Polaris Inc. (PII) Q3 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the Polaris Third Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Richard Edwards, Vice President, Investor Relations. Please go ahead.

Thank you, Gary, and good morning, everyone. Thank you for joining us for our 2020 third quarter earnings call. A slide presentation is accessible at our website at ir.polaris.com, which has additional information for this morning's call. Scott Wine, our Chairman and Chief Executive Officer; and Mike Speetzen, our Chief Financial Officer, have remarks summarizing the quarter, and 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 2019 10-K for additional details regarding these risks and uncertainties. All references to the third quarter 2020 actual results are reported on an adjusted non-GAAP basis unless otherwise noted. Please refer to our Reg D reconciliation schedules at the end of this presentation for the GAAP to non-GAAP adjustments. Now I will turn it over to our CEO, Scott Wine. Scott?

Thanks, Richard. Good morning and thank you for joining us. Nearly 10 months into this year that continues to present serious and surprising challenges, I remain inspired and impressed by the dedication and execution of this Polaris team. Their safety is always our number one priority and is never compromised as we accelerate production to meet rising demand. We will mostly review the resulting financials this morning, but the combination of agility, teamwork and creativity that is driving those numbers is much more noteworthy. Consumer interest in powersports stayed at record levels throughout the quarter as our dealers continue to attract new customers. Winning the competitive battle now is as much about availability as it is innovation. So our emphasis is temporary shifted from demand creation to demand fulfillment. All Polaris businesses are outperforming our internal expectations as our factories and supply chain ramped replenish dealer inventories. The investments in talent and tools we made to execute factory choice and supply chain transformation are paying off, allowing us to manage, not fight, the several dozen suppliers that are still working to recover. In stark contrast to a year earlier, we ended the third quarter with total liquidity at an all-time high. Mike Speetzen and his team have dramatically improved our cash management capabilities, which is a nice boost to a business that historically generates a lot of cash. Between our strong year-to-date results and improving outlook for the fourth quarter, we are raising our full year earnings per share guidance, which now sits above our original targets for 2020. Third quarter North American retail sales were up a healthy 15%, but our internal analysis suggests that it could have been double that if we had been able to accelerate production faster. A good example is our boat business, which achieved 50-plus percent retail growth as they efficiently ramped production and outshift their competition. Availability hurt our off-road vehicle market share, which was down slightly, but motorcycles, boats and snow each gained share in the quarter. Indian continues to outperform globally while posting record market share performance in North America. With our recently introduced model year 2021 vehicles and an exciting lineup still to come, extensive customer focused brand building and improved factory output, I am confident that Steve Menneto and his team will get our Off-Road Vehicle business back to gaining market share in the fourth quarter and the year ahead. Strong vehicle demand and overall ridership increases are supporting record sales for Polaris PG&A and improving growth in profitability at cap. North American dealer inventory slight -- declined slightly sequentially, but 55% year-over-year, leading to off-road vehicle DSO at its lowest level in decades. The coordination amongst our production, logistics, and sales team to maximize retail sales in this constrained environment is impressive and constantly improving as we strive to reach targeted inventory levels. This close collaboration is one of many reasons we are enjoying record dealer sentiment scores, leading the composite ranking and more individual categories than any other OEM. We expect to begin replenishing dealer inventory in the fourth quarter and continue through the first half of 2021. We can ramp factory output reasonably quickly because of our flexible assembly lines, training and standard work and outstanding production teams. Not unexpectedly, some of our suppliers are not yet capable of meeting the same rapid demand spikes. So, Ken Pucel and his team are aggressively working to accelerate their output. The number of suppliers past due is almost three times the normal rate and a moderately high number of those suppliers are limiting production, but we are tightly managing them to limit impact. The path to more normal production rhythm is very clear, with our Off-Road Vehicle build plan ramping up nearly 50% year-over-year in the fourth quarter. With new and diverse customers driving the majority of our growth and expanding the categories they increasingly invite their friends and colleagues to the sport, we are encouraged by the potential persistence of overall demand strength. Polaris Adventures is evidence of this with rides running at roughly twice the 2019 level since May. While Polaris is not unique in benefiting from this new customer growth, the approach Pam Kermisch and her team are taking to cultivate and engage them should extend our leadership position with these important demographics. I have probably opined enough on the partnership with Zero Motorcycles, but knowing the product plans and the opportunity we have to both disrupt the industry and earn our next $1 billion in electric vehicle sales significantly more quickly and enjoyably than the first, it is worth highlighting again this morning. When I asked Chris Musso to lead our Electrification initiative a year ago, we had bold ambitions, but no clear plan. He built the team, refined the strategy and orchestrated the Zero relationship that other OEMs had tried but failed to cultivate. With that foundation established, Chris has decided to leave Polaris at the end of November to return to Denver and McKinsey for an opportunity that is important for him and his family. We are a better company for his contributions to both Electrification and Off-Road Vehicles and are wishing well in his next chapter. As our Electrification efforts transitioned from strategy to execution, Mike Donahue, our Chief Technical Officer; will add that responsibility. Mike's leadership roles at Tesla, Bright Automotive, and other electric vehicle manufacturers, along with his experience with Alta Motors, provide him with the unique skill set necessary to achieve our goal of leading the Powersports industry and Electrification. I will now turn it over to our Chief Financial Officer, Mike Speetzen, who will update you on our financial results and plans.

