Polaris Inc. (PII) Q1 2022 Earnings Report, Transcript and Summary

Good day, and welcome to the Polaris First Quarter Earnings Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I’d now like to turn the conference over to J.C. Weigelt, Vice President of Investor Relations. Please, go ahead.

Thank you, Jason, and good morning or afternoon, everyone. I’m J.C. Weigelt, Vice President of Investor Relations at Polaris. Thank you for joining us for our 2022 first quarter earnings call. We will reference a slide presentation today, which is accessible on our website at ir.polaris.com. Joining me on the call today are Mike Speetzen, our Chief Executive Officer; and Bob Mack, our Chief Financial Officer. Both have prepared remarks summarizing the quarter and our expectations for 2022. Then we’ll take some questions. During the call, we will be discussing various topics, which should be considered forward-looking for the purposes of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. You can refer to our 2021 10-K for additional details regarding these risk and uncertainties. All references to first quarter actual results and 2022 guidance are reported on an adjusted non-GAAP basis, unless otherwise noted. Please refer to our Reg G reconciliation schedules at the end of the presentation for the GAAP to non-GAAP adjustments. Now, I will turn the call over to Mike Speetzen. Mike, go ahead.

Thanks J.C. and good morning, everyone. Thank you for joining us today. Just as the winter temperatures here in Minnesota have yet to relent, supply chain pressures persisted during the quarter and negatively impacted our results. While demand for our products remains healthy, ongoing supply chain disruptions continue to constrain vehicle shipments. As a result, our first quarter sales of almost $2 billion were flat versus last year and North American retail sales were down over 20% against a difficult comparison to last year, where retail was up 70%. That being said, we continue to see positive momentum, repurchase and pre-sold rates remain elevated, our model year 2023 SnowCheck sold out and On-Road is seeing strong interest with the launch of our new Indian Scout and Pursuit motorcycles. Compared to the first quarter of 2019, retail was up 21%, which is encouraging and one metric that helps sort through some of the volatility we've seen through the pandemic. While our first quarter results reflect share loss, we believe this is largely the result of shipment timing versus fundamental competitive wins from new products. In this volatile supply chain environment, share gains and losses are expected to happen throughout the year and are likely to be highly correlated to a manufacturer's ability to get product out the door. Margins in the quarter were also negatively impacted by inflationary pressure, as well as manufacturing inefficiencies associated with supply chain challenges. As a result, adjusted EPS declined 44% versus last year to $1.29. We did benefit from favorable pricing in the quarter, a direct result from the actions we took in the second half of last year and early this year. In fact, we saw double digit price increase across all segments of Off-Road, On-Road and Marine. We expect positive price momentum for the remainder of the year, which will partially offset increased supply chain costs. I want to take a moment to highlight our five-year strategy that we unveiled at our Investor Day in February. Our strategy refocuses our investments in the core, both organic and inorganic, and drives margin expansion through improved productivity. This coupled with our focused and balanced capital deployment execution, we believe will grow our leadership position in powersports and drive significant value creation for our shareholders over the long-term. Let me briefly review some of our recent highlights. During the quarter, we announced a 165,000 square foot expansion to our Wilmington PG&A distribution center, along with plans to upgrade our paint operations in Rosa, Minnesota. These efforts build on last year's capacity expansion in Monterrey, Mexico for our Off-Road business and our expansion in Indiana for our Marine business. This investment in the core gives us the capacity we need for the near-term. Our capacity constraints are completely driven by supply chain challenges. And once those abate, we have the capacity to raise throughput and generate improved manufacturing efficiencies in the near-term. We also maintained our focus on rider driven innovation with several new Indian motorcycle models and the launch of our model year 2023 Snowmobiles. We have received positive feedback regarding these products and our portfolio of Indian Motorcycles has never been stronger given the recent successful launch of the new Scout Rogue and Scout Sixty. In late February, we launched 24 new snowmobiles and two new snowmobile engines, an all-purpose lineup built to deliver the best experience on the snow. Led by the new Patriot 9R engine, we also introduced a four-stroke car lineup with the ProStar S4. Polaris continues to lead the way with the best lineup in the back country and on the trails. We were also honored to be recognized as one of Fast Company's most innovative companies. Polaris and Zero Motorcycles were named to the list of the most Innovative Joint Ventures, a true testament to our partnership aimed at delivering category-defining electric powertrains for powersports. The first vehicle borne of this partnership was the all-electric RANGER XP Kinetic that many of you were able to ride and admired at our investor meeting. We expect to continue leading from the front when it comes to rider driven innovation and electrification. Big race wins in RZR and Indian motorcycle highlight the performance aspects of rider driven innovation. The RZR team took the overall win at the San Felipe 250 with the RZR Pro R and swept the top three Pro UTV classes. In addition to King of the Baggers, Indian Motorcycles secured its second consecutive win at the 2022 Texas Half-Mile Flat Track race that when placed Indian Motorcycle and their team in the top two positions on the leader board for the season. Both wins showcase the capability of our products, and we could not be prouder of all the hard work by those involved to bring home these prestigious victories. We continue to see a healthy level of demand and customer engagement as reflected in several key data points. ORV pre-sold remain near peak levels, increasing sequentially, which supports the healthy demand level. Short-term and long-term repurchase rates are up, and ORV cancellation remain -- rates remain low, even with a price increase and delays in delivery. Polaris Adventures rides were consistent with last year despite the fact that we cannot meet snowmobile outfitter demand due to a lack of units being produced. The Polaris Adventures team is gearing up for their main riding season, Memorial Day through Labor Day and continue to engage new customers in powersports through the recent expansion of our membership program, Polaris Adventures Select to four more states in the Midwest. Lastly, PG&A attachment rates are at a record high, indicating that customers are looking to upgrade their vehicles, and powersports e-commerce continued to see strong growth. Broadly speaking, we remain encouraged given these demand trends. Additionally, dealer feedback continues to be positive around demand and not surprisingly, more constructive around availability. We serve our dealer network each quarter, and there was one dealer comment that I felt summed up the current environment well. My business is thriving, send us inventory and will take care of the rest. This, to me, points to a healthy demand environment that is ripe for growth once we work through the current supply chain environment. North American dealer inventory remains at record lows, with healthy demand further constrained by the persistent global supply chain headwinds, limiting any improvement inventory levels. Further given our strong pre-sold order book, most of the products we ship are already spoken for. While we expect inventory to remain below optimal levels for the remainder of 2022, we do anticipate modest improvement in the back half of the year and more profound rebuilding of inventory levels in 2023. Of course, that is assuming that we see the supply chain improve in line with our expectations. Given these dynamics, even if demand moderates, we believe there is runway for growth into 2023 as dealers get back to healthier inventory levels. As I mentioned, the supply chain challenges that exist globally from component shortages to logistics challenges are negatively impacting our production and shipping execution. Today, we have approximately 50 suppliers with component shortages, impacting over 100 of our units. And while that supplier number has remained consistent over the past year, the number of units these suppliers have impacted has risen sequentially and year-over-year. Specifically semiconductor shocks, displays, and wire harnesses are the areas where we experiencing the most risks and like many other industries, the root cause of the shortages remains logistics, materials, and labor. As we work to remediate the current situation, we are refocusing our lens that we look at the supply chain environment through; specifically we're taking a longer term view and suspect that the supply chain will not likely see substantial improvements in the near-term. As such, we are making design changes to work around challenging components. We have also reduced dozens of models to remove complexity to enable better delivery and we're institutionalizing certain aspects of our organization and recognition of the near-term permanence of the supplier and logistic triage efforts. We believe these efforts will improve our ability to deliver and as a result we will begin to see the impacts materialize in Q2. Lastly, I want to express my gratitude to all of our employees who have worked tirelessly to meet the needs of our customers. I'll now turn it over to Bob who will summarize our first quarter performance as well as our expectations for the remainder of the year. Bob?

