Q2 2022 Polaris Inc Earnings Call
Good day and welcome to the Polaris Vectra 'twenty earnings conference call and webcast.
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I would now like to turn the conference over to J C. Weigelt Vice President of Investor Relations. Please go ahead.
Thank you Betsy and good morning, or afternoon, everyone I'm J C Weigelt Vice President of Investor Relations at players. Thank you for joining us for 2022 second 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 Steeton.
Our Chief Executive Officer, and Bob Mack, 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 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 2021 10-K for additional details regarding these risks and uncertainties.
All references to second quarter actual results and 2022 guidance are for continuing operations and 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. Please note that with the completed divestiture of tap on July 1st historical results of the business are now reported as discontinued operations, starting with the second quarter of 2022 financial figures and guidance referenced today incorporate.
This change unless otherwise noted.
That was historically included in the company's aftermarket segment. However, because of the transaction we eliminated the aftermarket segment and the resulting power sports aftermarket businesses were reclassified to the off road and on road segments. Please see the appendix in today's earnings presentation for historical reference of the reclassified segment data.
Now I will turn the call over to Mike's Pizza go ahead, Mike.
Thanks, Jaycee Hello, everyone and thank you for joining us today I hope everyone is having a great summer and taken the opportunity to get outside.
Our second quarter results are indicative of a stable demand and a healthy consumer offset by supply chain challenges, which continued to constrain inventory at the dealers.
Sales of approximately $2 1 billion were up 8% relative to the second quarter of 2021.
Our teams continue to perform exceptionally well in a difficult operating environment and our results during the second quarter reflect our unwavering commitment to remain the global leader in power sports by executing for our dealers and customers.
While we are closely watching a number of indicators to understand the resilience of the consumer in this environment. The data continues to show a healthy consumer and stable demand.
That said North American retail sales were down 23% versus 2021, largely driven by supply constraints.
Specific to North America or V retail was up 13% sequentially.
Although these results reflect modest share loss, we continue to see share driven by shipping timing versus fundamental competitive wins from new products. We.
We did see share trends improve late in the quarter as availability improved and we expect this to continue into the second half of the year.
Further we're seeing modest improvements in the supply chain, which should begin to help build inventory at the dealers as well as improve market share performance, while we're nowhere near being clear of supply chain headwinds, we are seeing logistics in Peru, supporting sequential margin improvement in Q2, and it's and experiencing with less volatility and some commodity costs.
Pricing continued to be strong offsetting increased year over year costs, it's important to understand that the math of strong pricing offsetting costs produces minimal drop through resulting in pressure on margins. We expect this to continue to improve in the second half as we see better realization of our previously enacted price increases.
All in adjusted EPS declined 7% versus last year to $2 42.
We had a number of highlights during the quarter. So let me touch on a few.
It was exciting to announce.
The nationwide rollout of our adventure select offering.
<unk> the industry's first monthly subscription program members can now use monthly credits to rent the Polaris vehicles their choice of Polaris adventure locations nationwide.
Members now have open access to get outside and explore their own cities or bucket list destinations across the country in a new way exploring the outdoors off roading.
Touring the city on an open aired slingshot.
Or even cruising the open waters by pontoon.
Since launching <unk> adventure select early last year, 90% of our members are new to the power sports industry again, reflecting our commitment to open the industry up to new riders and customers.
In the spirit of innovation, which is the DNA of our company. We held our annual innovation awards to celebrate receiving a record breaking 70 patents. This past year. We are nearing the 2000 patent mark since our inception, and we anticipate we will hit that milestone this year.
We continually strive to push the industry with Ryder, driven innovation and the best customer experience as the market leader in power Sports. We believe innovation is key to growing the market. We have a strong track record of innovation and are excited for what we Havent store later this year and into next year.
During the quarter, we celebrated two important days aimed at celebrating our riders the industry and inviting new consumers to discover what power sports has offer the.
The first was international female writer day in early May where people went over 120 countries took to their motorcycles offered vehicles snowmobiles and boats and supported the female riding communities.
It was great to help celebrate this event and increase awareness with women, particularly because we have seen female ridership increase approximately 30% over the last two years.
The second event was national get outdoors day, and what better day to celebrate than with a company that assets customers and employees to think outside our.
Our products live outside and we want people to think about getting out with our products to help them discover fun and unique ways to experience the outdoors.
The final highlight I want to mention and which transitions us to the next slide is the launch of our 2021 geared for good ESG report.
We launched this initiative in 2019, one thing remains certain our products live in the environment and we need to be good stewards to Orlando water and air.
Our 2021 report consists of a tremendous amount of information and some success stories around our ESG strategy.
We've done a lot of work to reduce energy use water consumption and our carbon footprint and.
In addition, we have a $5 million investment with a national Forest Foundation to help improve trails and protect our land for our future enjoyment.
We also provide support in our local markets to help improve repair and create trails.
Our geared for good ESG report lays out some of the initiatives, we have related to a rider safety.
With many new writers coming into this space safety is Paramount and we aim to support our writers and how to write safely and responsibly in fact August kicks off National Motorsports safety mud and we have plans to leverage the timeliness of the month to promote safe riding practices with all our riders.
While we remain genuine and authentic with this strategy and we'll continue to do the right thing for our stakeholders. It is always nice to see external parties recognize the work Youre doing we have seen recent improvements in <unk> scores.
And accolades from a variety of publications.
Our geared for good strategy will continue to play a critical part in the direction of the company and I'm proud to lead a culture that embraces this commitment.
Shifting to consumer demand, we are continuously looking at a variety of indicators to understand true demand in the health of the consumer.
Well this is art more than science in aggregate, we believe our data shows a resilient consumer and stable demand with the vast majority of these indicators positive during the quarter with some others, reflecting moderating demand.
Looking at North American RV retail was up 13% sequentially. This data point in combination with the fact that we shipped approximately 10000 more units sequentially led to a modest decline in pre sold as a percentage of retail.
As our shipments of increase we are also seeing dealers able to retail more units on the floor or in transit, which is another step in the right direction to get back to a more normal environment and one factor that will naturally lower pre sold going forward.
Phenomenon was more pronounced in lower end models versus higher end or more complex models, where component availability is still challenged.
Shipment levels continue to dictate retail performance as our data retail days to retail continues at an incredibly fast pace.
During the second quarter days to retail was in line with that of 2021, which was one fifth of the time, we saw in 2019.
This means there's a high correlation between what we ship and what is retailed, which has given us little opportunity to restock dealer inventory.
Some other demand indicators and what Theyre signaling include <unk>.