Thanks, Scott. Good morning everyone. First, I want to echo Scott's enthusiasm for our third quarter results, which were nothing short of outstanding. The Polaris team rallied together to get product out the door as quickly and as safely as possible to meet ongoing strong consumer demand during the quarter. Third quarter sales were up 10% on a GAAP and adjusted basis versus the prior year. Shipments improved considerably across ORV, motorcycles and boats. Third quarter earnings per share on a GAAP basis was $2.66. Adjusted earnings per share was $2.85, which was up 71% for the quarter, exceeding our expectations. This incredible performance was driven by a combination of revenue growth, positive product mix, lower promotional costs and operating expense leverage during the quarter. Adjusted gross margins were up approximately 260 basis points year-over-year, primarily driven by lower promotion and floor plan financing costs, driven by lower dealer inventory and the lack of a factory-authorized clearance in the quarter. Improved absorption at our factories was muted by higher logistics costs associated with supply constraints. Operating expenses were down 4% in the quarter, as we benefited from the continued postponement of nonessential expenditures, along with the timing of expenses, which pushed approximately $15 million of spend into the fourth quarter. Given the significant operating performance improvement, we have reversed many of the employee-related cost actions taken during the second quarter and have approved select strategic projects, which will ramp up in the fourth quarter. Foreign exchange also had a positive impact on our quarterly results, primarily driven by the euro. From a segment reporting perspective, ORV, snowmobile, motorcycles and boats all reported increased sales for the quarter, driven by strong demand. ORV/snowmobile segment sales were up 12%, motorcycles were up 11%, and boats increased 30% during the third quarter. All segments benefited from lower promotional costs, which decreased considerably across the powersports industry, given high demand and lack of product in the channel. Aside from motorcycles, all segments also experienced improved product mix during the quarter. ORV/Snow mix was driven by strong PG&A sales. Q3 motorcycle product mix was skewed more towards our lower-margin mid-size bikes. Global adjacent market sales were down 6% during the quarter, as continued outperformance from Aixam and Polaris Adventures was offset by lower sales in our commercial, government and defense businesses. Given the pandemic’s impact on government and commercial budgets this year, many capital expenditures, including vehicles, have either been postponed or canceled in 2020. However, our commercial, government and defense businesses remain poised to capitalize when capital budgets begin to reopen. Aftermarket sales were flat to last year, with TAP sales up 1% and other aftermarket sales down 1% during the quarter. Retail sales remains a bright spot for TAP, as sales at four-wheel parts retail stores were up 6% in the quarter. The TAP team continues to right-size the wholesale business for improved growth and profitability. The remaining aftermarket sales were down during the quarter as a result of low inventory availability. Our international sales were up 9% during the quarter, mostly driven by strong ORV, snow, motorcycles and PG&A sales. About a-quarter of the growth came from improved currency rates. And lastly, our parts, garments and accessories sales increased a whopping 20% during the quarter, driven by strong retail demand, primarily for parts and accessories. Moving on to our guidance for 2020. Given stronger-than-anticipated performance in the third quarter, we have increased our total company sales growth guidance and now expect sales to increase versus 2019 in the 2% to 3% range for the year. You will recall our previous segment sales guidance was flat to down 2% versus 2019. I'll cover the specifics by segment in a few minutes. We are significantly increasing our full year adjusted earnings per share guidance for 2020 and now expect earnings to be in the range of $7.15 to $7.30 per diluted share, in excess of our pre-COVID guidance levels. The increase is driven by higher volume, lower promotions and floor plan financing costs, improved foreign exchange rates and operating expense management. These benefits are partially offset by manufacturing inefficiencies and higher logistics costs related to supply chain and efficiencies. Moving down the P&L, our previously issued guidance ranges remain unchanged as shown on the current slide, with the exception of the additional leverage generated at the operating expense line. We continue to monitor our spending in the face of the ongoing pandemic, while adding back select operating expenses based on our current performance and certain strategic projects. Foreign exchange also is expected to be better than previously anticipated for the year. While we haven't discussed tariffs in detail for some time, it's something we continue to closely monitor while aggressively pursuing ways to minimize their impact. Year-to-date, our tariff impact totaled approximately $45 million, lower than previously anticipated due to the receipt of additional exemptions and refunds as well as our ongoing proactive mitigation efforts. We now expect tariff costs for the full year to total approximately $65 million, which is primarily the China 301 tariffs Lists 1 to 4, a small amount of EU retaliatory tariff costs, all net of the refunds we received through the exemption process. While I'm not providing a view on 2021, I would remind you that our exemptions have either expired or will expire by the end of the year, and we'll provide an update at our earnings call in January. Lastly, as you do the math around the fourth quarter, keep in mind that while revenue is growing sequentially, the mix of shipments coupled with timing of the promo favorability from Q3 negatively impacts the expected gross margin. And as I mentioned earlier, we deferred $15 million in strategic investments in the fourth quarter. Moving on to sales expectations by segment. All of our businesses are expected to generate improved sales and profitability compared to our previously issued guidance. The consumer-focused portion of our business continues to perform better than the B2B segment. But even the in latter, we're seeing sequential improvement, albeit at a slower pace. Year-to-date, third quarter cash – operating cash flow finished at $676 million, up 55% over the same period last year, driven by lower working capital requirements and business growth. Given our year-to-date cash flow performance, we now expect full year cash flow to be up in the mid-30% range compared to last year. Our bank leverage ratio, defined as total debt to EBITDA, improved sequentially to approximately 2.45 times. Our liquidity is strong with $821 million of cash on hand at the end of the quarter and just under $700 million of available borrowing capacity on our revolver. Given continued uncertainty in the broader global economy, we will maintain flexibility with our capital for the remainder of the year. With that, I'll turn it back over to Scott for some final thoughts.

