Q3 2022 Polaris Inc Earnings Call
Good day and welcome to the Polaris third quarter 2022 earnings call and webcast all participants will be in a listen only mode. So do you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask to ask a question. You May Press Star then one on your Touchtone phone.
Loan and its withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mr. J C. Weigelt. Please go ahead Sir.
Thank you Chuck and good morning, or afternoon, everyone I'm J C Weigelt Vice President of Investor Relations at players. Thank you for joining us for our 2022 third 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 speeds are.
Executive Officer, and Bob Mack, our Chief Financial Officer, both have prepared remarks, summarizing the quarter and our expectations for 2022 as well as some early thoughts on 'twenty 'twenty. Three 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.
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 the risks and uncertainties all references to third quarter actual results and 2022 guidance are for our 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 now I will turn the call over to Mike speeds go ahead, Mike.
Thanks, Jason and good morning, everyone and thank you for joining us today I want to start off with our third quarter results, which reflect record quarterly revenue of $2 3 billion and while not a record adjusted EPS of $3.25 grew nicely at 64%. This.
This is a testament of the hard work and dedication of our global teams from supply chain to sales corporate functions and manufacturing.
Everyone played a role in achieving these results.
Margins improved during the quarter with positive contributions from price and volume offsetting higher year over year costs, both price and volume should continue to play a role in expanding margins as we exit the year.
While the retail story is mixed for the quarter with retail sales down 8% year over year, our premium products across utility and recreation and off road continues to be stable demand.
In addition, snowmobile demand has been strong as we entered the riding season.
We did experience some softness in razor and a T V with more pronounced softness in models that tend to be more price sensitive and or more leisure based.
Pontoon retail declined low double digits due to continued supply chain constraints.
Our 8% retail growth in on road was driven by Indian motorcycles, and a high mix of rework to ship a significant number of bikes that had been waiting for specific parts.
As shared last quarter striking the right balance of inventory at our dealers is a key focus for US we are closely monitoring inventory levels to enable dealers to have an optimal level of support.
To support customer demand as the supply chain continues to improve.
In fact, there were a handful of models, where we believe we are close to optimal inventory levels already such as Atvs and several off road vehicles and our recreation category.
All in our strong third quarter results allow us to maintain our full year adjusted EPS guidance and moved to the upper end of our sales guidance.
As we look at demand the story's become more mixed players or be retail was down sequentially by 4%. This was mainly driven by softness in the recreational space drilling.
Drilling down to more specific areas of softness we are seeing some customers be more price sensitive on value models, which is consistent with last quarter. This impacted some razor and ATV sales.
Across the industry. The utility segment continues to have stable demand indicators, while the recreational space seems to be slowing.
Our premium models, such as razor pro our turbo <unk> and Ranger Northstar remain favorites with customers. We're also seeing customer appeal for vehicles with the latest ride command plus connected technology. As this continues to be an area, where we have our innovative competition.
As anticipated the backlog of pre sold is declining as shipments improved and that was certainly the case this quarter.
Pre sold as a percentage of retail hit their peak last year at 75% in the third quarter and this year during the third quarter. They were trading near 40% with the decline being driven by a mix of improve availability and softening demand.
A few other points on demand include pre sold order cancellation rates are staying low across our business.
We continue to see a steady mix of customers new to Polaris, which is consistent with historical trends, while both short and long term repurchase rates remain elevated or within the historic range.
And P. G&A attachment rates are at or near record levels, indicating that customers are looking to upgrade their vehicles with higher margin accessories concurrently parts and oil service kids had a record quarter pointing to strong writing trends.
Another bright spot is the continued consumer interest in getting outside as evidenced by organic search for industry terms staying well ahead of 2019.
This level of elevated organic search gives us confidence that this is the time to increase spend on demand creation. The top end of the customer funnel is healthy and we believe that investing in demand creation can amplify organic interest and increase the number of leads at the bottom of the funnel.
As this process can take time, we made the decision to invest in growth and are increasing our spend on demand creation in the fourth quarter.
Broadly speaking, we continue to track how the consumer's bearing with pressure from rising interest rates inflation and higher gas prices, while we've not seen drastic changes in consumer behavior. Due to these factors, we will continue to closely monitor consumer behavior and erect react accordingly.
We also weigh these dynamics with the fact that our average consumers affluent owning their own home and dual income households.
Importantly, approximately 60% of our off road business is in the utility space as well as the commercial and defense sectors, where the purchase is not characterized as leisure or discretionary we.
We believe this part of the business is more insulated from external factors impacting consumer buying patterns will.
We will continue to be vigilant in monitoring these metrics and will remain agile as we see shifts in consumer demand trends.
So by segment, let me wrap up our thoughts on demand.
And off road, there is a clear delineation between utility and recreation demand indicators remain stable and utility while recreation is softening with pronounce moderation in the value segment.
And on road, we had a very strong Q3 and were able to ship a high percentage of rework bikes dealer inventory seems to be in a healthier spot and we believe we are closer to a normal operating environment as we enter the traditionally slower winter season, we expect to see a seasonally driven softening in demand.
For marine demand at the entry and premium levels continues to be healthy while we are seeing demand slow in the middle of the lineup.
Similar to motorcycles, we do see the industry is moving closer to a normal seasonal environment and with healthier dealer inventory levels, we expect seasonally seasonal weakness as we finish the year.
As discussed last quarter filling the channel remains one of the biggest opportunities for us in the near to medium term.
We made progress in the third quarter given improvements in the supply chain and expect this to continue as we progress through the fourth quarter and into next year.
