Good morning and welcome to the Polaris Third Quarter 2021 Earnings Call and Webcast. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Richard Edwards, Head of Investor Relations. Please go ahead.

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

Thanks, Richard. Good morning everyone and thank you for joining us. While demand remained very strong for our products with presold orders at record highs and new customers continue to be a large portion of our sales mix, we were negatively impacted by supply chain challenges for the quarter. We were able to meet earnings expectations in the quarter, but a combination of logistics challenges and supplier shortages impacted our ability to ship and as a result sales finished below our expectations. This is not unique to Polaris. The entire Powersports industry is being deeply impacted by the much-reported supply chain challenges. The good news is that Polaris continues to outperform as evidenced by our record year-to-date sales and earnings performance with sales and earnings up 24% and 59% respectively versus 2020. We also continue to drive market share gains in ORV, and other segments of the business are in line with or are up year-to-date in market share versus last year. Additionally, our PG&A and International businesses performed well with PG&A sales growing 8% and our International business delivering strong sales growth of 21% in Q3. While I will cover more details in a few slides, our new product introductions for ORV have generated a lot of excitement and energy for dealers and customers. We continue to manage through very challenging supply chain constraint issues stemming from port backups, escalating commodity prices, truck and driver shortages, and labor shortages; the list goes on and on. We are taking aggressive steps to combat these headwinds, but given we are 10 months into the year, the impact of any additional countermeasures may not be realized until sometime next year. Thus we're revising our full year 2021 guidance down slightly. While I'm disappointed that we're lowering our full year guidance as a result of the continued supply chain challenges, I couldn't be more impressed with the Polaris team for their ongoing dedication and exhaustive effort to keep the flow of our products moving to our customers. I also want to recognize our dealers for their understanding and dedication to Polaris in these challenging times, as well as our suppliers who continue to work with us to improve upon the availability of components. Moving on to retail sales for the quarter. Our third quarter North American retail sales were down 24% from the positive 15% reported in the third quarter of 2020. This resulted in retail being down 13% on a two-year basis. Our retail results were lower than originally anticipated driven entirely by supply chain issues. We continued to gain market share in ORV, despite the supply constrained retail sales, gaining almost a point and a half of market share with gains in both ATVs and side-by-sides. Motorcycles retail sales were also down for the quarter. Indian market share is now flat year-to-date with midsized bikes being the most supply constrained category. Snowmobiles retail was down 30% in the quarter, despite that our snowmobile business gained share during the quarter as we performed better than the market. Lastly, boats market share continues to remain up year-to-date. Dealer inventory levels ended the quarter down at 46% on a year-over-year basis and down 75% when compared to pre-COVID levels in Q3 of 2019. We currently have on average less than a month of inventory in the channel. Presold vehicles continue to be a very effective sales lever for our dealers to maintain consumer interests and as a way for consumers to stay engaged while their vehicle is being built. Given the competitive advantage we have seen with this process, the team has made some changes, which I'll provide more detail on shortly. Given the current supply chain issues, we don't expect the dealer inventory situation to improve materially until sometime in 2022. As I discussed earlier, continued unprecedented demand coupled with supply chain constraints have created significant disruptions in our shipping cadence. With dealer inventory at record lows, we do not expect to return to normal levels in the near term. The dealer presold order process has become an integral part of how we take orders and deliver products to dealers and consumers. Given the acceptance of the process and the escalating supply chain challenges, we've made some modifications to the preorder process to improve the visibility and predictability for dealers and consumers. Let me share a few of the changes with you. A few weeks ago, we adjusted delivery dates on a limited number of presold orders to align with our current production schedule. We are introducing a new industry-first online order tracker that will provide customers with order confirmation data plus the ability to find up-to-date shipping estimates for their presold order. This will allow for greater transparency of order status for both the dealer and presold customer. Next, we created a new Polaris off-road reservations program for select premium models, including a range of full-sized and multi premium plus models, general full-sized and multi-performance models, and the Razor Xtreme and multi-performance turbo models. These premium models are currently the most popular, have the highest demand, and represent the highest percentage of presold orders in our system today. We believe this allocation method will provide the necessary prioritization of whole goods and PG&A shipments to drive increased retail velocity and dealer profitability while improving the customer experience. All other models will remain unchanged within the existing RFM and presold process currently in place. In summary, these changes are designed to improve communication to the dealer and consumer while enhancing our ability to manage product flow in the supply constraint environment and setting clear expectations for shipment timing to better serve the dealer and customer. Our manufacturing plants continue to operate at peak supply chain constraint capacity. While our teams are mitigating shortages and delivery delays in real-time, the supply chain disruptions have become unavoidable for a large number of our models. The shortages include shocks, plastics, crankcases, doors, and, of course, semiconductors to name just a few. We continue to aggressively work with suppliers across our business who are behind schedule with ORV being impacted the most, given its size. A byproduct of the supply chain shortages is higher input costs. Each link in the supply chain from shipping lines, port bottlenecks, shortages of trucks and railcars to the increased rework and disruption in production schedules has created an environment where input costs have increased exponentially. As an example, since the beginning of the year, costs attributable to supply chain disruptions have increased fivefold. That's over $300 million of additional costs that we did not anticipate when the year began. We've attempted to offset these costs through pricing and surcharges, which Bob will discuss shortly. Again, I want to reemphasize, this is not a manufacturing capacity issue. It's a supply chain issue. Bob will give you an update on recent capacity additions, which will clearly demonstrate that we have and will have capacity improvements when the supply chain constraints subside. New product introductions and innovation remain a key component of our growth strategy going forward. During the quarter, we introduced 15 new ORV models, product enhancements, and limited edition models, including a new mid-size ranger with more comfort storage and a noticeably quieter ride. It comes with rider-inspired features, including a larger dump box, more onboard storage, more leg room, and new premium contour seats. Our NorthStar trim is also available with a fully enclosed cab to keep riders comfortable in the cold seasons. Sportsman, the industry-leading ATV brand just got better with the addition of the exclusive industry-leading 7-inch ride command technology with GPS navigation and communication technology. For our younger riders, we introduced a new RZR 200 EFI with industry-leading safety and technology features, including standard hard doors and high visibility front and rear LED lights, digital speed limiting to control top speeds, and geo-fencing to allow parents to control where the vehicle is allowed to go. Additionally, we added a number of enhancements in limited edition models to the RANGER, GENERAL, RZR, and Sportsman lineup for model year 2022. We continue to invest aggressively in research and development, and a bold slate of industry-first innovations are now entering the introduction phase with an exciting sequence of launches to play out over the next several years. One of these introductions, which is sure to excite our extremely passionate recreational riders, is the all-new RZR that will be unveiled on November 9th. If you haven't seen some of the teaser videos, you should check them out. While the new RZR has been highly anticipated, the social media and video teasers last week launched excitement across our rider forums and fan channels. One little nugget I'm excited to confirm today is that we're not just launching one new RZR. We're getting ready to launch two; the all-new RZR Pro R and the RZR Turbo R are ready to reaffirm our leadership position in the wide-open segment with the highest-performing recreational vehicle in the industry. We're incredibly energized to bring these industry-leading products to market. As I've said, innovation will always be front and center in our growth strategy. One innovation we have been talking about for some time now is the all-new full-size electric RANGER, which is set to launch in December. This is a completely redesigned RANGER. We've been previewing the benefits of this new RANGER in a number of marketing videos throughout the year, including more torque and power, instant acceleration, precise control, regenerative braking, industry-leading ground clearance, highest power to weight ratio, lowest cost of ownership, and the quietest ride. You can see each of these videos on our website. We're incredibly excited to bring this game-changing RANGER to market, as it reflects our commitment to expanding our product offering to meet the needs of our customers. With that, I'll turn it over to Bob who will summarize our third quarter 2021 results and our updated expectations for the remainder of the year.