Thanks Mike and good morning or afternoon to everyone on the call today. My comments will be around our first quarter performance and expectations for the remainder of the year. Before I jump into more detail, I do want to emphasize that the negative impacts from the supply chain were the main driver to these results and as Mike said, our teams are working tirelessly to navigate through the pressures. While, we do expect to see modest recovery beginning in the back half of the year, as you all know, accurately predicting the timing and extent of supply chain recovery is difficult. Let start by walking through sales and operating profit for the quarter. Sales of $1.96 billion were flat relative to last year with lower unit shipments and favorable pricing almost netting out. International sales were up by 1%, driven by strength in EMEA and Latin America, while Asia-Pacific saw modest declines. Total PG&A in the quarter was up 8% with On-Road PG&A, up almost 20%. Adjusted EBITDA margin was down 446 basis points with lower shipment volume and higher cost premiums being the largest headwinds. Positive price helped partially offset some of the increased cost around freight, raw materials, and inefficiencies associated with the supply chain. With mid-single-digit price increases effective April 1 on new and pre-sold ORV orders, we expect to be in a better position to offset the higher than expected commodity and logistics costs we saw in Q1 as we go through the remainder of the year. As we have discussed in the past, we are pricing to at least offset the impact of inflation on our cost base, but do not believe the elasticity in the market allows us to put our normal margin on top of that. This dynamic has a negative impact on gross profit and EBITDA margins due to the math of price netting out higher cost premiums with no flow through to profit margins. To put the commodities and logistics inflation in perspective, the cost of steel and aluminum in our products shipping in Q1 were up over 130% and 140% respectively, versus Q1 2021. Spot rates for containers from Asia and US trucking were also up 120% versus the same period in 2021. For steel, that is on top of 2021 rates for these commodities that were already up over 20% compared to the five-year average. All-in for the quarter, we have seen our cost premiums jump 150% versus a year ago or almost $100 million, most of which we see as a result of the current environment we are in and we'd expect many of these costs to subside over time. The low operating profit, our tax rate was lower than we had anticipated, driven by the larger impact of discrete items, given lower income in the quarter. Shares were lower by almost $2 million due to recent share repurchase activity. Turning to our segments. Let's start with Off-Road. Sales of $1.3 billion were up 2% relative to last year. Whole goods were up 1% and PG&A was up a strong 8%. Adjusted gross margins were down approximately 720 basis points. Supply chain disruptions had a negative impact on Off-Road’s performance impacting volume, mix and margin. Partially offsetting some of these headwinds with strong double-digit increases in pricing implemented in 2021. Looking at retail performance, we were down high 20s in North America with modestly better performance in side-by-side versus ATVs. We believe the industry was down high teens, thus pointing to a share loss for us in the quarter. As Mike stated earlier, we believe share shifts in this environment are the result of component availability and the ability to ship products into the channel versus the launch of new products by competitors. Thus, we continue to expect quarterly share shifts to be lumpy this year. One way to smooth out the shipment dynamics over the past year is to look at this on a 12-month rolling basis. With this metric, we estimate share in ORV was relatively flat to the industry. Overall, we continue to see ourselves in a strong competitive position within Off-Road. We believe we are more customer-centric than ever and have the global manufacturing capacity to meet these elevated demand levels. However, results in the near term are expected to be driven by the performance of the supply chain. Switching to On-Road now. Sales of $219 million were down 4% with whole goods down 8% and PG&A up 19%. Remember that our On-Road segment now includes [indiscernible], plus you see a strong mix of international revenue. First quarter results from those two businesses were up high teens. Supply chain shortages were the main driver for our Indian motorcycle share loss in the quarter. We have brought on additional suppliers for some of our most at-risk components and should begin to see some modest relief this quarter and growth into the back half of the year. Margin was up over 400 basis points due to positive mix and pricing in the quarter. While dealer inventory levels remain low, we continue to see strong demand from our -- with our presold ordering process. Indian motorcycle retail in the quarter was down in North America by over 30% and down international by almost 30%. Looking at share on a 12-month rolling basis, we believe we lost approximately 1 point of share to the industry. Moving to our Marine segment. Sales of $212 million were up 6%. We continue to see component shortages, which led to some share loss during the seasonally low retail quarter. On a 12-month rolling average view, we believe our share was relatively flat versus the industry. Late in the quarter and into April, we started to see production