With the progress made this quarter, we see inventory down approximately 50% versus 2019, we believe an optimal level of inventory represents an approximate 1.5 times increase from current inventory levels, which we estimate could total almost $400 million to refill the channel to this new optimal level of inventory.
We've seen recent evidence that where we can supply product. We can gain share that was evident in Indian motorcycle and raised during the third quarter and is playing out in October for Atvs as we had a heavy ATV shipments in the last couple of weeks of the third quarter.
Given an improving supply chain of recent softness in retail we expect this channel refill opportunity to last through the fourth quarter and into early next year, but the exact timing remains uncertain the.
The utility segment remains our greatest near term opportunity is the supply chain improves given lower dealer inventory levels, coupled with continued consumer demand.
Moving to some of our newest rider driven innovation announced recently for our 2023 model. Your lineups, we continue to push forward with industry first technologies next level performance and features that deliver for our customers for Ranger. Our Northstar Trail boss edition is packed with new upgrades, specifically designed to meet the demands of hardworking consumers.
The players razor lineup introduce new color audio lighting entire options to allow our customers to make their statement in writing their own industry, leading razor.
Lastly on off road, we announced that ride command plus will come standard in all 2023 Ranger XP 1000, Northstar additions and is available as an add on accessories, and several 2023 Ranger razor and ATV models.
First in the industry ride command plus users connected vehicle technology to create a more seamless ownership and riding experience the refreshes like vehicle health monitoring and remote location services. The technology also allows us to provide users with over the air updates, meaning our team can rollout new benefits as soon as they're ready.
We've already shared that location alerts post ride report and group ride plus our new features that will make available on ride command plus later this year. This platform continues to elevate our position in connected vehicles to deliver the best customer experience.
And Marine Godfrey Pontoons launched the Baidu G built from the ground up to optimize for electric propulsion, while also compatible with a more traditional gas powered engine. The Mighty G is the ultimate entry into upon tuning and boating, providing plenty of room for passengers, while delivering a highly maneuverable and comfortable right.
Hurricane announced the new Sunday 2600, offering at over 26 feet, which will be one of the largest deck boats and the hurricane lineup. The versatility of this boat is unmatched providing power and performance for an exhilarating time, whether it be tow sports fishing or a leisurely coors.
As you can see Polaris continues to lead the way by powering the passion and pioneering new possibilities for all those who play work and think outside.
I'll now turn it over to Bob who will summarize our third 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.
Looking at the quarter. It was great to see record sales and near record adjusted EPS and what continues to be a very dynamic market.
Sales benefited from strong volume and price offsetting amplified FX headwinds.
In spite of the dramatic foreign currency fluctuations international sales were up 10% driven by strength in EMEA and Latin America, while Asia Pacific saw modest declines totaled.
Total P. G N a revenue in the quarter was up 17% year over year, achieving a new quarterly record driven by strong attachment rates and part sales.
Adjusted EBITDA margin was up 153 basis points to 13, 7% driven by strong pricing higher shipment volumes and cost containment. These.
These positives more than offset higher warranty costs and higher than expected FX headwinds.
Supply chain cost premiums decreased sequentially, but remained a cost headwind on a quarter over quarter basis.
Below operating profit interest expense continued to tick up given higher rates and debt levels, we were opportunistic with share repurchases and bought one 7 million shares in the quarter.
We remain committed to executing the share buyback levels included within our guidance subject to market and other conditions.
Turning to our segments, let's start with off road.
Sales of $1 7 billion were up 33% relative to last year.
Whole goods were up 38% and P. G&A was up 18% with the variance made up of whole goods price.
Adjusted gross margins were up 340 basis points pricing and higher shipping volumes had a positive impact on sales and margin offsetting increased supply chain cost premiums warranty expense and FX headwinds.
Looking at retail performance, we were down high single digits in North America with better performance in side by sides versus Atvs.
We believe the industry was up low single digits, that's pointing to share loss in the quarter.
Breaking out the recreational O R V business, which includes razor and youth. We believe we continued to hold share with strength in the wide open and crossovers sub segments.
In the utility segment, which includes Ranger and a T V.
Loss share as shipments continued to be constrained by supply chain challenges.
On a 12 month Rolling average, we estimate <unk> share was down approximately three five points.
We still believe share shifts in this environment are the result of component availability and decisions around product 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.
While demand trends are mixed we do see an opportunity to gain share with increased shipment volumes in particular, we continue to see strong demand and opportunities for share gains at our utilities segment and commercial businesses driven in large part by Ranger as the supply chain eases for reference over 60% of our sales mix in off road is may.
Of our utility business, plus commercial and government and defense, we think of each of these businesses is more resilient and less discretionary our ability to increased shipments and serve these customers should position us well as we move through Q4 and into 2023.
Switching to on road now sales of $334 million were up 30% versus last year with whole goods up 32% and P G&A up 17%.
The main variance between whole goods in P. G&A was price.
Remember that our on road segment includes XOMA appeal, unless you see a strong mix of international revenue, which saw meaningful pressure from FX.
[noise] and improving supply chain helped increased shipments meaningfully on a sequential basis, leading to volume leverage and share gains for both Indian motorcycles and slingshot.
Margin was up 293 basis points it could have been even higher.
Then that if not for a substantial FX headwind, which is expected to continue.
Demand trends remain stable across a number of indicators Indian motorcycle retail in the quarter was up high single digits in North America versus the industry down low single digits.
Looking at share on a 12 month rolling basis, we believe share down 1% due to the strength we saw in the third quarter.
The on road team continues to execute at a high level and it was great to see the margin improvement despite the FX FX headwinds the.
