Good day, everyone, and welcome to the Polaris Second Quarter 2021 Earnings Call. [Operator Instructions]. I would now like to turn the conference over to Richard Edwards, Head of Investor Relations. Please go ahead, sir..

Thank you, Cole, and good morning, everyone. Thank you for joining us for our second 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 full 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 for additional details regarding these risks and uncertainties. All references to the second 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. I continue to be incredibly impressed with the dedication, commitment and execution of the Polaris team as we navigated ongoing supply chain pressures, logistical challenges and increasing input costs to deliver impressive second quarter results.

Focused execution is our mantra and it once again paid off as the team expertly navigated the challenges to enable us to exceed expectations. I want to again thank the entire Polaris team for their continued focus and commitment to this great company.

The powersports industry has experienced significant demand, and that trend continued into the second quarter. Demand, while down from unprecedented levels in the second quarter of last year was up over prepandemic levels of Q2 2019 by 14%. Overview market share gains continued in the second quarter with gains in both ATVs and side-by-sides.

We did, however, lose a small amount of share in India, particularly in our midsized bikes given the supply chain challenges. That said, demand remains strong for these models, and we anticipate our share gains will resume as our vehicle supply improves.

Boats also remained strong, growing retail sales and market share during the quarter and we have a healthy and significant backlog.

Although it's off season for snowmobiles with over half our snowmobile build this year being represented by our near-record high snow check preorders, the sales cadence of our snowmobile business will be even more heavily weighted toward our fourth quarter this year given the timing variation in our component deliveries.

Our PG&A and International businesses also performed quite well. PG&A sales were up 35% during the quarter. I'd also note that we are experiencing an increase in the attachment rate for PG&A as more consumers look to personalize their vehicles. Our International business continues to see strength.

We grew sales 64% as the economies outside North America continued to improve in Q2. Our earnings outperformed expectations, demonstrating the team's ability to overcome challenges with focused execution. Not surprisingly, production and delivery were and continue to be impacted by global supply chain and logistics challenges.

As a result of this and continued strong consumer demand, our dealer inventories are at the lowest levels in decades. I'll talk more about this in a moment. Given our first half results, continued strong consumer demand and our team's hard-fought ability to execute, I am pleased to report that we are again raising our full year earnings guidance.

Bob will give more details shortly. On a 2-year basis, our retail is up 14%, reflecting continued growth in powersports, driven by strong underlying consumer demand. As expected, our second quarter North American retail sales were down 28% from the 57% increase reported in the second quarter of 2020.

The gating factor for retail sales today compared to a year ago is low dealer inventory driven by supply chain impacts on delivery. Retail sales would have likely been significantly higher without these impacts. Despite the supply impacts to ORV retail sales, market share again grew during the quarter.

Our ORV business gained over 1 percentage point of market share in both ATVs and side-by-sides. Motorcycle retail sales also continued to grow, increasing 22% during the quarter. However, Indian lost a modest amount of share during the quarter, driven by low availability of bikes, particularly our very popular Scout and Chief models.

Strong boat retail also continued and remained ahead of the industry. Dealer inventory levels ended the quarter down 57% on a year-over-year basis and were also down sequentially. Our presold order process continues to be an effective lever that our dealers are utilizing to ensure they don't lose a sale.

And I'll go into this in more detail in the next slide. Looking at the remainder of the year, dealer inventories are expected to remain lean into Q4, which is when we are anticipating the supply chain issues will begin to slowly improve.

Given stronger-than-anticipated demand, coupled with continued supply constraints, our expectations for dealer inventory levels to return to RFM profile levels is now sometime in late 2022 or even into 2023.

As I discussed earlier, the unprecedented demand, coupled with the supply chain constraints, has created significant disruption in our shipping cadence.

With dealer inventory at record lows, the most effective, efficient way for our customers to secure the product they want, and for our dealers to maximize retail and profitability is through our presold order process. The advantage to consumers is that orders placed in the presold system received priority in our production and shipping schedule.

In addition, dealers and consumers can receive PG&A priority is placed at the time of the vehicle order. As a result, presold orders have increased significantly since the pandemic began. Pre-pandemic presold orders accounted for roughly 3% of our retail. Exiting Q2, ORV presold orders were approximately 80% of retail.

While there have been some reports that the presold order process can be misused, our audits have found that not to be the case. We regularly audit the system looking for a name change from the presold order at the time of registration.

These audits have found less than 1% where the names changed at registration and where there were changes, the majority had valid reasons for the change. I'd also point out that the presold order cancellations remain at low single-digit percent, which is similar to pre-pandemic levels.

Lastly, we have analyzed shipping patterns to our dealers by tiers, volumes and regions and were all within 1% of pre-pandemic levels. The bottom line is that there's high confidence in the presold order process, which is why it continues to be a competitive advantage in this very tight inventory environment.

Our manufacturing plants are operating at peak supply chain constrained capacity.