Thanks Mike and good morning, everyone. Mike highlighted the supply chain headwinds we faced in the third quarter and expect to continue to face for the remainder of the year. We want to make sure our investors understand that we are working diligently to counteract these headwinds while there is pressure in the near-term we believe we are well-positioned to capitalize on the sustained demand as the supply chain normalizes. We will have more on the remainder of 2021 later, but let me first start with the summary of the third quarter. Third quarter sales were flat on a GAAP and adjusted basis versus the prior year, finishing at $1.96 billion. Sales improved from motorcycles, global adjacent markets, and boats. ORV, snowmobiles, and aftermarket sales were down on a year-over-year basis, while supply chain constraints impacted all of our businesses. We were able to ship more motorcycles and adjacent market vehicles during the quarter compared to the same quarter in 2020, both sales positively impacted by improved product mix as we shipped a stronger mix of premium boats in the quarter. Third quarter earnings per share on a GAAP basis was $1.84, adjusted earnings per share was $1.98, which was down from the $2.85 we reported in Q3 last year as expected. Adjusted gross margins were down approximately 360 basis points on a year-over-year basis, mostly due to increased input costs from logistics, commodities, plant inefficiencies, and labor. The input costs were partially offset by increased pricing and ongoing lower promotional and floor plan financing costs. Adjusted operating expenses were up 4%, primarily due to increased research and development expenditures and to a lesser degree increased selling and marketing costs during the quarter. Income from financial services declined 38% during the quarter, primarily due to lower retail credit income. Retail financing penetration rates continued to be low due to more customers paying in cash, minimal promotional programs available from Polaris, and consumers having additional time to shop around for alternative financing options. Finally, the tax rate finished at 20.5% compared to 23.7% in the third quarter last year, due to favorable adjustments related to research and development credits taken in the quarter. From a segment reporting perspective, motorcycles, global adjacent markets, and boats increased sales for the quarter driven by volume, pricing, lower promotions, and favorable product mix. Sales for our ORV, snowmobile, and aftermarket segments reported lower sales for the quarter driven by the supply chain shortages. All segments continue to benefit from ongoing low promotional costs, given high demand and the lack of product in the channel. Pricing actions taken in May also had a favorable impact during the quarter, but were muted given the large quantity of customer pre-order units that did not benefit from the pricing actions. Average selling prices for all segments were up; ORV increased about 5%, motorcycles were up approximately 10%, adjacent markets increased about 1%, and boats were up approximately 30% for the quarter. Mix had an impact on ASPs in all segments. I will talk more about pricing actions we have recently taken as they're an important countermeasure to the increasingly inflationary environment we are facing today moving forward. Our international sales increased 21% during the quarter with all regions and segments growing sales, as many economies continue to gain traction as they recover from earlier COVID shutdowns. Currency added three percentage points to the international growth for the quarter. Parts, garments, and accessories sales increased 8% during the quarter with strong demand across all segments and categories in that business, particularly parts and accessories. Back orders driven by the supply chain bottlenecks remained high, limiting our growth in PG&A for the quarter. Moving on to our guidance for the remainder of the year, as Mike indicated, supply chain challenges significantly impacted our ability to ship product in the third quarter, and we anticipate continued pressure in the fourth quarter and into 2022. When we last updated our expectations in July, we had been expecting the supply chain constraints to ease as we headed into the fourth quarter. Unfortunately, the supply environment has not improved in the ways we had anticipated. Therefore we are lowering our full year sales and earnings expectations going into the fourth quarter. Total company sales are now expected to finish at approximately $8.15 billion for the year. At this projected sales level, full-year adjusted earnings per share guidance for 2021 is expected to finish at approximately $9 per diluted share. While we are disappointed that we have to update our guidance, keep in mind this is $0.25 per share higher than the high end of our original 2021 guidance range. The full year sales and earnings expectations are driven by our ability to source the needed components for our products. Our guidance assumes that supply chain performance will not deteriorate further in Q4 and that our suppliers will be able to fulfill our current expectations for component deliveries for the remainder of the year. While we typically have a solid view of the puts and takes for a