The combination of a strong product portfolio strong execution sets the segment up for future success and share gains.
Moving to our marine segment sales of $260 million were up 42%.
Shipment volume was the largest driver followed by price and mix similar to last quarter, we're angry shipment volumes by over 20% year over year.
The industry is beginning to return to a normal level of seasonality with demand slowing at this time of year.
In addition dealer inventory continues to right size, but remains 25% below 2019 levels.
North American retail was down low double digits for pontoons, and we believe the industry was up low double digits. We believe this share loss was largely attributable to supply chain challenges.
On a 12 month Rolling average view, we believe our share was down approximately four points versus the industry.
Margin was down 91 basis points, reflecting a difficult comp however, strong pricing and mix helped partially offset supply chain inefficiency costs.
Summing up our third quarter performance by segment easing supply chain challenges improved our ability to manufacture and ship product. We believe our teams are well positioned to finish the year strong and we are investing in the future.
As Mike said, we are closely watching demand trends and have yet to see material shifts in consumer behavior that are tracking softness in recreation recreational off road and possibly a return to normal seasonality across the portfolio.
On road trends remain encouraging it aligned well with specific measures. We took early in the year to improved component availability.
We expect demand creation spend to increase during the fourth quarter as we worked to stimulate the top end of our funnel, which will be more pronounced in our off road segment.
Pricing is expected to remain a positive contributor to margin in the near term as well as declining year over year commodity and logistics costs.
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 in.
In Q3, we generated 179 million in operating cash flow.
Our capital deployment priorities have not changed we continue to focus on high return organic investments dividends and opportunistic share repurchases during.
During the quarter, we bought back $206 million worth of Polaris stock, bringing our year to date repurchase amount to $379 million.
We continue to view, our stock is undervalued subject to market and other conditions and view these price levels as an opportunistic entry point.
Looking at cash we believe there are a couple of main drivers to help improve our cash flow generation profile.
First as an improving supply chain that should allow us to ramp production to consume raw materials and complete and ship our rework inventory to dealers. We started to see this phenomenon in the quarter, especially in on road, where they worked through a good portion everywhere.
Second the pricing actions taken throughout 2022 have provided a cash lift.
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. Most of the changes here are a function of narrowing our ranges due to the fact that we are nine months into the year.
Sales guidance has been narrowed to the upper end of our original range and now stands at 15% to 16% growth.
Within that we did move off road to the upper end of the range due to an improving supply chain leading to increased shipments.
We also anticipate strong show snow shipments in Q4 as the season ramps.
We lowered our outlook for on road due to increased FX headwinds.
This segment has the greatest percentage of business with international exposure.
For Marine we raised our outlook due to their ability to increase shipments and strong price.
Adjusted EPS from continuing operations is still expected to grow 11% to 14%.
While we are more comfortable with the middle to upper end of the range recent movements in FX have resulted in increased headwinds and further pressure could negatively impact our EPS assumptions.
Modeling Q4 every penny change in the Canadian dollar has an impact of approximately $2 million and every penny change in the Euro has a Q4 impact of approximately a half a million dollars.
If foreign exchange rates were to hold at current rates. There is an approximate $40 million full year headwind to operating profit compared to 2021.
This is $10 million to $15 million greater than what we had assumed in July and has been accounted for in our guidance.
A couple of items on margins first we narrowed our expected gross profit margins to a decline of 78 to 80 basis points. The high end of our prior range driven by FX and increased warranty expense in the third quarter.
We expect EBITDA margin to decline by approximately 30 basis points, which is narrowed to the high end of our prior guidance driven by FX and higher demand creation spending in the fourth quarter.
As we look at the fourth quarter compared to the prior year quarter, we expect volume and price to remain positive contributors.
Overall, it is encouraging to see improvements in the supply chain lead to increased shipping volume the health of the global supply chain continues to have an impact on our performance we remain focused on execution.
Increasing shipping volume should not only help our topline, but also benefit margin as we work through higher cost inventory.
This has a long track record of navigating challenging economic environments, and we do not expect this time to be any different.
With that I will now turn it back over to Mike for some initial thoughts on 2023.
Bob we thought it'd be helpful to give you some of our initial thoughts on 2023. So like many of you. We were closely watching a number of demand indicators, while being agile with our manufacturing and shipment plans. So that we can swiftly respond to positive or negative trends.
We expect organic investments to continue as we look to drive future growth through market expansion and introducing new vehicles and innovation to our customers.
We expect dealer inventory to reset the new optimal levels as the supply chain continues to recover.
Similar to the rest of the year there remains a strong correlation between the health of the supply chain and shipments.
On price, we expect to annualize our 2022 pricing actions.
Given current trends, we're seeing in the global economy, we expect foreign exchange and interest continue to be a headwind into next year.
And on cash we expect working capital to decline in operating cash flow to improve allowing us to continue to invest in our capital deployment priorities, which entail organic investments as well as buying back our own stock, which we believe is currently undervalued subject to market and other conditions.
Wrapping up we're seeing mixed signals in demand with retail down year over year.
Our plan is to take an agile approach in managing our portfolio of businesses and brands in the near term, while keeping close to the data. So that we can swiftly react impair.
Improvements in the supply chain are encouraging but challenges remain we continue to expect modest improvements as we progress through the remainder of the year, which is expected to have a positive impact on inventory levels.
While it's nice to celebrate the revenue milestone and strong adjusted EPS growth. This quarter, we realize there's more work to be done agility will be key as we navigate near term headwinds while at the same time remaining aggressive and our desire to grow the business and expand the market.
