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Polaris Industries (NYSE:PII)
Q2 2020 Earnings Call
Jul 28, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon or good morning, and welcome to the Polaris' second-quarter 2020 earnings conference call and webcast. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Richard Edwards, head of investor relations. Please go ahead.

Richard Edwards -- Head of Investor Relations

Thank you, Andrea. And good morning, everyone. Thank you for joining us for our 2020 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.

Scott Wine, our chairman and chief executive officer; and Mike Speetzen, our chief financial officer, have remarks summarizing the quarter, and 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 2019 10-K for additional details regarding these risks and uncertainties.

All references to the second-quarter 2020 actual results 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 Scott Wine. Scott?

Scott Wine -- Chairman and Chief Executive Officer

Thank you, Richard. Good morning, and thank you for joining us. Last quarter, I spoke about how thankful I was for the Polaris team's hard work and how confident I was they had positioned us to navigate and win throughout the pandemic. With the surge in demand for Off-Road Vehicles, Motorcycles, and more recently Pontoon Boats, the team is demonstrating impressive agility and resourcefulness as they support our dealers and deliver innovative products and solutions to our customers.

We will talk about outperforming expectations this morning, but admittedly, the outlook we provided in April was off by a country mile. The economic lockdown of our dealers and suppliers, along with concern for the global economy amid the pandemic led us to model negative retail sales for the second quarter and the year. Reality has been much different as many more people sought out the family enjoyment, excitement, and utility of our vehicles, and when coupled with more free time and fewer alternative ways to spend money, this provided a near-perfect backdrop for our powersports dealers. Our priorities remain consistent since the onset of COVID-19.

First, implementing protocols and guidelines to keep our employees safe, then working across our global supply chain and factoring that work to ensure the viability of Polaris, winning for our dealers and customers, and ultimately doing good for our shareholders. Even though I'm known as a tough grader, the team earned extremely high marks in each of these fundamental considerations. The combination of record off-road vehicle retail, COVID-19-related temporary plant shutdowns and our erroneous forecast for lower demand brought dealer inventory down below target levels, but our factories are performing well as they ramp up to meet demand and refill the channel. Liquidity is not a concern currently, but the cash war room exercises that Mike Speetzen and his team have greatly enhanced our cash outlook and management ability.

While noncash, we did take a $379 million impairment charge for our aftermarket business, which reflects the greater impact TAP has faced from COVID-19 and tariffs. This is accelerating our strategy to focus predominantly on TAP's retail channels, which I will cover shortly. Second-quarter North American retail sales were up 57% behind broad-based demand across our dealer network. A key fact underlying this top-line number is that nearly 75% of our off-road vehicle and motorcycle buyers in Q2 were new to Polaris.

While we love our current customers, we know that new customers are more likely to invite their friends to powersports, spend on apparel and accessories, and buy another Polaris vehicle. The solid demand for four-seat or crew side-by-side vehicles reinforces the family dynamic behind this surge, while our PG&A business experienced its largest ever quarterly sales confirms our large and growing installed base still has a strong desire to accessorize their vehicles. Both Indian and Slingshot performed well in the quarter with the new Challenger and Slingshot AutoDrive leading notable market share gains. Boats did not turn positive until June, but the subsequent recovery was quite robust.

Despite our impressive retail performance in off-road vehicles, our market share did decline in the quarter. This is never an acceptable outcome and I'm extremely confident that Steven Menneto and his team are driving the necessary actions and improvements to reestablish market share gains in the quarters ahead. I do not want to make any excuses, but this simple facts helps put things into perspective. In the months of May and June, the growth of our side-by-side business outpaced any of our competitors' total sales over the same period, kind of cool.

Dealer inventory declined precipitously in off-road vehicles and slightly in motorcycles for a net decrease of 47%. We did bring our plant network down for approximately 10 days, including Monterrey, which was down considerably longer. But our significant U.S. footprint was an asset that enabled us to respond quickly once we came back online.

With factories rapidly ramping to full production, we expect to make progress toward replenishing dealer inventory throughout the second half. Although year-end levels are likely to be down substantially. As noted, our growth is largely being driven by new customers who are increasingly gender, ethnic, and age diverse. Changing market dynamics are certainly contributing to this shift, but the customer engagement and demographic outreach efforts that Pam Kermisch and her team are leading give me confidence that we can sustain it.

Expanding the market is uniquely beneficial to the market share leader, and we will continue to invest in initiatives to keep this trend going. The aftermarket impairment charge we took primarily related to TAP did not cause us to change strategies, but it did accelerate the work Craig Scanlon and his team are doing to transition to a much more retail-focused business model. While we still see benefits in the integrated multichannel approach we've been operating, we recognized it does not require TAP's entire existing wholesale business, which has been a consistent drag on profitability. Our distinct Ford MVP advantages in business-to-consumer retail with both our national brick-and-mortar footprint and our significant online presence performing well.

With a more retail-focused business, we expect to drive consistent growth and better leverage our investments and our exclusive TAP brand offerings. California store closings and tariffs remain near-term headwinds, but the path to improving profitability is clear. I will now turn it over to our Chief Financial Officer Mike Speetzen who will update you on our financial results and plans.

Mike Speetzen -- Chief Financial Officer

Thanks, Scott. Good morning. You'll recall during our first-quarter call, my comments were centered around maintaining healthy liquidity profile, given the economic uncertainty as a result of the pandemic. As Scott indicated, given the tremendous rebound in retail sales during the quarter, and the extremely hard work of the Polaris team.

