Polaris Inc. (PII) Earnings Call Transcript & Summary

All right. We can get started. So I'm Craig Kennison with Baird Research. I've got the team from Polaris here, Bob Mack, who is the Chief Financial Officer; and J.C. Weigelt, Vice President of Investor Relations. As most of you know, Polaris is a powersports and Marine leader, manufactures and markets side-by-sides, ATVs, snowmobiles, motorcycles, small vehicles and boats for work, play in the military. We've got a few slides for you and then we'll pivot into a fireside chat, so have your questions ready.

Thanks, Craig. I'm going to try not to stand behind the podium, I'm going to try not to fall off of this thing. So just a quick overview. If you're not super familiar with Polaris. The company was founded in 1954. We were a snowmobile company in Roseau, Minnesota, Roseau's near Canada, cold, small place. Snowmobile's now would be one of our really smallest product segments. 16,000 employees around the world, bulk of that in the United States, 20 manufacturing locations, so plants in places like Huntsville, Alabama, Roseau still our original plant, Spirit Lake, Iowa, Monterrey, Mexico, Opole, Poland. We have a small plant in Vietnam, another small plant in China. So important to note, we're one of the few manufacturers that actually makes powersports products in Europe, the European markets including motorcycles. 4,000 dealers, about half of those in the United States, half overseas, so a really big dealer base. We ship over 400,000 units. We're the largest player in the industry. I'll talk about that in a little bit, and we sell products in 120 countries. But when you really think about the powersports market, the U.S. and Canada, to some degree, Australia are sort of one market and the rest of the world is nothing like that market. There's really no place like the United States in terms of the usage of power sports, the access to public land, things like that. So the markets are pretty different in Europe. So if you think about our size, we talked about at our Investor Day, this competitive moat. We are #1 in off-road, we're twice the size of our nearest competitor across the powersports category. In the on-road space with India and we're #2. And in our Marine space, pontoon and deck boats, we're #1. That scale really gives us a lot of advantages. It also brings around some challenges. When you think about the challenges with the supply chain right now, for us to hold our share, we have to make a lot more vehicles than everybody else. And so that brings along its inherent challenges just in the scale. But our team has done really well, and we try to leverage that scale. I mean we tend to have the most innovative vehicles in the market. We tend to be the person that defines new markets. We have the broadest set of categories. We're well known. Polaris is a very well-known brand. Indian is a very well-known brand. Bennington, on pontoon space, super well-known brands across all of the markets they play in. And we have hell a lot of scale. So whether it's dealing with a supplier, if they have an innovative new product, they're going to come to us first, because we bring the scale. Outside of automotive, we're the next largest vehicle manufacturer. So that scale is really important. And then we also have the largest distribution. So we have the ability to get those products to market. Mike and I took over a couple of years ago, we started looking at the company and took a look and said, okay, what's happened over the last several years, where do we want to go? And we thought about, what are we really good at? And then what we're really good at is, we're really good at powersports. And we had wandered into some other areas in the prior 5 to 10 years. And so we've really brought the focus back to being good in powersports. At our Investor Day, we talked a lot about best customer experience. What we're doing with things like Polaris Adventures and getting people out onto our products, getting Polaris Adventures Select, where you can pay a monthly fee and get access to products. We talked a lot about innovation and new products we've brought to market, things like the Pro R, the Turbo R, our new RANGER Kinetic, our electric vehicle that will start shipping later this year. And then we talked about some new things. So inspirational brands. When we talk to our Board about inspirational brands, we didn't say anything. We just showed pictures, so pictures of people having crazy fun on the great products we make. And that's what we mean by inspirational brands. When you think about things like RZR and Indian and Bennington and the fun people have interacting with our products, that's what we're going for. Agile and efficient operations, we've got to get better. We talked at Investor Day about improving margins. We've got a couple of businesses we really need to focus on. But even in our core off-road business, we've let margins come down over the last 5 years, and we've got to get back to where we were. And we've got plans to do that. Best team, best culture. We have a great team. It's been a challenge with COVID, obviously, everybody working from home. We're back to the office part time, hybrid, whatever you call it these days. But it's been great to have everybody back and interacting again and rebuilding that culture of comradery of innovation. Because we work in a really fun company, It's a fun industry, and it's been good to get everybody back out and riding and hanging out together again. And then Geared for Good. As ESG has become kind of a bigger topic, it's hard to relate that to powersports. And one of board members said, hey, don't call it ESG, please, come up with something that's authentic to Polaris. And so we came up with Geared for Good. And we've tried to do things and put ESG in a context that makes sense for what we're doing as a company and who we are. So things like trail preservation. So we have a multiyear, multimillion dollar commitment with the National Forest Foundation. Because, for us, we've got to protect water, land, roads, access to riding that's really important. We've also focused on our ratings through disclosure process. We talk a lot about safety. It's not just safety of the vehicles, it's education. A lot of people that are injured on powersports vehicles, it's because of how they use them. And as we have a lot of new riders through the course of the pandemic, we've really focused on how do we teach those folks how to ride safely. Our employees are very important to us. We've tried to keep everybody as safe as we could through COVID, did really well. We also have a great culture of safety from an [ ocean ] standpoint. We want our people to go home every day the way they came to work. And that's important. And then we focus on just some outside validation of that. So you wouldn't think of like a powersports company being Newsweek's one of the most admired companies, but we do a lot of work to create a culture where people want to come to Polaris. That's it. A quick overview.