We know that winning in a competitive environment requires our entire organization to be focused on delivering innovation, the best customer experience and efficient operations, we remain committed to being the global leader in power sports, while delivering shareholder value.
Finishing strong in 2022 is our next step in that journey, we believe the decisions and investments, we're making today will not only set players up to deliver the fourth quarter, but also generate strong growth and returns over the long term.
With that I'll turn it over to Chuck to open the lineup for questions.
Thank you we will now begin the question and answer session.
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 and to withdraw your question. Please press Star then two.
At this time, we'll pause momentarily to assemble our roster.
And the first question will come from Joe Ultra Bello with Raymond James. Please go ahead.
Hey, guys. Good morning. Thanks for taking my question here are not surprisingly I did want to dig a little deeper into the share loss.
You mentioned on the last call you were seeing some momentum late in the quarter and it looks like your inventory situation improve sequentially here in Houston.
She is simply that competitors are seeing supply chain, improving faster or is there something else going on.
Yeah, I'd say, there's a couple of things that play I mean first and foremost you know while the third quarter improved I would tell you that you know we had a pretty substantial portion of our shipments go in September .
Within September over half shipped in the last couple of weeks and so we ended up with a push up in dealer inventory, but I can tell you and you know we mentioned it in our prepared remarks.
We've seen very high retail levels for ATB, where we saw a substantial number of those shipments into the channel.
And so I suspect, we're clearing out a lot of that that inventory.
You know from a share perspective, I talked about it being a mixed story, where we had strong supply throughout the quarter in places like India, and razor Godfrey Hurricane and at the high end of our markets. We did really well we struggled a bit with bennington given the complexity of some of the products we feel.
We're in a better spot now.
And then Ranger specifically at the high end of the market, where we have continued strong demand you know we talked about the pre sold situation. If you pulled our pre sold the part there was a very high percentage of those that are at that high end range or market. The north star specifically, so you know, we're working hard to get ourselves into a a better position.
We know that when we improve supply are the share situation moves in the right direction for us and I suspect the timing of the shipments through the third quarter had had some impact on that and so you know as we look at October our retail performance is really good we've got good momentum.
Sequentially up from where we were in September and so you know at this point, we think we're in a good spot.
Got it very helpful. Mike. Thank you and I guess second question you mentioned earlier that you expect modest margin improvement next year, maybe help us.
Think about the puts and takes.
And I guess in particular, you know what.
What youre thinking about promotion activity next year.
Sure I would say is a couple of things you know we expect to continue to see the the cost environment moderate Ah obviously, it's been moderating it was a it was a headwind relative to Q3 last year, just because you know there has been there was so much cost.
Growth in the early part of 'twenty, two but those those commodity in trucking and other.
Other transport prices are starting to come down our levels of rework or coming down. So we expect those to be a positive as we get into next year, we'll have full price realization in the first half of next year you know our price increases went in in April we didn't really see all the realizations start coming through until Q, you know really this quarter. So we'll see.
See that carryover into next year on the positive side promo. Our you know our goal. We've said, we're trying to keep dealer inventory at a more modest levels to try to limit the level of promo.
You know we are going to spend on advertising, but promo to the extent that we promo comes back it's gonna be heavily targeted at any of their models that are slower moving or customers that are in the right point in the funnel that we think it'll move them to up to a purchase decision and then FX will also be a headwind.
So I think that combination will allow us to continue to improve margins along with the ongoing cost actions that we've talked about as we continue to focus on our.
Our platforming and modular as Asian initiatives, particularly in our you know our V. And then also our continued efforts with the supply chain. So you know I think theres puts and takes but I felt pretty confident of our ability to drive some margin improvement next year.
Okay, great. Thank you guys.
Thanks.
The next question will come from Craig Kennison with Baird. Please go ahead.
Hey, good morning, Thanks for taking my question. It's on repurchase rates, you mentioned that repurchase rates were healthy one.
Wondered if you could just define what you mean by short term and long term repurchase rates and then maybe comment on what you're seeing in terms of early trends from that pandemic a buyer.
Yeah. So the the distinction that we made Craig is you've got the short term repurchase rates, where we're tracking people, who will buy a vehicle and come back in three months six months, a year and those are actually at or above what we've seen historically so it indicates that consumers who have come in.
More recently into the category still have a really strong propensity to spend.
And then when we talk long term it tends to be you know three year five year 10 year and that's important because that's measuring the health of the customers that were pre pandemic and you know that is trending pretty consistent with what we've seen historic the other thing that we track and I mentioned it briefly in my prepared remarks, you know we get a law.
Lot of visibility through ride command as well as through our P. G and a business in terms of Ryder activity and we talked about the fact that our oil kits and our parts had record performance.
Which is indicative of the fact that consumers are out writing and using the vehicle, which is an important fact, because you know as you look forward even in a softening market consumers using their vehicles is still going to drive our business into the.
Into the P G and a business. So you know the the consumers who bought you know primarily if you think about it in 2020, when we saw the you know the 57% increase in retail in the second quarter. Those consumers are still heavily engaged as you know through your use side by side pricing reports you know the the pricing is.
Iterate it a bit from where it was during the pandemic, but it's still well above historical levels, which means that the availability of used is low which indicates people holding on to their vehicles.
Got it hey, thank you.
But.
The next question will come from Robin Farley with UBS. Please go ahead.
Oh, okay.
Uh huh.
And your availability improves the product.
That's impacting 'twenty 'twenty three in other words, if you are sort of focusing on your parts availability on the highest end vehicles will next year's mix, maybe not be it seems like it seems like mix is it.
