Polaris Inc. (PII) Earnings Call Transcript & Summary

Good afternoon, everybody. Thank you for joining us for our next presentation of the day, which is Polaris. By the way, before I start, I do want to make one public service announcement. We have some Slingshots outside. So anybody who wants to take a ride this afternoon after 4 o'clock, they are available. So please sign up. So for those of you who don't know, Polaris is the preeminent player in North America powersports across off-road vehicles, snowmobiles, motorcycles and now boats. I should also point out that the company's management team is here with us. We have the Chairman and CEO, Mr. Scott Wine; and the CFO, Mr. Mike Speetzen. And I think Scott has a quick video to show us a little more. [Presentation]

Well, thank you for joining us. Let's go back here. I think that video is a bit of an ode to our marketing team for many years. I talked about the fact that we became the world's largest power sports company because we're really good at making vehicles, but we suck at marketing. And last year, when we did the rebranding after we got into the boat business and owning Transamerican Auto Parts, the Think Outside tagline came. And I think we realized as we try to make our business more about experiences for our customers, they really found a way to help that resonate. Just a few stats about the company. We finished the year with just under $7 billion in revenue, and you can see that's become still largely an Off-Road Vehicle company, but Boats is growing reasonably fast. And for the first time ever, our Parts, Garments and Accessories business was over $1 billion. We show that revenue within respective business units. But overall, it's a pretty good year. The company is very global, increasingly global, Indian motorcycle being the fastest part of our global growth. But we feel really good about where the company ended 2019 and especially good as we enter into 2020. Our strategy really hasn't changed much over the last 8 or 9 years. We refined it a little bit, but our commitment to fueling the passion of our customers and enriching the lives of all of our dealers and stakeholders is really something that we believe in. But this idea of being a customer-centric, highly efficient growth company is something that we're extremely committed to. And if you think about our guiding principles, this idea of the best people, best team, safety and ethics, we're just uncompromising. This whole ESG movement, we looked at it. At first, we were saying, what does this mean? How do we play? And then we realized that this is something that we've been good at for a while, and with a little bit of effort we can be great at it. So we call it Geared for Good at Polaris now. And I think if you look at our stewardship report this year, you'll see that we're good corporate citizens as well as being a pretty good company. The tariff issues put a bit of a risk towards our 5 and 15 revenue and net income growth over 5 years. But as we looked at it, the momentum we've got, there's still an opportunity to get there. It's not the easy road that we thought we were going to have but certainly an opportunity if a few things go our way, including tariff mitigation, which is starting to flow. As we pursued our strategy, we've really expanded the markets that we can play in. A much, much bigger part of the pie and a part of the reason we got into boats is because most of our customers also are into watercraft of some kind, and 70% of the world is water and we wanted to anticipate that. But it expanded our market somewhat considerably. But really, with over $50 billion opportunity there, it becomes down to us executing from here. We don't need to expand the portfolio. We need to execute extremely well within the categories we have. And you can see the revenue from each of our business lines, and we feel good about where we're positioned. We just came here from Dallas last night. We had our annual spring dealer show, which is focused on snow, and Chris Wolf and the team, what they introduced really, by far, the best new products in snow. And we're coming off of a year where we were #1 in U.S. 2-stroke, #1 in the mountains, and we feel good about our ability to continue to gain market share and grow in that business. And Chris added the additional responsibility of being products -- he's still the president of snow, but he's also the product leader for Off-Road Vehicle so taking that same methodical approach to product management and working with Steve Menneto to help drive that business forward. Our Global Adjacent Markets business is doing extremely well. We've got the #1 electric utility delivery business in Europe. We've got the #1 autonomous light utility vehicle here in the United States so lots of opportunities for us to help grow that market. And Transamerican Auto Parts, that aftermarket business, we've had some execution challenges there, but we feel good about our ability to start to exit some of the lower margin pieces of that business and really grow that retail, where we've got an advantage. Ultimately, the guidance everybody's seen. We need the economy not to completely tank, but we feel good about 2 months in where we are and feel good about our opportunity to deliver positive operating margins really up and down the portfolio. So if you just look at the -- we talked about the economy being fragile. I think we finished the slide last week, and you look at the markets and the volatility that you see and you realize that, that fragile comment is fairly prescient. But so far, so good, and we feel very good about how the execution has gone. We are mindful of what's going on politically. We -- it matters to us, the regulatory environment, the leadership, the consumer product safety commission, tax policy, what that means for consumers. So we care, we're watchful, and we feel like we can deal with whatever comes that way. The coronavirus has had very little impact on us. It did shut down our China operations for a while. They're back up and running. So our owned factory in China is now back to producing vehicles. Our sales team has come back, and our dealerships are reopening there. We do -- have very aggressively worked on our supply chain to understand where parts limitations and risks were, and we narrowed it down to single-digit parts of concern, and each one of those are being managed. And we don't foresee any benefit as long as things continue to progress from where they are right now. Powersports industry is reasonably strong right now. And we think it's still going to be driven by side-by-side. And ultimately, it's our ability to execute better commercially that, I think, is going to be the differentiator for us. And early signs and Steve Menneto and his team are doing a nice job there. Much of our business is about innovation. We think we can bring a lot of innovation to the boat industry and with pontoons, and really that's a much lower price to bring innovation there than we've had in other parts of our business. Strategic sourcing. I've said it's the single biggest productivity initiative I've ever been involved in, in my career. And the execution of that has gone quite well, and we will exit this year at a run rate that's quite helpful and then start to get some very, very meaningful savings as we go into 2021 but really encouraged by what that means and the types of suppliers, the improvement in quality and delivery that we get. I talked about operating leverage and ultimately tariffs. We are not expecting any -- the question came earlier today, not expecting any additional agreements with China as the administration. We think that's only going to happen after the elections. So really, it's about getting the administration USTR to grant the release that they've already told us they were going to do, which ultimately would be helpful to us. And we've got lots of opportunities to spend money if it comes in. And this idea of translating our digital advantage, whether it's RIDE COMMAND or dynamics, into a sustainable competitive advantage is something we'll continue to invest in. So with that, we'll open it up for questions.

