Polaris Inc. Q1 FY2022 Earnings Call

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

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

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

Thanks, Mike, and good morning or afternoon to everyone on the call today. I will be discussing our first quarter performance and expectations for the rest of the year. I want to highlight that the negative impacts from the supply chain significantly affected these results, and our teams are working hard to address these challenges. While we anticipate a modest recovery in the latter half of the year, predicting the timing and extent of this recovery remains challenging. Let's review sales and operating profit for the quarter. Sales totaled $1.96 billion, unchanged from last year, with lower unit shipments and favorable pricing balancing each other out. International sales increased by 1%, mostly due to growth in EMEA and Latin America, though Asia-Pacific experienced slight declines. Overall PG&A rose 8%, with On-Road PG&A alone increasing nearly 20%. The adjusted EBITDA margin decreased by 446 basis points due to lower shipment volumes and higher cost premiums being the main challenges. Positive pricing helped counteract some of the rising costs associated with freight, raw materials, and supply chain inefficiencies. With mid-single-digit price increases effective April 1 on new and pre-sold ORV orders, we expect to address the higher-than-expected commodity and logistics costs seen in Q1 as we progress through the year. We are working to at least offset inflation impacts on our cost base with pricing, but there’s limited flexibility to add our normal margin on top. This situation negatively affects gross profit and EBITDA margins since price increases do not fully translate into profit margins. To illustrate the inflation in commodities and logistics, the cost of steel and aluminum for our Q1 products rose over 130% and 140% compared to Q1 2021, respectively. Spot rates for containers from Asia and U.S. trucking rose 120% compared to the same period in 2021. The steel costs were already elevated in 2021, being over 20% higher than the five-year average. Overall, in the quarter, our cost premiums increased by 150% compared to last year, amounting to nearly $100 million, with many of these costs expected to decrease over time. Regarding our operating profit, our tax rate was lower than anticipated due to the larger impact of discrete items linked to lower income during the quarter. Shares dropped by almost $2 million due to recent share repurchase activity. Now looking at our segments, in Off-Road, sales increased by 2% to $1.3 billion. Whole goods rose 1%, while PG&A experienced an 8% increase. Adjusted gross margins were down by about 720 basis points, influenced by supply chain disruptions affecting volume, mix, and margin. However, strong double-digit price increases implemented in 2021 partially mitigated these challenges. Retail performance showed a decline in North America, with the off-road industry down in the high teens, indicating a loss of market share for us during the quarter. We attribute these shifts to component availability rather than new product launches from competitors. We expect quarterly share shifts to be uneven this year, but when observed on a 12-month rolling basis, our ORV share appears stable compared to the industry. In the On-Road segment, sales dropped by 4% to $219 million, with whole goods down 8% and PG&A up 19%. Our On-Road segment now includes specific new products and benefits from strong international revenue; first-quarter results from these businesses rose in the high teens. Supply chain shortages primarily accounted for the Indian motorcycle share loss in the quarter. We have engaged additional suppliers for critical components, expecting to see gradual improvement and growth later this year. The margin increased over 400 basis points due to a better mix and pricing. Despite low dealer inventory, strong demand remains with our presold ordering process. Retail sales for Indian motorcycles fell over 30% in North America and nearly 30% internationally. On a 12-month rolling basis, we estimate a loss of about 1 point of market share. In our Marine segment, sales grew 6% to $212 million, although component shortages led to some share loss during the low retail quarter. When looking at a 12-month rolling average, we find our market share remains relatively stable compared to the industry. In late Q1 and early April, we noted improvements in production and shipping trends, anticipating strong growth in our Marine segment this year. Margins decreased by 137 basis points due to lower shipment volumes and supply chain inefficiencies. Positive pricing was recorded at mid-teens, but the product mix created challenges. In the aftermarket, sales declined by 5% to $218 million, with nearly a 9% drop in certain areas due to lower availability of new and used vehicles. Powersports aftermarket sales increased by 16% due to strong in-season snow orders. Supply chain challenges negatively impacted inventory and margins, which continue to be affected by inflation. In summary, the supply chain disruptions primarily drove our sales, market share, and earnings performance this quarter. Our focus remains on executing effectively in this challenging environment for the remainder of the year. Demand remains strong, and we believe we have the best innovation, quality, and safety to deliver top products in the powersports arena. Regarding our financial position, we expect 2022 to be a solid year for cash generation, with operating cash flow and free cash flow both exceeding 2021 levels. Our priorities for capital deployment remain unchanged, emphasizing high-return investments, dividends, share repurchases, and targeted acquisitions. We recently repurchased approximately $172 million of Polaris stock in the first quarter. We view our financial strength as a competitive advantage that allows us to invest long-term while generating strong returns for our shareholders. Now, let's look at our full-year guidance. Despite a below-expected first quarter, we see healthy demand ahead and anticipate ease in supply chain disruptions later in the year. Therefore, we are maintaining our full-year sales and adjusted EPS guidance, expecting sales growth of 12% to 15% and adjusted earnings growth of 11% to 14%. While consumer demand should remain robust, we predict a slight decline in overall powersports retail year-over-year due to ongoing supply chain issues. We foresee share shifts throughout the year influenced by component availability. Moreover, we expect a gradual increase in volumes in the second half of the year as supply chain health improves. Our vehicle assembly capacity should align with goals for unit shipments in the latter half of this year, similar to levels seen in the second half of 2020. For the second quarter, we expect lower volumes across most segments, particularly in Off-Road. Prices should increase sequentially, which should help offset supply chain costs. We will continue to price aggressively to cover our costs, though without adding margins on top of those incremental costs, leading to reduced gross profit margins compared to last year. We expect a year-over-year decline in EPS for the second quarter but anticipate robust growth in the latter half of 2022. For the full year, despite pricing for higher-than-anticipated costs, margins are now expected to be slightly below prior guidance due to current freight, raw material, and supply chain inefficiencies. We expect adjusted gross profit margin to decrease by 100 to 120 basis points compared to prior estimates of down 80 to 100 basis points, and adjusted EBITDA margin down 10 to 20 basis points from the original flat expectation. These pressures are likely to be more acute in the first half but should ease with improved volume leverage, better pricing realization, and stable cost premiums in the second half. Other considerations include a rise in net interest expense that should be offset by a lower tax rate of approximately 22% to 22.5%. We also benefit from recent tariff exclusions amounting to a $15 million gain this year. Additionally, we have adjusted our share count assumption to approximately 60 million shares by year-end, almost $1 million lower than our initial guidance. Overall, global supply chain disruptions negatively impact industry performance. We are determined to manage current challenges while building a resilient supply chain for the future. We expect to achieve strong growth in sales and earnings once supply chain issues improve, and we remain focused on navigating the current landscape. I will now turn it back over to Mike for some final thoughts.