Thank, Mike. We entered the final month of the year with a great team, improving production capability and comprehensively strong business momentum. Employee safety, as always, is our top priority. It is not lost on me that we are exactly one week away from a very consequential U.S. election. We cannot control the outcome, but we will be prepared to manage and mitigate the potential impact. We are cautiously optimistic that consumer demand for Powersports will remain healthy throughout 2021, and we have numerous plans and actions to help sustain that momentum. We will work with our dealers to maximize growth and share gains in 2021. Our short-term success is contingent upon our ability to manage our supply chain and accelerate production output, and I'm very confident our team will do just that. While much of our focus is on the outperformance of our Powersports portfolio, as Mike mentioned, improving trends at TAP, Aixam, Goupil, GEM and our other adjacent market businesses are encouraging. We have been deep in long-term planning in the past few weeks, and the outlook for earnings growth in 2021 is quite good, and beyond that, significantly better. With that, I'll turn it over to Gary to open the line for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Greg Badishkanian with Wolfe Research. Please go ahead.

Great. Thanks. Just a first clarification, when you said doubling the retail sales, I assume that's going from 15% to 30%. Is that what you meant?

Yes, Greg. You're good with math.

Okay. I just wanted to make sure it wasn't something else. And then when you think about promotional strategy, feedback on -- first, the feedback on the factory-authorized clearance, and then when you're thinking about future promotions, just given that inventory levels are low, you're trying to replenish the channel, but you also want to maybe stimulate some demand. How are you thinking about promotions going forward over the next few quarters?