Great. Thank you, Scott. Appreciate it. I did want to touch on a few of those things. I guess, first, starting high level, the North America powersports industry has been growing low singles. You're seeing growth in side-by-sides. Growth in snowmobiles being offset largely by a decline in motorcycles in terms of the industry. How do you see those dynamics playing out in 2020? Are we going to see more of the same? Or any changes in terms of that growth rate?

We've had -- we've been very good about motorcycles in the last few months. I think Steve Menneto handing it off to Mike Dougherty. So I think Indians with -- especially with Challenger coming out, so I think the motorcycle industry will be down, will outperform the industry and should see a little bit of growth. And then I think, in Off-Road Vehicles, the industry is going to continue to be in that mid-single digits. And our ability to execute and outperform the industry is probably -- we're more confident in that 2 months in than we've been in a while.

In terms of competitive landscape, it's been a fairly promotional environment for quite some time now. Are you seeing any changes? Is it getting worse? Is it getting better or you're still seeing a lot of money sloshing around?

It's a promotional-driven industry. And I mean I'm not proud of the fact that we have been leading in that in many ways. I think what we're looking at now is, I'll call it, the geography of our spend. There's promo, there's pricing, and ultimately I think Steve Menneto, because he's got so much experience in the industry, he's got a real good grasp of how we should be playing those against each other. So you'll see us -- the share of voice we have, the amount of money we're spending on advertising is going to be much higher than normal. But we expect the industry to continue to be very promotional. And inventories are a little high for some people, not for us. We feel very good, especially as retail has been better than we expected. We feel good about our dealer inventory. But when -- just recognizing that others have higher inventory likely leads to higher promotions, and we'll be prepared for that.