Part of this year.
And then I also wanted to clarify.
Got it.
And I know you mentioned the impact of FX are you also memory.
I'm just wondering if you are you getting more cautious because of the recreational or he patterns that you're seeing or are you thinking about that impacting on router with it you know.
Empire.
Yes.
Yeah, I'll start with that one a big part of it was foreign exchange me, and obviously, where we're tempering shipments a bit but the the largest driver would be around foreign exchange you know as I think about availability into next year.
Key point that I want to reiterate that I had in my prepared remarks as you know in our off road vehicle business over 60% is utility and utility really doesn't react to a lot of the same dynamics that you see with the leisure side of the business you know, we're selling into the AG markets, which are pretty good were sewn into the.
<unk> space government defense, there's a lot of construction activity not residential more of the commercial the infrastructure investments that are being made.
You know we sell through rental companies all of those indicators are very positive and when you think about where we've struggled this year relative to getting enough product and it is improving sequentially from a supply chain standpoint, but its really in our utility segment, it's in that range or business.
You know I think if you were to talk to dealers. They would tell you that that inventory level is still well below where they would like to see it and so we think that presents a good opportunity for us and as we move into 'twenty three and as you know we make a pretty good margins in that part of the business.
Okay. Thanks.
Comment on the mix.
Okay.
Well I mean, I think that really plays into the mix I mean, I think you know you're seeing some softening at the lower end of the market are in the recreation. The high end of the recreation space is still holding up.
And we make good margins there, but it really the players on the utility side. So you know its tough to know we're going through the planning process with our teams right now.
Which you can imagine is a pretty complex.
Process for us So we will have a lot more visibility into that in January .
Okay, great. Thank you.
The next question will come from Ana glass skin with Jefferies. Please go ahead.
Hey, good morning, Thanks for taking my questions.
I'm interested to dig into that demand creation spend do you feel you're missing eyeballs that competitors are getting looking to widen the funnel to people new to power sports Reengage past customers and is expected to be concentrated to one segment in particular or across the business.
Yeah.
Yeah, you know I would say that it's across the business, but obviously will be targeted you know when you think about the the demand softness that we've talked about in the rec space that'll obviously be an area of priority for us.
You know what I would say is we've had so much demand and I would say this isn't unique to Polaris. It's it's more across the industry over the past couple of years that we really didnt have to spend a lot of money. Because we were trying to you know all of us have been struggling to keep up with that demand level and so you know a lot of this cultivation activity takes time, which is <unk>.
Why you know we started spending in the third quarter were re ramping that spending in the fourth quarter.
And it's really aimed at you know re engaging with Paas customers. It's talk it's talking about bringing in obviously, the new customers to the segment, which we continue to do a good job of and it's really just about hey, if if the if the environment is going to slow into 'twenty three we want to make sure that we're taking those upper funnel consumers.
Bringing them down to viable leads for our dealers and we think now is the right time to spend.
Great and then thinking a little bit more tactically, how you approached us we know that customers have shifted how they shop for off road vehicles and other vehicles over COVID-19 and I'm more comfortable being online and social media has become more important how are you.
Thinking through the best way to reach these customers.
Yeah, I mean, we've had a pretty concerted effort over the past several years to increase our proficiency from a web perspective.
You know we've upgraded the configuration or as we continue to make that a focus area. We know consumers like to buy online or E. Commerce business continues to grow.
So making sure that we make that as easy for the customers as we can.
We have further web enhancements that we'll be rolling out early in 2023 that will make it even easier for consumers.
To get on and and understand what the right vehicle for them is if you think about the number of new customers, we're bringing in it's really important to start there and make that easy for a web experience standpoint. So you know we're spending the money to make sure that we've got that set up because we know that that's important we know statistically the consumers.
On the website anywhere from five to seven times before they ever been in or a dealership and so that's got to be a heavy focus for us. We think we're in a good spot where we think we're in a really strong spot relative to competitors, but there's a lot more we can do and we're investing in that as we head into 'twenty three.
Great. Thanks, so much.
Thank you.
The next question will come from James Hardie men with Citi. Please go ahead.
Hey, good morning, Thanks for taking my call I wanted to spend a little bit of time on this inventory fly fly five.
In the deck it seems like there's a lot of information being conveyed here and.
And I just wanted to parse through some of it I mean, I I guess one of the big questions. I think is sort of where we're going to finish the year in terms of inventory and what replenishment opportunity that we use for next year I guess, maybe if we just look at that 400 million replenishment number.
750, <unk> coming out of the second quarter, so $350 million drawdown.
How do we think about where you think that.
Going to finish the year given you know the fourth quarter is typically the replenishment quarter.
Yeah, you know, it's a tough one to answer James and I'm not trying to be coy, but you know there's a lot of variables at play what I'll tell you is you know is as we thought through the guidance.
We do believe that our fourth quarter retail will be positive for the year will be down, but we do think the fourth quarter will be positive.
And I you know, while I do think inventory will move up slightly.
I think that replenishment opportunity continues as we get into 2023 now I'll caveat that because obviously, we left our guidance range pretty wide given we just have a quarter to go and the reason we did that is because we're serious about our commitment to where dealer inventory needs to be so you know if we see a further slowdown.
Or a deepening or anything that would.
Put us at a compromised position relative to dealer inventory, we're obviously going to modulate our shipments which is why we left the guidance range like we did so you know there's a lot of variables at play.
But if things hold up as we anticipate we think that are the dealer inventory replenishment opportunity will continue into 2023.
Okay that is helpful and then.