Our manufacturing, supply chain and logistics teams continue to execute at a very high level, managing the ever-changing production schedules driven by component availability with a singular focus to meet the demand of our consumers and dealers with high-quality vehicles and components.

Despite our efforts, we couldn't meet all the demand during the quarter. As I indicated earlier, our presold order levels have increased significantly, and it appears those customers are waiting for the high-performing high-quality vehicles we produce. I'd like to be able to say today that we see the light at the end of the tunnel.

But given the ongoing heightened demand for our vehicles and supplier challenges, it appears we, along with the entire powersports industry will be in a period of tight vehicle supply for the remainder of the year.

Our teams are doing impressive work to keep the flow of products moving, including expediting components, adjusting build schedules, substituting materials were appropriate and buying select materials on the spot market. Focused execution and teamwork will ensure we win the competitive battle.

As indicated in our last call, we are also adding capacity later this year and into 2022 that will bring on 30% more production capability between ORV boats and motorcycles. This capacity is needed to meet demand, fill the dealer channel and allow for the addition of some very exciting new products coming next year.

One of the drivers behind the unprecedented demand has been new customers coming into powersports.

New customer growth in the first half of 2021, while down slightly from the robust rates in the first half of 2020 remains comfortably ahead on a comparable 2-year pre-COVID basis with approximately 300,000 new customers coming into the Polaris family over the first half of 2021.

The mix of new to existing customers has remained high at over 70% of the total customers for ORV, motorcycles, snowmobiles and boats. Our existing customers continue to grow at a healthy rate. And lastly, it's exciting to see the diversity of our customers also grow, led by Hispanic and female riders joining the Polaris family.

Overall customer demand in total remains very strong. We track repurchase rates for our customers, which are increasing on a year-over-year basis. This provides us with the confidence that our customers intend to remain with the sport.

I'll now turn it over to Bob Mack, who will summarize our second quarter results and our updated expectations for 2021..

First, the majority of our high margins, no Check snowmobiles won't ship until Q4 as compared to a stronger Q3 shipping quarter in 2020. Second, while we are increasing selling prices and adding surcharges to offset a portion of the cost increases. These increases do not take effect until late Q3, thus having a larger impact in Q4.

Let me quickly cover our sales expectations by segment. ORV snowmobile sales guidance remain unchanged at up high teens percent.

The only modification is the timing of shipments, as indicated earlier, with more snowmobiles being shipped in the fourth quarter of 2021 versus prior year, given the supply chain disruptions and the timing of our pricing actions hitting Q4 more heavily than Q3. Motorcycle sales are anticipated to be up low 30%, down slightly from prior guidance.

While we continue to expect our motorcycle business to grow and take share for the year, supply chain challenges are impacting production enough to possibly shift to some shipments into 2022.

In the remaining segments, Global Adjacent Markets, Aftermarket and Boats, we are increasing our sales expectations given the sales growth realized through the first half of 2021.

Year-to-date second quarter operating cash flow finished at $196 million, down 37% compared to the same period last year, driven by an increase in factory inventory due to the supply chain inefficiencies. Our expected full year cash flow performance remains unchanged at down mid-30% compared to last year.

During the second quarter, we spent $111 million on share repurchases. We will continue to prioritize organic investments in our business, along with share buybacks throughout the remainder of the year, subject to market conditions. With that, I will now turn it back over to Mike for some final thoughts..

Thanks, Bob. This quarter's results demonstrated the drive and determination of the Polaris team in the face of ongoing challenges. We will continue to effectively manage a challenging environment to meet consumer demand. The underlying earnings power of the company remains strong as does our financial health.

Demand for our products remains robust, and we do not see that changing in the medium to long term. Our supply chain remains the top challenge for the company with component supply not expected to improve until sometime late 2021 or even early 2022.

And as a result, dealer inventories are not expected to return to normalized levels until sometime in late 2022 or even early 2023.

While much of the focus has been on the supply chain, innovation continues to be the lifeblood of Polaris, and we have a number of new products coming, including the all-new electric RANGER, along with exciting model year 2022 launches.

Let me close by reiterating that we're winning in a challenging environment, and we remain focused on navigating through the current supply chain challenges and rising input costs to deliver products our customers are demanding while at the same time, delivering improved results and value to our shareholders.

With that, I'll turn it over to Cole to open the line for questions..

[Operator Instructions]. And our first question today will come from Robin Farley with UBS..

Just trying to think about if there's a way to quantify what retail was lost to product availability.

And when you talk about preorders being at a record level, is there a way to quantify what the -- if your preorders have been able to be fulfilled in the quarter, what percent of retail -- retail would have been and sort of how much higher? And I think in some ways, it's still going to understate, right, the sales that you would have made if they were actually products on the floor as well, but it still may help to kind of quantify the demand that wasn't captured by retail?.

Yes. I mean it's hard to put a specific number on it, Robin, but I will tell you that we had several thousand side-by-side shipments push out of the quarter, given production limitations. And I'll tell you, the team is -- they're doing incredible work.