and shipping trends slowly improving and continue to believe we will see strong growth in our Marine segment this year. Margins were down 137 basis points. Similar to the other segments, Marine experienced lower unit shipment volumes and inefficiencies associated with the supply chain. Price was positive in the quarter, up mid-teens, but mix was a headwind. Looking at aftermarket, sales for the quarter were $218 million, down 5%, where we saw tap down almost 9% due to lower availability of new and used SUVs and trucks for consumers to upfit. Our powersports aftermarket was up 16% on strong in-season snow orders. Challenges within the supply chain had a negative impact on inventory to sell and margins continue to be negatively impacted by inflation. Summing up our first quarter performance by segment, it is clear that supply chain disruptions were the main driver for our sales, share, and earnings performance this quarter. Our ability to execute and deliver in this environment remains our top focus as we progress through the remainder of the year. Demand remains healthy and we continue to believe we have industry-leading innovation, quality, and safety to deliver the best products in powersports. Moving to our financial position, we continue to expect 2022 will be a strong cash generation year with both operating cash flow and free cash flow well above 2021 levels. Our capital deployment priorities have not changed. We continue to focus on high return organic investments, dividends, share repurchase, and targeted acquisitions. Most recently, we have learned -- leaned more heavily into repurchases by buying back approximately $172 million of Polaris stock in the first quarter. We view our balance sheet and financial position as a competitive strength as it allows us to invest in our business for the long-term, while also providing the flexibility to deploy excess cash to generate strong returns for our shareholders. Now, let's discuss some updated thoughts on full year guidance. While the first quarter was lower than we had expected, we continue to see healthy demand and expect supply chain disruptions to ease modestly in the back half, both of which should positively impact our performance as we move throughout the year. Therefore, we are maintaining our full year sales and adjusted EPS guidance. We still continue to anticipate full year sales to grow 12% to 15% and adjusted earnings per share to grow 11% to 14%. We expect consumer demand to remain healthy, but overall powersports retail to be down slightly year-over-year, driven entirely by ongoing supply chain challenges. We believe this same dynamic will drive share shifts throughout the year as component availability drive shipments in retail. We also expect to see a modest ramp in volumes in the back half of the year as the health of the supply chain improves and the actions we are currently working with suppliers take hold. We believe we have ample vehicle assembly capacity to meet our unit goals in the second half of this year, which should be in line with the unit shipment levels we saw in the second half of 2020. Please see slide 19 in the appendix for further details on expected unit shipment volumes. As we look at the second quarter compared to the prior year quarter, we continue to expect lower volumes across most of our segments, especially in Off-Road. Price is expected to be sequentially stronger, which should help offset increased supply chain costs. As previously discussed, we will continue to price aggressively to cover our costs, but are not pricing at a margin to our incremental supply chain costs. This will continue to result in gross profit margin degradation compared to the prior year. We believe EPS in the second quarter will be down year-over-year, which means we will see strong growth in the back half of 2022. For the full year, although we are pricing for higher cost than anticipated, margins are expected to be slightly below prior guidance due to pressures we are seeing in the business around freight, raw materials, and additional inefficiencies associated with supply chain challenges. We now expect adjusted gross profit margin to be down 100 to 120 basis points for the year versus our original expectations of down 80 to 100 basis points. In addition, we now expect adjusted EBITDA margin to be down 10 to 20 basis points versus our original expectation of flat year-over-year. These pressures are expected to be more pronounced in the first half of the year and ease with volume leverage, higher price realization and stable cost premiums in the second half of the year. Some other items to note include higher net interest expense for the year that should be entirely offset with a lower tax rate closer to 22% to 22.5%. There were some recent tariff exclusions signed into law, which is a $15 million benefit this year. We are also taking down our share count assumption for the year to be closer to 60 million shares at year-end. This is almost $1 million less than our initial guidance. Overall, global supply chain disruptions continue to have a negative impact on the industry's performance. We remain focused not only on navigating the current headwinds, but also building a more resilient supply chain for the future. We believe we are well-positioned to deliver strong sales and earnings growth once the supply chain improves, and until then, we continue to focus on successfully navigating the current environment. With that, I will turn it back over to Mike for some final thoughts. Mike?