given quarter, which gives us confidence in providing a realistic guidance range. In this environment, the timing of component shipments could significantly impact the quantity and mix of products we were able to ship in a given quarter and therefore our results. We are doing all we can to deliver vehicles to our dealers and consumers, but have limited ability to quickly countermeasure certain unexpected supply chain disruptions. As such we have provided you with our balance projection for 2021, which is reflective of our current viewpoint on component availability and production run rates. One thing is certain: we will always do what is in the best interest of our consumers to get their requested vehicles to them as soon as we can. Moving down to P&L, we've made the following revisions. Adjusted gross profit margins are now expected to be down approximately 70 basis points, which is at the lower end of our previous guidance. The escalating increase in input costs, as Mike indicated earlier, has been significant. Mike mentioned the $300 million plus increase in input costs since the beginning of the year, but just in the third quarter alone, our input costs from logistics, ocean and truck rates, commodities, labor rates, and plant inefficiencies increased over $100 million, approximately 580 basis points when compared to the prior year third quarter. Given the magnitude of the input cost increases and the expectation that they are not transitory, we are quickly adjusting our pricing for model year 2022. Here in October, we announced price increases that will increase the average sales price on most ORV and motorcycle models in the mid-single digits percent range. Similar increases were also announced for associated PG&A. These increases are in addition to several price increases we have made earlier in the year. While the cost environment remains a headwind that will continue to impact our gross profit margins in the fourth quarter, the benefit of the recent pricing actions taken or announced will not have a significant impact until the first quarter of 2022, as the dealer's current pre-orders are set at the previous pricing levels. Adjusted operating expenses are now expected to improve 90 basis points as a percentage of sales versus last year, again, at the lower end of our previous guidance range, driven by the lower sales growth expectations, partially offset by prudent cost management. We are continuing to invest in the business while controlling our flexible expenses commensurate with our sales volume. Income from financial services is now expected to be down in the low-30s percent range, driven by the historically low dealer inventory levels, as well as lower retail financing income due to lower penetration rates of our retail providers as I explained earlier. We're adjusting our income tax provision rate expectations for the full year to be in the range of 22% to 22.5%, which is an improvement over our previously issued guidance, reflecting the flow-through of favorable tax adjustments related to the R&D credit. Guidance for the remainder of the P&L items remains materially unchanged from our previously issued guidance. Our sales expectations for our segments have been lowered given the supply chain challenges, with the exception of global adjacent markets, which remains unchanged for the year. While our adjacent market businesses are feeling the same supply chain challenges as our other businesses, they are in a better position with finished goods and dealer inventory given the B2B market has recovered at a slower rate than the consumer markets. Our current plan capacity is adequate to meet the current demand. When the supply chain constraints ease, we will have needed capacity in place to ramp quickly and begin to fill the dealer channel with much-needed inventory. We are expanding our Monterey facility by over 400,000 square feet, adding approximately 35% more capacity for Razor and general products over the next year to accommodate the model year 2022 vehicles, and additional ORV models expected to launch over the next couple of years. For Boats, we added approximately 55,000 square feet of manufacturing capacity in Elkhart, Indiana to meet the demand for Bennington. We brought the Syracuse, Indiana facility back online to support strong demand for our Hurricane deck boats. In addition to adding manufacturing space, we have also invested heavily in welding, bending, injection molding, and painting capabilities to support higher assembly volumes. With these capacity adds, we will be ready to meet the anticipated strong demand when the supply chain improves. Year-to-date, third quarter operating cash flow finished at $153 million, down significantly compared to the same period last year. The decrease was driven by an increase in factory inventory due to the increase in vehicles waiting for parts and our pre-buying of components to remove as much uncertainty around component availability as possible. While share repurchases remain a lever we like to use to return capital to shareholders, in the current supply constrained environment, we will concentrate much of our capital towards organic investments until the supply chain improves. With that, I will now turn it back over to Mike for some final thoughts.