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

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

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

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

Thanks, Mike.

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

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

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

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

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

I don't think so. While seasonality is important, the demand for our business doesn't really correlate with it. People are eager to get in line for vehicles, aware of the challenges in the broader economy. Our boat business exemplifies this; typically, we see a drop in demand at this time of year, but last year it actually surged as people wanted to ensure they could get a boat for the season. I suspect the same will happen as we move out of a season; people will still want access to vehicles. Additionally, with our inventory being significantly low, we anticipate a restocking even if demand briefly slows down.

Okay, great. Thank you, guys.

Hey, good morning.

Good morning.

So a couple of questions for me. I guess, what can you tell us about retail momentum over the course of the quarter? And, I guess, Mike, since you opened the door to April, extend that into April. There's clearly the narrative out there that, however you want to look at it on a comparable basis, but versus 2019 that every month this year has gotten sequentially worse. Maybe speak to that. Obviously, people would want to then connect the dots that the consumer is souring to some degree. But maybe speak to the sequential momentum?

Yes, I didn't notice the situation you mentioned. Our retail momentum has remained strong and solid. We've been surveying our dealers and receive extensive feedback from them. I didn't see anything indicating that dealers are concerned about a slowdown. Their comments were mostly centered around needing more product due to high demand. We share a significant portion of our dealer network with competitors, and those observations were not exclusive to us. At this point, I don't perceive a slowdown. While I acknowledge that a slowdown could happen at any time, all our statistics indicate otherwise. We are monitoring various metrics beyond just pre-sold rates, including website engagement, e-commerce, and attachment rates, and everything indicates a strong market compared to 2019.

Got it. If I'm calculating correctly, ORV retail grew in the first quarter compared to the fourth quarter, if we are comparing to 2019. However, you have reduced the retail guidance for the year. Can you help me understand that? Should we expect ORV retail to decline again, especially since it seems you anticipate improved availability? Could you clarify that?

Well, I mean, we're expecting availability to improve sequentially. But relative to the expectations we had for the year, it's obviously having an impact, a small impact on our ORV deliveries. That is really the pacing item. When we step back, we're not looking at it saying we're expecting some big demand drop off to drive retail down. It is 100% being driven by availability of the product. And obviously, if our efforts combined with a supply chain environment that improves better than we're expecting, we'd obviously be able to improve upon that because as you can see, in any given quarter, the majority of the retail is presold, which means we've got the ability if we can get the parts to get these vehicles through. We've got more than enough capacity, we're not facing labor challenges. This is purely about getting the components and then getting the vehicles out. So that's the view we have tied to the guidance that we are putting out today. But we're obviously doing everything in our power to try and improve upon that.