In terms of motorcycles, moving away from promotions for a second, I mean, just looking at innovation. You guys obviously talked about rolling out the Challenger for Indian. Are you seeing any competitive response to that from Harley-Davidson or others in terms of innovation?

They brought out the LiveWire, which is really a cool innovation. That's just a joke. Tough crowd.

Tough crowd.

Well, I mean, they are spending a lot more money, and ultimately that is going to lead to better products. I mean I'm really confident that we're going to see new products and new spaces for them. That's going to -- and we'll see how that plays out. But we feel very good about where we're lined up. FTR is -- was off to a slow start last year but how that's positioned in the marketplace and the iterations we can make off that bike, and now we've got the Bobber Sixty and just the Scout Bobber in general. And then when you bring out that liquid-cooled engine in Challenger, it's just a great bike in a very, very sweet part of the market.

Moving on to Off-Road, you guys sort of play the role of Harley-Davidson in motorcycles in Off-Road, where you're the market leader and everyone's coming after you, whether it be Honda, Can-Am, you name it. So from that perspective, how do you gauge your ability to gain share in Off-Road this year? And we'll talk about innovation in a second, but...

We lost more market share last year than we've lost in probably a decade in side-by-sides even through all of the recall stuff. And one of the things that we like to believe is that we are willing to learn, and we looked at what mistakes we made and what we can do to correct those. And I think we took a hard look as we've budgeted for this year to say, okay, what do we need to do differently? And I think the commercial execution, 2 months in, suggested that we've figured it out, and we'll be okay from a share perspective.

That leads me to my next question, which was going back to your summer dealer show. I was there. You rolled out a lot of new products, the new RZR platform, the RANGER 1000 to a lot of fanfare. And it seems like, at least early on, the consumer response was a bit tepid. And maybe I'm misinterpreting that, but if I am, let me know. If not, why do you think it was a little bit tepid?

It was a little tepid. I mean it wasn't a train wreck, but it was a little tepid for a couple of reasons. Our -- the 2 big product launches last year -- there's a lot of news, but the 2 big ones were the RANGER 1000, which was the replacement for the RANGER 900, and the Pro XP. And I think both of those had different challenges. The RANGER 1000, which we're seeing start to get really good traction now as it fits in the RANGER portfolio, which is off to a great start this year, because there was so much 900 inventory out there, it didn't really find its place until now. It took a little bit of while to work through that 900 inventory, and now people see the difference between the XP 1000 and 900 or the new 1000. And so that's doing fine now. It just took us a little bit. So perhaps we didn't message and market it quite right. And Pro XP is a great trail machine. I mean, it's not -- it is a phenomenal trail machine. We really targeted that more to the Southwest, where it's not quite as a good dunes machine. You can imagine the follow-on products in that category will do quite well in that space. But -- so we found that we feel good about where RZR -- actually RZR -- February was a good month, just across the board, actually, probably our best month in retail that we've had in 4 years or so, year-over-year growth in February. So who knows what CDK will say, but that's -- it was a really strong month, which means that RANGER was good, RZR was good. So we have better confidence that the portfolio is in good shape heading into the spring. And March -- February is almost a throwaway month. It's not quite a throwaway month, but we call Q1 March and we will see how that goes.

Okay. In terms of inventory, at least according to your guidance, it sounds like coming out of the first quarter, you're going to be in a lot better shape than you were going into the first quarter. Where do you see the competition on the Off-Road side in terms of inventory? Are they heavy? Or are you seeing more dollars out there, more promotion because of that issue?