Short and long term repurchase rates remain elevated or within the historic range.
Off road and on road pre sold order cancellations remained low.
G&A attachment rates remained near record levels, indicating that consumers are looking to upgrade their vehicles with high margin accessories.
Web traffic remains well above the 2019 and areas like website vehicle builds as well as inventory and dealer searches and lastly customers new to players continue to dominate retail purchases.
Broadly speaking, we believe our demand trends are stable and the consumer remains healthy, especially when compared to 2019 levels.
Additionally, dealers continue to be positive around demand and more constructive around availability, which we appreciate but know we have more work to do to improve availability even further.
While other factors such as rising interest rates inflation and higher gas prices are certainly a concern our data continues to show a resilient customer.
Remember that our average consumer has fairly affluent consisting of a dual income household and has good credit.
We'll continue to evaluate these metrics and communicate with our dealers regarding demand, but as it stands today, we see consumers that continue to be interested in power sports.
Filling the channel remains one of the biggest opportunities for us in the near to medium term with robust demand extending over the last several years inventory levels have not been able to keep pace due to supply chain challenges.
Where we sit today inventory is down approximately 70% from pre pandemic levels in 2019, while.
While demand has been strong since 2019 supply chain challenges have constrained the industry's ability to deliver and as a result, Polaris has only grown at a 2% CAGR over the 2019 to 2022 period.
Despite strong demand, we and the industry have not seen outsized growth.
So what does this mean from an inventory build opportunity the chart on slide eight shows our expected year end inventory position versus where it theoretically would be using the 2019 days sales metric.
We've talked before about our new optimal level of inventory given what we've learned over the last several years, what we're hearing from dealers and how we've been able to operate in this constrained environment.
We believe this new optimal level of inventory represents approximately two five times increase from current inventory levels, which we estimate could total almost $750 million.
This opportunity is separate from demand trends and could represent a meaningful buffer for sales if demand wanes or it could also represent upside if demand remains elevated and the supply chain can support production to fill the channel.
Switching gears to the supply chain challenges remain globally. However, there are signs of improvement from logistics to the number of component shortages negatively impacting our production and shipping execution.
Today, we have approximately 25 suppliers with component shortages impacting over 100 units. This represents an improvement of over 50% sequentially and suppliers with part shortages impacting over 1000 units has fallen 35% sequentially.
Despite those improvements we are still dealing with shortages in key components that continuing to limit production, such as chips shocks and wire harnesses, particularly for our higher end vehicles.
While some of this is a trend in the right direction production remains hampered by challenges within the supply chain. We continue to expect modest improvements as we progressed through the second half of the year.
We've seen improvement in logistics relative to what we saw in the beginning of the year with very few delays at major points of entry. This has allowed us to reduce expedite costs, which had a small positive impact in the second quarter and is expected to be another positive factor in the second half of the year relative to last year.
Reviewing our five year strategy, we are now closer than ever to being a core power sports company. The sale tap earlier this month demonstrates our ability to execute on our stated goals and refocus the organization on being the global leader in power sports.
For our continuing operations the five year financial goals, we laid out at our analyst meeting earlier. This year remain the same with mid single digit sales growth mid to high teens EBITDA.
Mid Twenty's, ROIC and double digit EPS growth.
We view this focus on power sports and the financial metrics, we laid out as a significant value creation opportunity for our shareholders and our teams are committed to the strategy.
Let me now turn it over to Bob who will summarize our second quarter performance as well as our expectations for the remainder of the year Bob.
Thanks, Mike and good morning, or afternoon to everyone on the call today, My comments will be around our second quarter performance and expectations for the remainder of the year, but first I want to lay out our new reporting structure given the recent sale of tap, which resulted in the financials from that business being moved to discontinued operations.
We now have three segments off road on road and Marine.
The mix of our previous aftermarket segment consisted of approximately 80% tap and 20% power sports aftermarket, including brands like climb five O nine pro armor and coping.
Results from these power sports aftermarket brands have been reallocated into the relevant segments, which include off road and on road we.
We have provided historical comparisons of this new reporting structure in the appendix of our earnings presentation and on our website.
Turning to the quarter, let us start by walking through sales and EBITDA for the quarter sales of 2.06 billion were up 8% relative to last year with strong mix and price offsetting lower unit shipments and.
In spite of foreign currency headwinds international sales were up by 1% driven by strength in EMEA and Latin America, while Asia Pacific saw modest declines.
Total P. G&A revenue in the quarter was flat year over year with on road P G&A up over 20%.
Adjusted EBITDA margin was down 182 basis points to 12, 4% with lower shipment volume and higher cost premiums being the largest headwinds.
Positive price and operating cost containment helped partially offset some of these headwinds sequentially adjusted EBITDA margin improved 315 basis points with positive contributions from price and modest improvement in the supply chain, which benefited our operational performance.
Below operating profit our tax rate was 21, 7%.
Interest expense ticked up as expected to $15 million, given higher rates and debt levels.
There was no no share repurchase activity in the second quarter as we remain prudent given current working capital levels and the portfolio actions, we undertook in the quarter.
Outstanding shares remained approximately 2 million lower versus last year, given our repurchase activity late last year and in the first quarter we.
We remain committed to executing the share buyback levels included with our guidance subject to market conditions.
Turning to our segments, let's start with off road sales of $1 5 billion were up 7% relative to last year whole goods were up 10% and P. G&A was down 3%.
Recall, we have accounted for the relevant power sports aftermarket sales in the segment.
Adjusted gross margins were down 359 basis points supply chain disruptions continue to have a negative impact on performance and although there was some sequential improvement we are still seeing constraints and components such as chips and shocks on.
On the plus side, we did see positive pricing on new and pre sold orders during the quarter with cancellation rates remaining low.
Looking at retail performance, we were down mid Twenty's in North America with better performance in side by sides versus Atvs.
We believe the industry was down mid teens, that's playing to share loss for us in the quarter.
Breaking out recreational RV, we believe we held share in the first half of the year and loss share in the utility segment, which includes Ranger and a T V.
More of the loss came from a T V where shipments were negatively impacted by one key supplier.
We continue to believe share shifts in this environment are the result of component availability and decisions around production priority such as prioritizing less content value product versus complex premium product and not the result of the launch of new products by competitors. Thus.
Thus, we continue to expect quarterly share shifts to be lumpy this year.
On a 12 month Rolling average, we estimate <unk> share was down approximately two points.
Overall, while demand might be off the pandemic peak, we still see it above pre pandemic levels with particularly healthy demand for our premium recreation and utility products.
