Good day, and welcome to the Polaris First Quarter 2021 Earnings Call and Webcast [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Richard Edwards, Head of Investor Relations. Please go ahead, sir.

Thank you, Chuck, and good morning, everyone. Thank you for joining us for our first quarter earnings call. A slide presentation is accessible at our Web site at ir.polaris.com, which has additional information for this morning's call. Mike Speetzen, our Interim Chief Executive Officer and Bob Mack, our Interim Chief Financial Officer, have remarks summarizing the quarter and our revised expectations for the full year. Then we'll take some questions. During the call, we will be discussing various topics which should be considered forward-looking for the purposes of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. You can refer to our 2020 10-K for additional details regarding these risks and uncertainties. All references to the first quarter 2021 guidance are reported on an adjusted non-GAAP basis, unless otherwise noted. Please refer to our reg G reconciliation schedules at the end of this presentation for the GAAP to non-GAAP adjustments. Now I'll turn it over to Mike Speetzen, our Interim CEO. Mike?

Thanks, Richard. Good morning, everyone, and thank you for joining us. Once again, the Polaris team delivered an impressive quarter despite substantial supply chain challenges. Our team has remained focused on meeting the needs of our dealers and customers, which allowed us to again beat expectations this quarter. Before we get started, I wanted to thank the entire Polaris team for their focus, dedication and execution this past quarter was truly impressive. Consumer interest in powersports continued at record levels throughout the quarter, with strong growth coming from both existing customers and new customers. I'm pleased to report that our ORV market share gains continued, which we expect to be an ongoing trend for the year. I'm also pleased to report that motorcycles, snowmobiles and boats also had strong retail demand and gained share in Q1. The strong growth we are experiencing is not only in our North American wholegood retail. Our PG&A business grew nearly 50% during the quarter, with all segments and categories up significantly year-over-year. And our international business was also strong with sales increasing 59% as countries impacted by the pandemic slowly began to reopen. Q1 results reflect an all-out effort by the Polaris team to overcome numerous challenges. We continue to operate our plants at maximum supply chain-constrained capacity and utilize every available tactic at our disposal to produce the products our customers were demanding. While our dealer inventory remains below optimal levels, we largely met demand and expertly navigated supply chain constraints. To do so, logistics, commodities and rework costs, have increased substantially. We are managing the cost as best we can and where it makes strategic sense have raised prices to compensate for this inflation. And yet, despite these headwinds, given the overall strong and better than expected performance seen in Q1 and…

Thanks, Mike, and good morning, everyone. As you just heard, our first quarter far exceeded our expectations given the ongoing strong retail demand across the portfolio. The Polaris team has met the challenges of supply chain shortages, logistics delays by working tirelessly with our suppliers, executing significant rework and coordinating with our logistics providers to deliver on our dealer and customers' expectations. First quarter sales were up 39% on a GAAP and adjusted basis versus the prior year. Sales were up significantly for all segments of our business, driven by the ongoing strength in powersports, the boating industry and in our adjacent markets and Aftermarket segments. First quarter earnings per share on a GAAP basis was $2.11. Adjusted earnings per share was $2.30, which was up significantly over last year's first quarter. The results were driven by increased volume across the portfolio, lower promotional costs and operating expense leverage during the quarter. Adjusted gross margins were up 352 basis points year-over-year, primarily due to the lower promotional costs driven by the strong retail demand and lower floor plan financing costs as a result of the low dealer inventory levels. Supply chain constraints were an ongoing pressure point to gross margins as logistics and rework remained high. And as we previously indicated, tariff costs were higher during the quarter as the onetime exemptions and refunds we saw in 2020 largely ended. Operating expenses as a percentage of sales were down 584 basis points as we realized leverage from the strong sales growth and the timing of some R&D expenses and stock based compensation costs being delayed into the coming quarters. Income from financial services declined 18% during the quarter as income from the Polaris Acceptance joint venture, which dealers use to finance their inventory continue to be down due to the…

Thanks, Bob. During the quarter, we experienced broad based retail strength across all of our businesses. New customers continue to drive significant growth during the quarter, supplementing strong demand from our dedicated installed base. Our supply chain's ability to keep pace with demand trends will remain an ongoing challenge for longer than originally anticipated but our size, agility and seasoned Polaris team gives me confidence in our ability to match supply with demand better than anyone in our industry. The company is in the best financial position in years with a strong cash position, debt below our targeted leverage ratios and all segments expected to grow sales, improve profitability and gain market share in 2021. Together, we continue to advance toward our near and long term strategic and financial targets and I couldn't be more thankful to be leading such an outstanding and talented team. With that, I'll turn it over to Chuck to open the line for questions.