Thanks, Bob. With all the uncertainties surrounding supply chain, forecasting 2022 is proving to be challenging. Let me give you some preliminary views on next year, given where we stand today. First, the supply chain is likely to be an ongoing challenge through the end of 2022. Supply chain issues have been with us to varying degrees since the pandemic first broke out in March of last year, but in the past quarter, the supply chain issues have intensified. Additionally, we're experiencing much higher costs than we anticipated. We're taking steps to raise prices now that will benefit us next year. Rest assured that we are working hand in hand with our suppliers to improve upon the current situation, and I'm optimistic we can continue to outperform the competition as we have so far this year. Dealer inventories are expected to remain lean through 2022 until the supply chain improves. In the meantime, we'll continue to prioritize the majority of our production to pre-ordered units until more supply chain flexibility is obtained. We expect consumer demand to remain healthy through 2022. The number of new customers that have entered the market is staggering and repurchase rate data supports that customers are staying with the brand. As the supply chain starts to recover, we are in a strong position to take full advantage of this, given our substantial investments and capacity expansion. I've talked at length about the steps we're taking to navigate the current supply crisis. Behind the scenes, we've also been taking a closer look at our portfolio of businesses. When I was first appointed to the CEO position almost a year ago, my mantra was focused execution that applies not only to the day-to-day operations, but also strategically in where we want to concentrate our time and capital. As such, we've made the decision to divest our GEM and Taylor-Dunn businesses with the expectation that a transaction will be completed by year-end. Finally, while we receive some favorable news out of the Biden administration around the possibility of tariff relief next year, the realities of the process were far less compelling. The initial exemption reinstatement process appears rather narrow and is likely to have an insignificant impact on our financials in 2022. 2021 has been a year of constant adjustments, but we've been winning by remaining agile and adaptable. The Polaris team is hands down the best in the industry. Couple that with the best brands and product portfolio in the industry, and I believe we have the winning formula for growth and improved profitability for years to come. With that, I'll turn it over to Jason to open the line for questions.