We do expect our pre sold orders to decline in the second half as we begin to transition into a more normal operating environment, coupled with an improving supply chain.
This means we are closer to delivering product in a more predictive predictable and timely fashion versus a negative signal on demand.
It was encouraging to see sequential improvements within the supply chain, especially in logistics and while challenges remain we continue to be encouraged with our ability to execute in this difficult environment.
We believe our business is poised for growth and share capture with an easing supply chain and look forward to continuing to deliver exceptional writer driven innovation to our customers across the globe.
Switching to on road now sales of $299 million were flat versus last year with whole goods down, 5% and P G&A up 24%.
Remember that our on road segment now includes exit manga appeal. Thus you see a strong mix of international revenue.
Second quarter results from those two businesses were up mid single digits.
As noted last quarter, we have brought on additional suppliers that Indian motorcycles and began to see the benefits of that towards the end of the quarter with more relief expected as the year progresses.
Margin was down 71 basis points due to unfavorable foreign currency and higher input costs.
While dealer inventory levels remain low we continue to see strong demand as pre salts remained near record levels.
Indian motorcycle retail in the quarter was down in North America by approximately 40% and down almost 35% internationally.
Looking at share on a 12 month rolling basis, we believe we lost approximately two points of share relative to the industry.
With continued easing of the supply chain and additional suppliers up and running we remain encouraged that our on road segment can have a robust second half growing sales and expanding margins.
Moving to our Marine segment sales of $273 million were up 38% we.
We continue to see component shortages, resulting in field inventory down 50% relative to the same period in 2019.
It seems the industry is beginning to return to a normal level of seasonality with demand slowing at this time of year given the summer is already in full swing.
We continue to hear from dealers that foot traffic in new new retail remains strong.
North American retail was down mid thirties for pontoons, and we believe the industry was down mid teens.
On a 12 month Rolling average view, we believe our share was down three points versus the industry as we focused on premium boats versus higher higher volume entry level units.
Margins were up 39 basis points due to positive mix and higher unit volume.
What offset by supply chain inefficiencies.
Rain grew shipment volumes by 20% year over year.
Summing up our second quarter performance by segment. It is clear that supply chain disruptions remained the main driver for our sales share in earnings performance this quarter.
We did see modest improvements in the supply chain challenges remain.
Our ability to execute and deliver in this environment remains our top focus as we progress through the remainder of the year.
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 capital deployment priorities have not changed we continue to focus on high return organic investments dividends opportunistic share repurchases and targeted acquisitions.
Looking at cash we believe there are a couple of main drivers to help improve our cash generation profile.
The first is an improving supply chain that should allow us to ramp production to consume raw materials and complete and ship our current rework inventory to dealers second is the realization of selling these products at higher prices.
We have already been implemented.
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.
Turning to our updated full year guidance expectations I want to emphasize that this now reflects the removal of tap in our current guidance as well as the base year of 2021.
Sales are now expected to grow 13% to 16%, which is slightly above our prior guidance due to the removal of tap.
This reflects strong growth in the back half driven by price and an improving supply chain.
We narrowed our sales expectation for on road to mid teens from mid to high teens due to foreign currency and a weaker than expected second quarter driven by supply chain constraints.
Adjusted EPS from continuing operations is still expected to grow 11% to 14%. Although we did take the top end of guidance down by 10 to $10 and 30.
Which reflects the removal of tap while holding the bottom end of guidance due to strong results this quarter.
Therefore, the midpoint of our full year guidance is $10 15, which is five cents lower than our original guidance.
As Mike stated, we continue to be encouraged by what our demand indicators are showing us.
There might be some mixed signals when comparing to peak levels over the last couple of years, but when stepping back and taking a longer view.
Still seeing elevated demand relative to pre pandemic levels.
We have confidence in these growth numbers, given our expectations around stable demand and improving supply chain and depleted inventory at the dealers.
This leads to a stronger growth in the back half an operating leverage driving double digit adjusted EPS growth for the year.
Couple of items on margins.
We expect gross profit margins to decline 60 to 80 basis points.
After adjusting for tap this is an improvement from our prior guidance, mainly due to supply chain costs getting better versus what we had originally forecasted.
This is partially offset by an increase in planned strategic operating expense investments.
We expect EBITDA margin to decline 20 to 30 basis points, which after adjusting for tap is consistent with our prior guidance.
Want to make note that with the exclusion of tap our base EBITDA margin improved by approximately one point relative to what it would be with tap.
As we look at the third quarter compared to the prior year quarter, we expect volumes and price to be positive contributors.
These positives are expected to help offset higher supply chain costs, leading to modest gross profit margin expansion in the quarter.
Some other items to note include a modest modestly higher net interest expense for the year.
We are projecting a greater negative impact from foreign currency versus our last forecast due to recent movements in the dollar.
Given the volatility in foreign currency, we thought it would be helpful to tell you. We are assuming an average rate of $1 <unk> for the euro to U S dollar and 78 cents for the CAD to the U S. Dollar in the second half of the year.
Every penny change in the Euro has a second half impact of approximately $1 million and every penny change in the Canadian dollar has a second half impact of approximately $4 million.
Exchange rates were to hold at these rates.
There is a there is a $25 million to $30 million headwind to operating profit for the year, which has been accounted for in our guidance.
Overall, we have seen some recent improvements in the supply chain that remains to be work to be done navigating current challenges. We still believe the health of the global supply chain is going to dictate performance. Our focus remains on execution and we believe there are numerous opportunities to increase sales with current demand levels, a modest improvement in the supply chain.
And replenish inventory at dealers.
We believe we are set up to start seeing price overcome many of the inflation headwinds and look to expand margins in the back half of this year. Our teams are resilient and we believe we are well positioned in the back half of the year to deliver strong results.
With that I will now turn it back over to Mike for some final thoughts.
Thanks, Bob while we are closely watching a variety of demand indicators demand remains healthy and stable across our business. We continue to see positive dealer sentiment and a variety of independent surveys cancellation rates remain low and customers continue to show interest in the industry.
While our results continue to be highly correlated with the health of the supply chain, we are seeing improvements and expect the supply chain to continue to modestly recover in the second half of 2022.
With this improvement we expect retail sales to accelerate meaningfully in the back half of the year due to current demand levels, coupled with our pre sold order program and easing comps.
On top of that we continue to sit at the forefront of a meaningful restocking opportunity at the dealer.
All of this into account gives me confidence in the trajectory of our business. We are more focused than ever on power sports and have a strategy to remain in the top spot while working to power the passion pioneer new possibilities for all those who play work and think outside with that I'll turn it over to Betsy to open the lineup for questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the key.