Thanks, Bob. While our results have been impacted by supply chain pressures, we continue to see strength at the dealer and customer level, a signal that demand remains healthy. We're expecting a modest decline in retail this year, driven by low inventory levels at dealers. These low inventory levels are directly correlated to the supply chain challenges. Our near-term focus remains on navigating the supply chain. And while progress might be hard to see now, we are working to control our own destiny by reducing complexity, redesigning around challenging components and making more permanent organizational shifts to support improved delivery. Our expectation is that there is modest improvement in the supply chain environment. That, coupled with our internal action supports the outlook; the deliveries improved starting in Q2. We have the team and capacity to make it happen, and our focus remains steadfast on delivering high-quality and innovative products to our customers, and we expect this strategy to deliver another strong year at Polaris. With that, I'll turn it over to Jason to open the line up for questions. Jason?

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Craig Kennison from Baird. Please, go ahead.

Hey, good morning. Thanks for taking my question. I'm sure there are going to be questions on the supply issues you face, but we're getting more questions on the economy. With the Fed potentially, finally ready to act to combat inflation, how do you reconcile the potential for a recession with the fact that you've also stockpiled a ton of demand in the form of these pre-sold consumer units and then the opportunity to restock dealers. I'm just trying to reconcile, you have this tremendous demand and yet there are plenty of red flags on the economy?

Yes. Thanks. Thanks, Craig. I mean, clearly, it's something that we're paying very close attention to. I guess, I'd point to a couple of things. I mean, you have to remember the customer demographic, I mean, our customers tend to be on the higher end of the pay and income scales. And so, that's always helpful. I'd also point to the fact that the inflation dynamic has been going on for quite some time now. So consumers have been wrestling with higher fuel prices and groceries and all those types of things. And our pre-solds have held up through that entire time frame, as we've got indicated on the one chart. The interest rate moves, that obviously will have some impact on our customers. But when you look at the interest rate component relative to the vehicle cost, I mean, it's actually its pretty small. So we're actually paying probably more attention to just the price increases that we've had to make, just to keep pace with the inflationary pressures. But we're encouraged the traffic at the dealers is strong, the fact that consumers are pre-buying, pre-purchasing at a very strong rate, and it's improved sequentially. I'll tell you, April saw a very similar performance. So we see that trend continuing. And if you think about the new cycle during that time frame, it's been pretty negative just with the geopolitical issues, as well as the inflation spike in the moves the Fed is making. So, I think if we were to go into a recession, we've had a lot of discussions about this internally. It would probably look like a recession we've never seen because if you look at our inventory, we've got highlighted on one of the charts that were down 75% from where we were in Q1 of 2020. Even if demand were to soften for a quarter or two or three, we still got ample runway in terms of getting inventory back into the channel. I'm not suggesting we're seeing the demand soften, but the point I'm trying to make is that the inventory is so depleted throughout the channel that we feel confident we'd be able to work right through any kind of economic movement that we might see or volatility because we've got a lot of work to do to get inventory back in the channel. So, at this point, we're watching it. We watch it daily. Our biggest challenge and concern, quite frankly, is around the supply chain and just making sure we're doing everything we can to take advantage of our own efforts to improve our throughput. We've seen that starting to materialize in April. So we're going to keep that as our primary focus.

Thanks, Mike.

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

Thanks guys. Good morning. So again, not surprisingly a couple of questions here on supply chain, since it does cover your outlook pretty significantly. I guess first question, you mentioned today, you do expect some modest improvement in the back half of the year. But it looks like if anything, supply chain got incrementally worse in Q1. So maybe what gives you that visibility or the confidence that we do see a turn starting in late 2Q or early Q3, for example?

Yeah. I think there's a couple of things, Joe. I mean, we highlighted some of the areas that we're seeing pressure and well, not all of them are perfectly lined up, we are seeing, as we work through with our suppliers, so things like wire harnesses and shocks as we work through with our suppliers, we're getting improved visibility around when they will be recovered to the volume levels. I mean, the area that obviously is probably the largest pacing item, not just for us but for the entire industry and many other industries is chip availability. So we're staying very close to the couple of key suppliers we have to make sure we understand and at least the communications that we've had at this point suggest that they are going to be driving improvement in their delivery to us here in the second quarter. And when you couple that with the other actions that I highlighted during my comments, I mean, we have literally taken out dozens upon dozens of models to reduce the complexity. I think you've probably seen that across our industry as well as many others to try and take that complexity out. It makes it easier to get the vehicles through the production process. Where we can, we're redesigning so that we can move between chips or even components that are causing us some challenges. And then, we've been operating with a temporary set of SWAT teams on some of these troubled supply chain areas. And the reality is, it isn't going to get better anytime soon. And so, we're making a lot of those organizational moves more permanent. And that allows us to make sure we've got the right staffing and the folks that can drive the kind of hour-to-hour discussions that we've got to have with our suppliers. So we're watching all that. We are seeing some minor green shoots out there relative to trucking availability and things like that. It's tough to know if that's a trend or just a data point, but we're going to keep a close eye on that.

The other thing to think about, Joe, is, you'll see through the year. I mean, we just put a price increase in April on both pre-sold and new orders. And so, that price will continue to be realized through Q2 and the rest of the year. And the cost is really when you get into the back half of the year, start to stabilize because the comps were really high last year as well. They were a lot lower Q1, Q2 in 2021, than they were in Q3, Q4. And costs right now seem to have stabilized at least for the moment. It's again, tough to have long-term visibility into that. But we're seeing some relative stability there.