[Operator Instructions] And the first question will come from James Hardiman with Wedbush Securities.

So similar to last quarter, my new favorite slide or graph is this capacity utilization graph. Maybe walk us through that in a little bit more detail. This is Slide 8 I'm referring to. When I look at that, this critical question of inventory, it seems like you think that capacity will expand in the second quarter and maybe meet demand, that you'll be able to build a little bit of dealer inventory in the third quarter. But then in 4Q, we're going to fall meaningfully shorter of that again, and we'll probably finish the year in a worse inventory position than we started. I don't know if I'm reading too much into that. There's a lot going on, information trying to reconvey there, but maybe walk us through the key assumptions there.

A couple of things. We put that red line on the graph to highlight the fact that we are running the factories at full capacity, but we use the word supply chain constrained for a reason, because we're dealing with producing vehicles partially complete. For example, when foam became a huge issue, we're rolling vehicles off the line without seats and then we're reworking those vehicles. Our rework rates are pretty high. But the team is doing a really good job of making sure that we're doing that in a high quality manner. Really, the supply chain is what's constraining us right now. I will tell you, the team, as I indicated in my prepared remarks, has done an outstanding job. Supplier issues with semiconductors come up, we're knocking them down. The team has been incredibly agile and going after that. We will make progress on dealer inventory from where we are today. It will increase as we go through the year based on the retail expectations that we have right now and that's really going to be predicated on us continuing to push these supplier issues down and get the manufacturing ramped up as much as we can. Some of the capacity that's coming online is going to help us here in the second half in terms of just being able to manage and digest the volume. But overall, I feel really good about where the team is at. And we can't see into the future and understand what the issues are going to be around potential supply chain problems, but I'll tell you, based on what the team has done thus far, I've got a lot of confidence. I made some comments in the first quarter in the January call around, we are not going to try and save money in the face of significant consumer demand. And so whether it's logistics or supplier work that we're doing, we're going to put the investment, the money, and you're seeing that come through in the margin profile. The good news is that this will abate at some point in time and we'll see that favorability come through from a margin perspective.

And then maybe just a quick follow-up, if I may. Selling and marketing, at least versus where the Street was, was a big beat. Some of that is presumably that you have this supply demand imbalance that's pretty favorable right now. I guess how do you think about that particular line item for 2021? And then what's sustainable as we go forward, I don't know, whether on an absolute dollar basis or a percentage of sales? What does that line item look like once we're past this crazy phase that we're in?

So I think if you think about OpEx, really, the impact you see in the Q1 is really one of timing. So we're forecasting expenses for the year to be flat and we feel good about, that's a reasonable level to use to run the business. So the 80 to 100 basis point benefit is really just based on the sales leverage. The timing issues in the quarter, which sort of turn around later in the year, are mostly some delayed spending on the engineering side, just as different projects move around and then some stock based comp that normally would have been recognized in Q1 that hasn't been recognized yet that will show up later in the year. So they're not things that will repeat themselves in the future. So it's kind of a 2021 anomaly. So I think you should think about the OpEx being flat for the year in dollars.

But should we assume a step up after this year? I mean, to some degree, for sales to be up as much as they are and that OpEx line to be pretty flat, I'm assuming that at least a portion of that is a function of the promotional environment, a favorable promotional environment we find ourselves in, which doesn't seem like it's really sustainable.

No, I mean, James, the promotional stuff falls through the gross profit. And Bob can certainly talk about some of the dynamics relative to that as we look out into the future quarters when we think promo will start coming back. I think Bob hit it, it's timing. As we go forward, the sales and marketing investment is something that we're going to continue to have as a high priority. The work we've done around attracting new customers is incredibly important. What I will say is the team has gotten even more efficient. The investments we made around our customer relationship management system, the data analytics tools. I was walking through with the team yesterday, the work that they had done around the new customers, and we go back and we measure their repurchase rate in the next three months, and we do that on a three month, six month, one year, five year, 10-year basis. And the amount of data and analytics that they have that helps us, because now we can take that data and be a lot smarter about where we do target promotion as well as where we're spending money, whether it's media campaigns or advertising on TV. And I think that will continue to be an efficiency for us. But I think on an absolute dollar basis, it will continue to grow into the future.

The next question will come from Craig Kennison with Baird.

