Polaris Inc. (PII) Q2 2022 Earnings Report, Transcript and Summary

Good day, and welcome to the Polaris Earnings Conference 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. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to J.C. Weigelt, Vice President of Investor Relations. Please go ahead.

Thank you, Betsy, and good morning or afternoon, everyone. I am J.C. Weigelt, Vice President of Investor Relations at Polaris. Thank you for joining us for our 2022 second 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 risks and uncertainties. All references to second quarter actual results and 2022 guidance are for continuing operations and are reported on an adjusted non-GAAP basis, unless otherwise noted. Please refer to our Reg G reconciliation schedules at the end of the presentation for the GAAP to non-GAAP adjustments. Please note that with the completed divestiture of TAP on July 1st, historical results of the business are now reported as discontinued operations starting with the second quarter of 2022. Financial figures and guidance referenced today incorporate this change unless otherwise noted. TAP was historically included in the Company’s aftermarket segment. However, because of the transaction, we eliminated the aftermarket segment and the resulting powersports aftermarket businesses were reclassified to the off-road and on-road segments. Please see the appendix in today’s earnings presentation for a historical reference of the reclassified segment data. Now, I will turn the call over to Mike Speetzen. Go ahead, Mike.

Thanks, J.C. Hello, everyone, and thank you for joining us today. I hope everyone is having a great summer and taking the opportunity to get outside. Our second quarter results are indicative of a stable demand and a healthy consumer, offset by supply chain challenges, which continue to constrain inventory at the dealers. Sales of approximately $2.1 billion were up 8% relative to the second quarter of 2021. Our teams continue to perform exceptionally well in a difficult operating environment, and our results during the second quarter reflect our unwavering commitment to remain the global leader in powersports by executing for our dealers and customers. While we are closely watching a number of indicators to understand the resilience of the consumer in this environment, the data continues to show a healthy consumer and stable demand. That said, North American retail sales were down 23% versus 2021, largely driven by supply constraints. Specific to North America, ORV retail was up 13% sequentially. Although these results reflect modest share loss, we continue to see share driven by shipping timing versus fundamental competitive wins from new products. We did see share trends improve late in the quarter as availability improved and we expect this to continue into the second half of the year. Further, we’re seeing modest improvements in the supply chain, which should begin to help build inventory at the dealers as well as improved market share performance. While we are nowhere near being clear of supply chain headwinds, we are seeing logistics improve, supporting sequential margin improvement in Q2 and experiencing less volatility in some commodity costs. Pricing continued to be strong, offsetting increased year-over-year costs. It’s important to understand that the math of strong pricing offsetting costs produces minimal drop-through, resulting in pressure on margins. We expect this to continue to improve in the second half as we see better realization of our previously enacted price increases. All in, adjusted EPS declined 7% versus last year to $2.42. We had a number of highlights during the quarter, so let me touch on a few. It was exciting to announce the nationwide rollout of our Adventures Select offering. Through the industry’s first monthly subscription program, members can now use monthly credits to rent the Polaris vehicle of their choice at Polaris Adventure locations nationwide. Members now have open access to get outside and explore their own cities or bucket list destinations across the country in a new way, exploring the outdoors off-roading, touring the city in an open aired slingshot or even cruising the open waters by pontoon. Since launching Polaris Adventures Select early last year, 90% of our members are new to the powersports industry, again, reflecting our commitment to open the industry up to new riders and customers. In the spirit of innovation, which is the DNA of our company, we held our annual innovation awards to celebrate receiving a record-breaking 70 patents this past year. We are nearing the 2,000 patent mark since our inception, and we anticipate we will hit that milestone this year. We continually strive to push the industry with rider-driven innovation and the best customer experience. As the market leader in powersports, we believe innovation is key to growing the market. We have a strong track record of innovation and are excited for what we have in store later this year and into next year. During the quarter, we celebrated two important days aimed at celebrating our riders, the industry and inviting new consumers to discover what powersports has to offer. The first was International Female Rider Day, in early May, where people in over 120 countries took to their motorcycles, off-road vehicles, snowmobiles and boats in support of the female riding community. It was great to help celebrate this event and increase awareness with women, particularly because we have seen female ridership increased approximately 30% over the last two years. The second event was National Get Outdoors Day and what better day to celebrate than with a company that asks its customers and employees to think outside. Our products live outside, and we want people to think about getting out with our products to help them discover fun and unique ways to experience the outdoors. The final highlight I want to mention and which transitions us to the next slide is the launch of our 2021 Geared for Good ESG report. We launched this initiative in 2019. One thing remains certain. Our products live in the environment, and we need to be good stewards to our land, water and air. Our 2021 report consists of a tremendous amount of information and some success stories around our ESG strategy. We’ve done a lot of work to reduce energy use, water consumption and our carbon footprint. In addition, we have a $5 million investment with the National Forest Foundation to help improve trails and protect our land for our future enjoyment. We also provide support in our local markets to help improve repair and create trails. Our Geared for Good ESG report lays out some of the initiatives we’ve related to our rider safety. With many new riders coming into the space, safety is paramount, and we aim to support our riders on how