Awesome. Well, thank you so much, Bob. And so we'll pivot to the fireside chat format. Please feel free to ask a question or submit one via the iPad here. Maybe I'll start. We've had a number of companies here and everyone is curious about the U.S. consumer. You, in some ways, are at the tip of the sphere at the discretionary purchase. Nobody needs to buy a boat or powersports, maybe they do.

Bite your tongue.

But curious what you're seeing in terms of the U.S. consumer today?

Yes. So a couple of things. So we -- right now, a lot of what we're selling is presold, a lot of what we're shipping is presold. We haven't seen the level of presold orders decline. The activity continues to be really strong. We haven't seen cancellations tick up. Activity in the dealers. Mike and I were out 2 weeks ago. We went and visited 8 dealers in the West. So Arizona, New Mexico, Utah and Colorado. And across the board, all the dealer principles said that business was strong, interest in the category was high. They weren't seeing any falloff in consumer demand. Web traffic looks good, builds look good. So we're not seeing that yet. The consumer in our space tends to be a little less economically sensitive. They tend to have incomes in excess of $100,000. A lot of them own their own businesses. So that's helped. And I think the demographics help. Our business is shifting away from baby boomers to millennials and down to Gen X. People are working from home. And I think they're investing in powersports because they've got time to use it.

So what specifically qualifies as a preorder? Are consumers putting money down that's not refundable? .

It depends on the dealers, so that we don't -- they don't preorder it with us, they preorder with the dealer. Each dealer has a different policy, I'd say typically ranges $500 to $1,000. And the refundability, again, is a little bit of a dealer dynamic. Like most dealers have made it refundable as long as they can resell the vehicle, which, right now, certainly isn't a problem. Cancellations have been super low. The dealer has to file paperwork with us with that person's name. And then that person can see in our system, we've taken over sort of the communication part once the order gets placed, so that they can go on our system, they can see where their order is in production. We can communicate with them because we want to kind of take the noise out of it because typical salespeople want to please the customer, the customer come in and they'd say, oh, it's going to be in 3 weeks. And then 3 weeks later, yes, it's going to be in 3 weeks. Customer will get mad at us, send Mike and I nasty e-mails. And really, we were delivering it when we promised to deliver it. So we've kind of taken over that communication to make sure it's clear and consistent. And then we verify all that stuff. So we make sure that, that vehicle that the name of the person that was on that vehicle is the person who gets the vehicle when it gets registered and that the dealers aren't trying to gain that system.