As I think about the market share conversation that we've had it seems like you guys believe that it is more a product availability issue.
Then it would be.
Product issue per se.
Which in theory would create a pretty big opportunity once you get back to sort of normalize stocking levels, maybe maybe walk us through that I don't know if you have any market share numbers today versus pre pandemic. It seems like you know pretty pretty big Delta.
But how you think about.
That opportunity as we get back to normal inventory levels, particularly given that it does seem that that dealer floor space has shifted pretty meaningfully and so that that's maybe an incremental barriers to clawing back some of that market share.
Yeah, I guess I'd say a couple of things.
We do know where and we have availability, we do well razor has gained share now pretty consistently.
Pretty much across the board and so we feel good about that Indian we struggled earlier in the year, we had some black apart paint issues that was constraining our ability to ship we've cleared through most of that in the third quarter and put us in a really strong share position.
In our boat businesses in areas like Godfrey Hurricane, we did really well Bennington, obviously struggled more complex product the ramp rate in the production levels has improved and we've seen that making an impact. So you know, yes supply does make a big difference we don't like seeing the negative share performance is as we look at.
Two two.
2023, given what we're seeing from a supply chain improvement perspective, and the sequential movement, even though we're not back to optimal levels.
We do see that as a share gain opportunity utility is our probably our number one focus area, because it's where we've probably struggled the most.
We've done really well at the high end of the market, where you look at you know the crews and the Northstar vehicles. It tends to be in the lower end smaller you know three seat vehicles, where you know we have focused our production efforts around where our customers are asking for product, but that does create a bit of avoid from a product.
Ability standpoint, you know I think that the Floorspace thing I don't know if I would agree with the comment that that shifted dramatically.
You know as we've gone out to our dealers you know you have to be careful when you have to ask what's sitting on the floor because they typically will have sold vehicles sitting there they'll have used vehicles. They are just trying to have as much as they can and so I don't think that's reflective of where we'll be in the future Steve Mento and his team have done a really good job through our norstar a program to incentive.
Is the dealers to have the appropriate level of stocking based.
Based on those local market dynamics, which has a direct impact on their profitability and we believe that as we get back to more optimized than normal inventory levels that are you know we will have the appropriate share of the dealership floor.
That's really helpful. Thanks, Mike.
Thank you.
The next question will come from Garrick Johnson with BMO capital markets. Please go ahead.
Great. Thank.
Thank you now that we're seeing some stabilization reps growth and gross margin.
Will you be.
Eliminating some really logistics surcharges at retail are scaling those back.
Yeah, you know well, we'll certainly evaluate that that's you know why we had put that surcharge on the way we did not made a didn't make any MSRP adjustments. So you know the teams are actively working through that.
We're probably going to be a little bit delayed in and making a move just because we've been bitten by this before where we thought things were short term and didn't move quick enough and then things persisted same thing on the backend we just want to make sure that the improvements are sustainable as.
As we move into 2023 and the teams will take appropriate action.
Yeah, the other thing to keep in mind.
Lot of that is on trucking, while trucking availability is better than trucking cost has come down diesel obviously continues to be a challenge. So that has a factor into the surcharges as well.
Okay, great. Thanks, and maybe a question on your new model rollout the recent twenty-three rollout.
Of weakness at the low end, maybe go through the decision to Ah.
Continue the raise of $5 $70 range or 500.
Yeah, you know I think the reality around those models as the.
Success rate was relatively low and so we felt that a pivoting the business in a different direction was was the right thing to do.
Both from a profitability standpoint, as well as a share perspective.
Okay, great. Thank you.
Okay.
The next question will come from David Macgregor with Longbow Research. Please go ahead.
Yes, good morning, everyone.
Mike.
Just talk about some of the levers you can pull to flex the business model in 2023.
In order to protect margins in that scenario, where maybe unit volumes were down sharply.
Yeah, well and you know a couple of things one I would point to the fact that you know we've talked for years about our recession playbook.
And you saw that our take effect during the pandemic in the early days of the pandemic before we knew that things were going to go a different direction.
And so you know we've got that you know obviously, we've got a refresh look at it the teams.
I know exactly what the drill is Ah and the priority is obviously you know we prioritize liquidity much like we did during the pandemic, making sure that you know.
We've got the right cash position, we're managing the leverage staying within our covenants are and.
And then preserving our priority strategic investments and making sure that we can continue to to further our growth agenda, but obviously do so in a N a and appropriate way.
You know we are as we look at the business you know we know the soft spots that could happen. We think primarily around the recreational side you know I would just remind you that over 60% of our offered vehicle business as utility and we see a lot more stability. There are more broadly in terms of where a potential recession could happen.
And then I'd also point out we have a $1 7 billion dollar P. G and a an aftermarket business and it's not to say that that wouldn't necessarily have a downward impact from a recessionary environment, but a lot of that business is service parts and accessories that people will tend to buy when they are extending the life of a vehicle, which is what we typically would.
See during a recession and so we think that is going to give US you know an appropriate level of buffer in the business. We've seen that play out before so you know we're committed to the dealer inventory levels. So obviously, we'll modulate shipments based on that the good thing is is that dealer inventories still is incredibly blow.
Where it has been historically and so the teams are you know modeling out what could happen. If we saw volume declines and we know exactly the cost pool that we would need to go. After some of that is just simply deferring some of it would be reducing in a more severe case and we know what those levers are we don't see any of that are at play right now, but obviously.
Bob and his team continue to monitor it and the team as evidenced by what we did in first and second quarter of 2020 are the team is ready to go and we'll react quickly.
Thanks for that.