to ride safely and responsibly. In fact, August kicks off National Motorsports Safety Month, and we have plans to leverage the timeliness of the month to promote safe riding practices with all our riders. While we remain genuine and authentic with this strategy and we’ll continue to do the right thing for our stakeholders, it is always nice to see external parties recognize the work you’re doing. We have seen recent improvements in rater [ph] scores and accolades from a variety of publications. Our Geared for Goods strategy will continue to play a critical part in the direction of the company, and I’m proud to lead a culture that embraces this commitment. Shifting to consumer demand, we are continuously looking at a variety of indicators to understand true demand and the health of the consumer. While this is art more than science, in aggregate, we believe our data shows a resilient consumer and stable demand with the vast majority of these indicators positive during the quarter with some others reflecting moderating demand. Looking at North American ORV, retail was up 13% sequentially. This data point, in combination with the fact that we shipped approximately 10,000 more units sequentially, led to a modest decline in presolds as a percentage of retail. As our shipments have increased, we are also seeing dealers able to retail more units on the floor or in transit, which is another step in the right direction to get back to a more normal environment and one factor that will naturally lower presolds going forward. This phenomenon was more pronounced in lower-end models versus higher end or more complex models, where component availability is still challenged. Shipment levels continue to dictate retail performance as our days to retail continues at an incredibly fast pace. During the second quarter, days to retail was in line with that of 2021, which was one-fifth of the time we saw in 2019. This means there’s a high correlation between what we ship and what is retailed, which has given us little opportunity to restock dealer inventory. Some other demand indicators and what they’re signaling include: short- and long-term repurchase rates remain elevated or within the historic range. Off-Road and On-Road presold order cancellations remained low. PG&A attachment rates remain near record levels, indicating that consumers are looking to upgrade their vehicles with high-margin accessories. Web traffic remains well above the 2019 in areas like website vehicle builds as well as inventory and dealer searches. And lastly, customers new to Polaris continue to dominate retail purchases. Broadly speaking, we believe our demand trends are stable and the consumer remains healthy, especially when compared to 2019 levels. Additionally, dealers continue to be positive around demand and more constructive around availability, which we appreciate but know we have more work to do to improve availability even further. While other factors such as rising interest rates, inflation and higher gas prices are certainly a concern, our data continues to show a resilient customer. Remember that our average consumer is fairly affluent, consisting of a dual income household and has good credit. We’ll continue to evaluate these metrics and communicate with our dealers regarding demand, but as it stands today, we see consumers that continue to be interested in powersports. Filling the channel remains one of the biggest opportunities for us in the near to medium term. With robust demand extending over the last several years, inventory levels have not been able to keep pace due to supply chain challenges. Where we sit today, inventory is down approximately 70% from pre-pandemic levels in 2019. While demand has been strong since 2019, supply chain challenges have constrained the industry’s ability to deliver and as a result, Polaris has only grown at a 2% CAGR over the 2019 to 2022 period. So, despite strong demand, we and the industry have not seen outsized growth. So, what does this mean? From an inventory build opportunity, the chart on slide 8 shows our expected year-end inventory position versus where it theoretically would be using the 2019 days sales metric. We’ve talked before about a new optimal level of inventory given what we’ve learned over the last several years, what we’re hearing from dealers and how we’ve been able to operate in this constrained environment. We believe this new optimal level of inventory represents an approximately 2.5 times increase from current inventory levels which we estimate could total almost $750 million. This opportunity is separate from demand trends and could represent a meaningful buffer for sales if demand wanes or it could also represent upside if demand remains elevated and the supply chain can support production to fill the channel. Switching gears to the supply chain. Challenges remain globally. However, there are signs of improvement from logistics to the number of component shortages negatively impacting our production and shipping execution. Today, we have approximately 25 suppliers with component shortages impacting over 100 units. This represents an improvement of over 50% sequentially and suppliers with part shortages impacting over 1,000 units has fallen 35% sequentially. Despite those improvements, we are still dealing with shortages in key components that continue to limit production, such as chips, shocks and wire harnesses, particularly for our higher-end vehicles. While some of this is a trend in the right direction, production remains hampered by challenges within the supply chain. We continue to expect modest improvements as we progress through the second half of the year. We’ve seen improvement in logistics relative to what we saw in the beginning of the year with very few delays at major points of entry. This has allowed us to reduce expedited costs, which had a small positive impact in the second quarter and is expected to be another positive factor in the second half of the year relative to last year. Reviewing our five-year strategy, we are now closer than ever to being a core powersports company. The sale of TAP earlier this month demonstrates our ability to execute on our stated goals and refocus the organization on being the global leader in powersports. For our continuing operations, the five-year financial goals we laid out at our Analyst Meeting earlier this year remain the same, with mid-single-digit sales growth, mid- to high-teens EBITDA and mid-20s ROIC and double-digit EPS growth. We view this focus on powersports and the financial metrics we laid out as a significant value creation opportunity for our shareholders and our teams are committed to the strategy. Let me now turn it over to Bob, who will summarize our second quarter performance as well as our expectations for the remainder of the year. Bob?