Is it any time your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question today comes from James Hardiman with Citi. Please go ahead.
Hey, good morning, and thanks for taking my call.
It sounds like it was a.
Solid even better than expected second quarter, I guess I'm curious as we look to the back half guidance.
Obviously this has been an ongoing conversation that a lot of people, giving you credit for getting to your full year numbers, not maybe walk us through the key assumptions.
For the second half.
Do you need to see get better in terms of supply chain.
And how much you know on the flip side, how much consumer deterioration could you withstand and still hit numbers. It seems like the guidance is much more a function of the former than the latter, but but maybe walk us through your assumptions.
Yeah. Thanks James.
You know obviously as we outlined you.
Continued improvement in the supply chain, although we're not you know we're not building in a substantial improvement.
And as we talked about in our last call we.
We had started to see coming out of the first quarter and improved flow in some of the areas that had stifled demand.
And our stifled our ability to produce quite a bit in terms of chips and shocks and even wire harnesses and we continue to see that progress through the second quarter and we exited the month of June was very strong.
As we look at the back half you know there is certainly a unit ramp, but if you look at it relative to where we were at in 2020, it's a slight.
Uptick if you look at our average monthly sales in the back half of the year there are less than what we executed in June .
And you know to your point.
We're assuming that the consumer remains stable demand remained stable, but even if the consumer were to pull back given the deficit. We're running from an inventory standpoint, we would continue moving forward. It would just allow us to replenish the channel a little bit faster.
Than we're currently anticipating.
As we outlined in my points as well as Bob's we don't see anything at this point that has that dynamic playing out. So we're going to continue to move forward with the plans. We have and then obviously, if we see consumer demand move substantially.
We've got the ability to pivot I would tell you that given the deficit we have in dealer inventory would have to be a pretty substantial pullback for that to be a meaningful impact to the company just given how low our dealer inventory levels are so the teams have been doing an excellent job of working through a pretty dicey environment, you know, even though we are.
We're seeing improvements it's relative to what we're experiencing so the supply chain is still you know, we're dealing with things everyday coming at us.
And even though the cost profile seems to.
Have at least stabilized and we're seeing some positive elements.
Elements as we outlined relative to logistics and resulting expedites our costs are still.
Still incredibly elevated AR, which is essentially why when you look at the margin profile of the business. The price changes we've made over the past year year and a half are essentially just covering the costs that we're experiencing the good news is in Q2, we were essentially offsetting those costs for the first time in quite a few quarters. So.
We're confident in our ability to execute the supply chain does have to cooperate but it's not a huge monumental improvement that we're expecting.
Got it and then just maybe to that last point about about.
Cost and.
And pricing.
Lot of dealers at least that we've talked to you expected a price increase in July it doesn't seem like you push that through curious how youre thinking about that I can say is that accurate.
But curious how you're thinking about that I guess, you could read that on the one hand that you feel better about your cost profile and that you don't need to lean into price as much I guess, the other REIT way to read that would be that that price elasticity is.
Is it increasing concerns so maybe just talk us through how to think about pricing as we move forward.
Yeah, James It's Bob you know listen I think as we've said all along we've tried to be very prudent with our price increases and not put ourselves in a position where we get too far ahead and have to have to promo are the stuff out. So we've tried to raise price in.
In line with what we're seeing with cost which has come at a you know obviously a deterioration to gross profit margins.
As we looked at July where we look at price we look at our next opportunity as model year launches and really the model year launches are kind of staggered through Q3 Q4, just given what's going on with production. So you know as we continue to roll through that we'll obviously be looking at cost and what's going on in the market and we will.
Make any decisions that we feel like we need to make at that time, but right now we haven't implemented a price increase since our April increase.
Got it.
Thanks for the color guys.
Thanks James.
The next question comes from Craig Kennison with Baird. Please go ahead.
Hey, good morning, Thanks for taking my question, it's been a great call very helpful slides thanks for that.
Mike I think you touched on this but you know Walmart is today and your customers seems to be doing okay. I'm. Just wondering if you're able to look at your demand by income cohort or something to understand if the dynamics are changing at that low end and if not like what are the signals that you look for.
I, just say look this slowdown which has hit Walmart is finally catching up to us.
Yeah.
It's a question that we've been spending a lot of time working through and what I would say Craig is that you know we have seen demand.
Moderate slightly I would say at the lower end of the category now some of that is also being driven when you look at pre sold by the fact that you know those are less complex vehicles and with the supply chain are starting to ease a bit they've been easier to get out.
Higher end of the spectrum from an income perspective, certainly is playing out well for us I mean, if you look at you know things like the crew Northstar Ranger, we are self constraining the number of reservations, we can take on that product.
We know that our dealers have a essentially a side book list of customers that are waiting for those vehicles and our other high end vehicles like the pro are in the turbo.
Our and so we know that the high end of the market continues to perform well and you know I think as we step back and look at that it's not that the consumers at that level are not being impacted by higher fuel prices and groceries and you know everything that's going on mortgage rates are starting to tick up.
But their discretionary income levels are higher and they tend to have more savings and so you know at this point, we really haven't seen.
That impacting them, but we're keeping a close eye on it and if you think about over the past couple of years, we've been selling an awful lot at the premium categories, so that demand level.
Continues to hold relatively well and we're going to keep an eye on that lower end of the market and make sure that we adjust accordingly, if our if we need to.
And as a follow up is there any evidence that maybe consumers that would be regular.
<unk> on a normal cadence maybe they sat out last year, because look you couldn't find anything.
You know as production improves in and those customers can get back into the market are they showing any signs of improving demand.
You know as we keep an eye on it I mean, we're we're obviously watching a lot of different things I mean, we you know one of the key metrics, we watch as you know existing consumers buying products versus new and.
Our new customers are as we mentioned remain high but they have come down slightly from what we saw you know the last couple of years, where we saw 70% of our sales coming from new to the category. You know, we're now down kind of sitting in the mid sixties. So you know one of two things one you've got a little bit of a slowdown in the new consumer but more than likely we've got existing customers.
Who were just kind of waiting it out coming back into the Fray.
The good news is as we track things like repurchase rates and we track them at short intervals like three and six months a year three years 510.
At least those near term measures are holding up and are either in line if not better than some of our historical numbers have been so you know at this point. It looks good you know as you know the used market is still very constrained and the used pricing is holding up so that you know obviously bodes well in terms of.
People still having interest to get into the category, maybe at some of the lower price categories.