I wanted to deconstruct the incredible retail growth in the quarter. I wonder if you could maybe characterize the mix as it relates to first time buyers, maybe your core repeat buyers. And then to what extent are there first time buyers from last year that may have said, hey, this is great. I want to buy another one and get my family involved. Things like that.

Yes, Craig, the mix, as I indicated, I mean, the growth was substantial in both categories. The new customers grew at 70%. Our existing customers at 40%. And as I was mentioning in that prior discussion with James, I went through with the team yesterday. The repurchase rates, we started watching this given the surge in demand in 2020. And I think one of the concerns we had was where we're going to have a bunch of people come in and then they lose interest. And the interesting fact is that the repurchase rates, as we look at our 2020 new customers versus, say, 2019 or even 2018 new customers, they're actually repurchasing at a substantially higher rate. Meaning they're coming back in three, six months, one year and repurchasing or buying another vehicle. And that's very encouraging, especially when you add that to the existing customer base that we've had for years is coming back in strength. As I mentioned earlier, 40% year-over-year improvement, and it's substantial. And I know that there's a lot of concern around where is retail headed for the year. And I think on a [Technical Difficulty] 2020, we think retail is going to be kind of flattish. And it will be down a little bit in ORV, up a little bit and Motorcycles down. But the point I would raise is, we are seeing continued strength through the year relative to 2019. And that's important when you think about where the industry was, the surge we saw in '20, this is not retreating back. We expect we'll be up probably 20%, 25% from a retail standpoint relative to where we were in 2019 on a full year basis. And that's not to be discounted and that's why we're working the capacity additions that I mentioned earlier, as well as evaluating potential capacity additions into the future.

And are you able to measure in any way the impact of stimulus checks as they come into the economy?

It's tough. I mean, we've gotten that question a lot. I guess I characterized it as it's just fuel to the economy and to what is already a very strong consumer savings rate. And I think if you look at our -- we've gone through our demographics and our customer profiles with investors over the years. And for the most part, our customers were really stable through the pandemic in terms of, their employment level didn't change, they were collecting stimulus money, the stock market is up, most of them, obviously, have 401ks. And so the financial stability and strength of our customers has certainly been an equation in this, but to be able to try and correlate the stimulus check itself back is tough to do.

The next question will come from Brett Andress with KeyBanc.

Just a question on some of the selective pricing that you're taking. Is there any way to quantify how much price you're passing on right now? And then maybe how much price you need to take or you plan to take in theory to offset some of the gross margin pressure?

So the announced price increase in ORV was about 2.5%, and that's obviously the biggest factor for us, biggest part of the market. And that comes into effect May 1st. So we'll start to see that in Q2 and through the balance of the year. In terms of the offset, the offset really is a combination of price, lower promo, lower finance interest, not just price. And so right now with that increase we're basically offsetting the cost of the increased logistics and the commodities. But it's on a dollar basis, so you lose a little bit from a gross margin percentage basis. We'll continue to look at price. I mean, obviously, it's tough to forecast commodities and logistics for the full year. We're in a little bit of unprecedented times, particularly from a logistics standpoint. Things are moving around pretty violently. So we'll continue to look at pricing through the course of the year. We have model year introductions coming up in August, so that should give us another opportunity. And so we'll continue to consider that as the year progresses.

And Brett, I would just add that the pricing moves have been incredibly strategic. I give the team a lot of credit for doing the work rather than just implementing a broad based price increase. They've been very specific around models. So we have some models that won't get touched. We'll have other models that may be higher, whether that's ORV, motorcycles or boats. And then we've also added freight surcharges, which, obviously, as some of the logistics issues abate in the future, that's obviously a toggle point for us with the dealers.

And then maybe building more specifically to, I think, James' question. I think the plan last quarter was to end 2021 channel inventories down 20% to 30% below optimal levels. I guess, with everything that we're seeing so far in 1Q, where does that target stand now? And then any commentary you can share on April retail trends here?

So the way I'd characterize it is that the fourth quarter dealer inventory is going to be lower than we were expecting before. But the plan right now is to improve it from where we stand today, about 30%, 35%. And so we will see sequential improvement. We'll start to gain a little bit of momentum. But as I said in my prepared remarks, it's going to take us into some time in 2022. And obviously, we'll continue to refine and work that as we get later in the year. April, I think, first and foremost, the expectation is we'll be down versus last year, just given how strong the second quarter. I'll remind you, we were up 57% in retail last year. So that's a tough comp. But the month of April has been performing better than we expected. And the retail is holding up, and the team is doing a great job of expertly navigating that. And even though we expect the full quarter to be down versus where we were in second quarter of 2020 versus where we were in 2019, we expect retail to be up, call it, 15% to 20 plus percent. And so tough comp to '20, but continued industry growth if you look back to the 2019 time frame.