Thanks, Mike, and good morning or afternoon to everyone on the call today. My comments will be around our second quarter performance and expectations for the remainder of the year. But first, I want to lay out our new reporting structure given the recent sale of TAP, which resulted in the financials from that business being moved to discontinued operations. We now have three segments: Off-Road, On-Road and Marine. The mix of our previous aftermarket segment consisted of approximately 80% TAP and 20% powersports aftermarket including brands like Klim, 509, Pro Armor and Kolpin. Results from these powersports aftermarket brands have been reallocated into the relevant segments, which include Off-Road and On-Road. We have provided historical comparisons of this new reporting structure in the appendix of our earnings presentation and on our website. Turning to the quarter. Let us start by walking through sales and EBITDA for the quarter. Sales of $2.06 billion were up 8% relative to last year with strong mix and price offsetting lower unit shipments. In spite of foreign currency headwinds, international sales were up by 1%, driven by strength in EMEA and Latin America while Asia Pacific saw modest declines. Total PG&A revenue in the quarter was flat year-over-year with On-road PG&A up over 20%. Adjusted EBITDA margin was down 182 basis points to 12.4% with lower shipment volume and higher cost premiums being the largest headwinds. Positive price and operating cost containment helped partially offset some of these headwinds. Sequentially, adjusted EBITDA margin improved 315 basis points with positive contributions from price and modest improvement in the supply chain, which benefited our operational performance. Below operating profit, our tax rate was 21.7%. Interest expense ticked up as expected to $15 million, given higher rates and debt levels. There was no share repurchase activity in the second quarter as we remain prudent given current working capital levels and the portfolio actions we undertook in the quarter. Outstanding shares remained approximately $2 million lower versus last year given our repurchase activity late last year and in the first quarter. We remain committed to executing the share buyback levels included with our guidance, subject to market conditions. Turning to our segments. Let’s start with Off-Road. Sales of $1.5 billion were up 7% relative to last year. Whole goods were up 10% and PG&A was down 3%. Recall, we have accounted for the relevant powersports aftermarket sales in the segment. Adjusted gross margins were down 359 basis points. Supply chain disruptions continued to have a negative impact on performance. And although there was some sequential improvement, we are still seeing constraints in components such as chips and shocks. On the plus side, we did see positive pricing on new and presold orders during the quarter with cancellation rates remaining low. Looking at retail performance, we were down mid-20s in North America with better performance than side-by-sides versus ATVs. We believe the industry was down mid-teens, thus pointing to share loss for us in the quarter. Breaking out recreational ORV, we believe we held share in the first half of the year and lost share in the Utility segment, which includes RANGER and ATV. More of the loss came from ATV where shipments were negatively impacted by one key supplier. We continue to believe share shifts in this environment are the result of component availability and decisions around production priority, such as prioritizing less contented value product versus complex premium product and not the result of the launch of new products by competitors. Thus, we continue to expect quarterly share shifts to be lumpy this year. On a 12-month rolling average, we estimate ORV share was down approximately 2 points. Overall, while demand might be off the pandemic peak, we still see it above pre-pandemic levels, with particularly healthy demand for our premium, recreation and utility products. We do expect our presold orders to decline in the second half as we begin to transition into a more normal operating improving coupled with an improving supply chain. This means we are closer to delivering products in a more a predictable and timely fashion versus a negative signal on demand. It was encouraging to see sequential improvements within the supply chain, especially in logistics. And while challenges remain, we continue to be encouraged with our ability to execute in this difficult environment. We believe our business is poised for growth and share capture with an easing supply chain and look forward to continuing to deliver exceptional rider driven innovation to our customers across the globe. Switching to On-Road now. Sales of $299 million were flat last year, with whole goods down 5% and PG&A up 24%. Remember that our On-Road segment now includes Aixam and Goupil, thus, you see a strong mix of international revenue. Second quarter results from those two businesses were up mid-single digits. As noted last quarter, we have brought on additional suppliers at Indian Motorcycles and began to see the benefits of that towards the end of the quarter with more relief expected as the year progresses. Margin was down 71 basis points due to unfavorable foreign currency and higher input costs. While dealer inventory levels remain low, we continue to see strong demand as presolds remain near record levels. Indian motorcycle retail in the quarter was down in North America by approximately 40% and down almost 35% internationally. Looking at share on a 12-month rolling basis, we believe we lost approximately 2 points of share relative to the industry. With continued easing of the supply chain and additional suppliers up and running, we remain encouraged that our On-Road segment could have a robust second half, growing sales and expanding margins. Moving to our Marine segment. Sales of $273 million were up 38%. We continue to see component shortages resulting in field inventory down 50% relative to the same period in 2019. Seems the industry is beginning to return to a normal level of seasonality with demand slowing at this time of year, given summer is already in full swing. We continue to hear from dealers that foot traffic and new retail remains strong. North American retail was down mid-30s for pontoons, and we believe the industry was down mid-teens. On a 12-month rolling average view, we believe our share was down 3 points versus the industry as we focused on premium boats versus higher volume entry-level units. Margins were up 39 basis points due to positive mix and higher unit volume, somewhat offset by supply chain inefficiencies. Marine grew shipment volumes by 20% year-over-year. Summing up our second quarter performance by segment, it is clear that supply chain disruptions remain the main driver for our sales, share and earnings performance this quarter. While we did see modest improvements in the supply chain, challenges remain. Our ability to execute and deliver in this environment remains our top focus as we progress through the remainder of the year. Moving to our financial position. We continue to expect 2022 will be a strong cash generation year with both, operating cash flow and free cash flow well above 2021 levels. Our capital deployment priorities have not changed. We continue to focus on high-return organic investments, dividends, opportunistic share repurchases and targeted acquisitions. Looking at cash. We believe there are a couple of main drivers to help improve our cash generation profile. The first is an improving supply chain that should allow us to ramp production to consume raw materials and complete and ship our current rework inventory to dealers. Second is the realization of selling these products at higher prices, which have already been implemented. We view our balance sheet and financial position as a competitive strength as it allows us to invest in our business for the long term while also providing the flexibility to deploy excess cash to generate strong returns for our shareholders. Turning to our updated full year guidance expectations. I want to emphasize that this now reflects the removal of TAP in our current guidance as well as the base year of 2021. Sales are now expected to grow 13% to 16%, which is slightly above our prior guidance due to the removal of TAP. This reflects strong growth in the back half driven by price and an improving supply chain. We narrowed our sales expectation for On-Road to mid-teens from mid- to high-teens due to foreign currency and a weaker-than-expected second quarter driven by supply chain constraints. Adjusted EPS from continuing operations is still expected to grow 11% to 14%, although we did take the top end of guidance down by $0.10 to $10.30, which reflects the removal of TAP, while holding the bottom end of guidance due to strong results this quarter. Therefore, the midpoint of our full year guidance is $10.15, which is $0.05 lower than our original guidance. As Mike stated, we continue to be encouraged by what our demand indicators are showing us. There might be some mixed signals when comparing to peak levels over the last couple of years, but when stepping back and taking a longer view, we are still seeing elevated demand relative to pre-pandemic levels. We have confidence in these growth numbers given our expectations around stable demand and improving supply chain and depleted inventory at the dealers. This leads to stronger growth in the back half and operating leverage, driving double-digit adjusted EPS growth for the year. A couple of items on margins. First, we expect gross profit margins to decline 60 to 80 basis points. After adjusting for TAP, this is an improvement from our prior guidance, mainly due to supply chain costs getting better versus what we had originally forecasted. This is partially offset by an increase in planned strategic operating expense investments. We expect EBITDA margin to decline 20 to 30 basis points, which after adjusting for TAP is consistent with our prior guidance. I want to make note that with the exclusion of TAP, our base EBITDA margin improved by approximately 1 point relative to what it would be with TAP. As we look at the third quarter compared to the prior year quarter, we expect volumes and price to be positive contributors. These positives are expected to help offset higher supply chain costs, leading to modest gross profit margin expansion in the quarter. Some other items to note include a modestly higher net interest expense for the year. We are projecting a greater negative impact from foreign currency versus our last forecast due to recent movements in the dollar. Given the volatility in foreign currency, we thought it would be helpful to tell you we are assuming an average rate of $1.06 for the euro to U.S. dollar and $0.78 for the CAD to the U.S. dollar in the second half of the year. Every penny change in the euro has a second half impact of approximately $1 million and every penny change in the Canadian dollar has a second half impact of approximately $4 million. If forward exchange rates were to hold at these rates, there is a $25 million to $30 million headwind to operating profit for the year, which has been accounted for in our guidance. Overall, we have seen some recent improvements in the supply chain, there remains to be work to be done navigating current challenges. We still believe the health of the global supply chain is going to dictate performance. Our focus remains on execution, and we believe there are numerous opportunities to increase sales with current demand levels, a modest improvement in the supply chain and replenish inventory at dealers. We believe we are set up to start seeing price overcome many of the inflation headwinds and look to expand margins in the back half of this year. Our teams are resilient, and we believe we are well positioned in the back half of the year to deliver strong results. With that, I will now turn it back over to Mike for some final thoughts.