Great. Thank you.
Thanks.
The next question comes from Anna <unk>.
With Jefferies. Please go ahead.
Hi, Good morning, Thanks for taking my question I wanted to build on crowd earlier question, it's encouraging to hear that demand indicator for holding them.
Light of everything going on with the consumer and of course, you know.
The color on purchasing and web traffic.
And if things were to change where do you think you'd see it first and would it be concentrated on one segment or more broadly maybe towards the lower end or across the board.
Yeah, So I guess I would've answered a couple of different ways.
I think we would start to see a more pronounced at the lower end of the segment and we've seen a little bit of moderation, but I again, I don't want to sound to a signal there. It really is just more a factor of we've got more inventory into the channel.
I would think it would start to then manifests itself maybe in the P G and a side.
<unk> is looking to maybe do a few more less accessories on a vehicle or maybe use the vehicle less and see a slowdown in and parts for repairs.
And then I think it would move into the higher end of the category now.
Now it doesn't necessarily going to play out perfectly that way, but that's that's essentially why we're looking at such a broad swath of metrics as we're trying to keep an eye on everything.
And we're not going to overreact, if we see a data point, because we've seen that along the way and in a lot of that's really being driven by the supply chain is creating so much volatility and just the flow of components parts and vehicles into the dealer network, but we're watching it and we've been very clear about what our expectations are around where dealer inventory will be.
And we've got daily visibility into the channel to keep an eye on that and we're watching demand patterns.
Across the entire North America, as well as international AR, and we'll be in a position to adjust if we need to the the good news is is that our dealer inventory levels are so low that as I indicated in the restocking opportunity that gives us quite a bit of a buffer. If we were to start to see some of those slowdown metrics playing out.
Ana This is Bob the other thing to think about you know Mike brought up earlier that you know through the course of the pandemic.
This industry really wasn't able to grow we made me saw some big big upticks in 'twenty.
As we came out as kind of the first round of closures, but pretty quickly blew through all the inventory everybody had in the dealer channel and in the warehouses and.
And after that they really this whole industry wasn't able to keep up with demand levels from a production standpoint, because of chip shortages and and other things. So you know normally you'd go into a slowdown with a lot of dealer inventory and coming off of kind of high production high retail levels and the reality is the retail levels, we're seeing right now.
Aren't a whole lot different than they were pre pandemic, just because of the availability of inventory and shipment levels are similar so Craig brought up the you know what happens are there people that walked in and.
Didn't see a unit and didn't buy it and Didnt buy anything in sort of went home with their their need unfulfilled and I do think theres some of that and as we if there is a slowdown we will get some more inventory into the channel and I think youll see a little bit of retail benefit there just by people being able to see product, yeah, I mean, but bobs points of gray.
One I mean, a lot of the questions. We got early on in the pandemic was how much of a pull forward is is this.
I actually think it's a bit of the opposite I mean, when you look at the growth that I mentioned in my prepared remarks from 19 to 22, where you know we've essentially grown about 2% that's at a lower rate from a CAGR standpoint than history historical which would suggest we've actually got pent up demand unfulfilled demand that has been waiting given all of the <unk>.
Why chain constraints and so you know I think if any of that anything that's going to provide more of a tailwind than than any perceived headwind from what was viewed as a pandemic bump that as Bob pointed out that pandemic bump kind of basically happened very quick and it basically depleted dealer inventory and we think now we've got you know some of our tried and true customers now.
Wanted to get back in and that's probably going to serve us well as we get through the next several quarters.
Great. Thank you that's very helpful. I wanted to touch on the 2022.
The volume ramp in the back half.
You know I appreciate that.
Yeah.
Has that improved in line with that.
Thus far into the quarter and when should we expect the off road plaque.
To positive volume growth.
So I think as you think about off road.
For the for the back half of the year.
You'll definitely see positive unit growth.
In the back half the the thing you've got to keep in mind, though is that the back half of the year the snow snow shipments come in so if you're looking at the total segment.
You have a lot of snow shipments in Q3, Q4 that that historically arent in Q1 Q2.
But but we will get into to positive shipment growth in the back half of the year.
Great.
The next question comes from Gerrick Johnson with BMO capital markets. Please go ahead.
Great. Thank you I'm, just going back to a couple of comments to put them together here I think you mentioned that you expected regional sales to accelerate in the back half and then you're just talking about positive unit growth in the back half. So is that acceleration mean, we could actually have retail are up year over year or is that just mean less less negative.
But less negative.
We still think it'll be down slightly.
It's anticipated to be up over where we were in 2019.
But down.
Ever so slightly versus a 21.
Okay, Great and then can you talk about your plans to increase capacity understand capacity is meaningless without components, but.
I think the target was 30% expansion capacity this.
This year can you talk about where that is both on the capacity side as well as the components to go into that capacity.
Yeah. So couple of things that we've done we obviously, we've talked about the marine business, which was incredibly important as we Bob mentioned in his prepared remarks, it's putting sort of a better position as we get into the second half to be able to continue to ramp our volumes much needed volumes.
Which should start to move market share back in a much better.
Position for us.
Really you know it's been on the off road vehicle side. Some of that capacity expansion has been we were putting a new paint system in our for our snowmobile business, which you know is going to help us be able to move product through a lot faster we've made substantial enhancements in Monterrey.
Which largely is about.
New product that will be coming out in 2023, so it's going to be incremental.
Obviously, we're ramping the supply chain to support that added volume so.
You know, we're continuing to look forward, we've had a number of discussions with our board. There are some things that we'll probably do to support in sourcing of components that we had outsourced and are costing us more than they would if they were internal and we can shift some of that internal production towards that as well as we look out over the long period I mean, we.
We think that the category still has good growth in our we're probably going to be in need of a new facility in the next call. It three to four years and so we're actively having those discussions in terms of.
Where we want to do that in and win.
Great. Thank you Mike Thanks, Bob.
Thanks, Gary.
Your next question comes from Robin Farley with UBS. Please go ahead.
Hi, great. Thanks, two questions. One is I think the slide mentioned that you saw a spike in port delays in July and I Wonder if you could.
Has that impacted your.
July capacity in terms of what you've been able to put out or are you just sort of saying if it were to continue that it could.
So if I understand the impact so far in Q3.
More of the ladder Robyn. It's just you know we had seen a continual improvement and then in July we saw a bit of a spike and I'm you know.
I'm sure that there's you know elements of how China reopened and the timing of our containers coming into the port.
They could have had an impact it's something we're keeping an eye on it but at this point it really hasn't had an impact on the business.