Joe, the other thing that Bob mentioned, I just want to make sure we emphasize the point. We are expecting to see improved unit deliveries into Q2 and then, obviously, into the second half. But it's not as large as the numbers may suggest, because you got to really think through the fact that our pricing is ramping. So there's a substantial amount of pricing in the second half, as Bob pointed out, so the unit hill we have to climb probably isn't near as challenging as one may think when you do the math around our first half, second half, I'm not trying to suggest that it's a lay-up by any stretch. But there's a pretty healthy component of pricing that starts to annualize as we get into the back half and more than offset the cost as well as, it makes the hill look larger into that second half from a calendarization standpoint.

That's very helpful. And just a follow-up on that. I mean, your business is very seasonal, all right? I'm thinking here offer vehicles, motorcycles, pontoons in particular, if that turn happens in August, September versus June, is there a risk that you missed the season this year from a demand standpoint?

I don't think so. And not that seasonality isn't important but, I mean, if you look -- the demand in pre-sold for our business, really aren't correlating with seasonality. I mean, people are trying to get in line to get vehicles, knowing that it's difficult to get anything more broadly in the economy today. And our boat business is a prime example of that in terms of the portion of last year where you would typically see demand wane, it actually spiked, because people were trying to make sure that they were able to get a shot at getting a boat for this season. And I suspect the same will be true, as we exit a season, people are still going to want to have access to a vehicle. And when you couple that against the fact that our inventory in the channel is down so substantially, we'd have a restocking even if that demand were to temporarily take a pause.

Okay, great. Thank you, guys.

You bet.

The next question comes from James Hardman from Citi. Please go ahead.

Hey, good morning.

Good morning.

So a couple of questions for me. I guess, what can you tell us about retail momentum over the course of the quarter? And, I guess, Mike, since you opened the door to April, extend that into April. There's clearly the narrative out there that, however you want to look at it on a comparable basis, but versus 2019 that every month this year has gotten sequentially worse. Maybe speak to that. Obviously, people would want to then connect the dots that the consumer is souring to some degree. But maybe speak to the sequential momentum? A – Mike Speetzen: Yes. I don't know that we saw what you suggested. Our retail momentum has remained pretty strong, pretty solid. As I mentioned, I mean we go out and we survey our dealers and I can tell you that we get dozens and dozens of pages of commentary from them. And I really didn't see anything in there that has dealers worried about slowdown. It was almost entirely focused around -- I've got so much business coming at me, I just need more product. And as you know, we share 70%, give or take of our dealer network with our competitors. And those comments weren't just unique to Polaris. So – at this stage, I don't necessarily see that. I'm not suggesting that there couldn't be a slowdown at any point. But all of the statistics we have, I mean, we are watching, as we've got highlighted on that one page, much more than just our pre-sold rates. We're looking at engagement on the website, e-commerce, attachment rates, everything and everything is still pointing to a continued strong market, especially relative to 2019. .

Got it. And then along those same lines, if I'm doing the math right here, ORV retail accelerated in the first quarter versus 4Q, if we're, again, comparing to 2019. But then you lowered the retail guidance for the year, is that, help me understand that. Do we assume that ORV retail turns negative again, or is – especially in an environment where it sounds like you expect availability to improve. So maybe – maybe connect a couple of that? A – Mike Speetzen: Well, I mean, we're expecting availability to improve sequentially. But relative to the expectations we had for the year, it's obviously having an impact, a small impact on our ORV deliveries. That is really the pacing item. When we step back, we're not looking at it saying, we're expecting some big demand drop off to drive retail down. It is 100% being driven by availability of the product. And obviously, if our efforts combined with a supply chain environment that improves better than we're expecting, we'd obviously be able to improve upon that because as you can see, in any given quarter, the majority of the retail is presold, which means we've got the ability if we can get the parts to get these vehicles through. We've got more than enough capacity, we're not facing labor challenges. This is purely about getting the components and then getting the vehicles out. So that's the view we have tied to the guidance that we are putting out today. But we're obviously doing everything in our power to try and improve upon that.

Makes sense. Thanks, Mike. A – Mike Speetzen: Sure.

The next question comes from Fred Wightman from Wolfe Research. Please go ahead. Q – Fred Wightman: Hey, guys. Maybe just to follow-up on that full year retail outlook. I think in the past, you were sort of expecting pretty similar performance from Off-Road and then On-Road. Is that still sort of the case in this new full year outlook, or is Off-Road a little bit weaker? A – Mike Speetzen: No, that's still the case. I mean, Off-Road picks up a little bit more momentum going into the second half of the year, On-Road stays a little more steady. But expecting them to have similar performance. Q – Fred Wightman: Okay. Great. And then if we just think back to last quarter, you had given us a little bit of color just as far as first half, second half expectations, it seems like you came in a little bit below that, just based on first quarter. Are you still sort of comfortable with that prior cadence? Is it going to be even more back half weighted based on what you're seeing and expecting today, or how should we think about that?

Yeah. As I think I mentioned, Q2 will be lower than prior year and lower than what we had previous -- lower in -- for the full half than what we had previously communicated. I think a good way to think about Q2 is from a revenue standpoint relative to Q1, you'll see low to mid double-digit growth in revenue. Think about it a regular drop rate on that and a little bit more OpEx in the quarter, Q2 than Q1. And that's where we think Q2 will land and then the quarters get sequentially better from their Q3, Q4. So it will be more back half loaded as we start to see the impact of the April price increase flow through and what hopefully is a stable cost base and some unit shipment improvement given the supply chain work we're doing that Mike has been talking about.

Perfect. Thanks guys.

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

Hi. Good morning. I have two, please. Thank you. First, you produced product in Mexico, some in the US, you've also got Europe and Vietnam. What kind of differences are you seeing in supply between those regions and manufacturers?

