Polaris Inc. (PII) Earnings Call Transcript & Summary

Okay. Well, thank you very much, and good afternoon, everybody. Thank you very much for being here for the Polaris presentation. I'm Craig Kennison with Baird Research and I'm joined by Bob Mack who is the CFO of Polaris. Polaris is the leader in powersports, also a leader in marine. It manufactures and markets products in the side-by-side market, ATVs, snowmobiles, motorcycles, small vehicles, you name it. It's a great company and they've been great friends to us. Bob Mack is going to walk through a handful of slides and then we'll open up for a fireside chat.

All right. So just a brief intro for anybody that's not familiar with the company, founded in 1954 in Roseau, Minnesota, founded as a snowmobile company. It's grown significantly since then, about 16,000 employees around the world, a fair number of those outside of the United States, particularly in Mexico where we have our largest factory. We are the market share leader in powersports. We participate, obviously, as Craig said, in a broad swath of the industry, on-road, off-road and marine, off-road being far and away the biggest driver of revenue and profits for the company. We have about 4,000 dealers around the world across all the brands, 19 global manufacturing locations. We ship over 400,000 units a year and we sell product around the world. About 15% of our sales outside the United -- are outside of North America and sell in over 100 countries. So as we look at it, as I said, we are the biggest in powersports. That is generally a really good thing. It was a little bit of a challenge during COVID because we had to produce so many more units. We had quarters where we reworked more units than the rest of the industry made, which certainly was a challenge. We're moving on from that now, thank God. But we are generally #1 there in the motorcycle space, #2 to Harley in the markets that we play in, and we're bigger than a lot of our competitor -- we're bigger than our competitors, which generally helps because it gives us a lot of advantage from an innovation perspective, access to suppliers, our manufacturing, our technology. We can leverage technology across the platform. So generally, in this industry, being big is generally better. A couple of great new products. And I want to -- a lot of questions today on the XPEDITION which just came out last week, really cool product. I'll talk about that in a second. But I want to focus on the XP first. So if you're familiar with the RZR market, this product replaced the RZR 1000 which is sort of the heart-of-the-market RZR product. So it's the highest volume-selling product. It's used kind of around North America on trails, in rock, in the mountains. It's not really a dunes product, high desert product. It's a 64-inch-wide product. But it is the heart of the market for RZR. And the XP 1000 have gotten pretty old and it's about 7 years old. So this product, we launched in April. We launched 2-passenger, 4-passenger versions, 3 trim levels, Sport, Premium and Ultimate and about 100 accessories at the same time. So this is replacing effectively our [F150] in the RZR space, our #1 selling product. And the reception has been great. If you go online and see some of the reviews, they've been fantastic. XPEDITION, super exciting product, just launched a couple of weeks ago, just did a big media trip. Everybody camping on the desert in tents. I didn't make it, but it looked like a lot of fun. This is targeted at somebody who's really into overlanding. They want to go out, they're riding. So picture the buyer for this thing. They've got probably $2,000 or $3,000, $5,000 to $10,000 mountain bikes on the back of it. They're going off into the wilderness to camp. So thing's got a lot of range. It's got a lot of room. It's a luxury vehicle. You can get it fully enclosed cab with heat and air conditioning. This is a new-to-the-market, new category product. There's not anything else like it out there. We just launched it, and we'll start shipping late June, early July. So you'll start to see it in dealerships probably late July. But reaction has been great. And again, the media reviews are just starting to come in, and they're really positive. Mike and I took over as CEO and CFO about 2 years ago. Last year, we had our first investor meeting in February in Vegas, a lot of you may have been there. We rolled out kind of our new strategy for the company, focused on these 6 pillars, but really the key takeaways from this are we're going to be the global leader in powersports. And that used to say powersports plus which meant we were going to go -- we were doing some things that really weren't powersports-related. We have sold all those businesses and we are focused on being the best in powersports. It's what we're good at. It's what we're known for. It's what our investors want. It's what we want. And so all of our energy now goes into the 3 segments we have, off-road, on-road and marine. We also put some financial targets out there. I think the most important two of those, as we talk to investors, EBITDA and getting our EBITDA margins back to the mid- to high double digits which is where they were historically. Now we're -- we have gotten as low as kind of 11% last year. We were around at about 12.5%. We're forecasting some improvement this year. Some of that comes -- the rest of that improvement starts to come later in the 5-year plan because it takes investment in plants and other things to get there but very focused on improving EBITDA margins. And then we have a very high ROIC or above 20%. We think we should be kind of in the mid- to high 20s. And so we're pretty focused on that too, and that seems to have resonated really well with the market. ESG, we just -- I would say the important thing here. We had goals, 5-year goals that were out there. We achieved them. We just launched our new goals when we published our sustainability report a few weeks ago. Mike and I have a pretty straightforward view on this type of stuff. We're not going to put goals out there that we see -- we don't have some plan for how we would possibly hit them. So that's why you don't see being carbon neutral by 2050 or something like that on here because we just don't know what that path would actually be. So these are goals we feel like we don't know exactly how we get to them. They're not easy, but they are achievable based on sort of the technology and the financials that exist today. So pretty focused on this and I think we'll make good progress. And with that, we'll go to Craig's Q&A.