Thank you. We'll now begin the question-and-answer session. Our first question comes from James Hardiman from Wedbush Securities. Please go ahead.

Hey, good morning. Thanks for taking my call.

Good morning.

So, supply chain sounds pretty bleak. It's pretty clear that it's worse than you would've expected it to be three months ago. I guess maybe talk about, if we can, drill down over the past few weeks, maybe a month, I guess a) from a delivery perspective, and b) from an input cost perspective, are things, as we sit today, getting better or are they getting worse, or are they pretty consistent with where they have been?

I would say that they're pretty consistent with where we've been. There were a couple of specific things that happened shortly after we had our call in July. Semiconductors have become a more pronounced issue. Obviously, the automotive sector is being tremendously impacted by that, and that has started to have a bigger impact on us. There are things that are specific to our company from a supplier standpoint, but if you step back, it's the broader supply chain environment. The fact that I think when we had our call, there were probably 40 ships sitting off Long Beach, and now it's up in the hundreds. The driver shortage, the truck chassis shortage, all those things have intensified. At this point, they're kind of just moving sideways. Our team is doing great work to ensure we get our disproportionate share of whether that's trucking or prioritization at the ports. We have a handful of what we call our mega suppliers, the suppliers that can have the biggest impact on us, and we're managing that on a day-to-day basis. When we see improvements in one, we tend to see something happen with another. Those are just the realities of the things we're working through right now. The good news is we're hearing from suppliers that things should start to get better, but that's within the context of the broader supply chain environment. So, we're taking that with bated breath and we'll see how that goes. Bob mentioned it; we're poised to react as soon as the supply chain starts to see more flexibility.

James, the other piece of input costs is obviously commodities. Looking out into next year, steel looks to be headed back down the chain towards a more normal level, although I think it will take at least a full year to get there. The buys for the early part of the year look to come in at better numbers, but there is some deferral of that impact as it rolls through because we're buying in advance. So that help won't show up right away. The downside is aluminum continues to get more challenging, and those things are going to tend to offset each other. Overall, it looks like the commodity stuff is going to be relatively flat at least for a little while.

Got it. And then my follow-up is sort of a related question. It's on the pricing side, probably the relief that pricing will hopefully bring, and I really appreciate the commentary surrounding all the timing, which I don't think the Street was necessarily thinking about the right way. I guess, as we sit here today, you've had a price increase in the fourth quarter. Do you feel like you've currently taken a sufficient amount of price, given where we are from an inflation perspective? And is there a way to think about sort of where the gross margin would be on currently priced units, i.e., model year 2022 units as opposed to the preordered units that you sold throughout the quarter?

Sure. I'll start at a macro level. As it relates to commodities, input costs, and all the logistics challenges, going through 2021 in Q3 and Q4, we're a little bit behind from a price promo standpoint in terms of getting those back. As we put in the peak Q4 price increases, that dynamic will start to change as we get into Q1, and we'll be pricing ahead of where we see the current costs and at least what we know of where they're going in 2022. We feel good about where we're headed into next year in terms of price versus inflation. Obviously, we don't have a crystal ball for what will happen next year, and we'll continue to be aggressive as we look at those factors and we'll remain aggressive with price as those things change.

Yes, I think, James, as you consider us analyzing the costs that have been ramping through the course of the year and then the additional price actions, as Bob said, we were behind in 2021, which is not surprising because I think everybody was just trying to figure out where things were headed. As we look into 2022, it should be a positive for margins because the annualization of the cost is less than the annualization of the price. We made the hard decision that we're going to honor the prices that we've got under our presold contracts. We didn't think it was fair to change the game on the customers, especially given their patience with waiting for vehicles that are more delayed than they were expecting. We believe that will be a favorable tailwind. A lot of assumptions surround that. For instance, we assume the supply chain doesn't get significantly worse, and we assume commodities won't dramatically increase in cost. Based on what we currently see, we feel pretty good about our position.

Makes sense. Good luck navigating a pretty tricky environment here, guys.

Thanks, James.