It's pretty consistent. I mean as you know, our Poland facility is really sourcing largely consistent with the rest of our supply base. We've seen some transitions with suppliers moving -- not necessarily moving out of China, but they're creating a secondary supply hub in Mexico. And so that, obviously, helps from a logistics standpoint, but that's more of a one-off. It's been pretty consistent across the board to all those different facilities. Now, given the facilities are far more focused factories, the specific challenges are what drive more of the unique nature. For example, our Roseau, Minnesota facility is largely a snowmobile factory. And so last year, we had some issues with a bearing supplier, which obviously that doesn't impact any of our other sites. So, it's more around that component availability than it is for the specific products made than it is a difference in supply base.

Okay. Thank you. My next question, from our research, it seems exclusive dealers are taking more pre-sold or pre-orders, whereas, multi-line dealers, multi-brand dealers less so because if they don't have a Polaris, they can just put them in a BRP or Honda or something else. Does that affect how you ship units going forward pre-sold for stock units?

No. I mean, look, we're trying to improve the availability. As we talked about in the prepared comments, we're doing everything we can to ship beyond just the pre-sold, which gets those stocking units in. But when you look at 70% of our retail is going through pre-solds, our direct Polaris dealerships are a small, small percentage of the base. So we're still seeing good penetration at our multi-line dealers, and we know that right now, the competitive battle is about availability more so than anything else. And so the fact that we're getting as many pre-solds as we can, we held on to those cancellation rate actually was cut in half despite delays in delivery and price increases. We view that as encouraging. And we know that we've got a window here to try and make up for the misses that we've had and make sure we're getting product in the hands of our customers as quick as we can.

Okay. Thank you, Mike.

Thank you.

The next question comes from Robin Farley from UBS. Please go ahead.

Great. Thanks. I have two questions. One is, can you just clarify for Q2, you talked about lower volume across our product lines, but you also set higher price. And so where does that net out in terms of sales year-over-year being up or down in terms of your shipment sales?

So, Robin, so ship in Q2 will be up relative to Q1. We're expecting Q2 to come in, like I said, low to mid-single-digits from a revenue perspective above Q1 2022 relative to Q2 last year, yes, units are up. The mix is a little bit different because we'll have a little bit higher percentage of snow -- I'm sorry, a little bit lower percentage of snow, but units will be up slightly.

So, units up slightly year-over-year, but dollar sales.

Sales will be--

Because the price right just for me…

Yes.

Okay, that's helpful. Thank you. And then my other question is on margins and with the guidance for gross margin to be down 100 to 120 bps, can you just kind of break out for us because there are some pieces of that that you have really good visibility on like your price increase, or like tariffs being lower versus the prior year? And then some pieces like obviously with less visibility because of the supply chain, could you kind of break out a couple of those pieces for us just so we can think about like every piece of margin, guidance is not at risk here. And there are some -- you think about the pieces that you do have really good visibility on. If you could just help us quantify that? Thanks.

Yes, obviously, challenging in the current environment, but volume mix is a little bit of a tailwind for us right now -- I'm sorry, I meant headwind, just because, as Mike said, we're limiting some of the numbers of units and the more complex units are obviously harder to make, harder to get all the parts for. So, we get a little bit of headwind from volume and mix from a GP perspective. From a price, obviously, we know what's locked in through April 1st. We don't have a specific plan on when the next time we would go with prices. We do a model year later in the summer and we've changed our profiles with our dealers, and we can raise price kind of with a month's notice. So, obviously, we're staying on top of that. As you look at the supply chain cost side of it, like I said in my earlier comments, we're starting to see some stability. And as we get into the third and fourth quarter, our comparables get to be pretty similar to the levels we're at right now. So, we think the risk of continued increase in supply chain costs to be relatively limited in the back half of the year versus the prior year and versus where we are right now. In fact, hopefully, we'll start to see some things improve. As Mike said, we've seen some green shoots in trucking and container availability and the pricing on some of that, hard to say whether that's a trend or not, it's a pretty dynamic environment. But we think we have some opportunity for some improvement there. So I think we have good visibility on the price, decent visibility on the mix. The cost premiums, again, I think we're loaded in pretty high right now, and we don't see something today that makes that change dramatically. But obviously, it's a dynamic environment. A – Mike Speetzen: Hey Robin, one way to think about the – if you're looking at margin rate, given the fact that we're doing far more frequent reviews of cost and associated price actions. If for example, we saw commodities or logistics or whatever spike, say in the second half relative to what we think, you might see margin erosion as a percentage because what would happen is, we would very quickly enact price or surcharges to offset that, but we're not building in a 30% margin when we price. The price moves we've made over the past couple of years, they're substantial. So trying to preserve the margin versus just trying to cover the cost is really the -- our strategy is, we've just got to cover the cost, it may erode the margin percent. But from a dollar standpoint will remain intact. So, it's really going to come with the execution of our volume levels as we move forward. A – Bob Mack: The other thing to keep in mind Robin is, we're doing our best to manage operating expenses. We improved our estimate of 10 basis points in terms of OpEx as a percentage of revenue, when we updated the guidance here today. And we're going to continue to focus on that as an offset to any increased supply chain costs or other business disruptions. Q – Robin Farley: Thanks. And then can you just -- anything on margin -- I'm sorry, on tariffs in terms of the… A – Bob Mack: Sure. So tariffs, we were looking at about $105 million for the year. We've got about a $15 million benefit from the exclusions that were recently enacted. So, we expect that will be at $90 million, unless something changes from a legislative standpoint, which we're not anticipating right now. Q – Robin Farley: Is that $90 million total, or you're saying delta versus last year, just to. A – Bob Mack: No, $90 million, total. Q – Robin Farley: Okay. Great. Thank you. A – Bob Mack: Thanks, Robin.