I mean we have rework operations essentially at each of our factories because we're keeping our production lines going and then going back around and retrofitting if it's shocks or windshields or whatever components have to be put on the vehicle to make sure we can keep things moving as quickly as we can.

From a presold standpoint, as I talked about in my chart, we're now up over 80% of our retail. And I would tell you, it's even higher than that because by the time the product is on the truck and on its way, it's probably already spoken for or is the minute it lands on the ground at the dealer, it's essentially sold.

So I think it's just safe to assume our retail would have been substantially higher, had the product either been delivered as committed or if they had existing dealer inventory sitting on the showroom floor..

Okay. And then just as a quick follow-up. In terms of your full year retail expectations, I think a quarter ago -- or at some point in the last quarter, you had talked about maybe the full year retail being down low single digits because of the product availability.

Is that kind of still where you think that -- in other words, no real change in -- from what you thought over the last quarter about how much you can overcome the logistical issues? Is it fair that it's still in that sort of down low single retail for the year?.

Yes. And as we've talked about, motorcycles is expected to be up pretty helpfully an RV or will be down mid-single digits. So the year down low single digits is what we're expecting right now, but I'll just remind you that when you compare that against 2019, so that it kind of patterns out the substantial lift that we got in 2020.

We're still probably going to be up high teens on a year-over-year as compared to 2019. So still pretty healthy growth relative to pre-COVID levels..

And our next question will come from Jaime Katz with Morningstar..

I'm hoping you can comment on the composition of owned inventories.

Obviously, there's a significant bump up given some of the supply chain constraints that you mentioned, is there any particular segment that maybe has a disproportionate amount of finished goods inventory on the books? And is there a way to quantify the impact of rework for the year?.

Sure. So as it relates to finished goods, I mean the primary increase in finished goods is in ORV and motorcycles as we have taken the strategic decision to build products when we can if they're short 1 or 2 parts and then put them into rework and rework them and ship them out once the parts come in.

So that's driving really the increase in finished goods. Any finished goods we have -- obviously, we're trying to ship out as fast as we can. So the rework is really what's driving that. We've also got some increases in raw materials as we bring in more product both for safety stock and to meet the higher demand that we're seeing in the channel.

In terms of quantifying rework, it's -- we're building to rework and it's high double digits for the quarter and for the year of what's going into rework..

Okay. And then if we look at the capacity slide that you guys had in the deck, which was, I think, Slide 8, it would imply that over the rest of the year, like you would aim to basically have sort of flattish inventory at dealers assuming all else equal, I think.

Is that the right way to think about it?.

Yes. I mean, what we were trying to get across and there, I mean a couple of things. One is just showing it relative to what we've been conveying that we've got in an unconstrained environment, we're in a decent spot from a capacity standpoint. It's really the supply chain that's got us in a constrained environment.

And the dynamic that you see happening in the third and the fourth quarter is really, the rework that Bob just referenced is essentially allowing us to make up for the shortfall that we'll have in that dark blue line in the fourth quarter.

So essentially, it's -- we end the third quarter -- we're anticipating we'll end the third quarter with a fair amount of rework similar to what essentially was going on in the second quarter. And that those vehicles will get completed and out the door to help satisfy the retail increase in the fourth quarter..

Our next question will come from Craig Kennison with Baird..

It's on the dealer network. The pandemic has certainly the potential to disrupt your dealer relationships. I would think more than ever, you're in a position to pick your dealer partners. I'm curious what you're doing to ensure that Polaris is getting a larger share of the best dealers going forward..

Well, Craig, you're right. And we've been doing work for several years now in terms of reducing some of the smaller dealers where we were a little bit more challenged and making sure that the dealer network was healthy. Certainly, this environment has put the dealers in a position where their margins are doing incredibly better.

Steve Menneto and I were out -- and Bob were out at a number of ORV dealers, about 1.5 months ago, and consistent feedback was the margin performance coming from Polaris is very high.

And that the work that Steve and his team are doing to partner with the dealers to make sure that we're being efficient with the money we do put into promo as well as just how we run our marketing programs and make sure that we're getting the right fulfillment.

And I think look, you're never going to have 100% positive reception to something like a presold order process. But the vast majority of the dealers view it as a positive, something that we can do different than many others, and it puts them in a position to be able to retain sales. We have worked with them.

I made a comment in my script about the fact that we're able to take PG&A orders at the same time and try and sequence that with the vehicle because that's an area where they obviously make even more margin. And so we're working that. We go through every quarter and get dealer sentiment. And believe me, they are brutally honest with us.

And we continue to be #1. As you know, the majority of our network overlaps with the competitors. So we get a pretty good snapshot of how we're doing. And right now, it's making sure that we continue to outperform our competitors with in getting product into the dealers. That's the #1 objective that we've got..

And our next question will come from James Hardiman with Wedbush..