Well, I think you heard both Mike and I talk about the confidence we have, and Steve Menneto and Pam Kermisch and the team to manage the business appropriately. Certainly, with inventories, as I referred to, at decade -- multi-decade lows DSO, we're not -- don't need to drive a lot of promotions. But whether it's the ag advantage or the military advantage, we're looking for ways to make sure that our brand is the most relevant, and we're confident that Steve and the team can do that. They've got tremendous experience, great analytical tools. And we think we can overall, prior to the pandemic even, we had plans to be more efficient with our promo use. And what's happened now is we've taken those plans that had us more efficient and taking advantage of lower inventory and dramatically lowered that. But we think overall we'll be able to maintain a more efficient promo usage. Mike, do you want to add anything?

The only thing I'd add, Greg, is we've talked historically about the split between dealer and consumer facing. And I would tell you right now, it's far more oriented towards the dealer and the dealers team, salesmen, things like that.

Yeah, all right. Make sense. Thanks guys.

You bet.

The next question is from James Hardiman with Wedbush Securities. Please go ahead.

Hi, good morning guys. So first, Mike, I'm going to ask the boring question about tariffs, but it seemed somewhat relevant here. You gave us that -- I think it was a $65 million number that you're assuming for this year. What does that number look like if you didn't have any of those exclusions, which I think would be the same as asking what is the assumption in terms of the incremental headwind for next year? And I think you've said that you expect earnings to grow even factoring in that incremental headwind? And then my follow-up would just be what's your level of confidence that, given all the puts and takes, that retail can grow next year?

So I think James, from a tariffs standpoint, we had originally guided the year that we thought refunds would be just over $10 million. They're about $25 million, so obviously that's a one-time item associated with the backward looking. So you can do the math relative to what that $65 million would look like. I think from a retail standpoint, I mean the backdrop is from my perspective, is very healthy. I think Steve and the team have done a lot of work, obviously, the overall environment right now is favorable. But when you look at the fact that we're pulling in so many new customers, and we know one thing for sure that those new customers tend to bring even more new customers. And we continue to see that trend. I mean, you saw the chart we had in the deck today. And the work that Pam and Steve and Mike Dougherty are doing is really paying off. And I think that's going to provide momentum into next year, regardless of what's going on in the backdrop on COVID and the broader economy.

And just to clarify, Mike, so the $65 million, $25 million are refunds, but there's also the exclusion benefit, right? Like I know sometimes we're counting this twice. There's a one-time benefit and sort of an ongoing benefit. Does that $65 million go to $90 million or does it something higher than that as I look at the 2021 if nothing were to change?

Yes, well, I don't want to get into speculating. I think you can do the math relative to the overall refund impact and we're still working through what the volume is. We did do some advance buys to try and at least mitigate when the tariffs come back on. So, there's a fair amount of complicated work that has to go into it. So, I'd hate to put a number out there and then have to provide something new in January.

But at the end of the day, you guys think that you can grow even including that incremental headwind that you're assuming sort of worst case scenario right now?

Yes, I mean the thing you have to think about is number one, I mentioned it several times we've got a fair amount of manufacturing inefficiencies. And we are expecting those to continue into the fourth quarter and we're working through what we think next year looks like. But when we've got the level of increase in our output that we have planned, I think it's the prudent thing to do. So, as we get into next year, obviously as we work those efficiencies down, our supply chain transformation program is kicking in substantial savings, and we're going to exit the year with a very strong run rate. So, those will help us. So, all those things together are going to more than offset any of the additional headwind that we get from tariffs.

Much appreciated. Thanks Mike.

You bet.

The next question is from Scott Stember with C.L. King. Please go ahead.

Good morning and thanks for taking my questions.

Good morning Scott.

Fourth quarter looks like you're going to be able to ramp up production pretty dramatically, but it also looks like you're going to have to, I guess, move heaven and earth to make sure that it happens with the capacity. Can you maybe just talk about how you're going to do that, the impact to margins, if there's any incremental inefficiencies? And how we should look at that heading into the early parts of next year?

Well I mean you think about it, there's puts and takes with ramping up production. One is we get better factory utilization, which is a helpful input to margins. But on the other side, there's additional logistics costs as we expedite suppliers and expedite shipments. As I mentioned, one of the things the team did extremely well in the third quarter was move shipments around to make sure they got to the right dealer at the right time, and that's an expensive cost, but overall it's predominantly the expedited -- expedite cost that we have to do with our supplier. But as I said Ken and his team -- it's almost a sign, they know exactly what the suppliers are, they're monitoring their capacity, they know what they need to get to, and we're working our production schedules based on that. But with all that said, we believe year-over-year, we're going to ramp up production about 50%. So, that clearly indicates our confidence in the team to do that reasonably well.