I'm pleased to report that our second-quarter results significantly outperformed our previous expectations. Our liquidity profile has returned to normal levels, and our full-year earnings expectations have rebounded to near pre-COVID levels. I'll provide additional detail on our view for the remainder of the year. But first, some comments on our second-quarter results.

For the second quarter, sales were down 15% versus the prior year. All segments reported lower sales driven by our plants temporarily suspending production for up to one and a half months due to the COVID pandemic. Despite many of our plants producing at or above pre-COVID-19 levels, by the end of the quarter, we were not able to offset the lost production during the shutdown period. Second-quarter earnings per share on a GAAP basis was a loss of $235 million or $3.82 per diluted share, which included a noncash pre-tax goodwill and intangible impairment charge of $379 million.

Last year's second-quarter income was $88 million or $1.42 per diluted share. Adjusted earnings per share was $1.30, down from the prior year's second-quarter adjusted earnings of $1.73 per share, but up significantly from previous expectations given strong retail sales, enabling greater shipments. This, coupled with strong cost management drove the over performance in the quarter. The $370 million noncash impairment charge is related to our aftermarket segment, primarily Transamerican Auto Parts.

Given the deterioration in expected short and midterm economic performance of TAP due to COVID-19, the company reevaluated the goodwill and intangibles in the aftermarket reporting unit and concluded that the fair value of the reporting unit and certain TAP trade names were less than their respective carrying values, resulting in noncash, goodwill and intangible impairment charges. As Scott indicated, we believe in the fundamental long-term attractiveness of the TAP business as we continue to take corrective actions to navigate the current economic environment and strengthen the business for the long term. Adjusted gross margins were down 190 basis points year over year, primarily due to COVID-related under absorption at our factories from the COVID-19 driven temporary production suspension. We also incurred costs to ensure the health and safety of our employees at all facilities.

We did recognize a modest level of favorability in tariffs in the quarter given the lower volumes and continued progress on exemptions, as well as refunds of prior tariffs paid. Operating expenses, excluding the impairment charge, which we've separately categorized, were down 15% in the quarter as we canceled or postponed all nonessential expenditures and undertook employee-related cost actions as a result of the pandemic driven economic uncertainty. Turning to our segment performance. All segments experienced lower sales during the quarter as expected, given the reduced shipments as the pandemic began to take hold early in the quarter.

Moving now to our balance sheet and liquidity profile for the quarter. Operating cash flow was $310 million for the six months ended June 30, up 53% from the same period last year and up significantly from Q1 driven by lower working capital requirements. Since our Q1 call, our cash position has improved significantly. We initiated a cash war room approach in Q2 that enabled the company to more effectively and efficiently manage cash flow, which not only benefited Q2 but through process enhancements will benefit the ongoing performance of the company.

As a result of this effort and improving business conditions, cash on hand at quarter end was $544 million, and our total debt levels finished the quarter at $1.9 billion down sequentially from Q1 by approximately $236 million or 11%. We currently have approximately $650 million available under our revolving credit line, as well as within our loan, and we're also within our loan requirements. Combined with our cash, we ended the quarter with approximately $1.2 billion of liquidity. Given our current liquidity and near-term outlook, we do not anticipate any liquidity issues for the foreseeable future.

Financial services income, which is primarily comprised of wholesale finance income and retail credit income was strong during the quarter, up 28%, driven by the strength of retail credit income given the strong retail demand. Dealer wholesale finance income was down 48% during the quarter due to dealer inventory levels being at historically low levels, as Scott explained earlier. Moving to full-year expectations. You'll recall that we withdrew our full-year sales and earnings guidance back in March given the onset of the COVID-19 pandemic and the immediate negative impact to retail.

Since that time, our visibility has improved somewhat. While we don't expect the demand trends seen in Q2 to continue at those rates, we are reinitiating guidance given depleted dealer inventory levels, coupled with modest ongoing powersports demand. Total company sales are expected to be in the range of $6.65 billion to $6.75 billion, which is flat to down 2% for the full year. We expect total company earnings per share to be in the range of $6.40 to $6.60 per diluted share, which is near the low end of our initial guidance of $6.80 to $7.05 per share that was provided back in January before the pandemic crisis.

Given our full-year sales and earnings guidance, second-half sales are expected to increase in the mid- to high single digits percent, again, driven by low dealer inventory levels and modest ongoing powersports demand. The second-half adjusted EPS equates to a range of $4.85 to $5.06 per diluted share or a 38% to 44% increase year over year. For the second half of 2020, we expect our revenue to be approximately evenly split between Q3 and Q4. However, given the mix of products produced and then timing of new product introductions, second-half earnings are more heavily weighted to the fourth quarter by about 60%.

Though our visibility has improved, I won't be giving as much detail as we typically do for guidance today as there are still many uncertainties around how this pandemic will play out for the remainder of the year. However, I will give you some top-level comments around a few key areas, beginning with gross margins. We now expect our gross margins to be about flat compared to last year. Despite being down 230 basis points in the first half of the year, the significant second-half improvement is driven by improved absorption at our factories, along with lower-than-expected tariff costs.

During the first half of 2020, we applied for almost $20 million of refunds from past tariff payments and expect to apply for just under $10 million of additional refunds on exclusions already received in the second half. We've received the cash for the bulk of these applied for refunds at this point. Our full-year guidance also assumes that we don't receive extensions for our current tariff exemptions, which are set to expire next month. Operating expenses are expected to be down slightly as a percent of sales and in total dollars year over year given the cost actions taken in Q2 and continued cost discipline into the second half.