And the next question will come from Greg Badishkanian with Wolfe Research.

It's actually Fred Wightman on for Greg. I just wanted to dig into the expectations for the full year powersport market, I think you guys are expecting that to be down low single digits now. Last quarter, that was down high single digits. Could you sort of touch on what changed? Is it more stronger demand lasting longer? Is it better ability to supply that, that's driving the improved outlook?

Fred, yes, I think it's just better demand. I think I think we had been anticipating that things would start to drop off earlier in the first quarter, that we would see strong retail performance but would be on a reducing basis, and that really wasn't the case. And March actually was an incredibly strong month for us. So I think it's just overall industry strength, I think. I don't know if I want to correlate it to a delay in the reopening of the economies because I have a firm belief that even after the economy has opened up, I don't think you're going to see a substantial change in the fact that people are going to want to continue to enjoy the outdoors and our products offer an incredible way to do that with their friends and family. But I think it's overall industry health. I think the economic backdrop certainly helps. I think the economy is far stronger than anybody was anticipating and I think it's going to continue to be stronger for the foreseeable future. So we're really encouraged by that. And if we weren't, we wouldn't be making the capacity additions.

And just to shift that output side of the equation. Last quarter, you talked about absenteeism in the 20% range. You guys called that out in the slides again this quarter. Can you touch on what you're seeing from a rate perspective, if that's picked up? What the labor backdrop looks like and how that's sort of playing into some of the supply constraints?

Yes, I would say that the factory dynamics are less of our issue, and that's why we put that red line on the chart. Certainly, absenteeism rates are still higher than they have been historically. I think we're navigating that much better. I think with the vaccine rollout, we've had success at a number of our locations hosting clinics where a substantial portion of the manufacturing population is able to voluntarily get vaccinated. And that certainly abates some of the concerns that we saw kind of late last year as employees were returning to the factory. The real issue for us isn't the plant, it's around the supply chain. And as I mentioned in my prepared remarks and a couple of the other questions, we're continuing to expertly navigate that and we feel confident we'll be able to meet demand.

And the next question will come from Scott Stember with CL King.

Can you maybe -- I'm not sure if you touched on this earlier, but could you talk about the cadence of guidance for the year? I know the back half of the year, we'll have some price increases coming through and some improvements on the supply chain side. But just for modeling purposes, how we should look at second quarter versus the last two quarters of the year?

Yes, I think the way to think about this year, which is different than sort of a normal year, we tend to see some seasonality and Q2, Q3 tend to be our bigger quarters. This year, just given the strength of retail in Q1 where we see it going through the year, I think there's a lot of customers, people are buying earlier into the season. So the normal timing is moving around a bit. I would think about the next three quarters all being very similar to Q1 from both revenue and profitability standpoint.

We're talking absolute terms or as far as year-over-year or just percentages or absolute numbers?

Absolute numbers. Because what you see in the second half of the year, so most of the commodities costs, a lot of that's hitting us starting in Q2, we were already locked in on pricing in Q1. So that starts to hit in Q2. Moves around a little bit in the back half. Price increases come in, in May. And then obviously, we'll look at what that looks like for the rest of the year. And a lot of the promotions benefit is in the first half of the year. So there's puts and takes but I think they'll generally look fairly similar on an absolute basis.

And last question just on Global Adjacent Markets, it's quietly improving very nicely. And I guess the powersports markets take all the glory. But can you maybe talk about Global Adjacent and what's driving that internationally?

So if you look at global adjacent markets, our business in Europe, which sells L6 registered vehicles to consumers in Europe that's recovered really well and has had a strong first quarter and anticipating a strong year. Our Goupil business in Europe also has picked up nicely coming out of COVID and is performing well for the year. On the US side, really, the strength has been in our commercial utility vehicle market where we sell RANGER derivative products mostly to the rental industry. And those industries are starting to recover as construction comes back and events slowly claw their way back. People had really taken down their inventory levels at the rental companies and we're seeing some nice recovery there, too.

The next question will come from Joe Altobello with Raymond James.

I want to go back on price increases for a second. You mentioned ORV is up 2.5% starting May 1st. Is there any sense that competitors are doing the same? Because I would imagine they're seeing the same cost pressures as you guys are.