Great. Thanks, and then also just wanted to clarify.
Guidance change for <unk>.
Operating expense.
So there was tapped it was removed and then you said that.
They were.
And what you've had to spend in terms of the supply chain.
So I guess first I just want to understand what was the operating expense change if he take tap out of both periods just to make sure I understood that.
And you.
You mentioned that the surprise.
Savings is offset by you mentioned strategic investments, but I wonder if you could give a little more color on that.
Yeah. So.
Robin it's Bob so on an operating expense.
If you what we were saying is you know we're seeing a better GP in the second half of the year and some of that benefit is offset by increased operating expenses as we look at bringing back some strategic investments that we've been holding on as we were waiting to see how the year unfolded.
You know overall the rate is going to be 100.
60 bps, you know really better than what it was in 2021, if you removed tap.
Opex is growing a little bit a little bit faster.
Just for the strategic investments, but we're still improving the rate for the year.
Robin if you remember at tap has a much higher had.
A much higher opex level than the rest of the company is clearly a benefit from having that exit.
And then the thing I want to clarify that that Bob mentioned as those investments that we put back in what we're essentially doing is we're starting to think forward you know in terms of what could the next three or four or five quarters look like and you know as you think about the last a year and a half two years, we haven't had to do a lot of what I'll call upper funnel.
Marketing to bring awareness to the category and so we're reigniting some of those investments with just in anticipation that things are going to start to return back to normal and we've got to get back to the good old demand stimulation of the past and those are those are investments that we're trying to you know much like we did if you remember a year year and a half ago when the supply chain.
Component issue started we looked ahead and said what's going to be the next frontier of potential bottleneck in it was labor.
And so we jumped on that pretty quickly and you you guys have not heard us talk about labor being a constraint because we got on that so quickly. So now we're thinking forward around some of that upper funnel marketing expenditure and making sure that we're continuing to invest for the future demand of the business.
Okay, great. Thanks very much.
The next question comes from Joe also Bello with Raymond James. Please go ahead. Thanks.
Guys. Good morning, I guess, the first question I wanted to clarify something that you guys can make it earlier in response to another question.
Regarding North America retail and the outlook for the second half I think you said you expect second half retail to be down less in the first half a gallon modestly for the year, but I think you were down over 20% in the first half, but maybe help us understand what.
No.
So sorry, Joe now the comment was pertaining to the full year.
So we will be down modestly for the for the full year will be up in the second half because if you think back to second half of 'twenty one right. The comps are a lot of la.
Lower second half is when things really started to go more sideways from a.
Supply chain standpoint, and so you know as we get into second half of this year, our shipping cadence is planned to improve and with it the retail cadence and so you'll see growth in retail relative to 'twenty, one in the back half and relatively flattish for the full years, where we think it's going to land okay perfect.
My follow up to that is.
On market share you know obviously it looks like you lost some share across the board here are mostly due to.
Availability rather than consumer.
Consumer tastes and preferences, but if I look at your your Indian here down in a quarter, where your biggest competitor shut down production for three weeks, maybe help me understand.
How we should interpret that and how you're thinking about that business.
Yeah. Your comments are right. It's why we clarify a lot of this is really availability I would tell you that our share losses were not to them.
Ours and theirs were to the rest of the industry. So you can imagine that's over a number of different <unk>.
Different players.
The other comment I'd make and it's.
You know probably more specific to <unk> or V. But applies a lot of the businesses. We are being very deliberate in what we ship in and you know Bob kind of touched on this a little bit you know our utility segment as shown share losses, but with you. If you look within that segment, we've really focused on meeting consumers, where they are going which is you know our four seat the crew.
Vehicles with Northstar components, those are obviously more complicated, but that's where the customer demand is so we've erred on the side of trying to make sure we're hitting that demand versus producing maybe less complex smaller units all of it counts. The same when you think market share, but when you think about value to the company future customers Theres a big difference.
And so we're being very deliberate about where we're delivering for the customer. The good news is we saw the share movement move in our direction in June which was encouraging and we're going to obviously keep the focus on keeping that to be a trend into the second half.
Got it thanks guys.
Thanks.
The next question comes from Joe Spak with RBC capital markets. Please go ahead.
Thanks, so much.
Bob the the walk on slide 12, I guess I'm not sure the exact price mix split, but if I just sort of assume it's pretty even and I look at the EBITDA flow through it would it would kind of suggest like.
You know 100 to 150 million year over year higher cost to sort of get to that that sort of level. You are showing on the flow through is that is that ballpark correct ballpark correct. I just I just want to try to sort of dimension. The potential benefit you see is price starts to really more than cover our costs in the back half.
Yeah.
Yeah, I don't I don't think you're materially materially off first half to second half I mean, if you think about the evolution of price through the course of the year right. We enacted the big price increase in April .
So it starts to show in Q2, and then obviously you get kind of full realization in Q3, Q4, which is part of the.
Part of the both the margin improvement and the revenue growth in the back half of the year also in Q2, we actually shipped through a bunch of North stars that had been ordered in 2021.
A to get them out to those customers, obviously are people waiting a long time, but but those units weren't price protected so.
Those were at lower the previous lower pricing, but they were price protected I'm sorry. So you know all of that gives you the the margin improvement starting in the in Q3 and then the cost picture.
Costs were already higher last year.
In the second half that's when they started going up so the cost picture is a little more stable year over year in Q3 Q4.
Okay. Thank you.
And Mike you know sort of a big question here I realize that but I think investors are sort of looking at you know Polaris hurting you know pre pandemic of north of $6 and now Youre doing over 10, and so they're looking for signals one way or the other as to why that would or wouldn't revert and so to your comments on like you know the 2% growth and that's below historic.
And there might be pent up demand.
Obviously revenue growth was well in excess of that because of price. So you know how do you think about price in order to drive that historic volume and I guess why is that volume price.
A better sort of profit trade and to make it even I guess you know.
It even bigger question I guess.
No.
If you were to see consumer softness in sort of maybe you know price is to give to drive the same volume do you think that you know lower commodities and then maybe a loosening supply chain provides a little bit of a natural offset to the margin.
Yeah, I mean, I guess I'd say, a couple of things I mean, yes, we've been moving price, but in terms of driving earnings. It really has been if anything a negative meaning we didn't move as fast as the price or the cost we're moving in.
And that dynamic essentially kind of what I'll say is plateaued here in Q2, where we basically offset the cost and as Bob pointed out as we get into the back half you start to get a better a little bit of an incremental it's still a drag on margins overall, but it it becomes less of a drag.