So I wanted to -- unsurprising that I wanted to circle back to the Slide 8. Obviously, a lot of information being conveyed here. But just the retail numbers that you're showing here, I read that as the overall retail demand steps down in the third quarter despite more manufacturing output, but then steps up a bunch in the fourth quarter.

Is that the way to read that? And why would that be the case?.

It's actually more a factor of what we're able to deliver. So when you look at that third and that fourth quarter bar, you see that the blue is above retail. But really, what that's reflecting is we're likely to be producing a ton of vehicles into rework, which won't put us in a position to meet the retail demand.

We don't anticipate consumer demand for the product to have a substantial step down. It's really more our ability to meet the demand. And so we know because of the checks we do, we're not alone in this. Many of our competitors are signaling to the dealer network around order taking and pushout of delivery dates.

So we anticipate that, that third quarter is going to be a little bit of a challenge. The good news is, is that we've got an incredible process to get those vehicles reworked and out to dealers, and that's really going to allow us to pick momentum up in the fourth quarter..

Got it. And so in both cases, you're -- what you're conveying here is that you're basically, you got to retail as many units as you're able to get out to dealers. It's just that in the fourth quarter, it's going to -- that number is going to be a lot higher than in the third quarter..

Yes. And our dealer inventory is going to improve slightly as we move out of Q2, but it's really not going to move much from there. And I think that really just conveys that we're essentially trying to keep up as best we can with retail demand with current factory production.

So we're just -- the demand has remained and we anticipate it's going to remain strong. And at this point, look, it's frustrating because I wish we could get ourselves to a point where we could meet all of that and start receiving dealer inventory because my sense is that, that would drive even more retail given what we're hearing from dealers.

But we're dealing with some substantial issues as is everyone and not only in our industry, but in just about every industry, whether it's plastics, shocks, semiconductors. And I give the team a lot of credit because they're batting those down every time they come up.

And even though we're pushing some shipments between quarters, they're doing a really good job of keeping things moving..

And our next question will come from Joe Altobello with Raymond James..

I had a couple of questions on your full year gross margin outlook, which seems to get better but the second half looks a little bit worse. So I guess first, how much of a benefit is the lack of promotion to gross margin this year? And second, you mentioned a number of headwinds.

How much of that might be structural versus temporary? And how should we think about gross margins, I guess, directionally next year, given all the cross currents between pricing surcharges and obviously, the higher input costs..

Joe, it's Bob. So I would think about gross margins a few different ways. If you look at it on a full year basis, there's about 0.5 point of negative from tariffs just because we had exemptions in 2020 that we don't -- we didn't repeat in 2021. So we sort of started the year with a little bit in a hole.

And then as you think about the price promo, price is a bigger impact than promo for the full year, but promo was a bigger impact in the first half, mainly because of the decline in dealer inventory. We don't see promo levels getting higher in the second half. It's just that they're not going to get lower either.

So -- and then as dealer inventory comes down, the reserves come down. So there's a little bit of impact of that. That was about 50 basis points in the quarter. As you think about the structural, it's a combination of things, right? So there's labor that will continue. Obviously, that's not going to go away.

We raised labor rates, but that's not a significant impact. It really comes down to commodities and logistics, and they're relatively equal for the year. So you look at things like steel. Steel right now is up 130% and 150% versus our 3-year and 5-year average. So a massive increase in steel.

Aluminum, copper and resins are all up 30% to 40% versus those 3- and 5-year averages. So that stuff has a fairly significant impact and really has accelerated through the year. So when we started the year, we thought the impact would be a level, it's now 4x the level we thought it was going to be from commodities. So that we expect to normalize.

There's nothing out there that says it won't normalize. This is -- these are unprecedented levels. The pace at which it normalizes, I think is the question. And we're about a quarter out in terms of seeing benefit or detriment.

And that's part of the dynamic in Q2 is that we are locked on some of our commodity purchases as we commit to volume really that also commits to price. And so if price goes up, we don't see it for a quarter, price comes down, we roughly don't see it for a quarter. It's not exact, but that's the relative math.

The logistics side, again, there's the expedite that will go away. We're expediting over the top of inventory that's stuck on the water or delayed. That's the bulk of it. We expect that to go away. Things like truck and ocean premiums, ocean containers are on average $8,500 a container right now, spot rates $15,000.

If you look back at 2019, it was $1,700. Where that plays out, harder to say, but it's also a smaller part of it. So we think the majority of this will correct itself as the supply chain challenges ease and as commodities normalize, other than labor and then we'll see what happens with ocean and truck rates..

Yes. And I think -- Joe, I think the setup for '22 feels like it's a positive, but I think Bob's point around the timing is key. I mean we anticipate a said in my prepared remarks that dealer inventory is still going to be challenged, which means that the promo environment hopefully will remain under a better level than it has historically.

And if these costs start to abate, we're doing a really good job of tracking that. Obviously, surcharges and things like that would go back. But we've made and will continue to make pricing moves that I think we're in a good position to hold on to. So it feels like the setup is good. It's just really more of a question around timing.