And Scott, what I would add to that is when we look from Q3 to Q4, obviously when you do the math, the margins are coming down. Pull the promo stuff off to the side that the inefficiencies started in, call it, mid to late August and really were at full force in September. And right now, we're banking on that essentially continuing through the fourth quarter. As Scott said, it's the right thing to assume and it's hard to imagine that the logistics costs and other things that we're incurring here coming out of the third quarter into the fourth quarter aren't going to continue. So that's a little bit of the headwind. Obviously, the work we can do to mitigate that, that will help. But the priority is to safely get product into the dealers, so we can move it through the channel.

All right, great. And last question, just, I guess, once we get through the fourth quarter and assuming that retail demand remains very strong next year, do you have plans to add additional capacity? Or can you continue to grow under the footprint that you have right now?

No. Our footprint can carry us for a while. We've obviously, as I mentioned in our prepared remarks, we've done our long range planning. And certainly, it gets constrained there at some point. But we believe we can get make it through 2021. We've added almost 500 employees in our factory network in the third quarter. So we ramped up quickly, so it really isn't a -- we've got additional capacity within our current network, but it's just managing the supply base, and we're confident doing that. It's just -- with a few suppliers, it's taken us a little bit longer than we would like.

Okay. That’s all I have. Thank you.

Thank you.

The next question is from Joe Altobello with Raymond James. Please go ahead.

Yes. Thanks, guys. Good morning. And, Scott, I just want to pick up on that comment you just made about supply chain issues. You mentioned earlier today, your market share in ORVs is really more about availability than innovation. So why do you think that some of your competitors have not been as impacted by these supply chain issues to the same degree? Is it simply they have lower volume? And do you see that getting better in the winter, as things have slowed down?

Well, I think, it's primarily because they started with much higher DSO than we did, so they had more for availability as they wound down. So they're going to end up in the same place we are. But it just took a little bit longer to get there, because their demand wasn't as high. But ultimately, I mean, as I said, we Steve Menneto and his team ran the analysis, and that was the sole limiter. And it's why we've got so much focus right now on improving output in the fourth quarter.

And I'd also say the size differential, when you look at the ramp-up that the markets had, given that competitors are substantially smaller than us, it's a very different equation for them.

That's helpful. And just secondly, I'm curious how retail looked in October, and if you're seeing any evidence that the election uncertainty is weighing on retail over the past few weeks?

None.

Okay. Great. Thank you, guys.

Thank you.

The next question is from Robin Farley with UBS. Please go ahead.

Great. Thank you. Great results here. I just want to clarify one thing though. When you're talking about consumer demand continuing into next year, you're not specifically saying that you expect retail to be positive in 2021? Or are you saying that? I just want to clarify. Obviously, it was such a tremendously strong year this year. You could be optimistic about retail next year and still not think it's going to be positive. So I just wanted to kind of clarify that. Thanks.

Yes. No, you're exactly right, Robin. I mean, we've had unbelievable -- actually, but we had reasonably good growth in January, February before things happened. Then down in March and April and then picked up beyond that. So I think it's going to be spotty throughout the year, but overall what we've said, and we tried to make sure we were careful with our words, is consumer demand to be healthy. And to your point, it could be very healthy and still not be positive to at plus 50 comp that we had in the second quarter. But ultimately, we do expect to go a healthy environment. And what we're seeing right now is literally, it's just part of the challenge with replenishing the channel is, just products going off the shelf almost as soon as we get into the dealership and that at some point is going to slow down. We just don't know when it's going to be.

Okay. Great. And then the corollary to that, I guess would be given how much dealer inventory is depleted, even if retail is down next year, if you -- what would shipments – I know you're not guiding to next year. But if we just look at your block chart showing that your inventory is about 1/3 of what it should be, what is that just restocking dealers to where you would like them to be for off-road or where they would want to be for off-road, would represent kind of what percent of -- that's equivalent to kind of what percent of retail sales in say, 2019? Just to think about how that restocking will be able to drive your growth even if retail is not positive?

Yes. I don't know if I can answer it in that context. But what I would tell you is, as we're doing the projections around where we want to get from an optimal dealer inventory DSO, it's going to take us through, call it, the first half to essentially get dealer inventory back on a consistent basis. And that's assuming retail plays out as we're expecting in the fourth quarter and through the first half.