And then maybe the same question around Marine industry, what are you seeing from a retail standpoint? How is that market different than what you see in powersports? .

Yes. I think the big difference in Marine is, it's obviously more seasonal. So going into the start of kind of boating season, it would have looked like there was probably some more inventory at the dealers than there really was because boats have been sold but not necessarily registered and certainly not registered with the state, which is where all the market statistics come from through Marine. So I think we'll see some of that accelerate now that we're through Memorial Day weekend and those deliveries. You talk to the boat dealers, I've been on the phone with a lot of them. You see what the publicly traded dealers, obviously, are doing. Boat retail demand remains strong. People are buying boats. Boats are tending towards the higher end of the market. I think the only thing that's been holding back boat shipments is that engine deliveries have been a little slow in parts of the industry, especially in certain larger sizes. But overall, Marine demand looks to be very solid for another season.

So it's interesting because we look at the retail side, and we know you're facing preorders, so you can't satisfy all of the retail demand. Let's talk about dealer demand, which is represented by inventory. We know that's low. Could you just give us an illustration of inventory in both the powersports channel and the Marine channel?

So powersports right now, effectively in any given month, dealer inventory is really zero at the end of the month. We'll report 9,000 or 10,000 units usually and that's mostly in transit. So anything that's staying around in dealer inventory more than 20 or so days, our folks are on the phone to find out why it tends to be like it's a youth product that somebody didn't pick up yet because they're giving it to their kids for their birthday. But most stuff that lands at the dealership is being delivered within 48 hours. I mean you go to a dealership, you'll see 4 vehicles outside, they all have sold stickers on them. And so dealer inventory is super low, not a lot of visibility into when that will start to build back up. It will just be when we can finally get shipping levels higher than retail levels. And retail is definitely constrained by those shipping levels. So it's a bit hard to have the visibility there. On the Marine side, I think Marine is probably in a little bit better shape from an inventory standpoint. Again, it's going to be left to really see as we get through the sell-through of the beginning part of the season. But people -- boats are still retailing. People are still taking orders for delivery even if it's not going to come in this summer because people have kind of gone through a couple of seasons now. And if they couldn't get the boat they wanted, they've finally decided to order it and just wait it out and get it because just not seeing the inventory get built back up. So I would say Marine's maybe just in a slightly better shape than powersports.

So the demand side is something we all worry about as investors, but I suspect you wake up every day worrying about the supply chain and your ability to meet demand. Talk about any supply bottlenecks that you face today and what the prospects are?

I'm a CFO, Craig, I wake up every day worrying about everything. But yes, I mean, the supply chain certainly has been our challenge. It's -- and Mike characterized it as green shoots on our call that spurred a bunch of -- I guess that came up on a bunch of other calls later in April. But we are starting to see improvements is probably the wrong word, but positive signs, maybe better. And more in the shipping side of things, right? Port of Long Beach is better than it's been, flow-through of containers is better, trucking availability is better, cost is a bit higher on the truck side because of diesel, but availability of trucks is better. Container cost, spot rates are still crazy high compared to the past, but relatively better compared to what it was last year. So that stuff is getting better. So that makes for a more efficient flow through the factories because stuff is coming in at a more regular basis. We're not expediting as much over the top with air. So that's good for everybody. We're not seeing dramatic improvements, though in the kind of the performance of the suppliers. So for us, I think every company is in a kind of different position, and every company has different individual supply challenges. What we've done is in the first quarter, we got -- we had thought we were being aggressive with managing our suppliers. We got incredibly more aggressive in the first quarter. And we've got teams, it's probably over 100 people now. They're out with our kind of biggest challenge suppliers every day around the world, working with those suppliers, identifying sort of what are the key things that are keeping those suppliers from performing, whether they need any parts, subcomponents. Do they need engineering changes? Do they need labor? We've set people from our factories to supplier factories to help with labor. Do they need capital? What's the bottleneck? And then also making sure that what they're building is prioritized to what we're building. Because when you're kind of pounded on suppliers and they've got a whole litany of parts that are open on POs, they're trying to fulfill whatever part they can get out the door, which might not be the part you really need. But it's -- they're at least checking something off the list. And so just ruthlessly sort of working together on that prioritization has helped a lot. So we look at it as self-help. And so far, that's been a good investment. It gives us a little more visibility. And we have direct line of sight with those problem suppliers to what's going on.