Considering a recovery in our business, we have approved several strategic programs and marketing outlays. We will continue to manage our costs with discipline, mindful of the economic uncertainty. Financial services income is expected to be flat to last year with higher retail income, offset by lower wholesale proceeds from Polaris acceptance. And finally, foreign exchange, while slightly improved from our initial 2020 guidance is anticipated to be slightly negative to pre-tax profit.

Moving on to sales expectations by segment. Again, I will give only directional expectations given the challenges in predicting with precision how the economy will perform. The strength of our second-half recovery is primarily driven by the ORV/Snow boats in PG&A businesses. We anticipate continued weakness in adjacent markets given the dependence on government, university, commercial and rental sales.

With that, I'll turn it back over to Scott for some final thoughts.

Scott Wine -- Chairman and Chief Executive Officer

Thanks, Mike. Our outlook is much improved from a quarter ago, and I certainly expect our forecast accuracy to at least be directionally correct this time as consumer and dealer demand has remained strong through July. We have invested significantly in tools, protective gear, and social distancing in our plants and offices to guard our employees from the risk of COVID-19 exposure and are redoubling our efforts as community spread increases. Dealer health is also a priority.

And for the next few months, that means accelerating shipments. The advantages of RFM are paying dividends as we can shift production and redirect deliveries faster than our competition. With our awesome team, impressive vehicles and accessories and engaging creative and rigorous sales execution, I like our chances to drive growth and market share gains in the second half. Aside from a few minor delays of our model year '21 product launches, they are on schedule and will emphasize the innovation is alive and thriving at Polaris.

As we proved in the first six months of the year, this Polaris team is ready to deal with whatever comes our way. Powersports appear strong, but the overall economic and global outlook is less clear amid the persistent threat of COVID-19, so we will be prepared to navigate references if they arise. While the risks are real and I'm not prone to optimism, I can fairly say that we are entering the second half of 2020 with the best setup for the industry and Polaris that I have seen in my dozen years at the helm. With that, I'll turn it over to Andrea to open the line for questions.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from James Hardiman of Wedbush Securities. Please go ahead.

James Hardiman -- Wedbush Securities -- Analyst

Hi. Good morning. I just wanted to make sure I understood the commentary on July since you put it out there, obviously, May and June were unprecedented in terms of ORV strength. It sounds like based on the prepared remarks and the press release that that ultimately continued in July, is that accurate?

Scott Wine -- Chairman and Chief Executive Officer

It's still far above our expectations.

James Hardiman -- Wedbush Securities -- Analyst

OK, that's helpful. And then, maybe any more incremental color you could give us on that 75% of your sales, which came from new customers that sounded like maybe the most bullish part of all of this? And maybe help us think about as you know, investors are going to look at this and say, wow, this is unbelievable, how are we going to comp against this next year, right? And so maybe any color you can give us on the sustainability of this unprecedented strength, maybe starting with that new customer piece?

Scott Wine -- Chairman and Chief Executive Officer

It's probably helpful, James, as you can refer back to Slide 7 where we kind of go through some of the demographic increases that we've seen. But really, our core customers are very engaged right now, and we're seeing solid growth among our call, our loyal Polaris customers. But increasingly, with more time without -- again, it's without Little League Baseball, without soccer games, without being able to take a trip to Disney, they have more time and more money. And so a lot of people that are new to the sport are coming in and finding a vehicle that's right for their family or right for them.

And what's nice about it, and I referred to it in my prepared remarks is that our core customers are great, but they're somewhat insular, right? They've got their riding buddies and they've got their core routines. But as we bring these new customers in, they're more likely to invite their friends to come along for a ride. They're more likely to be in line for a second Polaris vehicle over time. So we really like it.

And again, it's partly because of demographic shifts, but it's really a result of the tremendous effort that Pam Kermisch and her team are doing to facilitate this kind of growth. But you're certainly right. The comp next year is going to be tough.

James Hardiman -- Wedbush Securities -- Analyst

Scott, thanks for the color.

Operator

Our next question comes from Scott Stember of CL King. Please go ahead.

Scott Stember -- C.L. King and Associates -- Analyst

Good morning, guys, and thanks for taking my questions.

Scott Wine -- Chairman and Chief Executive Officer

Good morning.

Scott Stember -- C.L. King and Associates -- Analyst

Can you maybe talk about the inventory situation? I know that, obviously, this is unforeseen demand, that's where bringing things down to depleted levels. But when will you guys get to a point where you feel that you have 100% of what you need at these levels? Or is there a risk that at some point you could start facing some serious shortages, particularly on the side-by-side side?

Scott Wine -- Chairman and Chief Executive Officer

We are seeing some shortages now. I will just applaud Steven Menneto and the team for really being able to move products around and get it where retail needs to be. With Monterrey being impacted as long as they were, it really did put pressure on razor production. And I think we've rebounded as fast as anyone possibly could in Mexico, but that was a bit of a challenge for us.

And the plants are really running at rate right now, and we are making good progress. But as I said to James, the July demand still puts us so we're chasing demand and trying to replenish stock, and we're not making a whole lot of progress right now. But its hurting retail, but I will tell you that it's not hurting it such that it's not too bad.

Scott Stember -- C.L. King and Associates -- Analyst

All right. And lastly, just digging into this new customer that you talked about. Maybe just talk about the age profile and also the creditworthiness of these new people?

Scott Wine -- Chairman and Chief Executive Officer

Mike, I'll speak to the age. I mean, what we've seen is in the 26% to 45%, which is kind of how we classify the millennials if you will. They were up 100% for us in the quarter, compared to the 53% that we reported overall. So that that age group certainly did well for us.

