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Text: Mike Speetzen, our chief executive officer; and Bob Mack, our chief financial officer, have remarks summarizing the quarter and our revised expectations for the year, then we'll take some questions.
You can refer to our 2020 10-K and recent 10-Q for additional details regarding these risks and uncertainties.
While demand remained very strong for our products with presold orders at record highs and new customers continue to be a large portion of our sales mix, we were negatively impacted by supply chain challenges for the quarter.
We were able to meet earnings expectations in the quarter, but a combination of logistics challenges and supplier shortages impacted our ability to ship and as a result, sales finished below our expectations.
This is not unique to Polaris.
The entire powersports industry is being deeply impacted by the much reported on supply chain challenges.
The good news is that Polaris continues to outperform as evidenced by our record year-to-date sales and earnings performance, with sales and earnings up 24% and 59%, respectively, versus 2020.
We also continue to drive market share gains in ORV and other segments of the business are in line with or are up yea to date in market share versus last year.
Additionally, our PG&A and International businesses performed well, with PG&A sales growing 8% and our International business delivering strong sales growth of 21% in Q3.
And while I'll cover more details in a few slides, our new product introductions for ORV have generated a lot of excitement and energy for dealers and customers.
We continue to manage through very challenging supply chain constraints, issues stemming from port backups, escalating commodity prices, truck and driver shortages and labor shortages, the list goes on and on.
We are taking aggressive steps to combat these headwinds, but given we are 10 months into the year, the impact of any additional countermeasures may not be realized until sometime next year.
Thus, we're revising our full-year 2021 guidance down slightly.
Bob will give you more details shortly.
While I'm disappointed that we're lowering our full-year guidance as a result of the continued supply chain challenges, I couldn't be more impressed with the Polaris team for their ongoing dedication and exhaustive effort to keep the flow of our products moving to our customers.
I also want to recognize our dealers for their understanding and dedication to Polaris in these challenging times, as well as our suppliers who continue to work with us to improve upon availability of components.
Moving on to retail sales for the quarter.
Our third-quarter North American retail sales were down 24% from the positive 15% reported in the third quarter of 2020.
This resulted in retail being down 13% on a two-year basis.
Our retail results were lower than originally anticipated, driven entirely by supply chain issues.
We continue to gain market share in ORV despite the supply constrained retail sales, getting almost a point and a half of market share with gains in both ATVs and side by sides.
Motorcycles retail sales were also down for the quarter.
Indian market share is now flat year to date, with the midsized bikes being the most supplier-constrained category.
Snowmobiles retail was down 30% in the quarter.
Despite that, our snowmobile business gained share during the quarter as we performed better than the market.
And lastly, Boats market share continues to remain up year to date.
Dealer inventory levels ended the quarter down 46% on a year-over-year basis and down 75% when compared to pre-COVID levels in Q3 of 2019.
We currently have, on average, less than one month of inventory in the channel.
Presold vehicles continue to be a very effective sales lever for our dealers to maintain consumer interest and is a way for consumers to stay engaged with the -- while their vehicle is being built.
Given the competitive advantage we have seen with this process, the team has made some changes, which I'll provide more detail on shortly.
Given the current supply chain issues, we don't expect the dealer inventory situation to improve materially until sometime in 2022.
As I discussed earlier, continued unprecedented demand, coupled with supply chain constraints, have created significant disruptions in our shipping cadence, with dealer inventory at record lows and not expected to return to normal levels in the near term.
The dealer presold order process has become and will continue to be an integral process part of how we take orders and deliver products to dealers and consumers.
Given the acceptance of the process and the escalating supply chain challenges, we've made some modifications to the preorder process to improve the visibility and predictability to dealers and consumers.
Let me share a few of the changes with you.
A few weeks ago, we adjusted delivery dates on a limited number of presold orders to align with our current production schedule.
We are introducing a new industry-first online order tracker that will provide customers with order confirmation data plus the ability to find up-to-date shipping estimates for their presold order.
This will allow for greater transparency of order status for both the dealer and presold customer.
Next, we created a new Polaris off-road reservations program for select premium models, including the RANGER full-size and multi-premium plus models, GENERAL full-size and multi-performance models and the RZR Extreme and multi-performance turbo models.
These premium models are currently the most popular, have the highest demand and are the highest percentage of presold orders in our system today.
We believe this allocation method will provide the necessary prioritization of whole good and PG&A shipments to drive increased retail velocity and dealer profitability while improving the customer experience.
All of the models will remain unchanged within the existing RFM and presold process currently in place today.
In summary, these changes are designed to improve communication to the dealer and consumer while improving our ability to manage product flow in the supply constrained environment and setting clear expectations for shipment timing to better serve the dealer and customer.