Thanks, Bob. While we’re closely watching a variety of demand indicators, demand remains healthy and stable across our business, we continue to see positive dealer sentiment and a variety of independent surveys, cancellation rates remain low and customers continue to show interest in the industry. While the results continue to be highly correlated with the health of the supply chain, we are seeing improvements and expect the supply chain to continue to modestly recover in the second half of 2022. With this improvement, we expect retail sales to accelerate meaningfully in the back half of the year due to current demand levels, coupled with our presold order program and easing comps. On top of that, we continue to sit at the forefront of a meaningful restocking opportunity at the dealer. Taking all this into account gives me confidence in the trajectory of our business. We are more focused than ever on powersports and have a strategy to remain in the top spot while working to power the fashion, pioneer new possibilities for all those who play, work and think outside. With that, I’ll turn it over to Betsy to open the line up for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from James Hardiman with Citi. Please go ahead.

Hey. Good morning. Thanks for taking my call. It sounds like it was a solid, even better than expected second quarter. I guess, I’m curious, as we look to the back half guidance. And obviously, this has been an ongoing conversation that a lot of people are giving you credit for getting to your full year numbers. Maybe walk us through the key assumptions for the second half. What do you need to see get better in terms of supply chain? And how much -- on the flip side, how much consumer deterioration could you withstand and still hit numbers? It seems like the guidance is much more a function of the former than the latter, but maybe walk us through key assumptions.

Yes. Thanks, James. Obviously, as we outlined, continued improvement in the supply chain, although we’re not building in a substantial improvement. As we talked about in the last call, we had started to see coming out of the first quarter and improved flow in some of the areas that had stifled demand and stifled our ability to produce quite a bit in terms of chips and shocks and even wire harnesses. And we continue to see that progress through the second quarter, and we exited -- the month of June was very strong. As we look at the back half, there is certainly a unit ramp, but if you look at it relative to where we were at in 2020, it’s a slight uptick. If you look at our average monthly sales in the back half of the year, they’re less than what we executed in June. And to your point, we’re assuming that the consumer remains stable, demand remains stable. But even if the consumer were to pull back given the deficit we’re running from an inventory standpoint, we would continue moving forward. It would just allow us to replenish the channel a little bit faster than we’re currently anticipating. As we outlined in my points as well as Bob’s, we don’t see anything at this point that has that dynamic playing out. So, we’re going to continue to move forward with the plans we have. And then obviously, if we see consumer demand move substantially, we’ve got the ability to pivot. I would tell you that given the deficit we have in dealer inventory, it would have to be a pretty substantial pullback for that to be a meaningful impact to the Company, just given how low our dealer inventory levels are. So, the teams have been doing an excellent job of working through a pretty dicey environment. Even though we are seeing improvements, it’s relative to what we are experiencing. So, the supply chain is still -- we’re dealing with things every day coming at us. And even though the cost profile seems to have at least stabilized and we’re seeing some positive elements, as we outlined relative to logistics and resulting expedites, costs are still incredibly elevated, which is essentially why when you look at the margin profile of the business, the price changes we’ve made over the past year, year and a half are essentially just covering the costs that we’re experiencing. And the good news is in Q2, we were essentially offsetting those costs for the first time in quite a few quarters. So, we’re confident in our ability to execute. The supply chain does have to cooperate, but it’s not a huge monumental improvement that we’re expecting.

Got it. And then, just maybe to that last point about costs and pricing. A lot of dealers, at least that we talked to you expected a price increase in July, it doesn’t seem like you pushed that through. Curious how you’re thinking about that -- I guess, is that accurate? But curious how you’re thinking about that. I guess, you could read that on the one hand that you feel better about your cost profile and that you don’t need to lean into price as much. I guess, the other read -- way to read that would be that price elasticity is an increasing concern. So, maybe just talk us through how to think about pricing as we move forward.

Yes. James, it’s Bob. Listen, I think as we’ve said all along, we’ve tried to be very prudent with our price increases and not put ourselves in a position where we get too far ahead and have to promote the stuff out. So, we’ve tried to raise price in line with what we’re seeing with cost, which has come at obviously a deterioration to gross profit margins. As we look at July, we’re -- we look at price, we look at our next opportunity as model year launches, and really the model year launches are kind of staggered through Q3, Q4, just given what’s going on with production. So, as we continue to roll through that, we’ll obviously be looking at cost and what’s going on in the market, and we’ll make any decisions that we feel like we need to make at that time. But right now, we haven’t implemented a price increase since our April increase.

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

It’s been a great call, very helpful slide. Thanks for that. Mike, I think you touched on this, but Walmart missed today and yet your customer seems to be doing okay. I’m just wondering if you’re able to look at your demand by income cohort or something to understand if the dynamics are changing at that low end. And if not, like what are the signals that you look for to say, look, this slowdown, which has hit Walmart is finally catching up to us?

Yes. It’s a question that we’ve been spending a lot of time working through. And what I would say, Craig, is that we have seen demand moderate slightly, I would say, at the lower end of the category. Now, some of that is also being driven when you look at presolds by the fact that those are less complex vehicles. And with the supply chain starting to ease a bit, they’ve been easier to get out. The higher end of the spectrum from an income perspective certainly is playing out well for us. I mean, if you look at things like the Crew North Star RANGER, we are self-constraining the number of reservations we can take on that product. We know that our dealers have essentially a side book list of customers that are waiting for those vehicles in our other high-end vehicles like the Pro R and the Turbo R. And so, we know that the high end of the market continues to perform well. And I think as we step back and look at that, it’s not that the consumers at that level are not being impacted by higher fuel prices and groceries and everything that’s going on, mortgage rates starting to tick up. But their discretionary income levels are higher, and they tend to have more savings. And so, at this point, we really haven’t seen that impacting them, but we’re keeping a close eye on it. And if you think about over the past couple of years, we’ve been selling an awful lot at the premium category. So, that demand level continues to hold relatively well. And we’re going to keep an eye on that lower end of the market and make sure that we adjust according if we need to.

And as a follow-up, is there any evidence that maybe consumers that would be regular buyers on a normal cadence, maybe they sat out last year because, look, you couldn’t find anything. But as production improves and those customers can get back into the market, are they showing any signs of improving their demand?