Okay. Great. Thank you very much.

The next question is from Craig Kennison with Baird. Please go ahead.

Hey, good morning. Thanks for taking my question. Slide 8, it shows really impressive growth in the total addressable market, up around 6%, I think, year-to-date with still 3 months to go. I guess, I'm curious about your core customer, not that incremental customer, but the core customer. Is that customer upgrading at the same rate? Are they sort of deferring some of those upgrades, given it's just so tough to find inventory?

We're seeing consistent demand from our core customers. So I would – small single-digit growth. It's just the incremental demand. Almost all of the incremental demand is from those new customers and those new demographics. So -- but certainly, it's a good environment for our core customers, but it's a great environment for new ones.

And I'd argue they're spending money for PG&A. You look at the significant performance we've had, where they can't get a vehicle. I know I have some personal friends that they can't get their hands on a vehicle, so they're doing upgrades to their existing vehicles.

And then I don't know if you can put a number on it, but I would think a powersport vehicle has a higher attachment rate to it when it comes to buying that second or third unit. If somebody in the family buys one, somebody else may buy one later. That's certainly not true for a boat, for example. Is there any way to quantify what you think that follow-through demand might look like?

It's hard to quantify, Craig, but it's certainly indicative of the growth that Steve and his team are seeing and like we've demonstrated record PG&A results. And it's really what we've seen at a tap, where we do see that second and third buyer doing incrementally more and as we broaden our portfolio, not just with more attachments, but with more innovative attachments, we're certainly seeing that happen. And some of it ride demand is a great example where it's a benefit that people want. So we're seeing that happen, but I can't quantify it for you.

Thank you.

Your next question is from Jamie Katz with Morningstar. Please go ahead.

Hi, good morning guys. Nice quarter. I have a question, I guess, on the proximity to the election since you brought it up. Do you care to opine on maybe what your top issues might be, for just troubleshooting what might come up dependent on which candidate gets into office?

Tariff, taxes and regulatory.

Okay, for both.

I mean that – obviously, tariffs have been a headwind with the current administration. Taxes could be a headwind if it changes. And the regulatory environment certainly has been good with the Trump administration. So we just – we have to manage that. And I said in my remarks, we can't control it, but we'll be ready to deal with it.

Okay. And then I know global adjacent market's are small, but it looks like there is going to be some decent growth in the final quarter of the year. Was there a timing shift on some deliveries or something with the supply chain that was delayed that's being pushed into the fourth quarter? I know we're lapping weak results. How can we think about what is driving that improvement?

Yes. There's some time – you have remember that our defense business has some timing associated with it and that coupled with the fact that it's the law of small numbers, and that will be the main driver there.

Okay. Thanks.

You bet.

The next question is from David MacGregor with Longbow Research. Please go ahead.

Hey, good morning. Congrats on a good quarter. I wonder if just you could give us – you mentioned, Mike, the gross profit is up 260 basis points. How much of the margin contribution there do you think is from lower promotional activity?

Yes, it's probably just under 100 basis points that would have been from promo. And the way to think about that is a portion of it probably should have been skewed into Q2 and a little bit into Q4 just in terms of the way we do the promo reserve. And once we have line of sight that we're not going to need those reserves, given what's going on in the marketplace, we have to make the adjustments right away.

Great. And then ORV, is there any way you can talk about some of these sort of traditional subgroups like ag and ONG and just the impact that they may have had on the numbers for the quarter?

Yes. I mean, we were – we had most of our weakness in product availability in the Ranger category. And ultimately that is more related to ag. So interestingly, we've got – with the ag program being as successful as it's been, it's great demand there and we just were not able to fulfill it. And ultimately we're seen good – we got a great leadership in that team down in Huntsville. And they're ramping up production quickly, but that was more where we had the constraints in the quarter. So that was the biggest issue for us.

Great. Last question for me, just Slingshot, you talked about high 50s. How much of that's the AutoDrive response?

It's hard to say. Obviously, with such a de minimis portion of the population being able to drive a stick shift, you'd have to say that a good bit of it is. But really, the refinement of that vehicle is so good that I think we're seeing a lot of people trade up. So we're – it's really good demand for Slingshot, and the AutoDrive is going to give us a much larger opportunity than we had previously with only stick shifts.

Congratulations. Thanks.

Thanks.