So I think of Polaris as being the leanest company in powersports through innovations like retail flow management and other innovations where you really try to be lean with inventory. Has that been a disadvantage in this market where having a little buffer inventory in pockets of your supply chain would be beneficial?

It probably would have been a little bit of a benefit early on. But at this point, the whole global supply chain, everybody has blown through any buffer that they had. So at this point, I think we'd be in the same position we're in now. I think people probably have a better understanding of that they're just in time wasn't really quite just in time. And that some of that inefficiency was being taken up by buffer stock at suppliers down the tiers and people, I think, understand. I know we do. We understand the tiering of our supply base a lot better than we ever wanted to. It's no longer good enough to know your Tier 1s and in Tier 2s. We're down to like what's happening in the weather at our Tier 7 because that just ripples all the way up. I was saying to J.C. this morning, I'd hate to be like a Tier 6 or 7 supplier, sitting in Mexico. Your life's got to be absolutely awful right now because you're just getting pounded on by everybody. You're at the bottom end of the chain. And it's -- so it's -- I think it would have helped. But I think we've done a pretty good job. The challenge we have is we're the biggest. And so when we have a problem, we have it on a lot of units, and that's a challenge.

So inflation is an ugly word these days, how do you deal with it on the cost side? And to what extent can you pass it along to dealers, and ultimately, to consumers?

So yes, we've tried to be measured in our cost increases. We haven't gone out -- we haven't really priced to cover the margin. We priced to cover the cost. We feel like that's the right path so that we don't have to promote all of it out later. We've done some things with surcharges, but a lot of it has been MSRP. And we -- so far, we've been able to price as our costs have increases -- have increased. I think our challenge early on was, a, seeing those cost increases fast enough; b, pricing for them. And also the presold kind of hurt us because we weren't changing prices on the presold and then we changed our policy this year. And so in April, when we changed pricing, we changed it across the board. And so the pricing went up on the presold, didn't go up quite as much as it did on new units, but it did go up. So we've been able to price for it. On the cost side, we started Project Sunburst 4, 5 years ago, which is our supply chain project. We've moved to bigger suppliers, more formal contracts. Part of that is price transparency on commodities and things. So that at least allows us to anticipate kind of where the cost of that stuff are going to go. And also -- so we understand it when it's going up. We also know how to manage it out when it's coming down. So that's been, I think, a positive for us in terms of our ability to manage costs. And we just -- we're working really hard to fend it off as much as we can and then look for ways to be more efficient and move supply base around the world.

So at Polaris, you touched a lot of different consumers, a lot of different demographics. You've got heavier exposure in rural markets, sometimes with farmers or ag markets, affluent consumers buying boats and other of your products. Is there any evidence of dispersion among those different demographic groups in terms of performance? .