Thank you very much for preparing that. I think it's helpful and we appreciate it, Bob. As we mentioned, it's fireside chat. So if you want to send me a question, feel free to do so. I'll check the device once in a while. Look, you sell some seasonal products. We're in the prime season for some of those products. Investors are curious what retail trends look like this summer.

Yes. So when we started the year, we said we thought powersports retail would be flat to '22 for the full year. We were down a bit versus '22 in Q1 but up versus '19. And as we got into April, like we said on our call, we started -- got better weather, a little more normal seasonality, and we started to trend back to be flat to better than 2022. And we think that, that forecast of flat to 2022 is still a relatively good marker for the industry for the year. I think the thing to keep in mind is that 2022 retail was down about 10% from 2019. And so it's not like we're forecasting this Herculean year for the industry. It could be a little better than that. But right now, we expected the kind of entry level of the recreational products to be a little soft. That's played out and I think everybody sees that. But the rest of the market, the utility market, the high-end recreational markets have all been really strong. So it's clear it's kind of playing out the way we thought it would. And -- but we'll -- we're keeping an eye on it. Credit. We got a lot of questions on credit. We're not seeing a lot of issues with consumer credit or things like that. Credit scores, credit availability, all that's been -- remained relatively strong. Cash buyers remained really strong at the high end of the market like I said.

So I want to touch on availability. To what extent in 2022 was -- were your sales affected by product availability? And are you seeing better fulfillment rates driving retail this year?

Yes. So we were targeting to get inventories back to be about 20% lower than they were prepandemic. And for the RZR -- most of RZR product a little bit short still on the high end. And then ATVs, motorcycles, boats, we're kind of back to that level or we're at that level. So we're at the level where we want to be. I don't think availability is a big issue anymore. Ranger. On the utility side, we continue to have less inventory than we would like to. That's a factor of kind of two things: one, a lot of mix into higher-end product which is just harder to make. And just -- it takes time to reallocate capacity to get more capacity on Ranger. Utilities remained really strong. So retail has been strong in the utility space for Ranger. So with that strong retail, it's been harder to get inventory really caught back up. But we're really focused on that. And we'll continue to see improvement in that, I think, as the year develops.

So you mentioned that credit conditions maybe hadn't changed much despite some bad bank headlines. But talk about interest rates and the impact on your consumer and also on your dealer customers who face higher floor plan costs.

Yes. So in the retail side of the business, we don't have a captive. So we have 4 partners that we use to do retail plus the dealers have their own partners. Availability has been really good. Rates are definitely higher. So you're seeing that impact, that kind of entry-level consumer, I think more. Across all the products, about 50% of our products are financed. We do -- half to 2/3 of that is done by our partners in any given month. So we only see the statistics on that piece. But like I said, the availability has been good. The rate -- I think it's more rate shock than it is actual rate impact on the payment. I think people walking into a dealership, seeing a number that starts with an 8, 9 or a 1 that has a 0 after it is surprising to people, right? Rates have been really low, depending on your age bracket. You've not -- people haven't seen stuff like that. And these tend to be newer to the market, entry-level consumers, so they might be the first product they're buying. So we've done buydowns. They've been effective when we've done them. They tend to move the needle from a retail perspective. So it's having the impact we thought it would on the low end of the market, unfortunately. But the higher-end consumer tends to pay cash, and they're not really impacted by the rates. On the floor plan side, we have a JV with Wells Fargo. And so we do the -- collectively do the financing for our dealer floor plans. And those rates are higher, and it's a bit of a double impact for the dealers. They're coming off of having super low inventory, so having very little dealer pay on their floor plan because stuff wasn't staying around for the 60, 90 days the manufacturer pays. And now the inventories returned more to normal and interest rates are up. So credit lines have gone up commensurate with sort of the increases in MSRPs. Dealers were not -- we're not really getting a lot of feedback from dealers. They're not unwilling to take product because of floor plan interest. But I think they're trying to manage their inventories better, and that's one of the reasons we targeted being 20% lower than we had been historically was to try to help them manage their inventory as efficiently as they can, given the higher rates.