So we're going to learn a lot as we go through the back half of the year and have a much better understanding once we get into talking about guidance for '22..

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

It clearly sounds that in an unconstrained environment that retail sales in total could possibly be up this year.

Can you maybe talk about that? And if that is indeed to talk about it by segment?.

Yes. Well, I mean, first of all, retail will be up for motorcycles and that is constrained. So I anticipate it would be even better than where we're at. As I indicated in the upfront comments, the demand for the Bobber as well as for Scout in general as well as our new Chief model have been off the charts.

And so I think in an unconstrained environment, we would see a substantial increase relative to even where we are today in motorcycles and same goes for Slingshot. From an ORV standpoint, yes, retail would be much better, whether it would get back to flat or be up for the year.

I'm not going to make a comment on that because I think it's -- there's too much of the year left at this point, but it's safe to say that it would be substantially better than where it is.

And thankfully, our team is executing much better than many of our competitors, and that plus the presold order process has put us in a really good spot to continue to gain share..

Got it. And just last question on tariffs.

Can you just remind us what the incremental headwind will be for 2021?.

Yes. Sure. Incremental for '21 is about $40 million versus '20..

Got it..

About [indiscernible]..

And our next question will come from Gerrick Johnson with BMO Capital Markets..

I have two questions, if I may. First, the price increases. Can you talk about maybe the quantification of your average price increase and then also the mechanics of the surcharge and how that affects dealers and consumers. And then second is I get why financial services expectations are where they are.

But what I don't understand is how the outlook for Financial Services changed so quickly.

What caught you off guard there?.

I'll take both of those. I'll answer the second one first. On Financial Services, it's really just the environment. I think as people are waiting to impact cash and people are waiting longer to get their vehicles, so they're shopping credit unions and all of those kind of things.

So really across the board, all the third-party partners are just seeing lower penetration. We think that will normalize as time passes and then things get back to normal and people are walking in and buying the dealership that -- buying at the dealership. That's the real advantage of the in-house financing programs.

And so when that normalizes, I think we'll see that go back to pre-pandemic levels. We're not seeing challenges with people getting credits. And then the other piece of that is what rolled into there is the interest on floor plan. And obviously, floor plan is really down because of the fact that there's not a lot of dealer inventory.

Can you repeat your first question? Price....

The first question is on pricing and also....

Sure. So on the pricing, yes, we announced last quarter that we were implementing about an average of a 2.5% price increase and that went into effect May 1. On the surcharges and price increases on new vehicles at model year, that's all coming in late Q3. And so we're still working through that as to what that will be.

We are seeing a lot of people out there in comparable industries and in our industry go out with surcharges related to both commodities and transportation. And so we're going to look at that. And then, we'll also look at what we think pricing needs to be on a go-forward basis for a model year.

So we're trying to be balanced relative to what do we price in that we think is going to be permanent versus what do we think is going to be short term with some of the commodities and trade challenges. But we haven't set those numbers yet for later this year..

And Gerrick, the thing to remember is with financial services coming down, that also means we're not promoting for those financial rate buydowns. So we pick up favorability that essentially offsets a good portion of that..

I just want to clarify on the surcharge. That's not an increase in MSRP. That's an additional charge to the dealer and the dealer can then do what he wants with it..

Yes. And the reason we do it that way is because it can be very easily eliminated and the customer knows why we're doing it. And so if it's a freight surcharge once the freight environment comes back down to a more reasonable level that can be easily removed and you're not messing around with the MSRP..

And our next question will come from Joseph Spak with RBC Capital..

Maybe just to get to the gross margin outlook and Bob, I appreciate the comments on commodities and logistics as being headwinds. And maybe this is just sort of the timing of when some of those commodities hit you because obviously commodes have -- they didn't just start going up. They've been up for -- since last summer.

So can you just help us with -- if you look at the second half gross margin versus the first half on the implied guidance, it's like 250 basis points lower. And so I get the commodities and logistics are higher, maybe mix is a little bit of an impact, but you also have the pricing offset.

I was wondering if you could just help maybe bucket that and sort of help us bridge that 50 basis points..

Sure. So part of what you're seeing in the Q2, H1 dynamic versus H2 is that the commodities lag a little bit because we are locked out. In most cases, we buy out 30 days in advance to secure volume really more than price. And we don't hedge, obviously, you know that. So what we saw in the quarter was that we were buying out forward on the commodities.

We didn't see as much of the commodity impact has actually hit the market in Q2, and we saw the benefit of the pricing which started in May in the quarter. So from that perspective, it lined up really well, allowed us to have really good gross margins in the quarter. You get to Q3 and the pricing is really in the run rate.

Promo was benefiting Q2, both from lower promo and some reserve adjustments. Like I said, that account to reserve adjustments were about 50 basis points. You get into Q3 promo stays relatively consistent pricing is relatively consistent, and the commodities start to ramp up pretty seriously in Q3, Q4. So that's the far and away the biggest driver.