Our next question comes from Joseph Spak from RBC Capital Markets. Please go ahead. Q – Joseph Spak: Thank you very much. Mike, Bob, it sounds like internally, you've at least had some talks about what a recession could mean? And you've talked about in the past about this restock extending well into at least next year, I believe, was your prior comments. So – have you done the work like if a typical recession were to occur and you saw a demand hit, like how quickly does that new stock occur in that environment versus sort of going through next year? A – Mike Speetzen: Yes. I mean we're working through some of that, Joe. I mean it's -- there's a lot to it, because you'd have to determine are people going to cancel on pre-solds and then specific vehicle mix. But it would accelerate that potentially. But what I would remind you is -- I mean, first of all the last recession we had during COVID, we saw demand go up. So that was obviously a unique environment. But even if you go back to 2008, 2009, which again was a very different recession and driven from very different characteristics and what we're continuing with now, we saw our business drop off for a couple of quarters, and then come right back. And that was in an environment where we still had a pretty healthy level of inventory. So at this stage, I think we'd have to see a protracted slowdown to have any kind of a material impact. And we're just not seeing that in front of us right now. Obviously, the longer the inflationary environment persists, the more risk there is. As Bob and I both have pointed out, we are seeing some logistics markers that are at least indicating improving availability. We're not sure one data point doesn't make a trend, and we're trying to decipher how much of that’s driven by any kind of a drop off and more in demand more broadly versus just the logistics channels are improving because they've brought in more capacity and are getting more efficiency. So we're going to be watching that really closely here over the next couple of months. But I think from my standpoint, it's hard for me to imagine that we end up in an environment where all of a sudden we're going to do an about face and start looking at taking costs out of the business. I mean, we've got a lot of important strategic initiatives and with the channel refill opportunity in front of us, even if we were to see a demand drop off for a couple of quarters, I think we're still going to stay the course from a business perspective.

Yeah, that's very helpful. And maybe almost taking, sort of, a different, completely different scenario, like you mentioned a number of times you've taken will continue to take substantial price here, and that's helping to cover some of the inflation. But clearly, the inventory situation is probably making that a little bit easier to swallow. So if we think further out as inventory, not only for you, but your competitors normalize, I guess, I'm wondering how you think this plays out because MSRP is sticky, but to get industry volumes higher, it would seem like the industry is setting itself up for a higher promo per unit in the future. Is that your view, or is there sort of like a new normal here with the mix of maybe keeping lower inventories than normal but higher than today?

Yeah. I mean I think it's something we've spent time and continue to talk through. I think it's going to be a little bit of what you just articulated. Our goal is when we get on the backside of this. We're not going to be carrying anywhere near as much inventory. Now, obviously, we can't forecast what our competitors will do. But dealers are making a lot of money right now. And with our ability in a normalized supply chain environment to deliver products quickly and customize for what customers are looking for. That gives the dealer a really good opportunity to make more margin. If they're not carrying as many stocking units, they're obviously not paying the interest for the floor plan and they're not going to be induced by consumers to have to put as much promo against it. Now I'm not suggesting promo won't come back. It will be back and never completely went away. I mean, we still have some levels of special programs for the military, the ag markets, interest rates, things like that. So it will, but our strategy all along was not to try and be egregious with price because we want to be able to retain as much of it as we can. And that's why we've seen the dilution to our margins because we're essentially just covering the cost increases with the price moves. And we do suspect that when inventory gets back into a more normalized and the economy is back to normal, whatever that might mean that we'll see a little bit of promo come back, but we're also going to see these costs coming out of the system. And net-net, we think that's going to be a net positive for margins. And we think the dealers will continue to benefit as well.

Thanks very much.

Thank you.

The next question comes from Xian Siew from BNP Paribas Exane. Please go ahead.

Hi, guys. Thanks for taking the question. I think last quarter you talked about how you expect market share gains to continue into 2022? Do you still -- is that expectation still intact with the new updated retail guide?

Yes. I think, as we think about market share for the year, as we've said, it's going to be lumpy quarter by quarter, I think, really driven by people's ability to ship into the channel. Right now, I think, we think market share will be relatively flat with the industry. But obviously, it's going to depend on our ability to ship. So being the biggest player in the industry. So I think if we can continue to see some improvement from a supply chain standpoint, we have got a good opportunity to take share. We've got a huge amount of pre-solds that are holding firm. So if we can ship those, I think we've got a good opportunity. But we're being realistic in our view right now, looking at what we think we can really ship. And, obviously, having to take a bit of a view on what the rest of the industry is going to ship, which we don't have perfect visibility too.

Yes, understood. And then on the inventory, inventories are up. I just kind of want to understand how, I guess, supply chain is impacting that. Do you have inventory in transit in terms of maybe at the L.A. ports or you talked about China -- or is it, like, a lot of partially built unit? Is it just raw material on the books, just maybe if you can help unpack the inventory?