Mike Speetzen -- Chief Financial Officer

And Scott, I would say from a creditworthiness. I mean, we continue to see very strong performance. As we've talked in the past, we use a number of third-party independent financing partners. And so that that creates a check imbalance.

And what we've seen from the new demographic, the new customers coming in is they match the profile of the existing customers in terms of the income strength, the creditworthiness. So that's actually been a bright spot as we look at continued growth.

Scott Stember -- C.L. King and Associates -- Analyst

Got it. Thank you.

Operator

Our next question comes from Greg Badishkanian of Wolfe Research. Please go ahead.

Greg Badishkanian -- Wolfe Research -- Analyst

Great. Thanks. In terms of market share, the industrywide, as well as Polaris ORV, rose, I think, in the low 60s, according to the slide for North America. And I'm just wondering your prediction of market share.

And then, just as a follow-up, given the scarcity of product at the dealer level, what's the promotional environment looking like now? And would you expect that to be abnormally low?

Scott Wine -- Chairman and Chief Executive Officer

To start with the latter question, it is remarkably low. We're seeing good discipline among the OEMs. But really among the dealers. I mean, they recognize that they don't need to sell something that the next person will pay full price for.

So we're really seeing good discipline. And we really like the fact that our dealers are seeing a profitability boost through this. It's helpful for us, and you'll see it in our reserves coming down, but it's also just helpful in the dealers' profitability as well. What was the other part of the question?

Greg Badishkanian -- Wolfe Research -- Analyst

Market share.

Scott Wine -- Chairman and Chief Executive Officer

Market share, yes. Really, what we're seeing is who's got products is the one gaining right now and the Japanese competitors tended to be the ones. I mean, they were the share gainers in the quarter. We saw it.

Don't like it. But nonetheless, we know how to do it. And again, I'm really pleased with the work that Steve Menneto and his team were doing on sales execution. Our dealer sentiment surveys were the highest that we've seen in -- actually, since we've been doing the surveys.

So really seeing some improvements there. But really, it was a good quarter for the Japanese, and it came in our expense and some of our other competitors.

Greg Badishkanian -- Wolfe Research -- Analyst

Makes sense. Thank you.

Operator

Our next question comes from Joe Altobello of Raymond James. Please go ahead.

Joe Altobello -- Raymond James -- Analyst

Thanks. Hey, guys. Good morning. So I wanted to go back to Slide 14 for a second, you point out your expectations for the powersports market issue to be up low single digits.

It seems like that implies a pretty sharp slowdown in the second half, right. Does that mean that you feel like Q2 included a fair amount of pull forward? Or am I misinterpreting that?

Mike Speetzen -- Chief Financial Officer

Yeah, Joe, I don't know if I'd say pull forward. I think the fact that we've had so many new customers come into the business. That clearly has created a surge in demand. As I pointed out in my prepared remarks, we anticipate continued growth in the second half, just not at the same pace and cadence that we experienced in Q2.

And certainly, we're making the investments to try and make that not the case. But at this point, we felt it was prudent to plan for those levels. And given where our dealer inventory level is, we've, obviously, got the plants running full board to make sure we've replenished that into the second half.

Joe Altobello -- Raymond James -- Analyst

That's helpful, Mike. And then, maybe secondly on tariffs. You gave us a little bit of color earlier, but just wanted to clarify what the difference in tariff cost this year versus last year on a full-year basis? I assume you don't get the extension beyond August.

Mike Speetzen -- Chief Financial Officer

Yeah. So let me just give you a couple of data points. We're, obviously, still working through as we look into next year, what that means. And we're, obviously, still working to try and get exemptions extended.

But as I look at the numbers for this year, we ended up roughly being close to $30 million lower than what we were expecting. And a big portion of that, as I indicated in my prepared remarks was the refunds that we've received. If you go back to our original guidance, I had mentioned, we were around $10 million of refunds that we thought we would have this year, and that number is getting closer to $30 million. And obviously, that won't repeat into next year.

And then, as I mentioned in my prepared remarks, the exemptions are not assumed to extend for the balance of this year, and that's worth about $12 million. So that can give you a sense of what we're looking at, assuming nothing changes as we head into 2021. But we're, obviously, still working the mitigation efforts as hard as we can. We have moved some products out of China, and we'll continue to look for opportunities, and we're also continuing to work through USTR and the administration.

Joe Altobello -- Raymond James -- Analyst

Got it. Great. Thank you, guys.

Operator

Our next question comes from Tim Conder of Wells Fargo. Please go ahead.

Tim Conder -- Wells Fargo Securities -- Analyst

Thank you. And gentlemen, first of all, congrats to you and the whole team, great execution, and when the goalpost continued to move throughout the whole quarter. Several of the questions have been answered. But Scott, going to Slide 6.

Again, you said you're continuing to chase demand. It appears more on the ORV kind of there where current demand is on motorcycles. But obviously, the other part of that equation is the channel replenishment to adequate levels. When do you think that latter part, getting the channel back to adequate levels at this point would be reasonable to expect?

Scott Wine -- Chairman and Chief Executive Officer

I think we'll get motorcycles there by the beginning of the fourth quarter because the demand does fall off for motorcycle seasonality. Certainly feels like we're going to be chasing for really the remainder of the year with off-road vehicles. Because as Mike said, we've been relatively conservative with our expectations for retail in the second half. But if it exceeds that, which it has so far in July, it could put us in a deficit situation where our optimal dealer inventory is for most of 2020.