Expedites are relatively consistent. Ocean freight is certainly higher in the back half of the year, at least as we see it right now..

Yes. And Joe, I mean, just to Bob's point. I mean just rough math is the commodity impact is 4x what it was in the second half, 4x what it was in the first half. Because as Bob pointed out, we're rolling a lot of stuff through inventory plus we did do -- we don't do hedging, but we do forward locks and things like that.

So we were dampening that impact into the first half. And then when commodities actually went even further up the cost scale that's obviously put even just more mounting pressure into the second half..

Okay. That's helpful.

And just secondly, on the electric RANGER, that's supposedly to be unveiled end of the year on sale early in the industry challenges on both semis and batteries, is on track? Or has that been impacted by some of these challenges? And maybe also if you could just add any type of investments the dealers need to make in order to support electric product..

Yes. We've been tracking that very closely. Really, the -- as you mentioned, the electronics and the battery. Thankfully, we're going to have start of production in '22. So given that we've got time, I would say there's been some small impacts, but at this point, the team is still on track.

We -- much like we did with the rest of the business when we saw this stuff starting to happen earlier this year, we made sure that the team went out and protected for this program. So knowing how important it is that we wanted to make sure we didn't have shortages or stock outs that were going to impact that.

The other thing to keep in mind is that we're partnering with 0 on this E RANGER. So it's not like we're starting with a brand-new supply base that's not used to producing these components. Zero has got a long relationship with a lot of these suppliers that we're stepping into.

So we see that as an advantage, and it's certainly given us good access to work with those suppliers to prepare for our volume..

And our next question will come from Brett Andress with KeyBanc..

So going back to Slide 8. I don't want to overcomplicate it, but if you use 2019 as a baseline, do the retail bars imply that you're expecting 3Q to flow versus that low double digits that you did in 2Q. I just want to make sure we're using the right baseline for that..

Yes. I mean it will -- we still anticipate being up versus 2019 in the third quarter, but just not as much as we had been. And that's not -- again, I want to reiterate, that's not because we have -- we think there's consumer demand shortfalls. It's just the mounting supply chain challenges that the whole industry is facing right now.

So obviously, we've got the team geared to do better than that. Obviously, you guys know how we plan and execute against our business. So we're pushing our teams. And we'll continue to do what we've done in the last 3 quarters, which is making sure that we're outperforming the rest of the group so that we can continue to grow the share..

Got it. Okay. And then I think you mentioned 30% capacity increase across the business in 2022.

How much is being added to ORV? And then are the investments that you're making more in labor or adding shifts -- and are there any, I guess, new greenfield builds in that capacity expansion?.

I don't know that I would call it "greenfield." It's on our existing Monterrey campus. I mean we are facilitizing a building that had previously been used for light work as well as warehousing. So there will be facilitation or facilitization of that existing shell.

And I would -- obviously, given the size of ORV, the capacity adds are predominantly focused in that arena.

But as we mentioned on the chart, we are making capacity adds pretty much across the business, whether it be boats or PG&A, just given the uplift in demand that we've seen this year as well as what we anticipate will continue into '22 and beyond..

And our next question will come from David MacGregor with Longbow Research..

I guess my question is on new incoming retail orders and just what might be changing at the margin there. And I'm just wondering what patterns you may have been seeing in terms of new incoming retail orders through the quarter, and how that's -- kind of how that evolved through the quarter from the beginning of the quarter to the end of the quarter.

I guess that 80% presold number, which I'm sure is an average for the quarter.

But how did that number evolve over the quarter as well?.

It continued to increase through the quarter. And I would tell you, based on the number of e-mails that I get, consumers are -- increasingly want product. And so our perspective is that the underlying demand environment has remained quite strong. Obviously, the concern we have, and I'm sure everybody has is how long will consumers hang in there.

So we're making sure that we're communicating with them around the lead times for the preorders, keeping them updated to the extent that we can through the communications with our dealer and making sure we're getting product in the hands of our consumers as quick as we can.

And we are -- obviously, as our margins reflect, we are not sparing any expense. Where we have to expedite we do. If we have to direct ship from our factory to the dealers, to get the product into the hands of consumers, we're doing that.

So -- we know that we can recover those costs down the road, and we want to make sure that we're getting as much product into the hands of the consumers, especially those that are putting money down on them in advance..

Great. Great. And second question is just with respect to your motorcycle gross margins, which I guess there's a lot of things moving around in motorcycles this quarter, but the margins were up very nicely. And I'm just wondering, is that just because those smaller bikes were weaker in the mix? Is it because Slingshot considered to be more.

Can you just talk about as well how sustainable the improvement might be?.

Yes. So there's no question the mix, as you stated, helped motorcycle margins in the quarter with both Slingshot and heavyweight being a higher percentage than they have been in prior quarters. But the focus for motorcycles, as we've talked about, we've been building out the product portfolio.