Sure. So inventory, it's actually all of the things you mentioned. So increased products in transit, mostly on the water, longer transit times from Asia, longer time stuck in the port, inventory being expedited on top of that to help meet production. So that's increased in transit. Raw materials are up. Some of that is, you get build fallout and you've already brought the materials in, but you're missing certain key components. We're working hard to balance that out and make sure we're bringing in the things we really need and not continuing to bring in things that we've already accumulated through the course of all the supply chain disruptions. So the teams are on that every day. So I think you'll start to see that improve on the raw side. And then, really, it's -- on the finished goods side, the biggest driver is the inventory that's being held for rework. We're taking an approach of holding the majority of our inventory that needs to be, what we would call, rework or needs components added to it, that were short when it was originally built. Holding it in our warehouses and doing that rework in-house versus shipping it out to the dealers. And, obviously, from our view, we're doing that from a quality perspective and also not trying to burden the dealers. So you'll see -- you see finished goods ramping up a bit because of that inventory that's held waiting for rework. And, again, as the supply chain improves, we look to sequentially take that down quarter-over-quarter through the rest of the year.

Okay, got it. Thanks guys. That’s helpful.

Thank you.

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

Yes. Good morning, everyone. My question -- my first question was purely with regard to retail credit. I'm just wondering if you can comment on, what you're seeing in terms of retail credit availability for consumers and with all the talk and concern these days about a potential recession dead ahead, our credit providers maybe pulling back a little bit. And anything you can give us on that would be helpful?

Yes. We haven't seen any pullback from a retail credit availability or approval standpoint. Our pen rates are down a little bit because of the time consumers have to wait to get a unit -- so it gives them more opportunity to shop the credit unions and other things. So, disadvantages dealer financing a little bit. So we're obviously watching that to try to help our dealers work through that. But we haven't seen any increase really in defaults, defaults are at all-time historic lows -- in the portfolios that our partners have. So as of right now, we're just not seeing those issues in region.

David, I'd remind you that the retail construct -- retail finance construct is, we've got separation between us and the provider, which means that they're the ones carrying the bulk of the risk. And that means that the folks that are getting credit through those retail providers are usually high FICOs, strong credit history, and at least, what we've seen, and we even saw this during the 2020 timeframe around the pandemic impact. Our customers tend to stick with making their payments. So at this point, I don't think there's a whole lot of risk in that area.

All right. Good to hear. The second question is just with regard to the PG&A business, and it seems to be an important growth provider for you right now. How are field inventories in PG&A, I realize there's probably a big difference between parts versus garments and accessories. But -- just do you have the depth of inventory in the field right now to continue that growth into the balance of the year?

Yes, it’s improved. I mean we went through a period where we had some pretty high back orders because, obviously, we're sourcing for many of the same suppliers. The difference is that you've got a lot less parts that have to come together. If someone's buying a winch or a bumper or even a cab system, that compared to building a side-by-side that requires 3,000 parts and components to come together at one moment to complete the vehicle, the complexity is just not there. So the availability has been much better. And frankly, just the innovation we've got, you look at the number of offerings that we've come up with and the attachment rate for each one of our vehicles, it has increased. And I give the team with Indian motorcycle, a lot of credit. We've seen really strong PG&A growth as they continue to look at more and more offerings to really build that portfolio out. So, it's encouraging. Our Powersports aftermarket, so the non-PG&A piece that's businesses like Pro Armor, Klim, Kolpin, 509, obviously saw continued strong growth. So the teams are doing a good job in working the availability. We do have areas of stock outs, but we're pretty quick to get those addressed and get -- whether it's parts or garments or apparel into the hands of our customers, we're doing a pretty good job.

Great. Thanks Mike. Good luck.

Thanks.

The next question comes from Jamie Katz from Morningstar. Please go ahead.

Hi. Good morning, gentlemen. Thanks for taking my question. I guess, first, can we talk a little bit about aftermarket -- the aftermarket segment and what you are forecasting for the auto industry, I guess, for the remainder of the year given that the back end of the year. It looks like it's going to have to be significantly improved. And then can you talk a little bit about the cost structure improvements that you are making in the segment? Thanks.

Sure. So, you have to think about the aftermarket segment, obviously, in two pieces of the Transamerican piece and the powersports speeds, and they operate fairly differently. The Transamerican piece has been negatively impacted by just the availability of new cars or new trucks and jeeps effectively and even the tightness in the used market. So, consumers tend to buy a new vehicle or a new to the vehicle and then take it into our 4WP stores for upfit and just that lack of vehicles in the market, that's been a headwind for the business. For the rest of the year, many of you follow the auto market as more than we do, but we're not anticipating a dramatic improvement from an auto availability standpoint. There is seasonality built into that business. So, you tend to see Q2, Q3 tend to be just better seasons because people are out using their vehicles more and we tend to have more volume in those quarters. So, we do anticipate those quarters being improved from Q1. We're also been focused on – we've added some new stores. And so those will sequentially come into the run rate as the year rolls out. So that will help from a retail revenue standpoint also. On the powersports aftermarket side, that business has been really strong, if anything has been limited by just availability and timing of shipments of both product and apparel, a lot of the apparel is made outside the US, particularly on the kind of Gore-Tex waterproof side. And so, logistics and shipping have been a challenge there. But had strong Q1, and we anticipate a good year with those businesses. Q – Jamie Katz: Okay. And then I just have one follow-up on the inventory discussion you were having earlier. The way that it was being described implies that working capital demand should theoretically be significantly lower as we go through the year. Is that the right way to think about it? A – Bob Mack: Yes. I mean assuming we start – we continue to see – or we start to see modest improvements in the supply chain and increase our ability to ship we should start to see improvements in working capital as inventory comes down. Obviously, we've got to get through that to see it happen, but we're very focused on trying to limit what's coming in and focus on getting units out the door. So, we should see better working capital in the second half of the year. Q – Jamie Katz: Thank you.

This concludes our question-and-answer session, and the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.