As we keep an eye on it, I mean, we’re obviously watching a lot of different things. I mean, one of the key metrics we watch is existing consumers buying products versus new. And, our new customers, as we mentioned, remain high, but they have come down slightly from what we saw the last couple of years where we saw 70% of our sales coming from new to the category. We’re now down kind of sitting in the mid-60s. So, one of two things. One, you’ve got a little bit of a slowdown in the new consumer, but more than likely, we’ve got existing customers who were just kind of waiting it out coming back into the fray. The good news is as we track things like repurchase rates, and we track them at short intervals, like 3 and 6 months, 1 year, 3 years, 5, 10, at least those near-term measures are holding up and are either in line, if not better, than some of our historical numbers have been. So, at this point, it looks good. As you know, the used market is still very constrained and used pricing is holding up. So that obviously bodes well in terms of people still having interest to get into the category, maybe at some of the lower price categories.

The next question comes from Anna Glaessgen with Jefferies. Please go ahead.

I want to build on Craig’s earlier question. It’s encouraging to hear demand indicators are holding in, in light of everything going on with the consumer and appreciate the color on current purchasing and web traffic. If things were to change, where do you think you’d see it first? And would it be concentrated on one segment or more broadly, maybe toward the lower end or across the board?

Yes. So, I guess, I would answer it in a couple of different ways. I think, we would start to see it more pronounced at the lower end of the segment. And we’ve seen a little bit of moderation, but again, I don’t want to sound a signal there. It really is just more a factor of we’ve got more inventory into the channel. I would think it would start to then manifest itself maybe in the PG&A side, consumers looking to maybe do a few less accessories on a vehicle or maybe use the vehicle less and see a slowdown in parts for repairs. And then, I think it would move into the higher end of the category. Now, it doesn’t necessarily going to play out perfectly that way, but that’s essentially why we’re looking at such a broad swath of metrics is we’re trying to keep an eye on everything. And we’re not going to overreact if we see a data point because we’ve seen that along the way. And a lot of that’s really being driven by the supply chain is creating so much volatility and just the flow of components, parts and vehicles into the dealer network, but we’re watching it. And we’ve been very clear about what our expectations are around where dealer inventory will be, and we’ve got daily visibility into the channel to keep an eye on that. We’re watching demand patterns across the entire North America as well as international, and we’ll be in a position to adjust if we need to. The good news is, is that our dealer inventory levels are so low that -- as I indicated in the restocking opportunity that gives us quite a bit of buffer if we were to start to see some of those slowdown metrics playing out.

Anna, this is Bob. The other thing to think about, Mike brought up earlier that through the course of the pandemic, this industry really wasn’t able to grow. I mean, we saw some big upticks in ‘20 as we came out as kind of the first round of closures, but pretty quickly blew through all the inventory everybody had in the dealer channel and in the warehouses. And after that, really this whole industry wasn’t able to keep up with demand levels from a production standpoint because of chip shortages and other things. So, normally, you’d go into a slowdown with a lot of dealer inventory and coming off of kind of high production, high retail levels. And the reality is the retail levels we’re seeing right now, aren’t a whole lot different than they were pre-pandemic just because of the availability of inventory, the shipment levels are similar. So, Craig brought up what happens? Are there people that walked in and didn’t see a unit and didn’t buy it, and didn’t buy anything and sort of went home with their need to unfulfill. And I do think there’s some of that. And as we -- if there is a slowdown, we’ll get some inventory into the channel. And I think you’ll see a little bit of retail benefit there just by people being able to see products.

Yes. I mean, Bob’s point is a great one. I mean, a lot of the questions we got early on in the pandemic was how much of a pull forward is this. I actually think it’s a bit of the opposite. I mean, when you look at the growth that I mentioned in my prepared remarks, from ‘19 to ‘22, where we’ve essentially grown about 2%. That’s at a lower rate from a CAGR standpoint than historical, which would suggest we’ve actually got pent-up demand, unfulfilled demand that has been waiting given all the supply chain constraints. And so, I think if anything, that’s going to provide more of a tailwind than any perceived headwind from what was viewed as a pandemic bump that, as Bob pointed out, that pandemic bump kind of basically happened very quick, and it basically depleted dealer inventory. And we think now we’ve got some of our tried and true customers now wanting to get back in and that’s probably going to serve us well as we get through the next several quarters.

Great. Thanks for that. That’s really helpful. And I want to touch on the 2022 guidance and dig a bit in the volume ramp in the back half. I appreciate that supply chain has been a constraint here. Has that improved in line with expectations thus far into the quarter? And when should we expect Off-Road to inflect to positive volume growth?

So, I think, as you think about Off-Road for the back half of the year, you’ll definitely see positive unit growth in the back half. The thing you got to keep in mind though is that in the back half of the year, the snow shipments come in. So, if you’re looking at the total segment, you have a lot of snow shipments in Q3, Q4 that historically aren’t in Q1, Q2. But, we will get into positive shipment growth in the back half of the year.

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

Just going back to a couple of comments putting together here. I think, you mentioned you expected retail sales to accelerate in the back half. And then, you’re just talking about positive unit growth in the back half. So, does that acceleration mean we could actually have retail up year-over-year, or does that just mean less negative?

Less negative. We still think it will be down slightly. It’s anticipated to be up over where we were in 2019, but down ever so slightly versus ‘21.

Okay, great. And then, can you talk about your plans to increase capacity, understand capacity is meaningless without components, but I think the target is 30% expansion of capacity this year. Can you talk about where that is both on the capacity side as well as the components to go into that capacity?

Yes. So, a couple of things that we’ve done. We obviously -- we’ve talked about the marine business, which was incredibly important as we -- Bob mentioned in his prepared remarks, it’s putting us in a better position as we get into the second half to be able to continue to ramp our volumes, much needed volumes, which should start to move market share back in a much better position for us. Really, it’s been on the Off-Road vehicle side. Some of that capacity expansion has been -- we’re putting a new paint system in for our snowmobile business, which is going to help us be able to move product through a lot faster. We’ve made substantial enhancements in Monterrey, which largely is about new product that will be coming out in 2023. So it’s going to be incremental. And obviously, we’re ramping the supply chain to support that added volume. So, we’re continuing to look forward. We’ve had a number of discussions with our Board. There are some things that we’ll probably do to support insourcing of components that we had outsourced and are costing us more than they would if they were internal and we can shift some of that internal production towards that. As well as we look out over the long period. I mean, we think that the category still has good growth and we’re probably going to be in need of a new facility in the next, call it, three to four years. And so, we’re actively having those discussions in terms of where we want to do that and when.

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

Two questions. One is, I think the slide mentioned that you saw a spike in port delays in July. And I wonder if you could -- has that impacted your July capacity in terms of what you’ve been able to put out, or are you just sort of saying if it were to continue that it could, just to sort of understand the impact so far in Q3?