You mentioned buydowns. I wonder if you could comment more broadly on the mechanics of a buydown and then just comment broadly on promotional activity in the channel versus last year and versus prepandemic levels.

Yes. So we'll buy down. We'll go out to the dealers, to the market with a program on certain products to buy down the interest rate. We don't necessarily do it across all of the tenors. So we might do a buydown on kind of a 2-year loan and a 3-year loan to buy the rate down a couple of points to get it something -- to get it to be something that's more attractive to the consumer. Sometimes we'll do a buydown. You have an option of doing a rebate or a buydown. You usually can't do both. We see it it's effective for certain types of products. And so we end up paying that interest upfront to the partner. Because they are partners, we do get rebates based on volume so we get some of that money back, but it does move the needle. And it's just part of the overall promotional picture. Promo, when going through the pandemic, there was really no promo in powersports other than we had some programs for heroes, military and first responders, that kind of stuff. We kept that going. But there really wasn't any other promo. So as we come out of the pandemic and things have returned more to normal and inventories out there, you do see promo on slower moving models and on things. We launched that new XP so we had the old XP 1000s out there, so we had promo on those to clear those out. That's pretty much run its course now. Promo is -- so it's back. It's not back to the 2019 levels on a dollar per unit basis, but it's certainly elevated relative to 2021 or 2020, even to some degree, '22. I think we're about where it's going to be. I don't know that you're going to see big changes. You'll see promo move around on different models, but I think the overall level of promo, I don't think will dramatically change the rest of the year.

So part of your presentation and part of the strategy you announced in February of last year was to expand margin meaningfully. Talk about the levers you can pull to achieve that goal.

Sure. So the first big lever was fixing the portfolio. We had some businesses that, a, didn't fit the strategy; and b, didn't meet the financial profile. They were businesses that had about $1 billion of revenue and a very low to no EBITDA. So we sold those businesses between 2021 and 2022. We sold GEM and Taylor-Dunn at the end of '21, and then we sold the Transamerican Auto Parts business in 2022. And so that was the first lever and that picked up about 1 point of EBITDA margin improvement from those actions. The next thing we focused on is really the improvement of the Indian motorcycle and Slingshot businesses. Those are both businesses we built from kind of the ground up. We bought the Indian brand, but we didn't get bikes or a factory or any of that. So we had to design all those bikes, start building them, build the dealer network around the world. We've got about 400 dealers around the world now, 200 in the U.S. It's our most diverse business from a geographic standpoint with 40% of the Indian sales are outside the U.S. Slingshot's our most ethnically diverse business from a customer standpoint, but it's primarily a U.S. business. Indian will be EBITDA positive this year. Slingshot will be close depending on how the year shakes out. That's -- doesn't sound great, but that's a big improvement from where they were as we've been investing in them. So now that we feel like we've got the product built out enough in terms of the models, we're really focused on how do we drive better profitability. Some of it's volume, but a lot of it's just a good focus on making the product easier to manufacture, sourcing, things like that. And so that team has a path to profitability, and that's something we review with them every quarter and gets a lot of focus. The next big levers really are around the off-road business, and it's kind of a few different pieces. We still have $100 million drag from tariffs, the China tariffs because we do assemble product in the United States. So when that came in, in 2018, it wasn't clear whether that would be transitory or it would stay around. It's clearly staying around. During COVID, it was hard to start resourcing things just given the supply chain disruption. So now that, that's hopefully mostly behind us, we're focused on actions we can take to drive down those tariffs, so resourcing, moving things to places like Vietnam and Mexico instead of China. So that's actively underway. There is talk about maybe some tariff exclusions. I don't put a lot of confidence in the government scenario changing right now. I just don't see politically how that happens. But obviously, we'll take advantage of any of that we can find. The rest of it really comes from two things. It's -- in the off-road space, we invented most of these categories. So that's a great thing. But when you invent the category, you don't know what it's actually going to look like by the time you're done. So we had a lot of vehicles where the 2-passenger vehicle was designed one year by one team, the 4-passenger was designed maybe a year later by a different team. They might have different brake systems. They might have different steering columns. They might have different steering wheels. So there just wasn't a lot of commonality in the parts and we weren't doing things in modules and platforms. And now as we start to redesign products like the XP that have been out there for a long time, what you see is we launched 2-pass, 4-pass, all the accessories, all the trims all at one time. And so that gives us a lot more commonality of parts and assembly. And that allows us to be more efficient in the factory, reduces working capital. It gets us better costs with the suppliers because you have more volume, so across the same part numbers. So we're continuing to do that in the off-road space. That will take a period of time to work through. But at our Investor Day, we talked about Steve Menneto runs off-road, showed an example where BRP might have 11 -- or they might have 3 brake systems for that same suite of products, we had 11. So we might not immediately get to 3, but I think we got to 5 in that example in a year. So we've just got work to do to clean up how we have the portfolio. And then we've talked about expanding in Mexico. So like the XPEDITION is a great example. We added on to the Monterrey factory through the course of COVID. Now that we're running the XPEDITION and that product line, that's running down through the new line in Monterrey, which gives us cost advantage. It gives us tariff savings to the extent that parts are coming into Monterrey. We're also adding additional engine assembly capacity in Monterrey. Right now, we make engines, assemble engines both in Mexico and in the U.S. And we'll continue to do that, but we'll shift more of the engine assembly to Mexico for the products that are made in Mexico. And then we're adding a new backshop factory. So over the last several years, as the products have gotten bigger and more sophisticated, we've -- we try to have like a 50-50 balance on a lot of our manufacturing in terms of like things like injection molding, welding, tube bending. And we've kind of ended up with more outsourced just because we didn't have the internal capacity. So we're putting a new backshop factory in Mexico that we've started construction on and will start to come online in 2024. So as we take those actions, we feel like we can drive the margins up back towards where they were historically in the off-road business.