Hi, good morning. Thanks for taking my question. Just to follow up on that last point from James. How willing are your customers to absorb, I guess, this rising inflation?

It's interesting. We have really not heard much from customers. When you look at the price increase on the overall cost of a vehicle, as you heard in my prepared remarks, our premium models are selling at a high rate. The percentage increase in dollar terms is really not significant. Given the supply constraint environment and the scarcity of being able to find something, and we know that our competitors, as we kind of watch the landscape, we see similar types of moves. We're not an outlier by any stretch. I think there is not infinite elasticity around price, but given the moves we've made, which have been smaller and more deliberate, we feel that consumers will be willing to accept that. We'll obviously keep an eye on that as we move forward, especially as some of these costs start to subside, and hopefully, we'll be able to hold on to a good portion of that pricing.

Thanks. And then my question goes to the Taylor-Dunn and GEM decision. Can you quantify the impact on profit of that decision? And then maybe just cover what criteria you're using to define what the future of your portfolio looks like?

As we stated in the press release, the business brought in less than $100 million in revenue and was not profitable. So that will give you a good sense of its situation. As we've talked in the past, we're going to continue to evaluate the portfolio. When you look at that business, it clearly does not fit straight with what we do in Powersports, and frankly, it will likely perform better in the hands of another owner that can spend more time and allocate capital directly into that type of platform. It's got a great management team, and we have a lot of confidence that it will do well once we complete the transaction here in the fourth quarter. We're meeting with our board here in a couple of days to continue discussing strategy and portfolio, and we will continue to evaluate that as we move forward.

Great, thank you.

You bet.

So first question on the guidance for this year, it looks like your revenue guidance implies that your delivery cadence should improve somewhat in Q4. You talked about the lack of visibility here. Have you seen that pickup in October? And how much confidence do you have that that will happen, I guess?

A lot of the fourth quarter dynamic is really driven by our snow business. As I mentioned earlier, when James asked the question, I mean, we really haven't seen a material change. We're literally battling every day to make sure that we've got materials inbound. We've taken what normally would be an inefficient process around rework and essentially have a secondary factory at each of our facilities where we're taking completed units off the line that are missing one to five components, positioning them, and then reworking them as those parts come in real-time and getting them out and shipped as quickly as we can. Again, I haven't seen much change in that environment. We're still battling every day. The uptick you see in the fourth quarter is largely driven by the snowmobile business as we try and ramp into the seasonality.

That's helpful. And maybe to transition over to the cost pressure side. If I interpret you correctly, Mike, what you're saying is cost pressures have probably peaked here in Q3, but they're likely to plateau for a bit before they get better. Is that a fair characterization?

Yeah, I mean it's a generalization. We've been able to go out and lock steel in at a more favorable price than what we've been seeing more recently. But as Bob indicated, aluminum is becoming a little bit more of an issue if you're watching some of the commodity markets. So there's going to be moves back and forth. I don't anticipate we're going to see the huge jumps that we've seen historically. The issue is that we're obviously lapping 2021, where we saw those costs ramping throughout the year. If you assume those costs stabilize, you're still going to have an increased cost profile. The good news is there's a similar dynamic around all the pricing moves that we've made, as well as the pricing moves that are happening as we speak. We believe we'll be in a better position. We see something different playing out with cost if we see them continue to rise, and we're in a position to continue to evaluate it. We're taking a far more proactive review process of our pricing. It used to be more of a model year or an annual review process. We're now looking at it quarterly, but it's even more frequent than that.

Got it. Very helpful. Thanks, guys.

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

Hey guys. Mike, at the end, when you were sort of wrapping things up, you made a comment that inventories were expected to reset lower. Was that a comment on dealer inventories or company-owned inventories? Could you just sort of give a bit more color on what you meant there?

Yeah. In my closing comments, I was talking about dealer inventory levels. We don't expect them to improve dramatically through 2022. Even if the supply chain starts to loosen up, we can deliver; demand is still at pretty high levels. I suspect it's going to take us a while to get the dealer inventory levels back to where they need to be. Company inventory is obviously at a very high level right now for two reasons: one, we're bringing in raw components, and second, we have a fair amount of finished goods waiting on one, two, or three components. We suspect that logjam will start to break free, and that should start to improve the company inventory profile as we get into 2022.

Perfect. And then on the gross profit breakdown, what happened in the corporate segment GP this quarter? Was there something meaningful to call out?