Yes, the -- and obviously, when we gave our Q1 guidance that played into -- that essentially earnings being down pretty significantly. I would tell you that, based on Scott's comments around our February performance, it's really quarter-to-date performance from a retail standpoint. Inventory is pretty much where we need it to be right now. So we feel good about the plans that we've put in place and how quickly we've been able to correct that. And it wasn't that inventory was substantially out of whack. But given the uncertainties around the economy, we want to make sure that we were being prudent as we always are with the dealers. There are some competitors that have dealer inventory at levels that we're hearing. We obviously share dealers. About 60%, 70% of our dealers are shared with our competitors. And we are hearing that chatter back from them. I'll just tell you, we're -- Steve and the team are just staying laser-focused on executing. So they are going to be dealing with those issues, and we're out working hard to make sure we're moving our equipment.

But as of today, you guys are where you want to be, in fact.

Pretty close. Yes.

Okay. Moving on to Boats. You guys obviously made a couple of acquisitions in the last couple of years, Boat Holdings being the biggest of the 2; clearly, with Bennington, their line of pontoons in mid-2018. You bought Larson, much smaller acquisition last year. What attracted you to the boat space, I guess, number 1? And how does this fit in with the rest of the portfolio?

Yes. Well, one of the things that I've learned in my decade-plus in this industry is if you're going to be in the space, you've got to get 3 things right. You've got to get good products, good brands and great distribution. Those 3 things are required to be successful in powersports. And when we were approached about buying Boat Holdings, we realized that Bennington had the phenomenal product, the premium brand in the industry, and extraordinarily good distribution. So that really -- and really, the benefit of what we got was Bennington, the opportunity is to take Godfrey, Hurricane, Rinker and ultimately Larson and bring those up to a similar level of performance. So that's really where we get the upside. But really, Bennington is an incredibly strong player. When you put Bennington and Godfrey together, we're the largest pontoon manufacturer in the world, and there's opportunities for us to continue to build on that. The -- as I mentioned in my prepared remarks -- could you call those prepared remarks? I don't know. But the cost of innovation is extremely low. I mean we don't spend very much money and can bring a lot of the technology advantages we have in our core powersports business over. So there are some synergies. But ultimately for us, it was the fact that 70% of the world is covered by water and we didn't offer anything for our customers to enjoy that. What we've done with Polaris Adventures, we are giving people the opportunity to participate without ownership. And if you think about extrapolation of that business model, we needed to be in boats for that reason as well. So we feel good about where we are. The execution of Jake Vogel and the team has been good, and we think there's opportunity for that business to continue to grow and be an important part of the portfolio going forward.

Is there a lot of overlap between your boat owners and your off-road vehicle owners and your motorcycle owners?

I think the number's about 30% of our off-road vehicle customers also own boats.

Staying on the M&A theme, you guys have been fairly acquisitive in the past. Going forward, do you expect to continue to do more acquisitions, more bolt-ons? Or do you like the portfolio the way it is and you want to focus more on that?

We are really comfortable with the portfolio right now. I think some of the things that aren't as well known, some of the best acquisitions we've done aren't necessarily big brand names. We acquired a company called Primordial, which gave us ultimately RIDE COMMAND, the best trail mapping system in the world. We bought Swiss Auto that gave us the ability to bring our engine portfolio up to the world class level. So I think some of those small niche acquisitions may be something we do, but the portfolio is in really good shape. I mean it's an opportunity for us to expand our share in that $50 billion pie that's much more interesting than going out and buying something much bigger at this point.

So you guys don't see yourselves going into another part of powersports, let's say?

We'll probably invent our way there rather than buy our way there.

Fair enough. Moving on to tariffs. You guys have obviously been impacted a fair amount by tariffs. You're probably sick of talking about it. But I guess the good news is you guys, I think, are starting to get some exclusions. So maybe, first, kind of paint the picture of how you get impacted by tariffs? And maybe second, how far along are you on the exclusion process? And could we see some upside or downside, if you will, to the impact this year?