More of the latter, Robin. It’s just -- we had seen a continual improvement. And then, in July, we saw a bit of a spike. And I’m sure that there’s elements of how China reopened and the timing of containers coming into the port that could have had an impact. It’s something we’re keeping an eye on it. But at this point, it really hasn’t had an impact on the business.

And then also just wanted to clarify, in your guidance change for operating expense. So, there was TAP that was removed and then you said that there were improvements in what you’ve had to spend in terms of supply chain. So, first, I just want to understand what was the operating expense change, if you take TAP out of both periods, just to make sure I understood that. And then, you mentioned now that the supply chain savings is offset by you mentioned strategic investments, but I wonder if you could give a little more color on that. Thanks.

Yes. Robin, it’s Bob. So, on operating expense, if you -- what we were saying is, we’re seeing better GP in the second half of the year, and some of that benefit is offset by increased operating expenses as we look at bringing back some strategic investments that we’ve been holding on as we were waiting to see how the year unfolded. Overall, the rate is going to be 160 bps, really better than what it was in 2021 if you remove TAP. So, OpEx is growing a little bit -- a little bit faster just for these strategic investments, but still improving the rate for the year.

Robin, if you remember, TAP has a much -- or had a much higher OpEx level than the rest of the company. So, clearly, a benefit from having that exit. And then, the thing I want to clarify that Bob mentioned is those investments that we put back in, what we’re essentially doing is we’re starting to think forward in terms of what could the next three, four, five quarters look like. And as you think about the last 1.5 years, 2 years, we haven’t had to do a lot of what I’ll call upper funnel marketing to bring awareness to the category. And so, we’re reigniting some of those investments with just in anticipation that things are going to start to return back to normal, and we’ve got to get back to the good old demand stimulation of the past. And those are investments that we’re trying to -- much like we did, if you remember, 1 year, 1.5 years ago, when the supply chain component issue started, we looked ahead and said, what’s going to be the next frontier of potential bottleneck, and it was labor. And so, we jumped on that pretty quickly. And you guys have not heard us talk about labor being a constraint because we got on that so quickly. So now, we’re thinking forward around some of that upper funnel marketing expenditure and making sure that we’re continuing to invest for the future demand of the business.

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

I guess, first question, I wanted to clarify something that you guys mentioned earlier in response to another question regarding North America retail and the outlook for the second half. I think you said you expect second half retail to be down less in the first half and down modestly for the year, but I think you were down over 20% in the first half. So, maybe help us understand what you’re trying to do there.

So -- sorry, Joe. The comment was pertaining to the full year. So, we’ll be down modestly for the full year, we’ll be up in the second half, because if you think back to second half of ‘21, right, the comps are a lot lower. Second half is when things really started to go more sideways from a supply chain standpoint. And so, as we get into second half of this year, our shipping cadence is planned to improve and with it the retail cadence. And so, you’ll see growth in retail relative to ‘21 in the back half and relatively flattish for the full year is where we think it’s going to land.

Okay. Perfect. Thanks. And my follow-up to that is on market shares, obviously, it looks like you lost some share across the board here, mostly due to availability rather than consumer take some preferences. But, if I look at your Indian share down in a quarter where your biggest competitor shut down production for three weeks, maybe help me understand how we should interpret that and how you’re thinking about that business. Thanks.

Yes. Your comments are right. It’s why we clarify a lot of this is really availability. I would tell you that our share losses were not to them, ours and theirs were to the rest of the industry. So, you can imagine that’s over a number of different players. The other comment I’d make, and it’s probably more specific to ORV but applies to a lot of the businesses, we are being very deliberate in what we ship in. And Bob kind of touched on this a little bit. Our utility segment has shown share losses. But with -- if you look within that segment, we have really focused on meeting consumers where they’re going, which is our 4 seat, the crew vehicles with North Star components, those are obviously more complicated, but that’s where the customer demand is. So, we’ve erred on the side of trying to make sure we’re hitting that demand versus producing maybe less complex smaller units. All of it counts the same when you think market share, but when you think about value to the company, future customers, there’s a big difference. And so, we’re being very deliberate about where we’re delivering for the customer. The good news is we saw the share movement move in our direction in June, which was encouraging, and we’re going to obviously keep the focus on keeping that to be a trend into the second half.

The next question comes from Joe Spak with RBC Capital Markets. Please go ahead.

Bob, the walk on slide 12, I guess I’m not sure the exact price mix split. But if I just assume it’s pretty even and I look at the EBITDA flow through, it would kind of suggest like $100 million to $150 million year-over-year higher cost to sort of get to that sort of level you’re showing on the flow-through. Is that ballpark correct? I just want to try to sort of mention the potential benefit you see as price starts to really more than cover costs in the back half.

Yes. I don’t think you’re materially off first half to second half. I mean, if you think about the evolution of price through the course of the year, right? We enacted the big price increase in April. So, it starts to show in Q2 and then obviously, you get kind of full realization in Q3, Q4, which is part of the both the margin improvement and the revenue growth in the back half of the year. Also in Q2, we actually shipped through a bunch of North Stars that had been ordered in 2021, A, to get them out to those customers, obviously, people waiting a long time, but those units weren’t price protected. So, those were at lower -- the previous lower pricing, but they were price protected, I’m sorry. So, all of that gives you the margin improvement starting in Q3. And then the cost picture, costs were already higher last year in the second half, that’s when they started going up. So, the cost picture is a little more stable year-over-year in Q3, Q4.

Okay. Thank you. And Mike, sort of a big question here. I realize that. But I think investors are sort of looking at Polaris earning pre-pandemic of north of $6 and now you’re doing over $10. And so, they’re looking for signals one way or the other as to why that would or wouldn’t revert. And so, to your comments on like the 2% growth, and that’s below historic and there might be pent-up demand, obviously, revenue growth was well in excess of that because of price. So, how do you think about price in order to drive that historic volume? And I guess, why is that volume price, a better sort of profit trade? And to make it even, I guess, an even bigger question, I guess, if you were to see consumer softness and sort of maybe price us to give to drive the same volume, do you think that lower commodities and maybe a losing of supply chain provides a little bit of a natural offset to the margin?