The only thing in there would be absorption, and that is obviously tied to the amount of product flowing through the factory with all the disruptions.

Okay. Thank you.

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

Hey, good morning. I want to just dissect expectations for the gross margin with respect to the pre-sold order program. It sounds like the premium products are sort of taking the lead on demand, in which case it's possible that we could have a near-term lift in gross margin as those orders sort of take priority in the fill process. Can you walk us through maybe how we should think about that?

I think it's a fair characterization. We've seen that dynamic play out through the year. Quite frankly, the NorthStar RANGER and our four-passenger RANGERS and RZRs have had the highest levels of demand. Those tend to be the more expensive vehicles. There's an element of that, but the other component is the price moves we've made. As we work through existing pre-orders and obviously start to take new orders at different pricing levels, that should position us better, especially if input costs continue to hold at current levels, and we don't see those increasing substantially given the current environment. We're obviously working through all that now. You can imagine the budgeting process for 2022, as I alluded to in my closing comments, is far more complicated than normal. We're running a lot of different scenarios with the unknown backdrop around how the supply chain performs throughout the course of the year.

Okay. For pre-sold orders, I think last quarter you guys were running at about 80%. It looks like in the, what's shown on Slide 7, that it would be even higher than that for Q3. Can you update us on what that looks like quarter-to-date and maybe whether that's easing or accelerating? Thanks.

It is performing in about the same area. It's become an important competitive advantage for us. We made adjustments to the program, as I outlined, a lot of that was based on feedback from our dealer channel and recognizing that the supply constraint environment's going to last much longer than I think anybody expected. We've adapted the program, and it's working really well. We’re receiving high marks from our partners.

Thank you.

Thanks.

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

Great, thanks. Wanted to circle back to some of the comments for 2022. You highlighted the $300 million of higher supply chain input cost pressures for this year. Looking at those individually, it looks like those factors would continue through 2022. So, is the idea that selling price will exceed that $300 million for 2022? Is that in the price increase that you've already announced, or can we expect maybe some during the year model price increases in 2022, needed to exceed that $300 million in higher expenses?

Hey, Robin, it’s Bob. As we looked at the increasing input costs for 2021 and how we thought those would factor into 2022, we expect them to stay relatively consistent, certainly for the first half. We're certainly planning scenarios that they can stay consistent for the whole year. The price increases we just put in the last few days were designed to offset those going into 2022. If commodities and all the input costs stay at the current levels, we feel like we'll be on top of those from a pricing standpoint. In 2022, if they get worse, we'll reassess pricing again at some point in 2022. Like Mike said, we're looking into this pretty much monthly on the cost input side; we're looking at it daily and weekly. We're proactive around it now and will continue to stay on top of it next year.

Great. Thank you. My other question is just on market share. There have been some import brands from China that have been making headway in market share. Can you sort of estimate what that may be doing to the overall market, or do you not really? I know they don't really fluctuate in the premium segments where a lot of Polaris product is, so is it fair to think of them as not being in your market?

It would be easy for us to make that general assumption and say, hey, they don't play in ours and ignore them. But that's not how we operate. The reality is they are not having a huge impact on us right now. But we are watching carefully and ensuring that we're in the right competitive position, but overall we feel really good. The team has done an excellent job of managing; think about the size of our business, depending on which competitors you add up, you have to combine two or three of them to reach our size. There is a substantial opportunity for us to have disruption and miss market share, so we've shown four or five quarters now that we're not letting that happen. The team's done a great job of navigating that.

Okay, great. Thanks very much.

Thank you.

Yes. Good morning, everyone. Just a question on the price increases. I just wanted to get some clarity. Are these price increases that are expected to continue going forward? Or are there surcharges embedded in there that might retrace as your costs come back down?

Yes, I would say, David, throughout the year we had a mix of both true price increases and surcharges. The most recent round is primarily price increases that we expect to remain through 2022 and into the future.

Okay. Just to follow up on that, when you reference the prior question about the ASPs you're launching now, are they sufficient to cover that $300 million cost inflation next year? Does that include surcharges, or not?

No, we separate the surcharges from the MSRP move. We do that because those usually stem around logistics. As those freight charges start to fluctuate, we maintain the ability to provide quick relief to the dealers around that specific component.