Not really. We got this question a lot today about, are we seeing differences in sort of performance in higher-end vehicles and lower-end vehicles or entry vehicles? And we're really not right now. And some of that is because a more affluent commercial might still buy -- consumer might buy an entry-level vehicle because either they're new to the sport or where they ride, doesn't lend itself to buying a higher-end vehicle because the higher end vehicles tend to be wider and longer and faster. And if you're riding trails in New York, it's not really -- you can't really use that power. So it's no sense in buying one. But we're not seeing credit applications fall off, we're not seeing approval rates come down. So again, we're just -- we're not seeing what other parts of the consumer economy are seeing. And I think part of it goes to the fact that we -- given the supply chain challenges the whole industry experienced, we didn't get as big of a COVID bump as say TVs or things like that, they were able -- there was a lot of demand, and they could ramp up and satisfy that demand. And everybody that wanted a TV bought one and now nobody needs a TV for a couple of years. We had a lot -- so big retail growth kind of '21 -- second half '21 over -- or second half '20 over '19, but that's because we came out of the initial COVID shutdown with lots of inventory in the channel, in our warehouses, in the factory and in the supply chain. And once we burn through all that, we've struggled to get back to those kind of production levels. So -- in retail levels, in shipment levels, the retail levels are based on the shipment level. So we never really got -- we got a little bit of a bump, and then we've never really been able to capitalize as an industry. And so I just don't think we kind of pulled forward the kind of demand other people did.

Back in February, you did a great presentation kind of resetting expectations under your leadership team. And one of the small changes that may not be so small, is you changed the Boat group to the Marine group. Talk about your broader marine strategy beyond just boat.

Yes. So we looked at Marine, we looked at the space. And one of the things Polaris is really good at is the aftermarket. So if you look at our powersports business or the rest of our powersports business, we have far and away the largest aftermarket portfolio, both of Polaris branded products and non-Polaris branded products. And so we really weren't doing that in Marine. Now the market is a little bit different. You buy a Pontoon boat, you don't buy a kind of a bare Pontoon boat and then buy a bunch of accessories at the dealer, you configure the boat how you want it, and it shows up that way. But there's a lot of opportunity in the Marine aftermarket, both for things that would go on our boats and things that could go on other boats. And so we didn't want to limit ourselves just to boats. We like the marine space. We've done really well with our acquisition of Bennington, Godfrey and Hurricane. Business has performed really well. We got a great leadership team, great brands. We see expanding, but we're going to be margin focused. So we're -- you're not going to see us go out and do deals that are going to be dilutive to the high margins we have in our marine business. We'll look for things that can be accretive and we'll be judicious about what we do.

A business that doesn't get as much attention is Transamerican Auto Parts. Could you give us an update on what that business is and how it fits in your portfolio? And what your opportunities are to maybe improve the margin profile? .

Sure. So we bought Transamerican Auto Parts in 2016. The biggest part of that business is the 4-wheel parts retail stores and the brands, Smittybilt, Pro Comp, 4WP Factory. So it's really aftermarket accessories for jeeps and trucks. In the stores we sell our products, we also sell other people's products, and we install those products. We have an e-commerce business and we also have a wholesale business where we sell to kind of other Jeep truck shops in markets where we maybe don't have a store. So it's a roughly $700-ish million revenue business. Margins are -- have always been pretty tight. The gross profit margins are okay. You have all the cost of operating stores, so the net margins haven't really been where we've needed them to be. And the industry has been challenged. There's a lot of stuff in that market that comes from China. So the tariffs have impacted costs. And then with the slowdown in Jeep truck production, when you just don't have the new -- the flow of new jeeps and trucks into the market, people tend to accessorize their jeep and truck when they buy it, whether they buy it new or they buy it used. Because there's not the level of new jeeps and trucks, you're not getting that sort of bite at the apple on upfit. And because people aren't buying new ones, they're not selling their old ones, so you're not getting that one either. And so that's really been a challenge for all the Jeep truck aftermarket folks. So we're -- it doesn't get a lot of focus maybe from the investment community. It gets plenty of focus for Mike and I, I can promise you. And it's an area where it's a good-sized business that doesn't generate the margins it needs to. And we've been pretty clear that we're going to -- we're working through the team, what we need to do differently, whether we have to run the business differently, focus on different parts of the market or are we really the best owner for the business? And we'll make a decision around that, but it's something we're either going to fix it or we'll figure out what we do next.