So where is Bernd at? Every time he gets asked a question, how he’s going to pay for health care, how much time do I have? So how much time do I have on tariffs? It has been a tremendous drag on us. And I will just always say, I mean, I'm in agreement what the administration is trying to do to get better behavior out of China. The issue we've got is we spent $3.5 billion in the United States every year bringing our products to market, $3.5 billion. We have 9,000 employees in the U.S., yet we're the only powersports supplier that's paying tariffs. The Canadians manufacture everything in Mexico, so they don't pay tariffs. The Japanese import all their parts from Japan, they don't buy much of anything in the U.S. They don't pay tariffs. So taking that message to Washington and helping them understand and eventually getting the support to say, "Hey, this is not how this is supposed to work," which is why we're starting to get reasonable relief. But it's just -- I was shocked at how long it took me to get that message conveyed such that they would actually do the right thing. And now they're doing the right thing. It's just taking a while for it to happen, but that's why we're getting a year-over-year reduction and feeling better about where we are with tariffs going forward. But it has been a big struggle. And the big challenge is that we're the only one in the industry paying for it. So our price increases that were somewhat tied to tariffs, but not specifically, put us at a disadvantage. So we feel like we have all of that stuff under control now, and we'll just deal with the way things are and move from here, but we feel better about tariffs than we have in quite some time.

And where are we on the exclusion process? And the reason I asked that, I think the number coming into this year was an incremental $85 million that was just baked into the guidance. In terms of what you've gotten back from the U.S. trade...

We've gotten enough to get it to that number. Everything else additional would be helpful, and we are working adamantly to make sure -- internal to players, we talk about something called the say:do ratio. I mean I give people credit for actually doing what they say they're going to do. We just are trying to get the USTR to do what they said they were going to do.

So progress...

Let me -- you said incremental $85 million. It's not incremental $85 million. So $85 million, we're down $5 million versus where we were last year.

That's a good point. Thank you. So the exclusion -- the pace of exclusions is in line with that $85 million.

Yes. So when we went out with guidance back in January, we based it on everything that we literally had in hand. And obviously, that wasn't everything that we're expecting, but there's just too much risk associated with trying to project what that will be. It's moving through the process. It's slow. It's a lot slower than we would expect. And obviously, we'll be in a position as we get through the first quarter to at least update on how that's going, and if there's any additional benefit that we'd expect.

Okay. Last question for you. You did make some personnel changes late last year. Steve Menneto, which you mentioned earlier, he moves from motorcycles to Off-Road. Maybe give us a sense for the reason for that move and why that makes you better prepared to compete in 2020.

We invest a lot in talent. And I think if you look where I spend most of my time, it's ultimately on talented people development and whatnot. And as we looked at the competitive landscape, really it was literally saying, okay, what gives us the best opportunity and advantage from a leadership perspective. And Steve, 20-some years of experience, all of what he did in motorcycles, he was the right person at the right time for that job. I thought it was a good move when I did it. I will tell you, 3 months in, I'm kicking myself for not doing it a while ago. He's really kicking, kicking. And Mike Dougherty's done a fantastic job. I mean he's got a passion for motorcycles, got great knowledge of the Indian business, and Mike has made really quick decisive moves as well. So I think that -- those 2 together and what -- that's the top level stuff. It's the changes we made underneath that to reinforce Steve and his team that, I think, is giving us that execution advantage that we're starting to see and ultimately we’ll benefit from through most of the year.

Great. We've got probably 3 minutes left. If anybody want -- has a question or 2. We'll take a couple in the room. I guess before we wrap up, anything else that I should have asked you that I didn't, that you want to get across to the audience?

No. I mean like I said, we -- it is -- March is an incredibly important month. It's very important for motorcycles and in Off-Road Vehicles, it's really good. We have -- Mike said, year-to-date, it's a good performance, really good performance so far. We just need to make sure that, that translates into a great March. I will tell you that I said in a meeting earlier today, with the markets as volatile as they were last week yet our customers still went into dealerships and bought a lot of products the last couple of days, it was fun. So we're somewhat encouraged by just the state of the consumer right now.

That's good to hear. Well, great. Thank you, Scott. Thank you, Mike.

Thank you.

Thank you, everybody.