The chief was the last big sort of bike we needed to add to have a pretty full and robust motorcycle portfolio. So now we'll be focused more on derivatives and focused on profitability. So that team has a pretty tough objectives to go after, and we're focused on their path to profitability to continue to improve that business..

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

Another question just on motorcycles.

As we look at competition, maybe primarily in midsized bikes, any impact in the quarter from competition versus just purely supply?.

Well, I do think, obviously, one of our key competitors, I think, has found their footing, which certainly is helping them. I think their supply challenges are probably dampened relative to us given a fair amount of insourced components that they do.

But what we're hearing from our perspective is the demand for our product given the brand recognition is incredibly high. And at this point, the biggest impact we had was just simply our lack of ability to produce those bikes. So we feel really good. We know that there's some competitive news that came out.

Our team has done the assessment, and we still think that we've got the best product in the market..

Okay. And then second one for me is just circling back to capacity.

And as you've added some capacity here, primarily in Monterrey, can you just talk about your other facilities and what opportunities there are in adding additional capacity? And longer term, if supply chain issues get worked out and demand continues to be robust, do we reach a point where we start to look at a new facility that's needed?.

Yes. So we -- I mean, we are making moves. I mean Monterrey, obviously probably gets more attention just given it's our largest manufacturing environment. But we're adding -- we added capacity in Indiana for boats.

We actually took a facility we had shuttered when we shutdown Rinker and Larson and are refacilitizing that to be able to handle the hurricane brand. We're adding distribution space in Ohio to be able to help us serve our East Coast dealers and some of our southern dealers much better.

I do think we're going to be in a position where we're going to have to reevaluate much larger capacity adds. The team is working through that, and it's a discussion that we'll obviously have with the Board.

But at this point, we are 100% focused on making sure we're managing this current environment and trying to make sure we keep our eyes forward to say -- to see when that next capacity limit is going to be reached.

One of the things that we did was we pushed our teams really hard to go evaluate the labor markets because even though labor really wasn't a constraint for us given the supply chain challenges, once those get abated, we wanted to make sure that we were in a strong position.

And so the team did a really good job of looking at each of our facilities and did market-specific adjustments to make sure that we're able to retain and attract labor so that when the supply chain challenges start to abate, labor doesn't become the next challenge. So I have a lot of confidence the team is doing a really good job.

So I think both the near-term capacity moves that we're making as well as the potential long term, we'll put the business in a really good spot..

And our next question will come from Billy Kovanis with Morgan Stanley..

In your opening remarks, you mentioned inventory levels could get back to normalized levels by late '22, early '23.

Just wanted to confirm, is that the new time line you think it will take to replenish inventory even despite some of the enhanced capacity you have coming on in Q4 and a pretty strong retail sales environment calling for flat growth versus the plus 25% growth in 2020? And then do you worry about losing customers and share given this delayed time line?.

Well, as long as we're continuing to perform like we have been, there's really nowhere for the customer to go. We've got the best delivery performance. And you couple that with the best product in the market. It puts us in a pretty good spot. And the team understands that, and that's where our priority is at.

The reason we made the comments around dealer inventory levels is -- I mean, they're at an incredibly low level, historically low levels.

And when we look at that and we do the math going forward, assuming that you return to kind of a low to mid-single digits retail growth rate in '22 even with the capacity adds, we know that it's going to take time to get the inventory levels up.

And the reason that we said late '22 or even to '23 is, it's anybody's guess as to when all these supply challenges are going to abate. When we started out the year, we had a view that these would largely be resolved by the middle of the year, and we would be back to building dealer inventory in the second half. And that certainly has not worked out.

We're not alone. There's just -- I don't know that there's many markets you can go and buy a product and actually, they've got it in stock. Most of it is dealing with a lot of these same issues around steel and aluminum and resins and specialty components. So the team's got to stay focused like we have been.

And I think the presold order process gives us the ability to get consumers locked in and get excited about the vehicle and make sure that they've got it for the next riding or boating season, which is really important, and we're going to do everything we can to make sure that we improve upon that..

Got it.

And just on the cost pressures, if these don't abate towards the end of '21, would you consider a substantial price increase for new models in '22? And would that be able to fully mitigate some of the cost inflation there?.

Yes. I mean, obviously, we're evaluating weekly what's going on with commodities and logistics costs. We have a review once a week. And we'll continue to look at that as the year develops. And as we head into next year, we're going to look at, as we said, surcharges. We're relooking at model year pricing.

We already took 1 price increase that was an unscheduled midyear price increase on the ORV motor cycle side. Boats actually has done a couple of price increases. So we're trying to be balanced between price increases to offset the costs versus how long we think those costs are going to stay in the system.

And that's a bit of a moving target, but we will continue to be as aggressive as we can be..

And our next question will come from James Hardiman with Wedbush..

I just wanted to clarify, Mike, I think earlier in the call, you said you still expect retail to be up high teens versus 2019. I believe the comparable estimate a quarter ago was 20% to 25%. Do you want to make sure those 2 numbers are apples-to-apples.