So that's a good transition to talking about margin. You laid out a pretty good plan in February. Maybe you could just frame the buckets where you see the biggest margin opportunity.

Sure. So at our Investor Day, we talked about a few different buckets. And the first one I would think about is portfolio. So we exited GEM, Taylor-Dunn, that was like $100 million business that wasn't making a lot of money, but did take a lot of focus and would have taken a bunch of investment to get it to a scale that mattered and a profitability that it needed to be at. So we exited that business. Like I said, we're working on TAP, we're working -- Indian needs to be more profitable so we're working on that. So some of it is just optimizing the portfolio and getting that to where it needs to be. Secondarily, it's really looking at the gross profit margins in the off-road business. As you mentioned, we're the innovation leader, but I think to some degree, that's also caused some product proliferation and not even so much products, but just SKUs inside those products. And Steve gave an example at the Investor Day, we have 11 brake systems where one of our competitors might have two. And so we've got to get some of that stuff under control. So we've got a big effort running on both modular design and platforming kind of resembling some of what the automotives do to try to get to better scale and efficiency. That dovetails really nice with our supply chain strategy. Obviously, tariffs don't appear to be going anywhere. And so now that those look like they're going to be around for a while, we're going to make a more concerted effort to try to design around and source around some of the tariff stuff. And then really just continuing to run the business better. We really held the line on OpEx, and it's not that we're not investing more in engineering and things that matter like marketing, we are, but we've really cut our G&A cost. And as the business has grown, we haven't grown that. So it's getting that right balance. I feel like we've got a good path back to that kind of 16%, 18% that we were historically at from an EBITDA standpoint.

So it's obviously powersports, we need power. What's the role of the EV engine as it ultimately or potentially replaces some [ ICE ] applications?

We're excited for EV. We have our partnership with zero motorcycles. We thought that was a good way to get into the EV space. They've been at this for a long time. They've put hundreds of millions of dollars into developing their technology. So we thought that gave us a nice jump start, if you will. We're focused on really end markets that we think offer the most opportunity. So you see us rolling out the Kinetic, which is our RANGER product. That's a utility product that will go to people that own ranches and farms and wineries and there's a lot of interest from the big rental houses, people that use it for work, but they're in a confined space, they have a place to plug it in every night. I think you'll see electric in those more work-oriented applications first. And then maybe, over time, branching out into more rec. But the reality is if you're out in the Dunes, in Glamis, it's the biggest riding area, there's not power for 30 miles. So you're running -- you got 300,000 people camping on generator-driven RVs. They're not going to be able to charge vehicles too. So it's just not -- it's going to be a while before we get to those kind of applications. But we see it being a good thing, and I think it will help grow the market. I think there's people that will have an electric RANGER, an electric ATV that wouldn't have maybe bought a petrol one just because of the ease of -- I'm just going to plug into my garage, just don't want another gas engine to maintain. So I do think it's going to, over time, will help grow the market.

So in the last less than a minute, talk about Polaris Adventures and how it provides an opportunity for people to test the industry?

Yes, we love Polaris Adventures. Before I became CFO, and they took away all my fun jobs. That was a business that reported to me, and it's a great model where we went into these rental companies and rental operators, and they were typically offering kind of older product. And a lot -- for a lot of people, that was their first time they ever saw a powersports product. And so we wanted to give them a better experience. So we provide those operators with new vehicles and all the back office support and all that and coordinate that experience nationally. We've rolled out Polaris Adventures Select, where you can be a member and you can go pick up vehicles at different dealers, you can pick them up at a trailhead, you can use your points at Polaris Adventures. So it really gives a way for people that don't maybe have the ability to store a vehicle at their house to access powersports. Some of those will grow into owners. Some of them will be kind of renters, users, their whole life, and that's great. It grows the sport and we think it grows the brand.

Great. Well thank you so much, Bob and J.C.