Tim Conder -- Wells Fargo Securities -- Analyst

OK. And then, if I may have the follow-on here. Any potential looking to repay liquidity? And then, on tax law changes. So whoever wants to take this one? I know, Scott, this is probably not in your optimistic bucket and probably your pessimistic bucket, but proposed changes by some of the candidates out there on the individual and the corporate, how do you anticipate that at this point, the potential impact that that could have on 2021 demand?

Scott Wine -- Chairman and Chief Executive Officer

I'm not going to speculate on what's going to happen in the political arena here over the next few months. I certainly don't -- part of the reason we're being conservative with our guidance is we're just not sure what the whole election rhetoric is going to mean to demand. So we're being a little bit cautious about that. Clearly, a change in the administration would be negative for tax policies for both corporations and likely many of our customers.

So we're mindful and be watching that, but nothing we can do except try to get a different outcome.

Mike Speetzen -- Chief Financial Officer

And then, from a liquidity standpoint, obviously, we're doing tremendously better than we had expected. And anticipate that that will continue through the year. We guided that our operating cash flow will be up mid-teens. And I think we're going to be in a position.

We have $100 million in notes that come due in December. That will be easily dispensed. The biggest issue that I'm working through with my team right now is the $300 million of term loan that we took out. There are restrictions as have been publicly disclosed around share repurchase and some other things.

And I think I'd like to try and get that off of our shoulders as best we can. But we'll continue to look at that. We want to make sure that our forecast is settled out, and things are working toward what we've guided, if not better. And we'll continue to manage that.

But our goal is to continue to delever the business, and we did that in Q2, and we'll do that for the rest of the year.

Tim Conder -- Wells Fargo Securities -- Analyst

OK, great, very helpful. Thank you, gentlemen.

Operator

Our next question comes from Brett Andress of KeyBanc Capital Markets. Please go ahead.

Brett Andress -- KeyBanc Capital Markets -- Analyst

Hi, good morning. So just following up on promotions. What do you plan to do about the fact that you authorized clearances fall, given the inventory situation. And then, normally, this time of the year, we started to hear new products.

In news you mentioned some delays, but is the timing of those releases still sometime here in 2020?

Scott Wine -- Chairman and Chief Executive Officer

Yeah. No, as I said, we've been -- the team has really done a nice job. And when I say the team, it's certainly our engineering group, which many of them have been working remotely, have really done a nice job working with our supply chain team and our factories teams to keep our production launches on schedule. I don't think anything has moved out of the year.

Now we may choose for commercial reasons to not launch something depending on how late it goes in the season. But no, certainly, everything is on track to be in the year if we want it to be within the year. The FAC, as you can imagine, without any inventory, excess inventory, we won't be running our traditional FAC playbook. I will tell you, though, the team has really come up with a great plan with, again, as I talked about, the strong demand for accessories, the record PG&A quarter that we had.

We are going to have an event where we promote our aftermarket accessories and give people the opportunity to accessorize their vehicles through the fall thing. But right now, with demand where it is, it would be foolish to spend money on an FAC.

Brett Andress -- KeyBanc Capital Markets -- Analyst

Got it. And if I could just follow up a bit more on inventory, likely to be down substantially by year-end. But is there a new normal of channel inventory you want to end up at when things start to normalize? I guess, what I'm getting at is, will dealer turns possibly be structurally higher coming out of this going forward?

Scott Wine -- Chairman and Chief Executive Officer

One of the investments we've made and Ken Pucel and his team really led it is to get RFM throughout the entire portfolio. And so we've been working with our dealers prior to the pandemic, and actually, in the early days of the pandemic, they wanted less inventory. So we were helping them to lower their profiles. We are certainly looking at how much inventory is finished, goods inventory we need, and how much inventory we need in the channel.

And that's an individual profile with each individual dealer that we will continue to evaluate and know. But I don't know that it's a huge step down, but it's likely to be slightly less.

Brett Andress -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

Our next question comes from Jaime Katz of Morningstar. Please go ahead.

Jaime Katz -- Morningstar -- Analyst

Hi. Good morning, guys. Nice quarter. So I'm curious about gross margin gains ahead.

And I surmise that the greatest gains that we're going to see in the second half as we get back to flattish gross margins for the year would be in ORVs and boats. But is there any other catalysts we should really be thinking about that will help that metric improve?

Mike Speetzen -- Chief Financial Officer

Yeah, Jaime, it's going to primarily be driven by just the surge in volume. When you look at it from first half to second half, our volume is going to be up well over $800 million, and we're driving a 40-plus percent drop rate. And then, just given the mix of business, I think it's important to point out, and we've talked in the past, our ATV, portion of ORV does carry less lower margins than side-by-side, and we've experienced strong growth there as well. So that will dampen that just a little bit.

And there's a little bit of favorability from some of the tariff refunds that will come into the second half, but really, we're actually going to start to face headwinds as we get into the latter part of Q3 and into Q4, given the exemptions will expire and we'll be bleeding off the lower value inventory. So I mean, that's really the gist of it. Our supply chain transformation program is continued in earnest. I can tell you that the team has not taken any of the pressure off of that.

The savings, as we've talked in the past, are ramping as we get into the second half. So that's certainly providing a little bit of tailwind, but it's really attributable to the volume increase.

Jaime Katz -- Morningstar -- Analyst

OK, that's helpful. And then, with the writedown on TAP, I think you've probably updated your agnosis for both sales potential and maybe profit potential for that segment. Is there any insight you guys might be willing to offer on that as you revalue that TAP business?

Mike Speetzen -- Chief Financial Officer

Yeah. So two things. One, we reevaluated TAP and boats. You'll be able to read it in the Q that comes out today.

