventories than normal, but higher than that today.
Yes, I mean I think it's.
We've spent time and continue to talk through I think it is going to be a little bit of of what you just articulated our goal is when we get on the back side of this we're not going to be carrying anywhere near as much inventory now obviously, we cant.
<unk>.
Forecast, what our competitors will do but dealers.
We're making a lot of money right now and with our ability in a normalized supply chain environment to deliver products quickly and.
And customized for what customers are looking for that gives the dealer a really good opportunity to make more margin if they're not carrying as many stocking units. They are obviously not paying the interest for the floor plan.
And theyre not going to be induced by consumers to have to put as much promo against it now I'm not suggesting promo won't come back it will be back and ever completely went away I mean, we still have some levels of special programs for the military the AG markets interest rates things like that.
So it will but our strategy all along was not to try and be egregious with price because we want to be able to retain as much of it as we can.
And that's why we've seen the dilution to our margins because we're essentially just covering the cost increases with the price moves and we do suspect that when inventory gets back into a more normalized.
The economy is.
Back to normal whatever that might mean that we will see a little bit of promo come back, but we're also going to see these costs coming out of the system and net net we think that's going to be a net positive for margins and we think the.
Dealers will continue to benefit as well.
Thanks very much thank.
Thank you.
The next question comes from <unk> <unk> from BNP Paribas Exane. Please go ahead.
Hi, guys. Thanks for taking the question I think last quarter you talked about.
You expect market share gains to continue into 2022.
Is that expectation still intact with the new updated retail guidance.
Yes, I think as we think about market share for the year as we've said, it's going to be lumpy quarter by quarter.
I think really driven by people's ability to ship into the channel.
Right now I think we're we think market share will be relatively flat.
With the industry, but obviously, it's going to depend on our.
Our ability to ship so.
Being the biggest player in the industry. So I know I think if we can continue to see some improvement from a supply chain standpoint, we have got a good opportunity to take share we've got a huge amount of pre salt.
That are holding firm so if we can ship those.
We've got a good opportunity, but we are.
Being we're being realistic in our view right now looking at what we think we can really shift and then obviously.
Having to take us a bit of a.
Our view on what the rest of the industry is going to ship, which we don't have perfect visibility too.
Yes, yes understood.
And then on.
The inventory inventories are up just kind of wanted to understand how I guess supply chain impact that you have inventory in transit in terms of you know maybe at the L. A ports are you talked about China.
Yes.
Or is it like a lot of partially built unit just raw material.
On the books, just maybe if you could help unpack the inventory.
Sure. So inventory is actually all of the things you mentioned.
<unk> increased our increased product in transit, mostly on the water longer transit times from Asia longer time stuck in the port.
Inventory being expedited on top of that to help me production.
So thats increased in transit.
Raw materials are up some of that as you get build fallout and you've already brought to materials and what you are missing certain key components. We are working hard to balance that out and make sure we're bringing in the things, we really need and not.
<unk> to bring in things that we've already.
Accumulated through the course of all of this supply chain disruption. So the teams are on that everyday.
So I think youll start to see that improve on the raw side and then really it's on the finished good side the.
The biggest driver is the <unk>.
Inventory, that's being held for rework.
We're taking an approach of holding.
The majority of our inventory that needs to be.
What we would call rework their needs components added to it that were short when it was originally built holding at our warehouses and doing that rework in house versus shipping it out to the dealers.
And obviously for our from our view, we're doing that from a quality perspective, and also not trying to burden the dealers.
So youll see you see finished goods.
Ramping up a bit because of that inventory that's held waiting for rework and again as the supply chain improves we look to sequentially take that down quarter over quarter through the rest of the year.
Okay got it thanks, guys that's helpful.
Thank you.
The next question comes from David Macgregor from Longbow Research. Please go ahead.
Yes, good morning, everyone.
My first question was really with regard to retail credit I'm. Just wondering if you can comment on what youre seeing in terms of retail credit availability for consumers with all the talk and concern these days.
Recession did ahead.
Credit providers, maybe pulling back a little bit.
If you could give us on that would be helpful.
Yes, we haven't seen we haven't seen any pullback from our retail credit availability or approval standpoint.
Our pen rates are down a little bit because of the time consumers have to wait to get a unit. So it gives them more opportunity to shop, the credit unions and other things so it disadvantages dealer financing a little bit.