The next question is from Gerrick Johnson with BMO Capital Markets. Please go ahead.

Thank you. Good morning. Hey, Mike, you guys mentioned that the supply chain transformation program was beneficial in this challenging environment. Maybe you could talk a little bit about that. I recall the goal was 60% for suppliers. So intuitively, it would make me think that you might be in an disadvantageous position. So tell me how that's benefiting you in this environment?

Yes. I'd say a couple of things. One, if you go back to when COVID first came on the scene, coronavirus came on the scene, Ken and his team mobilized around the Asia-based suppliers and what the impact was. We – because of wave one and essentially we're through wave two, our knowledge of that supply base, coupled with what we were doing during the tariffs, was very high. And so we were able to get in very quickly, prioritized. We've got a team that can go in and help from a production standpoint where need be. I would argue because of the work we've done, we've made sure that we've got stronger suppliers. So fewer doesn't mean weaker, fewer actually means stronger, and our knowledge of them is much, I call it much more intimate. We're only through now the second wave, starting the implementation. So, there's still a fair amount that has to go. And I would argue where we trimmed off suppliers probably actually helped us during this, because those tended to be weaker suppliers with poorer performance and probably would not have been able to keep up as we went through this substantial volume ramp up.

Okay. That makes a lot of sense. And how are you guys planning RFM profiles for off-road next season for your North American dealers?

Well, we're planning to meet them. Yeah. But in all seriousness, Steve and his team are really looking at, can we run the business with slightly less DSO than we did previously as we help our factories continue to get better at replenishing products. So we've got -- we constantly work with our dealers to help them manage their – what their profile looks like. And I will tell you that it was an interesting phenomenon because when we started in January and February, we, as you might recall in the first quarter, we're trying to bring down dealer inventory, and we had dealers lobbying for lower profiles. And now we've got every single dealer asking for more, so we're going to balance that out. But I think in balance, we'll have just slightly lower DSO than we had coming into this.

All right. Thank you guys.

Thanks, Gerrick.

The next question is from Joseph Spak with RBC. Please go ahead.

Thank. Good morning. Actually, I wanted to maybe follow-up on that comment you just made, Scott. I know you made it clear that you think the inventory has curb demand and obviously the level of inventories is certainly extremely low. But with gross margins, the highest in over five years or about five years, does this really make you rethink your inventory strategy somewhat? And maybe even further, do you think it may have caused the industry to finally find some religion on inventory and promotion?

Well, clearly we're confident that what Ken and Steve and the team have done to manage the whole value chain gives us the opportunity to manage our network with a lower net inventory. It really -- unfortunately, I do think you're right. The pandemic helped them find religion. But it really takes the -- some discipline across the competitive set and I don't have any confidence that that's true once we get back to normal operating procedure. So we've all seen -- it benefits our dealers, their margins are better. The OEMs are all of our margins are better. But I think it's a false promise to think that everyone's found religion that the world is going to go back and be a completely different place going forward. There's hope, but hope is not a strategy. But I think we'll be a little bit better as an industry, but probably not a lot.

Okay. And then the second question is just on the 10-year partnership with Zero, and I think you indicated with that you want to have an electric product in each of your core segments by 2025. Can you just explain the partnership a little bit more, and I don't think there was an investment. And maybe why that differs from some of the other electrification strategy you've done in the past where you've actually acquired technology?

Yes. As you pointed out, with owning Brammo's motorcycle business for a while and all of the experience we've had with Goupil and GEM and Taylor-Dunn in the electric space, and even with the best-selling electric product in the industry with our Ranger EV, we've got a lot of experience. But as we approach this time around with Musso's leadership, we really looked at who has the best -- before we looked at available technology. And I think if you look at others in the industry, they found available technology, and that's what they're going with. We chose what we're confident it is the best technology for our types of products. And what they've proven with 15 million miles of on-road experience with Zero's motorcycle business and the leading industry sales of elected powertrains that fit in a constrained environment. Again, if you build -- you know this because you cover the space, if you build an electric pickup truck; you've got a [Indiscernible] of space to put batteries. We don't have that real estate. So, what Zero has figured out is with a great battery supplier and a great power management system, how to integrate that into a motorcycle. And with what -- it's not plug and play, but it's not that far from it where we can take that powertrain capability and put it into our off-road vehicles and the teams are off and running. But the reason we chose them is because we believe that they are the best in the world to help us electrify Powersports.