The TAP business was far more significantly impacted. It performs better than automotive, but it follows more of those trends, which have been quite deep, and that really triggered what we had to do on that business. The boats business has been impacted, but it's held up well and Jake and the team continue to run that business incredibly well. And while it did lower the headroom versus between the market and book value, we still, obviously, are in a good spot there.

And assuming we don't have any further economic issues, we're pretty confident with what we can do with that business going forward. Scott went through it in the prepared remarks with TAP. The retail side of that business is doing very well, especially with being slightly handicapped by some of the store closures and things that we've been dealing with, but the pickup in-store and just the overall retail performance, do it yourself, really has propelled that business nicely.

Jaime Katz -- Morningstar -- Analyst

OK, thank you.

Operator

Our next question comes from Gerrick Johnson of BMO Capital Markets. Please go ahead.

Gerrick Johnson -- BMO Capital Markets -- Analyst

Thank you. Good morning.

Scott Wine -- Chairman and Chief Executive Officer

Good morning.

Gerrick Johnson -- BMO Capital Markets -- Analyst

So on the first-quarter call, you guys -- on the first-quarter call, you commented that COVID hotspots were not necessarily in gray off-road riding areas. That seems to have flipped. You don't know the hotspots from the South and West and Interior. Has that affected retail at all? Is that a concern? Or was that something that in retrospect really wasn't an issue on the first quarter?

Scott Wine -- Chairman and Chief Executive Officer

No. I think what -- remember, riding an off-road vehicle is about one of the safest things you could do to not get COVID-19. Most people are wearing gloves, they're wearing helmets. They're in the outdoors.

Those three things are about as good as it gets. And certainly, and I think what I said is, what I meant when I talked about the hotspots aren't where we sell. That's not where we sell during the pandemic. That's not where we sell anyway.

I mean, San Francisco, New York City, they're great markets for some things. They're just not great markets for snowmobiles and off-road vehicles. And Chicago is a good market for motorcycles, but some of the other cities are not. So I really think in a weird way, Gerrick, the pandemic drives, it limits people's opportunities to do other things, which brings them into powersports.

And we've seen that continue in as the media talks about the increases in some of these states. It really is not -- there's been zero negative correlation with our retail.

Gerrick Johnson -- BMO Capital Markets -- Analyst

OK, great. Thank you.

Scott Wine -- Chairman and Chief Executive Officer

Next question?

Operator

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

Robin Farley -- UBS -- Analyst

Great. Thanks. You've commented on it a little bit, but I just want to clarify two things on your retail expectations for the year, you're seeing up low single digits for the market. And then, I know you said Polaris is a little bit ahead of that.

But given that the industry was up 50% to 60% in Q2, how do you get to low single digits for the year without declines in the second half? In other words, I don't know if you're just sort of kind of making a conservative statement about the full year. Just trying to square the math of that. Thanks.

Mike Speetzen -- Chief Financial Officer

Yeah. We do have retail. I would tell you, Robin, it's kind of flattish in the second half. We expect Q3 will continue to be positive, although not anywhere near as positive as what Q2 was.

But Q4 is when we anticipate things will go negative. I do think we are being conservative, given what we've seen in July, but we've seen how volatile the environment can be. And depending on how things shake out with how COVID will be dealt with. We've got the election uncertainty.

There's just a number of different things that could interject a lot of volatility and, quite frankly, give us uncertainty. So that's the way we're looking at it right now. And obviously, if things start to play out better than that, we're in a position, just given all the great work that's been done in our factories to be able to try and respond to that.

Robin Farley -- UBS -- Analyst

That's great. And then, also your expectation that it's going to kind of take you most of the rest of the year to kind of replenish dealer inventory, at least in the ORV segment. Does that mean -- I guess, how should we think about if retail is better than the sort of flattish outlook you're saying for the second half? Do capacity constraints limit your retail? In other words, is supply ultimately going to be capping that growth as well, just given, obviously, how depleted the inventories are? Can we think about like kind of what the supply constraint might be on retail in the second half?

Scott Wine -- Chairman and Chief Executive Officer

Yeah, Robin, I will tell you. Again, I just want to give a shout out to what the work that Steve Menneto and our logistics team and everybody is doing to move stuff around. Even with inventory down where it is, we are seeing incredibly strong retail through July. So I'll tell you that we're almost down 50% from where we were at the end of this first quarter, and we're still driving very, very strong retail.

So it's not like there's zero on the floor. It just limits the upside that we're seeing. And certainly, if demand continues as it is, we will be chasing it longer than we anticipate. Our factories, I'm really pleased with the work going on in our supply chain in factories to be running, as well as they can.

So it literally is just a matter of what happens with retail, but we don't think there's a huge hit, I mean, all we're doing is talking about decreasing the significant positivity of retail. I don't think that's a terrible thing.

Robin Farley -- UBS -- Analyst

So you could grow retail double digits in the third quarter. And again, not at the level you saw in Q2, but you're not capacity constrained to that degree, it sounds like, right? You could still do some level of double-digit retail in Q2.

Mike Speetzen -- Chief Financial Officer

Our dealers are not going to run out of inventory.

Robin Farley -- UBS -- Analyst

OK, thank you.

Operator

Our next question comes from David McGregor of Longbow Research. Please go ahead.

Colton West -- Longbow Research -- Analyst

Hi, good morning. It's Colton West on for David. I guess, to start off, how has COVID-19 impacted the way that Polaris conducts business online in the long term? And are you looking at more direct-to-consumer channel utilization?