Okay. My second question really is kind of a bigger picture and it deals with the pre-sold orders. Obviously, you’ve invested some time and effort and money into accommodating that process. At some point in the future, I guess the world will normalize and return to a more balanced state. I’m just curious what the nature of pre-sold orders will be in your business moving forward. How do you think about that?

Yes, no, it's going to be an important component. We’ve made comments a couple of times that when we get back to normal, whenever that happens, we don’t expect our dealer inventory levels to return to levels they've been historically. We’ve demonstrated that we can deliver pretty quickly to what dealers are looking for. Therefore, in the future, we believe we’re going to carry a much lower day sales outstanding at the dealership, and with our capability to deliver a customized vehicle to a consumer quickly, we think that's going to be very advantageous. It's good for us, and it's great for the dealers in terms of helping them manage their margins and profitability. We have seen that reflected clearly. I think you've heard the same from many of the large automotive players, where they expect this to permanently change how they think the dealership model will look in terms of how much inventory sits on the lot versus customers placing customized orders. We’re honing those skills and believe it will be a strong competitive advantage moving forward.

Great. Thanks a lot, Mike. Good luck.

Thanks.

Hi, thanks for the question. Last quarter you showed a slide with the supply chain talking about how some rework vehicles could double producing in Q3, which satisfies some plans for Q4 I guess, with where the supply chain is. Are reworks going a bit higher now? When you look at Slide 8 that you have now, is the 20% lower unit looking to aggregate the reworks versus lower production underlying?

Yes, it's safe to say the reworks are higher. When we came out last quarter, we were assuming we weren't expecting the supply chain to get dramatically better. We certainly weren't expecting it to get worse, which is in fact what happened. The amount of rework we have is higher. It moves around week to week depending on the delivery of components that were short for those units. The team is doing a good job prioritizing those inbound components, whether they go straight to the production line so we can produce a clean unit, or into rework depending on how late those units are. It's a pretty sophisticated operation, and the team is doing great work managing it.

Okay, got it. And then on the retail sales and market share, you talked about how ORV retail sales were down mid-20s, but gaining share versus the industry. Yet on a two-year stack, it seems like retail sales were down and lower than the industry. I know there are supply chain constraints, but can you explain what's going on there on a two-year stack in terms of market share and that positioning?

We started gaining share in the fourth quarter of last year. If I look at each quarter, we've been gaining about one or one and a half, two points of share. We're back to a pretty good spot. There are always going to be elements of different categories that we have. For ORV, we feel good. For motorcycles, we feel really good. In boats, we feel great. Overall, we’re in a good position.

Okay, great. Thanks guys, and good luck.

Tesla has unveiled a plan to release an electric ATV. Do you see this as a validation and potential expansion of the Powersports time, or do you see it as a potential risk to Polaris? How are you planning ahead of this?

We've been talking for a while about the RANGER we have coming out. It's a phenomenal vehicle. I had the opportunity to ride it again a couple of weeks ago with some of the recent changes, and it's going to be a spectacular vehicle. Look, do I think it reaffirms? Sure. We know the space probably better than most. What you're going to see from us is vehicles built to address customer needs. At the end of the day, I think the competitive environment is going to play out over the next couple of years. I'm really excited about what we have in our electric vehicle lineup. It starts with the RANGER, but you're going to see us quickly coming out with other vehicles that meet the needs of our customers as opposed to being merely showy vehicles.

Got it. Thank you.

The next question comes from Mark Smith from Lake Street Capital Markets. Please go ahead.

Hey guys. I just wanted to ask on PG&A business. It looks like that's holding up pretty well. Can you just talk about kind of attachment rates on new products and what your inventory looks like and any supply chain issues that you have in PG&A?

Sure. I think we've seen attachment rates remain pretty consistent, with a little bit of improvement depending on the product. Our bigger challenge is clearing the backlogs, particularly in some of the ORV product lines. It's not degrading significantly. We haven't been able to progress clearing the backlogs on PG&A as we'd like to, given the supply chain constraints. The backdrop for PG&A is favorable, as attachment rates are strong and given vehicle availability, we have a lot of consumers who are riding and repairing or upgrading existing products, and that size of our installed base gives us a great aftermarket opportunity. The team is executing really well, given that backdrop.

Great. Thank you.

Yes. Thanks, Jason. That's all the questions we have. We just want to thank everyone for participating this morning. Look out for the new Razor coming on November 9 and the new electric RANGER in December. We look forward to talking to you next quarter. Thanks again. Goodbye.

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