Yes, I mean, we do monitor. I mean, given the fact that we share 60% to 70% of the dealer network, we do get intel and we do know that there are price actions that have happened before us and after us. And I think each OEM is taking their own specific approach but I do think it's a mix of MSRP changes as well as freight or logistics add ons.

And in terms of gross margin, obviously, a lot's going on right now. But how are you guys thinking about your longer term gross margins? Do you still see an opportunity to get back to that prior peak margin, tariffs aside obviously, exiting next year or does that get pushed off essentially?

Well, I think there's some complexity around it. And I hate having this discussion because it always feels like there's a but to the sentence, but there is. I think the onetime costs that we're dealing with now, and we do think they're onetime, the elevated, whether it's steel, resins, from a commodity standpoint, certainly the logistics spike that we've seen, we do think those are going to abate. And as I pointed out in my prepared remarks, our supply chain transformation continues to progress incredibly well and so we're continuing that upward trajectory. These onetime costs are going to start to abate. Obviously, promo and some things like that will start to come back in. But we look at it as an opportunity for us to leverage the existing footprint we have. And I think the biggest unknown that we've got is where are tariffs headed, which is not something we spend an awful lot of time talking about. And frankly, I think it's too early in the new administration's time line for us to have a viewpoint. I mean, we obviously continue to self advocate and work through, whether they're political or through the administrative channels. But I don't suspect we're going to hear a whole lot until the end of the year, maybe into next year. And I think that's going to be one of the biggest unknowns for us to be able to get to that high 20% range. Bob, anything you would add?

Ken and I, our teams are working really hard to track and work on plans to make sure that the onetime costs that are coming in this year around expedites and logistics come out of the system as those challenges abate, and that's a big chunk of it. Commodities, we expect to start to trend back more towards normal as we get kind of exiting 2021. I don't think it's going to happen anytime soon. But I think as we get back into the fourth quarter, depending on what happens with the rest of the economy, that should start to settle down, if some more capacity comes back online. Obviously, the storms in Dallas kind of piled on to a bad situation and so some of that's starting to flow again and those costs are starting to alleviate a little bit. And then really on the long term side, to Mike's point, it's really the focus on the Sunburst project and make sure we execute on that and drive the value out of that, that we targeted to do and what we can do to leverage the footprint. So I think you'll see us continue to march down that path. The timing is going to depend on the timing of some of these other things.

The next question will come from Gerrick Johnson with BMO Capital.

You mentioned that mix was negative because of constraints more so than demand. So you're probably producing more ATVs, probably fewer side by sides. Would that be correct? You maybe have a bigger backlog for side by side. And then also kind of related to that, on the demand side, what do you see the mix oriented towards at retail?

So you guessed correctly there on the ATVs versus side by sides. When you just look at an ATV from a design standpoint, it's a simpler product that has about half the parts of the side by sides. So just mathematically, your supplier problems are going to impact it less just because you have less parts to be impacted. So we've been able to build ATVs at a higher rate than we have side by sides with some of the logistics challenges. From a demand standpoint, I think the demand is so strong right now that it's pretty solid across the board. So obviously, we're focused on trying to recover side by side build in the later part of the year. And we feel like we'll have some ability to do that, but that mix is still going to continue to impact us. The other side of mix, which I really didn't get into, is the international and PG&A, PG&A growing really strong. International also growing strong, but international margins tend to be a little bit lower. So those two, to some degree, counter each other.

And what are you seeing in terms of financial characteristics of the end consumers, the credit quality there and what are your financial partners saying about delinquencies and things of that nature?

It's been pretty benign. I mean, financing has been readily available. We're not seeing higher default rates right now. I mean, obviously, we're not in the financing business, we do that through partners. But consumers have found available financing at competitive rates and we don't think financing is having a big impact on the industry right now.

The next question will come from Robin Farley with UBS.

I wanted to just clarify, first, one of your comments about retail expectations for the year. Was that down low single digit your expectation for the industry or for yourself specifically, or maybe it was both? And then also I wanted to kind of see if you could help us quantify the restocking opportunity that sounds like in '22. When you think about, whether it's in dollar amount or kind of shipment, if you could help us think about if sales were flat next year to this year, just that restocking piece of it though. Would that be equal to kind of what percent of 2019 shipments or what percent of 2019 retail? In other words, just the inventory piece, if you could help us sort of think about that, that has the opportunity to offset in '22.