Our manufacturing plants continue to operate at peak supply chain constrained capacity.
While our teams are mitigating shortages and delivery delays real time, the supply chain disruptions have become unavoidable for a large number of our models.
The shortages include shocks, plastics, crank cases, doors and, of course, semiconductors, to name just a few.
We continue to aggressively work with suppliers across our business who are behind schedule, with ORV being impacted the most, given its size.
A byproduct of the supply chain shortages is higher input cost.
Each link in the supply chain from shipping lines, port bottlenecks, shortages of trucks and railcars to the increased rework and disruption in production schedules, has created an environment where input costs have increased exponentially.
As an example, since the first of the year, costs attributable to supply chain disruptions has increased fivefold.
That's over $300 million of additional costs that we did not anticipate when the year began.
We've attempted to offset these costs through pricing and surcharges, which Bob will discuss shortly.
Again, I want to reemphasize this is not a manufacturing capacity issue.
It's a supply chain issue.
Bob will give you an update on recent capacity additions, which will clearly demonstrate that we have and will have capacity improvements when the supply chain constraints subside.
New product introductions and innovation remain a key component of our growth strategy going forward.
During the quarter, we introduced 15 new ORV models, product enhancements and limited edition models, including a new midsized RANGER with more comfort, storage and a noticeably quieter ride.
It comes with rider-inspired features, including a larger dump box, more onboard storage, more legroom and new premium contoured seats.
Our Northstar trim is also available with a fully enclosed heated cap to keep riders comfortable into the cold seasons.
Sportsman, the industry-leading ATV brand, just got better with the addition of the exclusive industry-leading seven-inch RIDE COMMAND technology with GPS navigation and communication technology.
And for our younger riders, we introduced a new RZR 200 EFI with industry-leading safety and technology features, including standard hard doors and high visibility front and rear LED lights, digital speed limiting to control top speeds and geo-fencing to allow parents to control where the vehicle is allowed to go.
In addition, we added a number of enhancements and limited edition models to the RANGER, GENERAL, RZR and Sportsman lineup for model year 2022.
We continue to invest aggressively in research and development and a bold slate of industry-first innovations are now entering the introduction phase, with an exciting sequence of launches to play out over the next several years.
One of these introductions, which is sure to throw our extremely passionate recreational riders, is the all-new RZR that will be unveiled on November 9.
If you haven't seen some of the teaser videos, you should check them out.
While the new RZR has been highly anticipated, the social media and video tease last week launched excitement across our rider forms and fan channels.
One little nugget I'm excited to confirm today is that we're not just launching one new RZR, we're getting ready to launch two, the all-new RZR Pro R and the RZR Turbo R are ready to reaffirm our leadership position in the wide open segment with the highest performing recreational vehicle in the industry.
We're incredibly energized to bring these industry-leading products to market.
As I've said, innovation will always be front and center in our growth strategy.
One innovation we have been talking about for some time now is the all-new full-size electric RANGER, which is set to launch in December.
This is a completely redesigned RANGER.
We've been previewing the benefits of this new RANGER in a number of marketing videos throughout the year, including more torque and power, instant acceleration, precise control, regenerative braking, industry-leading ground clearance, highest power-to-weight ratio, lowest cost of ownership and the quietest ride.
You can see each of these videos on our website.
We're incredibly excited to bring the this game-changing RANGER to market as it reflects our commitment to expanding our product offering to meet the needs of our customers.
Mike highlighted the supply chain headwinds we faced in the third quarter and expect to continue to face for the remainder of the year.
We want to make sure our investors understand that we are working diligently to counteract these headwinds and while there is pressure in the near term, we believe we are well-positioned to capitalize on the sustained demand as the supply chain normalizes.
We will have more on the remainder of 2021 later, but let me first start with a summary of the third quarter.
Third-quarter sales were flat on a GAAP and adjusted basis versus the prior year, finishing at $1.96 billion.
Sales improved from Motorcycles, Global Adjacent Markets and Boats.
ORV, snowmobiles and aftermarket sales were down on a year-over-year basis.
While supply chain constraints impacted all of our businesses, we were able to ship more motorcycles in adjacent market vehicles during the quarter compared to the same quarter in 2020.
Both sales were positively impacted by improved product mix as we shipped a stronger mix of premium boats in the quarter.
Third-quarter earnings per share on a GAAP basis was $1.84.
Adjusted earnings per share was $1.98, which was down from the $2.85 we reported in Q3 last year as expected.
Adjusted gross margins were down approximately 360 basis points on a year-over-year basis, mostly due to increased input costs from logistics, commodities, plant inefficiencies and labor.