Yes. I mean, I guess, I’d say a couple of things. I mean, yes, we’ve been moving price. But in terms of driving earnings, it really has been, if anything, a negative, meaning we didn’t move as fast as the price or the costs were moving. And that dynamic, essentially kind of what I’ll say is plateaued here in Q2 where we basically offset the cost. And as Bob pointed out, as we get into the back half, you start to get a little bit of an incremental, it’s still a drag on margins overall, but it becomes less of a drag. As we look out from a price elasticity standpoint, obviously, there’s a fair amount of this that’s gone in to cover things like logistics and expedites. And some of that’s been done through freight adders that are independent of an MSRP change and those things are designed intentionally to come off, once we start to see logistics abate. And so, we would see that as a potential lever. But, our intent is, is that -- and it was the way we originally designed our price moves. If you remember back two years ago, we were catching a fair amount of flack for not being more aggressive and more than covering the cost to try and hold margins. It was very intentional because as these costs start to abate, our intent is to try and hold on to a portion of those price increases, which will have a net plus from a pricing standpoint. And we’re going to continue to watch that closely. We understand the price elasticity. Obviously, there’s a lot more elasticity when you get into some of these higher featured products with a lot more technology, which are the ones we’ve had probably the most trouble producing and meeting demand on, but consumers have been resilient and are still waiting for those vehicles. So, it’s still going to be a part of the calculus moving forward. And as you pointed out and I made the point earlier, we haven’t seen some outsized demand. I think there’s been a lot of concern that we’re going to see a huge slowdown or a backing away. And if anything, over the past three years, we’ve really only seen about 2%, just over 2% growth. And from my perspective, we know from talking to customers, there’s been a fair amount of customers that are legacy Polaris customers that have held off because of just the lack of availability and they’ve spent more time accessorizing vehicles and preparing the existing ones. And we think they’re going to step back into the market. Given dealer inventories are low, we’ve got room to handle any kind of a potential demand pullback, even if it’s for a couple of quarters, we think we’re still in a good spot. So, I like the setup of the company. You got to think about the fact that price has not just been because we’ve moved price, prices also come from larger, more featured vehicles with a lot more tech and consumers are willing to pay for that.

The next question comes from Fred Wightman with Wolfe Research. Please go ahead.

You’ve mentioned some expected tailwinds just from lower expedites. Is there any way to frame the benefit, either what you saw in 2Q or sort of what you’re expecting incrementally for the rest of the year versus the outlook last quarter?

Yes. I would say, it’s -- I mean, it’s not a dramatic impact, Fred. I mean, it’s -- they were improving in the last outlook and that kind of hit our -- around our expectations. It is a bit of a month-to-month thing. I mean, the expedites happen either because the supplier gets behind or because of delays in the port and you got to fly stuff over the ports. So, that’s not going to be a huge driver in the back half of the year being dramatically different than Q2. It was -- I think, Fred, it’s just more of a positive signal because we spend awful lot of earnings calls talking about expedites increasing sequentially. And so, it’s nice to see things at least settling down a bit, hopefully improving.

Makes sense. And just on the financing side, is there anything that you guys are seeing at the dealer level from the consumer, either financing uptake or penetration versus sort of what you would normally see or sort of the wholesale side, just dealers’ orders relative to carrying costs getting a bit higher, anything that you guys are seeing discernibly different on either one of those?

No. I actually went through this with the team last night looking at just the results from our quarter [ph] pen rates have stayed relatively consistent. They’re a little bit lower than they have been historically just because buyers have cash and also with the wait times, they have an opportunity to shop. Delinquencies have ticked up a little, which is consistent kind of with the rest of the market, but it’s still an incredible portfolio for the finance partners, and average credit scores and approvals remain consistent Q1 to Q2 and with last year. So, not really seeing -- credit availability looks good. Partners are aggressive. There’s not a lot of finance promo in the market right now, just because of the inventory situation. And then on the wholesale side, dealer credit lines, they’re nowhere near the tops of their credit lines just because of the low inventory, and dealer financials have never been better. So we’re not expecting any issue with restocking relative to credit.

The next question comes from John Healy with Northcoast Research. Please go ahead.

I just wanted to stick with the financing line of questioning for a moment or two. I would love to talk a little bit about consumer affordability. Just with the step-up in ASPs over the last couple of years and now with base rates and probably risk in the credit market picking up. Can you talk to us about what monthly payments look like for the average consumer that comes in and picks up an On-Road and Off-Road vehicle, maybe compared to pre-COVID? And as you studied the consumer, how important is monthly payment to them? And where do you think the friction point might be in terms of demand destruction and along those lines as well, what sort of flexibility is there to work on maybe extending term of loans? And have you seen that in the marketplace at all?

Yes. So, I would say you take a step back and you think about sort of what’s happened with pricing over the last couple of years. So, you’re talking about products ranging from an ATV at sort of with an MSRP of $7,000, that’s up about 12% versus 2019. And then, you get to the higher-end products, I mean you’re 25% to 35% and those are up 20%. So, obviously, price has an impact. Consumers are sitting on, I think, it’s $2.3 trillion of excess cash. So, we’ve seen lower financing, a lot more cash buyers. So, as things change and rates go up, I think it will have an impact, but I think it will be relatively minimal. We’re not hearing that as a big part of the story right now. Credit has been heavily available if consumers want it and as is the opportunity for cash buyers. There’s not a lot of promo going on in the system right now, people buying down rates and things like that. You may see a little bit of that come back, but that’s a fairly efficient way for people to sort of incentivize the market, but that activity has been relatively low to this point?

Yes, John. And some changes that we made, this dates back to when I first joined the company. Our vehicles started to become more and more expensive at that point. And a lot of the loan programs we had I think were max duration of three years. And so, we made a fair number of enhancements to take the term out longer to make it a little bit easier for consumers. The thing I would tell you is, historically, our customers, even say they’ll take a five-year loan out, they’re typically paying that off in 2.5 to 3 years. So, what it tells me is the monthly payment is not unimportant, but they’re not looking at carrying this thing to full term. They typically are trying to time it with other cash proceeds and things that they’ve got. And the good part is that our financing partners are independent, so they act in accordance with their balance sheet. And even if we saw promo coming back in to help with rate buy-downs, we end up making a portion of that back given the arrangements we have with the partners in terms of the return on the portfolio. So, at this point, it hasn’t been something that -- I don’t want to say we’re not mindful of, but it just isn’t a major factor.

Great. That’s really helpful. And then, I just wanted to ask on the market share side of things. Obviously, you guys -- big knowledge has been a little bit of loss share, but comfortable that you’ll get that back. Can you talk to us about relationships with dealers right now? And what gives you that confidence? What gives you that confidence that you’ll get that back. What’s kind of happening behind the scenes there that you can help us with underwriting that thought process?