So from a retail standpoint, I mean, obviously, we don't guide retail. But when we look at our models, we think we're going to be flattish for the year. And that obviously has ORV down a little bit, motorcycle is up. And that's predicated on what we are projecting right now and obviously, we'll continue to update that as we go forward. And as I mentioned, we do see dealer inventory improving through the end of the year, but we're still going to be short of what is ideal. Last quarter, we talked about the fact that we were probably 30% to 40% below optimal level. And obviously, given better demand, we're even further than that. So it's a restocking opportunity into '22. I don't want to throw any numbers out because we're not prepared to do that. We've got a lot of work to do to see how demand shapes up here as we continue out through the second quarter. It's been better in April than we were expecting. And obviously, we want to see the critical months of May and June and how they play out, because that's going to be really important in terms of how confident we are in the back half, as to whether or not they're potentially a stronger retail or not.

And then just lastly, I don't know if you gave what was the change in ASP in Q1?

I don't think we did because we've got so many different moving parts, but we can certainly get that for you.

The next question will come from Jaime Katz with Morningstar.

I hope we can dig a little bit more into the profitability of the boats business, given the flexibility of the cost structure. I think the gross margin came in a bit ahead of what we had expected and ahead of 2019's first quarter. So is that something that can sustain over the remainder of the year, or was there some part of mix or some other factor that maybe we should consider as different in the first quarter?

No, I think the first quarter is relatively reflective of the strength we see in that business. One of the things we really liked about the business model when we bought Boat Holdings, was that the majority of it was pontoons, which is relatively flexible from a volume standpoint and not particularly capital intensive. So that team has done a great job being able to ramp up production in Q1. Q2 will be a little bit more challenging just because of shortages of foam across the whole marine industry, foam for seating and foam for flotation. So you'll see some challenges in Q2 that will pick back up in Q3, Q4. But in terms of gross margins for the year, we expect to be able to continue to improve as that business grows. We've got a lot of cost improvement initiatives in place but obviously, it has the same commodities and logistics challenges as the rest of the business.

But even with the delay in foam, that's not leading to an increase in cancellation of orders or anything like that?

We've been able to ramp up, I think, as fast or faster than any other manufacturer in the marine industry and keep pace and we're focused on customer sold boats to make sure they're getting them before the start of the season. So I don't think we're losing customers. And I think we'll be able to continue to perform the rest of the year.

And then on the autonomous vehicles, I know you guys said there was going to be more detail later in the year. But is there a way for you to just size what that opportunity is for us, maybe who the end user might be and what the total addressable market might be.

Obviously, autonomy and mobility are sort of rapidly changing segments of the economy as the technology continues to improve. What I can tell you, our partner, Optimus Ride with the GEM vehicle, they've got five operating sites where they're running vehicles with a safety driver. They have a pretty aggressive plan to grow that as we can deliver the actual full autonomous vehicles in 2023, and their view is it's a very substantial market. We agree with that. Putting real dollars and units to it is pretty tough because it's all going to depend on the timing and the pace of the rollout. So we see it as a good opportunity but a little too early to size it.

The next question will come from David MacGregor with Longbow Research.

Yes, kudos to the team for execution. Just a really brutal environment. So job well done. I guess, I wanted to ask about market share gains here. And under the more normal circumstances, the consumer is going to make the purchase decisions based on branding and product features and everything else. I can see where in this environment it might swing a little more towards availability. So I guess I wanted to ask you about your market share gains. And do you feel it was just largely based on -- you just had better availability than your competitors, or what do you think was behind that?

Yes, I think, David, it's tough to parse through it. But I would tell you that there's a couple of facts in there. I do think our availability, if you look at all the dealer surveys or whether it's the ones that the sell side does or the ones that we do, certainly, we have been better than many of our competitors, but I will tell you that they have improved relative to where they were. So I don't want that to sound like there's just no competition in the channel because that isn't the case. And I think if you walk into any dealership, you're going to see that front and center. So I think our demand is really being predicated on the fact that we've been very targeted around some of the promotional work that we do. And when I say promotional, it's about we're bringing existing consumers back, recognizing loyalty to the brand. I think the innovation, I mean we launched over 40 new products in the first quarter and that's just the start for the year. And the success we've seen with the Snowmobiles, the success we saw with the new trail RZR, in a lot of those instances, the products aren't even available but the demand is through the roof in terms of orders. And the fact that we have customers preordering in terms of getting their hands on a vehicle as it's going through the factory I think speaks to it. And I think that just bodes well in terms of all the work we've done in terms of marketing and the innovation that we have around our products.