My second question, just with respect to gross margins were up 15 basis points on 32% revenue growth.
A lot going on this quarter I appreciate that.
Can you help us just understand some of the puts and takes there and why the lack of leverage and how we should be thinking about that going Q4 Q into early 'twenty three.
Yeah, I think a lot of what you're seeing is sort of a year over year a comparison challenge.
The costs in Q3, while supply chain is starting the costs are starting to trend in a positive direction.
Relative to Q3, 'twenty, one there's still elevated so.
That's that's really the main driver in the ER and the limited leverage in the quarter.
But as we continue to play through Q4, and then into next year those supply chain costs. We expect to continue to come down that will roll through our through inventory and we'll start to see better leverage.
Okay. Thanks very much.
The next question will come from Fred Wightman with Wolfe Research. Please go ahead.
Hey, guys. Good morning, I, just wanted to come back to the restocking opportunity and really just to see if that $350 million sequential decline was in line with sort of what you guys were expecting last quarter and then just to sort of get a sense. If that was a matter of fulfillment that actually drove that.
Number to come down or if you're actually seeing some change to dealer orders or backlogs or cancellations or anything like that.
Yeah, well I guess I'd characterize it as you know there was a.
A sequential improvement in dealer or an shipment and supply chain.
But as we pointed out I mean, you know the the issue is we shipped an awful lot in September as the supply chain improvements allowed us to get through the rework that we had in the business and a lot of those shipments actually happened in the last couple of weeks of the quarter and if you think about it from the time. They leave we recognize revenue when they actually show up on a dealership.
Lot go through setup in or out the door, that's what's actually happening in October and so while dealer inventory did improve sequentially. We know as we watch retail daily that we've cleared through at least on the a T V and even on the side by side our side of the business. We've cleared through an awful lot of that inventory here in October .
<unk> and so you know while the progress of $350 million in the quarter or was there some of that has been eating away at with stronger retail in the month of October . So you know that said, we did see some slowing like we said we've seen some slowing in the you know the.
The lower end of the recreational category and you know we've got inventory that I wouldnt say its at optimal levels, but it's getting close and that certainly performed a little bit better than we were expecting.
Okay, Great and then Bob you made a comment that you guys were comfortable in sort of the middle to upper end of the EPS guidance range. But then there was also some discussion about FX headwinds so was that comment sort of.
Including or excluding FX and maybe if you could just reiterate what you were trying to get across there.
Yeah. So in my prepared remarks, I mentioned that we were comfortable in the upper end up mid to upper end subject to FX and I think that's just a little bit of a caution on our part given that we don't know what's going to happen with FX rates in the fourth quarter I mean, they moved pretty dramatically in Q3 more than we were expecting a they seem to have.
Level off at the moment, but are you now.
Global governments, and what Theyre going to do with interest rates are anybody's guess, so we're just giving ourselves a little bit of room in case that that goes a direction that we're not expecting and then also as Mike said you know we also are we are going to be vigilant about maintaining dealer inventories at the right levels and if we feel like we need to throttle back on our production and shipments if we see things start to deteriorate further in the fourth.
Order.
Do that so.
That's why we gave ourselves that room on the bottom line.
Great. Thank you.
Yeah.
The next question will come from Giants, you with BNP Paribas. Please go ahead.
Hi, guys. Thanks for taking the question I wanted to follow up on gross margin and particularly off road you almost did 26% gross margin and three Q is this kind of the right baseline are going forward into <unk> and 'twenty three should we continue to expect to see sequential improvement from here or how are you thinking about it.
Yes, I think you should we expect to see continued improvement going into 'twenty twenty-three them. Obviously, you know in any given quarter, you're going to have some mixed dynamics.
In Q3, Q4, you have a shipment of snow units if.
If we return to some normal seasonality.
You'll have a little bit of impact from that but but if you kind of look at it on a normal production basis. You know this is a what we said we were going to try to do get back to the levels. We've been at previously as supply chain starts to normalize and and continue to improve from there as we focus on modularity.
Platforming and you know our supply base. So yeah. This is this is a level that are where we are but we're going to continue to focus on making it.
Making it better because we're not happy.
With.
At the moment.
Okay got it that's helpful. And then you mentioned price sensitivity on the value models, maybe can you talk about what's happening in that scenario. So our consumers seeing the price and maybe thinking the products too expensive and walking away are you stepping up promotions to move the unit or would you like look to lower pricing on some of those value units.
Maybe just some color on what what exactly is happening in that scenario.
Sure. So you know if you think about the the buyer in that end of the category, particularly on the Rec side, you know they tend to be a buyer who's who's financing.
The unit.
So obviously the financing costs continue to come up as rates rise financing penetration actually has gone up.
As people finance more of the dealers. So we've got a little bit of we've got promo out there on select value units.
To buy down some rates.
At 36 months.
To provide some some movement there and then a little bit of promo on some of the stuff that slower moving but you know that customers just more price sensitive and you know, they're both going to look across the the offerings of all the competitors you know looking at the price and then they may also make a decision to buy or not buy so you know as we continue to see that slow down.
We'll do some things from an advertising and promo standpoint that were within our R. R.
Our purview to do them, but that is probably the weakest part of the consumer market right now and I think that's kind of playing out across auto and others.
Okay got it.
And I guess, just maybe just the mix between the value versus premium you mentioned utility versus rack, but do you have any color on value versus premium I guess.
Yeah, I mean, we we are definitely overweight towards premium I'm not necessarily in units, but obviously in dollars.
So if you think about you know two two or three seat versus you know crew models, we overweight towards crew and then premium things like.
The high.