So we're obviously watching that.
Try to help our dealers work through that but we haven't seen seen any increase really in defaults defaults are at all time historic lows in the portfolios that are our partners have so.
As of as of right now, where we're just not seeing those issues and David I'd remind you that the.
The retail construct retail finance construct is we've got separation between us and the provider, which means that they are the ones carrying the bulk of the risk.
And that means that the folks that are getting credit through those retail providers are usually high FICO is a strong credit history in.
At least what we've seen and we even saw this during the.
2020 timeframe around the pandemic impact our.
Our customers tend to stick with making their payments. So at this point I don't think there's a whole lot of risk in that area.
Great great good to hear.
The second question.
As regards to the P. G enable citizen seems to be.
Port growth provider for you right now.
Field inventories in P. G&A I realize there's probably a big difference between parts garments and accessories, but just do you have the depth of inventory in the field right now to continue that growth into the balance sheet.
Yes. It is.
Improved I mean, we went through a period, where we had some pretty high back orders because obviously, we're sourcing from many of the same suppliers.
Difference is is that you've got a lot less parts that have to come together, if someone's buying a winch or a bumper or even a cab system that compared to building a side by side that requires 3000 parts and components to to come together at one moment to complete the vehicle the.
Complexity is just not there so the availability.
<unk> has been much better and frankly, just the innovation. We've got you look at the number of offerings that we've come up with and the attachment rate per each one of our vehicles. It is it has increased and I give the team with Indian motorcycle a lot of credit we've seen really strong P. G&A growth is.
They've continued to look at more and more offerings to really build that portfolio out so it's encouraging.
Our power sports aftermarket so the non P. G&A piece that's.
Businesses like pro armor climb Cold then 509, obviously saw continued strong growth. So the teams are doing a good job in working the availability, we do have areas of stock outs, but we're pretty quick to get those addressed and get.
Whether it's parts or garments are apparel into the hands of our customers were doing a pretty good job.
Great. Thanks, Mike Good luck. Thanks.
Yes.
The next question comes from Jamie Katz from Morningstar. Please go ahead.
Hi, Good morning, gentlemen, thanks for taking my question I guess first can we talk a little bit about aftermarket.
The aftermarket segment and what you are.
Forecasting for the auto industry I guess for the remainder of the year given.
Yeah.
Yeah. It looks like it's going to have to be significantly improved and then can you talk a little bit about that cost structure improvement that you are making in this segment.
Sure.
So you have to think about the aftermarket segment, obviously in two pieces of the transamerican piece in the power sports speeds and they operate fairly differently <unk>.
Trans American piece, the negatively impacted by just the availability of new cars, new trucks and jeeps effectively.
<unk>.
Again, and even the tightness in the used market so.
Consumers tend to buy a new vehicle or a new two then vehicle and then take it into our for WP stores for outfit and just with that lack of vehicles in the market.
That's been a headwind for the business for the rest of the year.
If any of you follow the.
Auto market is more than we do but we're not anticipating dramatic improvement.
And auto availability standpoint, there is seasonality built into that business.
So you tend to see.
Q2, Q3 tier tend to be just better seasons, because people are out.
Using their vehicles more and we tend to have more volume in those quarters.
So we do anticipate those quarters being improved from Q1, we're also.
<unk> been focused on we've added some new stores and so those will sequentially come into the run rate as the year rolls out.
Will help from a retail revenue standpoint also on the power sports aftermarket side that business has been really strong if anything has been limited by just availability and timing of shipments of both product and apparel.
A lot of the apparel.
Made outside the U S, particularly on the on the kind of Gore Tex waterproof side, and so logistics and shipping have been a challenge there but.
But had a strong strong Q1, and we anticipate a good year.
With those businesses.
Okay, and then I just have one follow up on the inventory discussion you were having earlier waves.
Hopefully being described implies working capital demand should theoretically be significantly lower as we go through the year is that the right way to think about it.
Yes, I mean, assuming we start we continue to see a or we start to see modest improvements in the supply chain and increase our ability to ship.
Should start to see improvements in working capital as inventory comes down.
Uh huh.
We've got to get through that to to see it happen, but we're very focused on.
Trying to limit what's coming in and focus on getting units out the door. So.
We should see better working capital in the second half of the year.
Thank you.
This concludes our question and answer session and the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Yeah.
Okay.
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Okay.
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