It sounds like it's sustainable. I guess the second question I wanted to ask you was just on RFM. You rolled this out a few years back at a time when the market was actually in the flip condition and we had too much inventory at the dealer levels. And of course, now we're the other way around. At the time, the thought was that it would help you regulate the flow of product to the dealers. But how does it help you in this kind of environment now where the dealers are tight on inventory? Do you just run RFM wide open and it just lets product go wherever you can supply it, or does it play some other governing manner here? I'm just trying to understand the role of RFM in a tight market.

Well, I think it's more complicated. But I think the basics are that we went through and did a lot of work around profiles. And so as demand is heating up, obviously, everybody is trying to get their hands on equipment. And the profiles help us keep that in check so that dealers and their exuberance maybe asking for more than what they really should have in a given region of the country. And so it helps us as we try and define that. It also helps us as we start lining up all the production. As I mentioned in my comments, the ability to get pre sold is something that I think is really enabled because of the work we did around RFM. The flexibility we have in our manufacturing in terms of being able to model mix and make changes real time is not to be underestimated, and I think it gives us a real competitive opportunity. I mean, obviously, there was a little bit of a disadvantage when this all started because many of our competitors had bloated inventory levels and they were able to bleed those down, but that went away pretty quickly. And I would argue, we're now in a better competitive position because we can react faster with our factories. And when you couple that with the spectacular work being done by our supply chain to manage all the supply disruption, I think it creates a very strong winning equation.

The next question will come from Joseph Spak with RBC.

I guess I wanted to just go back to Slide 8 and maybe some points of clarification. First, like, why does the unconstrained capacity go down in the fourth quarter? I would have thought that's just sort of like a theoretical capacity. It says also you're adding capacity at select locations like how and I guess why are you doing that if you still have ample capacity? And then finally, the gross cost savings, $200 million ahead of plan. Should we interpret that as it all come in sooner or the pie is potentially larger?

So a couple of things. The reason the [bars] bolt dip in the back half, I mean, that is from a production standpoint, it's pretty routine to take your factories down at the end of the year, required maintenance, you've got vacation time with the holidays, a number of those different things. And I will tell you, in the past, if you look at the end of 2020, we didn't ramp down as much because we essentially paid to continue working through that time period. But I mean, the factories are working at full capacity and you've got to do the right level of required maintenance. The reason -- first of all, this graph does not have, for example, the boats manufacturing included. This is really what I would call our core powersports, ORV, motorcycles combined. The capacity add, so the boat capacity add, obviously, is not reflected here and that is helping because there is some constraint there, even though we are facing some of the same supplier issues. But we're adding because, as we look forward, we anticipate the market is going to continue to grow. And we've got new products coming online that we'll be able to add that additional volume in while not taking away from the capacity we need to produce the ongoing vehicles, and that's a big part of what we're doing down in Monterrey. And as it relates to $200 million, I think we used the word slightly ahead. I don't want to get too excited because, in the grand scheme of things, being ahead is good but it's not enough to necessarily overcome all these other issues we have. And we're going to continue pushing forward. And as Bob outlined, the good news is, is that these costs are going to continue to accrue. And once the one off costs that we're doing a really good job of tracking abate, we're going to be left with pretty substantial savings. The $200 million won't all be there by the end of this year, but we anticipate over the next several years, we're going to get ourselves there and probably ahead of schedule.

And then just maybe just on electrification. I know you have the 10 year exclusive of Zero on ORV. Is there scope to expand that to motorcycles? Maybe not exclusive because I know they do their own bikes. And if not, can you just remind us of your electric plans within the Motorcycles segment?

Well, I mean, you saw some of it. I mean, we're obviously targeted at the youth. But I would tell you, we learned a lot from the past when we had an electric motorcycle through the Victory brand. We do think it's an attractive segment and we're taking a hard look at it. And I would just say that as we look forward, we continue to look for opportunities with our existing partner as well as any potential new partners. And we think it's a big opportunity. Bob, obviously, participated and led the process with Zero. So Bob, you want to add a couple of comments?

Obviously, the initial partnership is focused on off road, but we have regular conversations. There's opportunities to expand it into the other product lines as we jointly feel it makes sense and motorcycles is an obvious one. It's also obviously the most challenging because Zero's primary product is motorcycle. But we see opportunities with both Zero or potentially other partners as we see that market starting to grow in the future.

The next question will come from Mark Smith with Lake Street Capital.

I just wanted to look into PG&A just a little bit more. You talked previously about kind of the rebuy cycle and what you're seeing. Can you talk about kind of the incremental buy within PG&A and any lag that you see from new customers? For instance, are they buying apparel a month or six months after or are we seeing more parts that are needed as new customers maybe are rough around some of these vehicles than existing customers?