Thank you very much.

The next question is from Shawn Collins with Citigroup. Please go ahead.

Yes, great. Thank you. Scott, Mike, and Richard, good morning. It's great to speak with you.

Good morning.

So, retail is more than healthy across all your segments, so I wanted to ask about Motorcycles. Industry is down about 2% or 3% in the third quarter. Maybe it's up 2% or 3% if you include three wheels. Yet Indian is up 42%, so the impressive growth continues to run -- Slingshot up high 50s. Can you just talk about recent trends in Indian? And if there's anything different most recently with the impact of COVID? And also maybe just on the competitive environment and landscape for Indian that you're seeing in general? Thank you.

Yes. I'm probably one of the few people that watched it, but they had the bagger races this weekend and Indian won against the field of almost all competitive bikes. That's kind of what's going on globally right now. We're doing really well in Europe, really well in Australia and Asia. But the U.S. market, which is the biggest for us and for our competitor, is really exceptionally well for us. The Challenger has been a great bike for us. I talked about Slingshot and what the AutoDrive has done for us. But FTR is doing well. The Indian Scout and scout bobber continue to do well. And really, Mike Dougherty and the team, with Indian globally, are driving great performance. And not only are we driving growth, but we're accelerating margin expansion as well. And that's going to continue into next year, so we're really encouraged about where we are with the Motorcycle business.

Great. That's helpful. Thank you for the time and insight.

Thank you.

Next question is from Mark Smith with Lake Street Capital Markets. Please go ahead.

Hi guys. I wanted to ask about average selling price and any shift during the quarter. Did you see new consumers coming in and looking for kind of entry-level, lower-priced things? Or were those all sold out, and they would buy basically anything that was at a dealer?

I think it's a mix of both. Obviously, if you look at our ASP during the quarter, it is skewed by the fact that we had to reverse the promo out and I think if you look at the rest of the year, it's, call it, more flattish once you adjust for that. I mean we certainly have seen, I mean, clearly, with how well our ATV business is doing, that people are coming in at all ranges of the spectrum. I don't know that it's easy to characterize that they're all coming in at the value segment or at the high end. I think it depends. It depends on consumer, it depends on the geography. And to your point, it also depends on availability of the product.

And that leads to the next question, which is, as you ramp production here, are you really focused on these higher priced, maybe higher-margin products versus a line dedicated to four wheelers rather than XP PROs?

No, I would tell you, it's pretty much across the board. When you look at our dealer inventory, I mean, I don't want to say it's all down equally, but there are certain spots where we have bigger deficits that we're working through, but I don't know that it's disproportionate either way.

Okay. Great. Thank you.

You bet.

[Operator Instructions] The next question is from Brandon Rollé with Northcoast Research. Please go ahead. Brandon Rollé: Good morning and congratulations on the strong earnings results. I just have one question, largely just on the recalls announced this month. There were two Stop Sale/Stop Ride. In prior years, sometimes there were more recalls in the pipeline that hadn't been announced yet? And, I guess, my question is, are the recalls over with these two in October? Or should we be expecting more on the way? Thanks.

Well, I mean, first and foremost, as I said in my prepared remarks, the safety of our employees is our top priority. And we feel the same way about our customers. So when we identify a problem with any of our vehicles, we're going to address it, if it presents a risk to our customers. And these were two disparate issues that we've had. They weren't related at all. I think when you're referring to a series of recalls, I think, that goes back to when we had the problem with Thermal that we were working through on various things to make sure we were improving the thermal efficacy of our vehicles. And that's not the case now. What we're doing is, looking, we've got incredibly capable team and tools to evaluate what's happening with our products in the field. And when we identify a risk that we don't find acceptable, puts our customers at risk, we're going to go out and fix it. And that's what you're seeing here, and we do it with speed. Key to do it is before anyone has the risk of getting injured on our products. And I think that's what you're saying. But no, it’s absolutely not indicative of a whole bunch more recalls coming down the pike. That being said, if we need to recall a vehicle, we will do it. Brandon Rollé: Great. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Richard Edwards for any closing remarks.

Thank you. And I just want to thank everyone for participating in the call this morning. And we look forward to talking to you at the end of the year. Thanks again and goodbye.

The conference has now concluded. Thank you for participating – for attending today's presentation. You may now disconnect.