Makes sense. Thanks, Mike.

Hey, guys. Maybe just to follow-up on that full-year retail outlook. I think in the past, you were sort of expecting pretty similar performance from Off-Road and then On-Road. Is that still sort of the case in this new full-year outlook, or is Off-Road a little bit weaker?

No, that's still the case. I mean, Off-Road picks up a little bit more momentum going into the second half of the year, On-Road stays a little more steady. But expecting them to have similar performance.

Okay. Great. And then if we just think back to last quarter, you had given us a little bit of color just as far as first half, second half expectations, it seems like you came in a little bit below that just based on the first quarter. Are you still sort of comfortable with that prior cadence? Is it going to be even more back half weighted based on what you're seeing and expecting today, or how should we think about that?

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

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

It's been quite steady across the board. Our facility in Poland is sourcing in line with our overall supply base. We've noticed some suppliers establishing a secondary hub in Mexico, which aids logistics, but that's more of an exception. Generally, operations are consistent among various facilities. However, since our factories focus on specific products, unique challenges arise. For instance, our operation in Roseau, Minnesota primarily produces snowmobiles, and last year we faced issues with a bearing supplier, affecting that site specifically and not others. Thus, the challenges stem more from component availability related to specific products rather than significant differences in our supply base.

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

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

Okay. Thank you, Mike.

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

So, Robin, we expect shipments in Q2 to increase compared to Q1. We're predicting Q2 revenue to be in the low to mid-single digits higher than Q1 2022 compared to Q2 last year. Yes, unit sales are up. The product mix is slightly different because the percentage of snow products will be a bit lower, but overall unit sales will see a slight increase.

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

Sales will be.

Because of the price, right just for me…

Yes.

Thank you for that information. My other question pertains to margins. With the guidance indicating a decrease in gross margin by 100 to 120 basis points, could you provide more details? There are some aspects where you have clear visibility, such as your price increase and lower tariffs compared to the previous year. However, there are also elements where visibility is limited due to the supply chain. Can you break down some of these components for us? This would help clarify that not every aspect of margin guidance is at risk, especially considering the areas where you have a good understanding. Any quantification you could provide would be appreciated. Thank you.

Yes, it is certainly challenging in the current environment, but the volume mix is somewhat favorable for us at the moment. I apologize for the earlier confusion; I meant to say it's a headwind because, as Mike mentioned, we are limiting the number of units, and more complex units are obviously more difficult to produce and to source all the necessary parts for. Therefore, we are experiencing some headwinds from the volume and mix perspective. Regarding pricing, we are aware of what is locked in through April 1st, but we do not have a specific timeline for our next price adjustments. We typically review this during the model year later in the summer and have adjusted our agreements with dealers, allowing us to raise prices with about a month's notice. We are actively monitoring this situation. On the supply chain cost side, as I mentioned earlier, we are beginning to see some stability. As we approach the third and fourth quarters, our comparisons will align more closely with our current levels. We anticipate that the risk of continued increases in supply chain costs will be relatively limited during the latter half of the year compared to both last year and our current situation. In fact, we are hopeful that some improvements will occur. Thus, we feel confident about our visibility on pricing and have decent visibility on the mix. We believe our cost premiums are currently quite high, and there is nothing suggesting a significant change in that regard at this time, but it is important to recognize that this is a dynamic environment.

Hey Robin, one way to think about the margin rate is that we are conducting more frequent reviews of costs and related price actions. If we were to see a spike in commodities, logistics, or similar factors in the second half compared to our expectations, you might observe a decrease in margin percentage. This is because we would promptly implement price adjustments or surcharges to counterbalance that. However, we are not factoring in a 30% margin when we set prices. The price adjustments we've made over the last couple of years have been significant. Our strategy focuses on covering costs rather than solely preserving margin. This might lead to a decline in margin percentage, but in terms of dollars, we will remain stable. Ultimately, our success will depend on how well we execute our volume targets as we progress.

The other thing to keep in mind, Robin, is we're doing our best to manage operating expenses. We improved our estimate of 10 basis points in terms of OpEx as a percentage of revenue when we updated the guidance here today. And we're going to continue to focus on that as an offset to any increased supply chain costs or other business disruptions.

Thanks. Can you provide any information on tariffs regarding the…

Sure. So tariffs, we were looking at about $105 million for the year. We've got about a $15 million benefit from the exclusions that were recently enacted. So, we expect that will be at $90 million, unless something changes from a legislative standpoint, which we're not anticipating right now.

Is that $90 million total, or you're saying delta versus last year, just to.