Scott Wine -- Chairman and Chief Executive Officer

Yeah. Last time we talked about the launch of quick deliver ride, which has been really helpful, and we're seeing more of our customers engage online with Transamerican Auto Parts, for example, they've got a great online presence that is really doing well. And our own accessories and aftermarket business were increasingly creating opportunities for consumers to buy from us and pick up at the dealership. So we are doing more to move people in that direction.

Really, it's enhancing the website to make it easier for people to do the shopping there and then ultimately coordinate with that that delivery to the consumer. So a lot is happening in that environment. We just launched the industry's first customer portal, we saw the press release perhaps yesterday with ride ready and the ability to have dealers come to your house and repair your products. So we are certainly preparing to lead the way for a more digital future, but it's transpiring now.

Certainly, with adventures, we are gaining just tremendous momentum there as more people take advantage of the opportunity to find a place to ride and go do it for a weekend. Ultimately, that's going to be helpful to long-term purchases. So yes, the team has really embraced it, but not a tremendous shift from first quarter and now.

Colton West -- Longbow Research -- Analyst

OK, thank you. And then, can you provide some color on Challenger and how the progress is going there? I believe on the first-quarter call, you guys commented that Challenger was taking share in Indian retail up mid-teens percent in the second quarter would suggest that you guys are continuing to do so? And what does the owner profile look like for Challenger specifically?

Scott Wine -- Chairman and Chief Executive Officer

Challenger, as I indicated in my prepared remarks, is doing extremely well. And we like our heavyweight segment. It's more profitable, but really midsize has done just a tremendous resurgence in our mid sized bike. Scout Bobber and even FTR are performing well.

But really, it's the first liquid cool bike we've ever put out. Really, it fits the profile for many riders that actually likes victory. It gives them a little more room on the bike. And really, when compared to the competition, it's just hands down better bikes.

So we feel really good about what the demand has been, both from consumers and now dealers, and it should be a gift that keeps on giving for a while.

Colton West -- Longbow Research -- Analyst

All right. Thank you very much.

Operator

Our next question comes from Craig Kennison of Baird. Please go ahead.

Craig Kennison -- Robert W. Baird -- Analyst

Hey, thanks for taking my question and great call, really helpful discussion here. My question was on Indian. The largest competitor there is conceding market share to focus on scarcity value. And that would seem to leave a nice price umbrella for Indian.

And really open the door for further share gains. Does that change your view at all on the potential for Indian volumes and profitability going forward?

Scott Wine -- Chairman and Chief Executive Officer

What we've seen -- I mean, a year ago, you might recall, there was some lunacy over there as they were embracing promotions and discounts at a rate we hadn't seen ever from them. So I think pulling back from that and having a more rational approach makes a lot of sense. The industry needs better pricing power. Our dealers need better that.

And to see some discipline there is welcome news. Ultimately, it's a good brand. They've got a good dealer network. And we don't expect to have this gift that they've given us continue. But certainly, with lower unit volume in their dealerships and higher prices, and really, we've just got a great lineup of bikes.

I'd tell you what Mike Dougherty and his team are doing to make sure that that we're getting the bikes where they need to be. But really, the lineup is good and getting better. And then, we're encouraged by it.

Craig Kennison -- Robert W. Baird -- Analyst

Thanks.

Operator

Our next question comes from Brandon Rolle of Northcoast. Please go ahead.

Brandon Rolle -- Northcoast Research -- Analyst

Good morning. I just had a couple of questions. First, on parts and accessories availability, I think everyone understands ORV inventories challenge, but could you shed a little light on parts and accessories availability, especially ahead of a factory authorized clearance, will you be running a special event for parts and accessories? And then, two, just also, could you talk about the new families that are coming in, are they replacing a vacation? Or do you really think these families are staying in the industry for the long haul? Thank you.

Scott Wine -- Chairman and Chief Executive Officer

Yeah. Steve Eastman has done a miraculous job with our business since he's been here. And really, the team is managing inventory reasonably well. We were a little heavy with PG&A inventory, both in our dealerships and within our own warehouses.

So this has helped clean that up a good bit. And they've done, again, just like the whole goods, they've done a nice job managing the supply chain. So we're not seeing many stock outs. And when we do, they're days, not weeks or months.

So that's been very helpful. And really, FAC is really designed around some of those accessories that are slower moving, but really beneficial to consumers. And I think, Steve and Steve, Eastman and Menneto, have worked together to come up with a good plan there that I think should work well for our dealers.

Mike Speetzen -- Chief Financial Officer

Yeah. I think the question around the new families and how permanent. I think when you're making a commitment to the price tag of the vehicles we have, I think it's safe to assume that this is going to become part of what they do, and they're going to realize that it becomes a great family activity. As Scott said in his remarks, the number of four-seat vehicles or crew vehicles that we're selling is highly indicative of this being more of a family activity.

And while it may not fully displace people taking vacations, I think that it brings a new aspect of being outdoors. And enjoying that with not only their family but with friends. And we think that that's something that can continue into the future. It's something that we've been focused on.

It was a big part of the rebranding of the company that we did. And so we think it is sustainable. Obviously, the growth rates will be tough to mimic, but we do think that we're bringing these folks in permanently into the family.

Brandon Rolle -- Northcoast Research -- Analyst

Great. Thank you.

Operator

Our next question comes from Mark Smith of Lake Street. Please go ahead.

Mark Smith -- Lake Street Capital Markets -- Analyst

Hi, guys. Can you talk about with new customers coming into the space, primarily as we look at off-road vehicles? Just a little bit about your mix, did you see more let's call them entry type vehicles, maybe some older 900s and 1,000s versus XPs and Pro XPs or perhaps how ATVs trended during the quarter?