Yes. Bob and myself were out with Steve Menneto at a number of our dealers in four states. And dealer sentiment was very positive, especially considering the fact that deliveries are as constrained as they are, and that’s not just a Polaris issue. That’s an industry specific. I will tell you that the feedback from dealers, they love the innovation that we’ve come out with. They’re seeing the enhancement and the quality of the vehicles. They’re incredibly appreciative of how we’re handling the approach to rework and the supply chain challenges that are sitting inside the network. And so, they’re giving us really good marks. Obviously, profitability is at an all-time high, just given how constrained inventories are, and there’s very little discounting going on in the marketplace. Really what they want is more product. And so, we have continued to enhance our communications. We’ve worked to try and take the burden off of the dealer to get caught in between the consumer and us. And so, we implemented late last year the ability for consumers to go in and check on availability and where their product is in the cycle. And all those things are working in our favor. So, we don’t take it for granted. We know we’ve got to continue to improve the situation. But overall sentiment with dealers is very positive. And basically what they told us when we were out is you give me more product, I’m going to be able to move it, because we’ve got a large list of consumers waiting to get stuff.

The next question comes from Xian Siew with BNP.

So, you talked about stepping up the marketing efforts a bit, but selling and marketing expense was down about 5% ex TAP year-on-year. So, should we expect -- or I guess, why was that down? And then, should we expect it to start increasing to the back half and into maybe next year? Yes.

Yes. So, it was more a comment around what we’ve got planned in the second half. I mean, obviously, given -- the last thing we wanted to do is go out and stimulate even more demand than we’re having trouble satisfying today. But as we look out, knowing that the supply chain has improved and anticipating that we continue to see it improve, obviously, not just through the end of this year, but as we get into ‘23. When we talk about stimulating that upper funnel, it is not stimulating immediate demand. This is broader level advertising, trying to bring more awareness to the category. The things that we’ve been doing and frankly, kind of pulled back on just given there were so many challenges with the supply chain, and we knew it was going to take us longer than just a quarter or two to work through those.

Okay, got it. And I also wanted to dig into the gross margin change -- or the gross margin pro forma versus with TAP, so now down 60 to 80 versus like 100, 120. And so it seems like implied that TAP was the big source of pressure because slide 21, you say gross margin expectations are unchanged for some of those core segments. So, maybe can you help bridge that? Like, what -- why was TAP such a big drag? I know you’re getting rid of that, but why was it so much worse than kind of the core and then maybe a better sense of like the improvement for the core businesses?

Yes. I mean, look, TAP had -- I mean there’s a reason that it’s no longer part of the portfolio, aside from not being core to powersports, the financial performance of the business was incredibly difficult and challenging. And, for those who have followed us over the years, they know that that is continuing to get more and more challenging. From a gross profit standpoint, there were a couple of things going on. One is, the weight of the tariffs continued to weigh heavy on that business with a lot of components being sourced out of Asia. But, we also were seeing demand pullback. There just was not as much activity going on, especially in some of the higher-margin segments. Things like DSI, Dealer Services International, where we would outfit new pickup trucks and jeeps that were coming into the dealer to provide a hero product, dealers just don’t have inventory, and they have absolutely no desire to go out and do that type of work because they’re selling pickup trucks without blinking an eye. So, there were a lot of different factors that were creating a fair amount of challenge in the business. The good part is, is that after this question, I don’t think we’ll be talking about it much.

Yes. And I think as you look at the improvement in GP, so TAP obviously, that had a fairly minimal when you remove TAP from both, kind of the original guidance and the current guidance. The TAP removal actually had a fairly minimal impact. The improvement in guidance is really driven by operating improvement in the continuing business.

Okay, got it. And sorry, just to clarify, you mentioned TAP was a big tariff hit. And there’s been talk of potentially lifting tariffs. So, would that be less of a benefit now because a lot of the headwind, I guess, was in TAP? I just want to clarify that.

No. It was a big impact for TAP relative to the company, and we’re still looking at over $100 million worth of tariff costs sitting in our P&L. So, on a relative basis, it was a big impact for them, but we’re still carrying a pretty substantial load. I mean, we still have about 15% of our components coming in from China. So, we’re watching that develop. We’re not anticipating anything positive. If it does, we’ve got the team ready to go. We’ve demonstrated a capability to take advantage of an exclusion process, et cetera. At this point, we’ve got the team more focused on how do we get cost out of the things we can control.

The next question comes from Brandon Rolle with D.A. Davidson. Please go ahead.

Thank you for squeezing me in here. I had one quick question. On slide 7, you had talked about new presolds being modestly down sequentially, although web traffic had remained strong. Could you talk about the trends you saw throughout the quarter and driving incremental presold units? Thanks.

Yes. So, part of that is -- I mean, as you can imagine, it’s a pretty complicated calculus. One thing is that we delivered a fair number of, as Bob mentioned, North Stars that had been woefully late to schedule, just given the challenges we’ve had around chips and some other components. So, we cleared through a fair amount of that. So, that obviously brought the number down. We did see a little bit of moderation in presold volume at the lower end of the market. It’s tough to tell how much of that is being driven by anybody pulling back from a demand standpoint versus the fact that we’ve been able to get the inventory position improve from where it had been. So, think about things like trail RZRs. And so, we’re keeping an eye on that, trying to understand it. The good news is, is that with the increase we had in shipments sequentially from Q1 to Q2, very little of that is -- was still sitting in dealer inventory after the end of the quarter, which signifies that between a combination of presolds and then just foot traffic, retail things we’re able to move. The other thing that I would note is on the higher end of the market, so think about things like North Stars and Pro Rs, things that are on reservation. We are self constraining that. And the reason that’s important is that we know we have dealers that have lists of people waiting to get on the reservation list. And the reason that we’ve constrained it is because given what we see from a supply chain standpoint, we’re trying to make sure that we can put delivery expectations out that consumers who are putting money down on the vehicle are willing to accept. Obviously, as the supply chain continues to sequentially improve, we’ll be able to open that allocation of reservations up, and we know we’ve got a very long list of people waiting to get in.

The other thing to keep in mind, we saw good improvement in presolds at Indian and Slingshot. But as we get into the third quarter, we’re starting to sell out of some of the key models in terms of what we’re going to build in it for the 2022 model year before we change the ‘23. So, we’re also self-constraining on some of those, so that we don’t deliver somebody the wrong model year product.

This concludes our question-and-answer session and also concludes the conference call. Thank you for attending today’s presentation. You may now disconnect.