No, $90 million total.

Okay. Great. Thank you.

Thanks, Robin.

Thank you very much. Mike, Bob, it sounds like internally, you've at least had some talks about what a recession could mean? And you've talked about in the past about this restock extending well into at least next year, I believe, was your prior comments. So – have you done the work like if a typical recession were to occur and you saw a demand hit, like how quickly does that new stock occur in that environment versus sort of going through next year?

Yes, we are looking into that, Joe. There's a lot to consider, including whether people will cancel pre-sold orders and the specific vehicle mix, which could potentially accelerate things. However, I want to highlight that during the last recession we experienced during COVID, demand actually increased. That was a unique situation. If we think back to 2008 and 2009, which was a very different type of recession with distinct causes, we saw a decline in our business for a couple of quarters, but it rebounded quickly. This occurred while we still maintained a relatively healthy inventory level. At this point, a prolonged slowdown would be necessary for any significant impact, but we're not seeing that right now. Of course, the longer inflation continues, the greater the risk could be. Bob and I have noted some logistics indicators suggesting improved availability. However, we need to be cautious, as one data point does not establish a trend, and we’re trying to determine if this is due to a general decrease in demand or improvements in logistics from increased capacity and efficiency. We will monitor this closely in the coming months. From my perspective, it's difficult to envision a scenario where we would need to drastically cut costs. We have several critical strategic initiatives, and with the opportunity for channel refills ahead of us, I believe that even with a potential demand dip over the next few quarters, we will maintain our current business strategy.

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

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

Thanks very much.

Hi, thank you for taking my question. Last quarter, you mentioned that you expected market share gains to continue into 2022. Is that expectation still valid with the updated retail guidance?

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

Yes, I understand. Regarding the inventory, it is increasing, and I would like to know how the supply chain is affecting that. Do you have inventory in transit at locations like the L.A. ports or in China? Is it mainly partially built units, or is it raw materials that are recorded on the books? It would be helpful if you could clarify the inventory situation.

Certainly. The inventory situation involves several factors, including an increase in products that are currently in transit, primarily on the water, along with longer transit times from Asia and delays at ports. Additionally, we're expediting inventory to support production needs, contributing to the increase in items in transit. Raw material levels are also higher due to build fallout; we may have received materials but are missing some key components. Our team is actively working to address this by ensuring we only bring in necessary items and avoid accumulating excess due to ongoing supply chain disruptions. Progress on raw materials should become evident soon. On the finished goods side, the main factor affecting our inventory is the volume being held for rework. We’re opting to retain most of the inventory requiring rework or additional components in our warehouses, instead of sending it out to dealers, to maintain quality and avoid putting extra pressure on them. Consequently, we expect to see an increase in finished goods due to the inventory held for rework. As the supply chain situation improves, we aim to gradually reduce these figures quarter-over-quarter for the remainder of the year.

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

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

We haven't noticed any decrease in retail credit availability or approval. Our penetration rates have decreased slightly because consumers are taking longer to get a unit, which allows them more time to explore options like credit unions. This situation slightly disadvantages dealer financing, so we are monitoring it to assist our dealers. However, we haven't observed any significant increase in defaults; they are currently at all-time historic lows in our partners' portfolios. As of now, we are not encountering these issues in the region. David, I want to point out that in the retail finance model, there is a clear separation between us and the provider, which means they are shouldering most of the risk. Typically, the customers accessing credit through those retail sources have high credit scores and solid credit histories. Moreover, we observed this trend even during the pandemic in 2020. Our customers generally remain committed to making their payments. Therefore, I believe there is currently minimal risk in that area.

Good to hear. My second question is about the PG&A business, which seems to be a key driver of growth for you right now. What is the current status of field inventories in PG&A? I understand there may be significant differences between parts and garments and accessories, but do you have enough inventory on hand to sustain that growth for the rest of the year?

Yes, it’s improved. We went through a period with high back orders since we rely on many of the same suppliers. The difference now is that fewer parts need to come together. For instance, buying a winch or a bumper or even a cab system is much simpler than building a side-by-side which requires 3,000 parts and components coming together to complete the vehicle; the complexity is just not there. So, availability has greatly improved. Furthermore, the innovation we've introduced has led to increased offerings and attachment rates for each of our vehicles. I credit the Indian motorcycle team for driving strong PG&A growth as they expand their offerings. This is encouraging. Our Powersports aftermarket, including businesses like Pro Armor, Klim, Kolpin, and 509, continues to see strong growth. The teams are doing a good job managing availability. We do experience some stock outs, but we quickly address those issues and ensure parts, garments, or apparel reach our customers effectively.

Great. Thanks, Mike. Good luck.

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