You know as we look out from a price elasticity standpoint, obviously, there's a fair amount of this that's gone in to cover things like logistics and Expedites and you know and some of that's been done through a freight adders that are independent of an MSRP change and those things are designed intentionally to come off once we start to see logistics abate.
And so we would see that as a as a potential lever.
But our intent is is that and it was the way. We originally designed our price moves if you remember back two years ago, we were catching a fair amount of flak for not being more aggressive and more than covering the cost to try and hold margins. It was very intentional because as these costs start to abate our intent is to try and hold onto a portion of those.
This increases which will have a net plus from a pricing standpoint, and we're going to we're going to continue to watch that closely.
We understand the price elasticity, obviously, there's a lot more elasticities when you get into some of these higher fees.
Featured products with a lot more technology, which are the ones. We've had probably the most trouble producing and meeting demand on the consumers have been resilient and are still waiting for those vehicles. So.
It's still going to be a part of the calculus moving forward and you know as you pointed out and I made the point earlier, you know we haven't seen some outsized demand I think theres been a lot of concern that we're going to see you know a huge slowdown or a backing away and if anything over the past three years, we've really only seen about 2% just over 2% growth and from my perspective, we know.
Know from talking to customers, there's been a fair amount of customers that are legacy players customers that have held off because of just the lack of availability and they've spent more time accessorizing vehicles and preparing the existing ones and we think they're going to step back into the market are given dealer inventories are low we've got room to handle.
Any kind of a potential demand pullback you know even if it's for a couple of quarters. We think we're still in a good spot. So I like the setup of the company you got to think about the fact that prices not just been because we've moved price prices also come from larger more featured vehicles with a lot more attack and consumers are.
Willing to pay for that.
That's very helpful. Thank you.
Yeah.
The next question comes from Fred Wightman with Wolfe Research. Please go ahead.
Hey, guys. Good morning, you've mentioned.
Some expected tailwind just from from lower expedite is there any way to frame the benefit either what you saw in <unk> or sort of what you're expecting incrementally for the rest of the year versus the outlook last quarter.
Yeah, I would say, it's a I mean.
It's not it's not a dramatic impact Fred I mean, it's you know they were improving in the last outlook and they've kind of hit our around our expectations. It is a bit of a month to month thing I mean, the the expedites happen either because of supplier gets behind or because of delays in the port and you've got a fly stuff over the ports.
So.
That's not going to be a huge driver.
In the back half of the year being dramatically different than Q2. It was I think Fred it's just more of a you know a positive signal because we spent an awful lot of earnings calls talking about expedites increasing sequentially.
And so it's nice to see things at least settling down a bit hopefully improving.
It makes sense and just on the financing side is there anything that you guys are seeing at the dealer level from the consumer either you know.
Financing uptake or penetration versus sort of what you would normally see or sort of the wholesale side. You know just dealers orders relative to carrying costs getting a bit higher anything that you guys are seeing discernably different on either one of those.
No you know I actually went through this with the team last night are looking at there just the results of <unk>.
Pen rates have stayed relatively consistent you know, they're a little bit lower than they have been historically, just because buyers have cash in and also with the wait times you know they have an opportunity to to shop dealing.
Delinquencies have ticked up a little which is consistent kind of with the rest of the market, but it's still you know its been.
An incredible portfolio for the finance partners.
And our average credit scores and approvals remain consistent Q1 to Q2 and with last year, So not really seeing a credit availability looks good our partners are aggressive theres not a lot of finance promo in the market right now.
Yes, because of the inventory situation and then on the wholesale side you know dealer credit lines. You know they are nowhere near the top so their credit lines, just because of the low inventory and dealer financials have never been better. So we're not expecting any issue with restocking relative to credit.
Great. Thanks, guys.
Thank you.
The next question comes from John Healy with Northcoast Research. Please go home.
I think he was just wanted to stick with the financing line of questioning for a moment or Kim would love to talk a little bit about consumer affordability, just with the step up in Asps over the last couple of years and now with base rates and probably risk in the credit market picking up can you talk to us about what monthly payments look like.
<unk>.
The average consumer that comes in and picks, but and honor in off road vehicle, maybe compared to pre COVID-19 and as he studied the consumer you know.
How important is monthly payment to them and you know where do you think the friction point might be in terms of demand destruction and you know along those lines as well.
You know what sort of flexibility is there to work on maybe extending permanent loans and have you seen that in the marketplace at all.
Yes, So you know you.
I would say you take a step back and you think about you know sort of what's happened with pricing over the last couple of years. So.
You know you're talking about products ranging from an a T V. It sort of with an MSRP of $7000.
That's up about 12% versus 2019, and then you get to the higher end products I mean, your 25 to 35 and those are up 20.
So obviously the price price has an impact.
Consumers are sitting on I think it's 2.3 trillion dollars of excess cash so we've.
We've seen lower financing a lot more cash buyers are so you know as things change and rates go up I think it'll have a it'll have an impact, but I think it'll be relatively minimal we're.
We're not hearing that as a big part of the story right now.
You know credit's been heavily available if consumers want it and then and and as just as is the opportunity for cash buyers theres not a lot of promo going on in the system right now people buying down rates and things like that you may see a little bit of that come back, but that's a fairly efficient way for for people to sort of incentivize the market, but that activity has been.
Low.
At this point John .
John and you know some changes we made this dates back to when I first joined the company you know our vehicles start to become more and more expensive at that point in a lot of the loan programs. We had I think were you know a matched duration of three years and you know so we made a fair number of enhancements to take the term out longer.
To make it a little bit easier for consumers.
I would tell you as.
You know historically, our customers even does say they'll take a five year loan out there typically paying that off in two and a half to three years.
So what it tells me is the monthly payment is is not unimportant, but theyre not looking at carrying this thing a full term are they typically are trying to time it with other cash proceeds and things that they've got and you know the <unk>.
Part is is that our financing partners are independents. So they act in accordance with their balance sheet and even if we saw a promo coming back in to help with rate buy downs, we end up making a portion of that back given the arrangements we have with our partners in terms of the return on the portfolio. So you know at this point it hasn't been something that I don't want to say, we're not a mindful of but it is.
Just as a major factor.
Great. That's really helpful. And then just wanted to ask on the on the.
The market share side of things, obviously you guys.
You know the acknowledge there has been a little bit of loss share, but comfortable that you'll you'll get that back can you talk to us about relationships with dealers right now and you know what gives you that confidence what gives you that confidence that.
You'll get that back and what's kind of happening behind the scenes. There that you know you can help us with underwriting that thought process.