The input costs were partially offset by increased pricing and ongoing lower promotional and floor plan financing costs.
Adjusted operating expenses were up 4%, primarily due to increased research and development expenditures and, to a lesser degree, increased selling and marketing costs during the quarter.
Income from financial services declined 38% during the quarter, primarily due to lower retail credit income.
Retail financing penetration rates continue to be low due to more customers paying in cash, minimal promotional programs available from Polaris and consumers having additional time to shop around for alternative financing options.
And finally, the tax rate finished at 20.5%, compared to 23.7% in the third quarter last year due to favorable adjustments related to research and development credits taken in the quarter.
From a segment reporting perspective, Motorcycles, Global Adjacent Markets and Boats increased sales for the quarter, driven by volume, pricing, lower promotions and favorable product mix.
Sales for our ORV, Snowmobile and Aftermarket segments reported lower sales for the quarter, driven by the supply chain shortages.
All segments continued to benefit from ongoing low promotional costs, given high demand and the lack of product in the channel.
Pricing actions taken in May also had a favorable impact during the quarter, but were muted, given the large quantity of customer preorder units, which did not benefit from the pricing actions.
Average selling prices for all segments were up, ORV increased about 5%; Motorcycles were up approximately 10%; Adjacent Markets increased about 1%; and Boats was up approximately 30% for the quarter.
Mix had an impact on ASPs in all segments.
I will talk more about pricing actions we have recently taken as they are an important countermeasure to the increasingly inflationary environment we are facing today and going forward.
Our International sales increased 21% during the quarter, with all regions and segments growing sales as many economies continued to gain traction as they recovered from earlier COVID shutdowns.
Currency added 3 percentage points to the International growth for the quarter.
Parts, garments and accessories sales increased 8% during the quarter, with strong demand across all segments and categories in that business, particularly parts and accessories.
Back orders driven by the supply chain bottlenecks remained high, limiting our growth in PG&A for the quarter.
Moving on to our guidance for the remainder of the year.
As Mike indicated, supply chain challenges significantly impacted our ability to ship products in the third quarter, and we anticipate continued pressure in the fourth quarter and into 2022.
When we last updated our expectations in July, we have been expecting the supply chain constraints to ease as we headed into the fourth quarter.
Unfortunately, the supply environment has not improved in the ways we had anticipated.
Therefore, we are lowering our full-year sales and earnings expectations going into the fourth quarter.
Total company sales are now expected to finish at approximately $8.15 billion for the year.
At this projected sales level, full-year adjusted earnings per share guidance for 2021 is expected to finish at approximately $9 per diluted share.
While we are disappointed that we have to update our guidance, keep in mind, this is $0.25 per share higher than the high end of our original 2021 guidance range.
The full-year sales and earnings expectations are driven by our ability to source the needed components for our products.
Our guidance assumes that supply chain performance will not deteriorate further in Q4 and that our suppliers will be able to fulfill our current expectations for component deliveries for the remainder of the year.
While we typically have a solid view of the puts and takes for a given quarter, which gives us confidence in providing a realistic guidance range, in this environment, the timing of component shipments could significantly impact the quantity and mix of products we are able to ship in a given quarter and therefore, our results.
We are doing all we can to deliver vehicles to our dealers and consumers, but have limited ability to quickly countermeasure certain unexpected supply chain disruptions.
As such, we have provided you our balanced projection for 2021, which is reflective of our current viewpoint on the component availability and production run rates.
One thing is certain, we will always do what is in the best interest of our consumers to get their requested vehicles to them as soon as we can.
Moving down the P&L, we have made the following revisions: adjusted gross profit margins are now expected to be down approximately 70 basis points, which is at the lower end of our previous guidance.
The escalating increase in input costs, as Mike indicated earlier, has been significant.
Mike mentioned the $300 million-plus increase in input costs since the beginning of the year, but just in the third quarter alone, our input costs from logistics, ocean and truck rates, commodities, labor rates and plant inefficiencies increased over $100 million or approximately 580 basis points when compared to the prior-year third quarter.
Given the magnitude of the input cost increases and the expectation that they are not transitory, we are quickly adjusting our pricing for model year 2022.
Here in October, we announced price increases that will increase the average sales price on most ORV and motorcycle models in the mid-single-digits percent range.
Similar increases were also announced for associated PG&A.
These increases are in addition to several price increases we have made earlier in the year.
While the cost environment is a headwind that will continue to impact our gross profit margins in the fourth quarter, the benefit of the recent pricing actions taken or announced will not have a significant impact until the first quarter of 2022 as the dealers' current preorders are set at the previous pricing levels.