Scott Wine -- Chairman and Chief Executive Officer

Certainly, that's -- you kind of nailed it. I mean, we certainly saw exactly that happen. Now part of it, again, was due to availability. But I think first priority, we saw people wanting crew vehicles.

That's just where they are. But then the next thing down, ATVs were very, very strong in the quarter. And ultimately, I think newer families, as Mike just talked about, they come in, they don't want to buy that premium vehicle. They just want something to be able to get on the trail and enjoy time with the family.

So I will tell you, mostly what's driving the mix is availability right now. But those new customers are wanting to try it out and not the premium side of the market.

Mark Smith -- Lake Street Capital Markets -- Analyst

OK. And a follow-up to that, does that give you perhaps opportunity for upgrade as we look maybe next summer? And then, also with that, just anything you can talk about on stimulus and how you think that impacted sales? And as you look at maybe another round coming out to any potential positive impacts from that?

Scott Wine -- Chairman and Chief Executive Officer

I don't think next year. All of these new customers coming in, they're not likely to upgrade a year from now. I mean, I think some will -- we love those people that do, but I don't think we should count on that. What is more likely though is, again, as I said, the likelihood of them inviting their friends and so they have someone else to ride with and having those people ultimately buy vehicles is much more likely than that that individual upgrading the vehicle.

Mike Speetzen -- Chief Financial Officer

I think from a stimulus standpoint, we've actually spent a lot of time with our partner retail financing banks, as well as external advisors. And the U.S. savings rate went up. We saw consumers actually prepaying loans.

There was some taking advantage of deferral of loan payments and things like that, but those seem to be returning to normal levels. It doesn't look like people were using that is just the way to get to a new vehicle. As I mentioned earlier, the creditworthiness of these folks coming in, they typically have dual income family. They weren't necessarily heavily impacted by the unemployment activity that happened coming out of Q1 and into Q2, and we think that they saw this is a way to use money that they had allocated for other things.

Vacations, cruise, as you name it. So at this point, we don't foresee that the stimulus necessarily had a gigantic impact. Now, if there were more stimulus that were to come in the system, I think it just gives people that much more confidence and could create more stimulus for demand going forward.

Mark Smith -- Lake Street Capital Markets -- Analyst

Excellent. Thank you.

Operator

Our next question comes from Joe Spak of RBC Capital Markets. Please go ahead.

Joe Spak -- RBC Capital Markets -- Analyst

Thank you very much. Scott, I missed sports for many reasons, but one of them is certainly you're running at a little anecdotes to compare the business to. Bigger picture question, just away from all the positives sort of near-term trends. And it's really somewhat of a strategic question.

So in the past, you've talked about electrification, and I know you have some product there. It's still prohibitively expensive. And I think if you look at the listed price from some new competitors taking preorders for vehicles that are not available until '21 if ever, prove that, but I am wondering if there's a lesson there for you because the costs will come down. You know the ORV customer better than anyone.

And so have you thought about that sort of model about putting out a vehicle design, taking preorders, seeing what demand really is, and trying to retain your leadership for what could be a growing part of the market over the years? And maybe you could just remind us, would you always do something the powertrain for those alternative vehicles in-house? Or would you ever partner?

Scott Wine -- Chairman and Chief Executive Officer

Yeah. Good question, Joe. I'll tell you that I'm counting on Navy noted aim playing on Labor Day weekend to kind of get back into the whole sports analogy opportunity for me, but we'll see what happens. Certainly been a bit dismal of late.

When we made the leadership change last year, we put Chris Musso into this electrification role for us. And while we haven't been issuing press releases, there has been tremendous progress made by the team, understanding what the opportunities are and how we might approach that market. So I will tell you that my thinking about electric has changed. Certainly, the concern all along for me was the triangle between range cost and performance.

And right now, we believe that triangle is starting to narrow in and be something that we can bring to the powersports consumer that is not only as good but potentially better than some of our current industrial, I mean, internal combustion engine operations. So we see the opportunity. We expect to be among the leaders. The lunacy that you talked about with some of these preorders of vehicles that don't exist, we're probably not going to do that.

But what do I know, their valuations are so high, but certainly, expect more from us around electrification in the not-too-distant future.

Joe Spak -- RBC Capital Markets -- Analyst

Thank you.

Mike Speetzen -- Chief Financial Officer

OK. With that, that's all the questions we have. We want to thank everyone for participating this morning, and we look forward to talking to you again next quarter. Thanks again, and goodbye.

Operator

[Operator signoff]

Duration: 56 minutes

Call participants:

Richard Edwards -- Head of Investor Relations

Scott Wine -- Chairman and Chief Executive Officer

Mike Speetzen -- Chief Financial Officer

James Hardiman -- Wedbush Securities -- Analyst

Scott Stember -- C.L. King and Associates -- Analyst

Greg Badishkanian -- Wolfe Research -- Analyst

Joe Altobello -- Raymond James -- Analyst

Tim Conder -- Wells Fargo Securities -- Analyst

Brett Andress -- KeyBanc Capital Markets -- Analyst

Jaime Katz -- Morningstar -- Analyst

Gerrick Johnson -- BMO Capital Markets -- Analyst

Robin Farley -- UBS -- Analyst

Colton West -- Longbow Research -- Analyst

Craig Kennison -- Robert W. Baird -- Analyst

Brandon Rolle -- Northcoast Research -- Analyst

Mark Smith -- Lake Street Capital Markets -- Analyst

Joe Spak -- RBC Capital Markets -- Analyst

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