Polaris Industries (NYSE:PII)
Q2 2021 Earnings Call
Jul 27, 2021, 10:00 a.m. ET
- Prepared Remarks
- Questions and Answers
- Call Participants
Good day, everyone, and welcome to the Polaris second-quarter 2021 earnings call. [Operator instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Richard Edwards, head of investor relations.
Please go ahead, sir.
Richard Edwards — Head of Investor Relations
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?
Mike Speetzen — Chief Executive Officer
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 two-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…
Read More:Polaris Industries (PII) Q2 2021 Earnings Call Transcript