Adjusted operating expenses are now expected to improve 90 basis points as a percentage of sales versus last year, again, at the lower end of our previous guidance range, driven by the lower sales growth expectations, partially offset by prudent cost management.
We are continuing to invest in the business while controlling our flexible expenses commensurate with our sales volume.
Income from financial services is now expected to be down in the low 30s percent range, driven by the continued historically low dealer inventory levels, as well as lower retail financing income due to lower penetration rates of our retail providers, as I explained earlier.
And we're adjusting our income tax provision rate expectations for the full year to be in the range of 22% to 22.5%, an improvement over our previously issued guidance, reflecting the flow-through of favorable tax adjustments related to the R&D credit.
Guidance for the remainder of the P&L items remains materially unchanged from our previous issued guidance.
Our sales expectations for our segments have been lowered given the supply chain challenges with the exception of Global Adjacent Markets, which remains unchanged for the year.
While our adjacent market businesses are feeling the same supply chain challenges with our other businesses, they were in a better position with finished goods and dealer inventory given the B2B market has recovered at a slower rate than the consumer markets.
Our current plant capacity is adequate to meet the current demand.
And when the supply chain constraints ease, we will have the needed capacity in place to ramp quickly and begin to fill the dealer channel with much needed inventory.
We are expanding our Monterrey facility by over 400,000 square feet, adding approximately 35% more capacity for RZR in general over the next year to accommodate the model year '22 vehicles, the new RZRs coming in Q4 and additional ORV models expected to launch over the next couple of years.
For Boats, we added approximately 55,000 square feet of manufacturing capacity in Elkhart, Indiana to meet the demand for Bennington, and we brought the Syracuse, Indiana facility back online to support strong demand for our Hurricane deck boats.
In addition to adding manufacturing space, we have also invested heavily in welding, vending, injection molding and painting capabilities to support higher assembly volumes.
With these capacity adds, we will be ready to meet the anticipated strong demand when the supply chain improves.
Year-to-date third quarter operating cash flow finished at $153 million, down significantly, compared to the same period last year.
The decrease was driven by an increase in factory inventory due to the increase in vehicles waiting for parts and our pre-buying of components to remove as much uncertainty around the component availability as possible.
While share repurchases remains a lever we like to use to return capital to shareholders in the current supply constrained environment, we will concentrate much of our capital toward organic investments until the supply chain improves.
With all the uncertainties surrounding the supply chain, forecasting 2022 is proving to be challenging.
Let me give you some preliminary views on next year, given where we stand today.
First, the supply chain is likely to be an ongoing challenge into 2022.
Supply chain issues have been with us to varying degrees since the pandemic first broke out in March of last year.
But in the past quarter, the supply chain issues have intensified.
Additionally, we're experiencing much higher costs than we anticipated.
We're taking steps to raise prices now that will benefit us next year.
Rest assured that we are working hand-in-hand with our suppliers to improve upon the current situation, and I'm optimistic we can continue to outperform the competition as we have so far this year.
Dealer inventories are expected to remain lean through 2022 until the supply chain improves.
In the meantime, we'll continue to prioritize the majority of our production to preordered units until more supply chain flexibility is obtained.
We expect consumer demand to remain healthy through 2022.
The number of new customers that have entered the market is staggering and repurchase rate data supports that customers are staying with the brand.
As the supply chain starts to recover, we are in a strong position to take full advantage of this, given our substantial investments in capacity expansion.
I've talked at length about the steps we're taking to navigate the current supply crisis.
But behind the scenes, we've also been taking a closer look at our portfolio of businesses.
When I was first appointed to the CEO position almost a year ago, my mantra was focused execution that applies not only to the day-to-day operations, but also strategically and where we want to concentrate our time and capital.
As such, we've made the decision to divest our GEM and Taylor-Dunn businesses, with the expectation that the transaction will be completed by year-end.
And finally, while we received some favorable news out of the Biden administration around the possibility of tariff relief next year, the realities of the process were far less compelling.
The initial exemption reinstatement process appears rather narrow and is likely to have an insignificant impact on our financials in 2022.
2021 has been a year of constant adjustments, but we've been winning by remaining agile and adaptable.
The Polaris team is hands down the best in the industry, couple that with the best brands and product portfolio in the industry, and I believe we have the winning formula for growth and improved profitability for years to come.

user
compname reports q3 earnings per share $1.84.
polaris third quarter 2021 earnings results.
q3 earnings per share $1.84.
q3 adjusted earnings per share $1.98.
qtrly reported sales of $1,960 million, up $5 million from reported sales of $1,955 million for q3 2020.
full year 2021 sales guidance is now expected to be approximately $8.15 billion.
gem and taylor-dunn expected to be divested by year-end.

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