And if so, is that basically an estimate of how much retail you feel like you've lost as a result of these supply chain issues versus where you -- versus where we were 3 months ago?.

Yes. I probably was mixing a couple of things. The high teens was more of an ORV expectation. For the total company, it's still in that low to mid-20% range..

Okay.

So it's ultimately unchanged for both versus how you thought about it 3 months ago?.

Yes..

Okay. And then obviously, there's going to be no great answer here when you're talking about politics. But maybe speak to the tariff legislation obviously, some differences between the Senate and the House bills that have come through.

But just how are you thinking about the likelihood of getting these exclusions reinstitute?.

I wish I was more optimistic. I think there's good rationale. Janet Yellen has been on the record, has not supportive of the tariffs. I think it's going to take some movement around the USCR specifically around how we want to deal with China. I think there's a view that we -- any kind of backing off the tariffs is going to be viewed as going light.

And frankly, with some of the moves that have been going on with China, I don't think now is going to be the time. And so we continue to drive the business the way we had. We look for opportunities if we can source outside of China. I don't know that China has really got an impulse to get to the table. The trade imbalance is widening.

So it certainly has not had a huge impact on them. And I think the administration is going to have to figure out what tactic they want to take. So we're not going to sit back and count on it. So we've continued to push the team to manage the supply chain side as much as we can.

But quite frankly, it's taken a back seat relative to all these supply chain challenges because, obviously, as Bob covered, they're far more expensive at this point than what we're continuing with tariffs. So we continue to monitor it. We've got folks that advocate for us on the hill.

And when the time is right, we'll make sure that we're pushing the right agenda..

Makes sense..

Okay. A couple of more calls, Cole, we can..

Yes, sir. So our next question will come from Shawn Collins with Citigroup..

My question is on the electric RANGER coming out in the fourth quarter and next year. The electric vehicle revolution is really picking up steam in autos. So I wanted to ask what reaction you've seen so far on the soon-to-be released RANGER.

And any thoughts on your best guess on how electric plays out in the ORV and powersports world in general?.

Yes. The reception around the electric RANGER at least the feedback we've gotten is people have looked at the teaser videos and the value proposition around it being the highest performing ranger that we'll have has been positive.

And we've had historically people who bought our electric RANGER in the past, and this obviously will perform immensely better. And so we think that's a positive. We do think that there's other areas in off-road vehicle that could be attractive. Obviously, there's portions of our youth portfolio where electric makes a heck of a lot of sense.

And then there's going to be other areas that we're going to continue to explore. Now at the same time, there's a lot of challenges.

When you start talking about products like Razor and the areas that they're used, charging infrastructure as well as the use case and how those vehicles are used means that the run times are short and the opportunity to charge them is tough. So we're not just going to use that as an excuse not to go do anything.

We've got some ideas around partnerships and how we look at the charging infrastructure that others will be likely investing in. And we're likely to be a fast follower around things like that. But we've got our plate full with what we've got going on with the RANGER. It's an excellent product.

And the team is in full force to make sure we get that launched at the end of the year and in the hands of consumers in 2022..

And our next question will come from Xian Siew with Exane BNP Paribas..

Thanks for the question. So one of the challenges that you highlighted on Slide 8 was COVID pressures in places like India and Southeast Asia. And now, for example, in Southern Vietnam, there were some lockdowns recently.

So maybe if you could just give us an update on the situation there for you guys? And if you can maybe remind us of how exposed are you to these regions..

Yes. I mean we have component supply that comes out of all those regions. And much like we've had with other elements of the business, we try and manage those as best we can.

And where we've got the opportunity to either source from an alternative location, we will do advanced buys or frankly, produce the vehicle with the components missing and then go back and do the rework once we're able to get the continuity of supply. So we are literally managing a lot of different variables.

It's whether there's shutdowns in a specific geography, the availability of shipping containers, availability of trucks or rail, it is literally one thing after another. And the team, as we've demonstrated, has done a great job of managing that. So I think the backdrop hasn't necessarily improved.

And you could argue with the Delta variant becoming a bigger, bigger discussion. That's obviously going to continue to be a challenge, not just for us, but I think for the entire manufacturing industry..

Okay. And just a quick one. For the presales -- the preorders, if I were to order like an ORV now, how long would the consumer have to wait for a delivery? Just trying to get a sense of how long people are willing to wait..

Yes. I mean it really depends on the vehicle that you're ordering, but you could say it's going to be anywhere from 6 to 10 weeks, and there could be variation on either end, just depending on the type of vehicle and where we're at, at that moment relative to supply.

And the good thing is, is that we're doing a good job of communicating with dealers so they can keep consumers up to date. And as we pointed out, the fallout rate for preorders has been incredibly low. So consumers are definitely wanting to wait to get their vehicles..

Okay. I want to thank everyone for participating this morning and your interest in Polaris, and we look forward to talking to you next quarter. Again, have a good day. Goodbye..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time..