I would say that we probably don't have those stats. But when we look across the different components of PG&A, as I mentioned in my prepared remarks, we're seeing growth pretty much everywhere. I mean, parts are up over 30%, which I think is a good signal that folks are using their equipment, doing the repairs. We've done a lot with DIY videos so that folks, if they can't get into a dealership because the dealerships are pretty jammed right now, they can do the work themselves given their relative skill level. Accessories are up 60% that's a good indicator that folks are accessorizing their vehicles after they bought. And we actually view that as a big opportunity as we're going through the sale process at the dealership. We're a little challenged because of the backlogs that we're dealing with in our PG&A supply. But over the long term, we think that there's big opportunity to continue to increase the amount of content that we have on the vehicles as they come off the showroom floor. And I think the fact that our accessories are up 60% is just an indicator that consumers do look for ways to make the vehicle unique for themselves. So the growth is great. It's obviously highly profitable for us. And we're seeing it pretty much across every element of PG&A.

The next question will come from Billy Kovanis with Morgan Stanley.

Just wanted to summarize a lot of the commentary on this call and tell me if I'm right here. But your inventory levels are currently down 71% and you are going to build some inventory through the rest of the year. Even if we assume sort of 2022 retail sales are down, doesn't that give you a pretty good sort of production runway up until mid to late 2022? Can you just correct me if I'm wrong there?

I think the only thing I'll correct you on is using the word late 2022, because I don't know that we have that clarity yet. We were very deliberate around our word, some time in 2022, and I think that's important. And we're going to continue to watch, because it really does depend on how things cadence out. And I mentioned it, I think, when I was responding to Robin's question. April is important but May and June are just as important. I mean, we saw tremendous growth that led to the 57% year-over-year increase in the second quarter last year. And really understanding how that's patterning out, I mean, right now, if April is in and cater, it's stronger than we expected. And so that's obviously going to influence how we characterize the 2022 timing of the channel refill.

And then just shifting to electric real quick. Any customer feedback that you can share with us in your initial model releases? And is there any plan to potentially bolt on any company that you think would give you some edge in electric manufacturing?

I mean, we don't have anything out in the market, per se. We have our existing products out there. What I can tell you is if you haven't seen the video that we put out on the new electric RANGER, we're demonstrating its capability here in our very cold Minnesota backdrop. And I can tell you, I mean, it's just a phenomenal vehicle and the team is continuing to refine it. And the best part about our strategy, we're working with Zero, who's got the powertrain expertise and understands the components and how to configure and we're dedicating our time and energy to what we do best, which is really around the design of the vehicle and the chassis. And when you merry those two together, I think it's going to be an incredibly powerful combination and I think that's what you see coming out with the teaser videos that we have on the RANGER. So we'll know as we get into 2022 when we launch that vehicle, but I fully expect it's going to be an incredible reception.

Our next question will come from Shawn Collins with Citi.

I wanted to ask about the motorcycle industry. Huge retail quarter at Indian, up low 60s. Your US peer had retail up 30%. It's certainly nice to see the industry grow, following huge growth in off road, RVs and boating. Can you possibly provide some qualitative color on kind of what you're seeing and hearing from consumers and if you think the motorcycle industry and Indian is set up for a better industry tailwind for the rest of '21? And Mike, I think you had said that you expect the motorcycle industry to be up a little, if I'm not incorrect.

Yes. I mean, look, I think the backdrop is the industry is poised to do better. I think we've talked a number of different times that the industry, given the dominant player, is really predicated on how they did last year, which wasn't great. So the industry is doing better partly because of that but because we're outperforming. I mean, our market share gains continue. We introduced the new Chief, which essentially kind of fills out the Indian platform. And I would tell you, I mean, we are seeing strength across the board, whether it's FTR, the Bobber, the demand for the new Chief as well as our heavyweight bikes. And I think it's just the uniqueness of the brand. The bikes are beautiful. They're engineered incredibly well. And we think we're going to continue to win that competitive battle for the foreseeable future.

That's the last question. Just one follow-up on the ASP. Off road vehicles ASP was up approximately 6%. Motorcycles ASP was down about 2%. That was really the mix between the full sized motorcycles and the midsized motorcycles. And then for the total company, it was up about 4% on ASP. With that, we'll end the call. I want to thank everyone for participating. We look forward to talking to you next quarter. Goodbye.

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