Yeah, you know, Bob and myself, we're out with steepen out to a number of our dealers in four states and.
Dealer sentiment was was very positive, especially considering the fact that deliveries are as constrained as they are in that that's not just a polaris issue. That's an industry specific I will tell you that the feedback from dealers. They loved the innovation that we've come out with Theyre seeing the enhancement in the quality of the vehicles are there.
We're incredibly appreciative of how we're handling the approach to rework in the supply chain challenges that are sitting inside the network and so they're giving us really good marks.
Obviously profitability is at an all time high just given how constrained inventories are and theres very little discounting going on in the marketplace.
You know really what they want is more product and so we have continued to enhance our communications.
We've worked to try and take the burden off of the dealer to get caught in between the consumer and us.
So we implemented a.
Late last year, the ability for consumers to go in and check on availability and where their product is in the cycle and all of those things are working in our favor. So you know we we don't take it for granted we know we got to continue to improve the situation, but you know overall sentiment with dealers is very positive and basically what they told us when we were out as you gave me more.
So I'm gonna be able to move it because we've got a large list of consumers waiting to get stuff.
Great. Thank you so much.
Thank you.
The next question comes from Shan deal with BNP. Please go ahead.
Hi, guys. Thanks for the question. So you talked about stepping up the marketing efforts a bit.
But selling and marketing expense was down about 5% ex Tac year on year it.
So should we expect that or I guess why was that down and then should we expect it to start increase into the back half and into maybe next year.
Yeah.
Yeah. So it was more a comment around what we've got planned in the second half I mean, obviously given the last thing we want to do is go out and stimulate even more demand than you know were having trouble satisfying today, but as we look out knowing that the supply chain has improved and anticipating that we continue to see it improve obviously not just through the end of this.
Year, but as we get into 'twenty three.
When we talk about stimulating that upper funnel is not stimulating immediate demand. This is broader level advertising trying to bring more awareness to the category of the things that we've been doing in.
And frankly kind of pulled back on just given there were so many challenges with the supply chain and we knew it was going to take us longer than just a quarter or two to work through those.
Okay got it and also wanted to dig into the gross margin change or gross margin pro forma versus with tap so now.
<unk> 60 to 80 versus 400 120.
And so it seems like implied that tap was a big source of pressure because you know slide 21, you say gross margin.
Expectations are unchanged for some of those core segments.
So maybe can you help bridge that.
Why was tasks such a big drag I know you are getting rid of it but why was it so much worse than kind of the core and maybe a better sense of the improvement.
For the core businesses.
Yeah, I mean, you know look tap tap had a I mean, there's a reason that it's no longer part of the portfolio aside from not being core to power sports the financial performance of the business was incredibly difficult and challenging.
For those who have followed us over the years. They know that that is continuing to get more and more challenging.
From a gross profit standpoint, there were a couple of things going on one is the weight of the tariffs continue to weigh heavy on that business with a lot of components being sourced out of Asia.
We also were seeing demand pullback there just was not as much activity going on especially in some of the higher margin segments.
Things like DSI.
Dealer services International where we would outfit new pickup trucks and jeeps that were coming into the dealer to provide a hero product dealers just don't have inventory and they have absolutely no desire to go out and do that type of work.
Because they are so so and pick up trucks without blinking an eye so.
There were a lot of different factors that we're creating a fair amount of challenge in the business you know.
The good part is is that after this question I don't think we'll be talking about it much.
Yeah, and I think you know as you look at the improvement in a N G. P. So.
Tap, obviously that hadn't that had a fairly minimal you know when you are.
<unk> tapped from both.
Kind of the original guidance in the in the current guidance.
Tap removal actually had a fairly minimal impact of the improvement in guidance is really driven by operating improvement in the continuing business.
Okay got it and sorry, just to clarify you mentioned tap was a big tariffs hit.
And you know theres been talking about potentially lifting terrorists, so would that be less of a benefit now because a lot of the headwind I guess was intact or just wanted to clarify that no. It was a big impact for tap a relative to the company and we're still looking at over $100 million worth of tariff.
Sitting in our P&L. So you know I know.
Relative basis, it was a big impact for them, but were still carrying a pretty substantial load I mean, we still have about 15% of our components coming in from China. So.
We're watching that develop we're not anticipating anything positive if it does we've got the team ready to go we've demonstrated a capability to take advantage of you know an exclusion process et cetera.
At this point, we've got to see more focus on how do we get costs out of the things we can control.
Okay got it thanks.
Thank you.
The next question comes from Brandon Rolle with D. A Davidson. Please go ahead.
Thank you for squeezing me in here I had one quick question on slide seven you had talked about a new pre sold as being modestly down sequentially. Although web traffic remains strong could you talk about you know the trends you saw throughout the quarter and driving incremental pre sold units. Thanks.
Yeah. So you know part of that is I mean as you can imagine it's a pretty complicated calculus. One thing is is that we delivered a fair number of as Bob mentioned North stars that had been.
Woefully late to schedule just given the challenges we've had around chips and some other components.
So we cleared through a fair amount of that so that obviously brought the number down.
We did see a little bit of moderation in pre sold volume at the lower end of the market.
It's tough to tell how much of that is being driven by anybody pulling back from a demand standpoint versus the fact that we've been able to get the inventory position improved from where it had been so think about things like trail razors.
And so you know, we're keeping an eye on that trying to understand it. The good news is is that with the increase we had in shipments sequentially from Q1 to Q2.
Very little of that is we're still sitting in dealer inventory after the end of the quarter.
Which signifies that you know between a combination of pre sold and then just foot traffic retail things, we're able to move.
The other thing that I would note is on the higher end of the market. So think about things like North stars and pro are things that are on reservation.
We are self constraining that and the reason that's important is that we know we have dealers that have lists of people waiting to get on the reservation list.
And the reason that we've constrained it is because given what we see from a supply chain standpoint, we're trying to make sure that we can put our delivery expectations out the consumers who were putting money down on the vehicle.
Are willing to accept obviously as the supply chain continues to sequentially improve we'll be able to open that allocation of reservations up and we know we've got a very long list of people waiting to get in.
The other thing to keep in mind, we saw a good improvement in pre sold that Indian and slingshot, but as we get into the third quarter.
We're starting to sell out of some of the key models in terms of what we're going to build in it for the 2022 model year before we changed the 'twenty three so we're also self constraining on some of those so that we don't deliver somebody the wrong model year product.
Great. Thank you.
This concludes our question and answer session and also concludes the conference call.
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