Hi, and wide open razor and north star's end and our crew Rangers, we tend to over index towards premium.
Got it thank you so much.
Sure.
Our next question will come from Brandon <unk> with D. A Davidson. Please go ahead.
Good morning, just a couple of quick questions on optimal inventory levels one.
Compared to where you were pretty pandemic, how do your current plans for optimal inventory levels compare to maybe what you thought they should be pre pandemic and two you.
What type of market share levels or you are baking in for one and a half times current inventory levels for dealer replenishment in off road vehicle.
Yeah, you know I think from an optimal inventory level perspective, you know the simple answer is below where we were in 2019.
It depends on the segment of the.
Business with each of the categories you know what.
I'd say more generically as you get into the lower priced categories dealers like to have more inventory on hand, those consumers tend to shop based on price, they're not looking at you know customizing the vehicle as much and they're not necessarily willing to wait so you might see inventory levels that may not be quite were nine.
<unk> was but they'll certainly be close to and then as you get into some of the higher end segments.
You know dealers want constrained inventory because it helps from a profitability standpoint.
Those customers also tend to want to customize the vehicle more do you think about somebody who's buying a northstar ranger or a pro our turbo our razor Ah they tend to want to make those vehicles, a little bit more unique in and get them tailor made and as long as we're able to quickly deliver those vehicles are you'll see are lower than what we saw in 2019.
Our inventory level, and where we're still working through all that obviously the supply chain dynamics play into that as well because what we don't want to do is constrained dealer inventory in and then have supply chain issues that hampered our ability to deliver so.
It's it's gonna be a bit of a journey as we calibrate what those inventory levels are what I would tell you is we've got the team keenly focused on gaining share as we move forward I talk a lot about the fact that our inventory levels in our utility business are low.
Below where we would like them to be we're delivering to what consumers are pre buying but.
But we're not able to get our inventory up above those levels and that's going to be a big focus which has us in a positive share position not just in the fourth quarter, but as we get into 2023.
Okay, Great and just one last follow up you know the Japanese competition has been largely absent this year, maybe planning to come back next year, how do you plan.
To compete against you know it seems like a couple more players potentially having more inventory in this space in 2023.
You know I think it's the same focus we've had you know the availability is absolutely key in on top of that making sure that we've got the right innovation coming out we've got an exciting year coming up from an innovation standpoint, and I think whether it's the Japanese or some of our other competitors I think it's going to put us in a.
Really strong position.
Great. Thanks.
Thank you.
The next question will come from Jamie Katz with Morgan with Morningstar. Please go ahead.
Hi, Good morning, I'm wondering where you think you guys offer offering some really interesting information on suppliers with part shortages.
<unk> more than 100 and.
A thousand units I wanted to make sure that that is still trending in the right direction.
That hasn't alleviated completely.
Has that does that mean that maybe some of the constant expedited shipping that you were originally paying and that sort of ameliorated.
Yeah. The there's a reason we didn't put a chart in there, it's just becoming less and less of a dialogue.
So all of those metrics have improved sequentially. They continue to improve in the fourth quarter in terms of what we've seen.
That said I don't want to make it sound like the supply chain is back to an optimal level. There are pockets, where things are back to where we wanted to see them, but there are some areas that we still see constrained supply you know semiconductors is a prime example, in a much better spot than it was trending in the right direction, but it's going to.
A bit of a journey until we get back to the levels that we'd be able to meet all the demand that we have in front of us. If you think about the amount of tech that we now have on the vehicles. So.
It's just not as big a part of the equation I think it has shifted towards the macro and the demand environment, but we're obviously spending obviously a lot of time still managing the supplier situation internally and you know, it's not yet to a level that allows us to get everything out there that's a big part of this market share.
A discussion we've had specifically around our utility.
<unk> business, but it is moving in the right direction and we're going to continue to push and do everything we can to make sure those improvements not only.
Stick, but continue to move in the right direction.
And on the cost side I mean, we've definitely seen a things like the expedite costs start to come down as we have to sort of fly less inventory.
Over the top of of what's on the water. The port congestion has cleared up pretty dramatically here in the last 60 days or so so those costs are starting to come down.
But to Mike's point, you know there are still.
The challenges are with various suppliers and so let's cut those costs don't fully correct and we expect to see that continue to moderate as we go into 2024 absent any other changes to the economy.
Okay, and then just quickly I know this is like I mentioned, but are you guys finding any opportunities without saying too much on for maybe tuck in acquisitions temperature and vertical capabilities of the business. The next time, we can enter one of these cycles when he may.
Their position.
Yeah, I mean look we're certainly doing some work to make sure that we're prepared but I'll I'll tell you you know.
Given the macro backdrop.
As well as just you know where were trading a it's hard for me to imagine a better investment than ourselves right now.
But we are keeping an eye out there and there's you know there's things that are of interest, but you know we've got our priorities set right now we've got a lot to do on the execution side, we've got a lot of exciting innovation coming and I want to make sure that that were successful as that comes out in 2023 and.
At the current valuation, we think that Polaris is a really attractive investment.
I do think you know we talk a lot about investing in our business and you know we've ramped up the level of Capex and the investment the last couple of years and a lot of that's been focused on you know not really exciting projects, but just adding more back shop production capacity and capability.
Around the around the world that are various factories to allow us to bring back in things that had been outsourced that just due to to volumes. So we are making investments and then you know to your point some of the things that are you know we were challenged with we were looking at investments internally to do some of that but not necessarily from an M&A perspective more of them.
Nick investment perspective.
Thanks.
Thanks.
This concludes our question and answer session as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect.
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