So we have a question from the audience. If you would comment on the impact of new powersports entrants into the market and the impact on your growth and margin profile.

Yes. That's -- I'm guessing that's directed primarily at CF Moto. CF Moto came into the U.S. They've always -- they've been big in Europe for a long time. Often, they're #1 in Europe, and that's partly driven by the fact that, in Europe, powersports products tend to be used on-road. They're not really used for recreation. They're used as small task vehicles in smaller suburban rural cities is -- around the kind of city centers and stuff for vendors and store owners and things. You don't have a lot of true off-road riding in Europe. And because CF Moto has a kind of lower-priced entry-level product, that product meets the needs of the European customers. So CF Moto has been strong in Europe for a while. In the pandemic, they shipped a lot more units into the U.S. than they had historically. And everybody was short inventory, so there was certainly a market for those products. The customers buying those products tended to be new to category and were using those products in a way that is different than kind of our customer uses it. So we look at the market as it's developed. If you are a higher end, you want high performance, innovation, ride handling, lots of power, you tend to focus on Polaris or BRP. If you're a Honda customer, you've got a Honda car, you tend to buy a Honda UTV. But the Honda, Kawasaki, Yamaha products tend to be more in that middle of the market, not the most innovative, not the highest power, good, reliable product. And they're not in things like the XPEDITION and the Pro X -- Pro R and all the kind of high-end, high-power markets, whereas us and BRP are. And then, at the entry level, you've got CF Moto kind of at the dealers and then you've got some other stuff at like the Lowe's and Home Depots and people like that. That stuff is real entry level. But CF Moto, the CF Moto buyer tends to use their product. They'll run it on-road, in places where you can take it on-road. They'll run it on dirt roads. They're using it for kind of more of a basic transportation. And if they -- what we hear from dealers is if they decide they want to move up to kind of a higher performance product, they come in and they start looking at our stuff or BRP's. And if not, they're content with that kind of entry-level performance product. We're looking at that. We don't take them lightly. They're a good competitor. We're looking at should we participate more in that entry space, is there something there for us that we can do at margins that makes sense, and we'll continue to evaluate that. But I think, overall, it's probably been a positive for the industry because it brought people into the space. And we feel like as they move up, they'll move up to our products.

Bob, could you talk about plans to electrify the powersports industry?

Yes. So we started -- we announced our Kinetic RANGER about a year ago. We started shipping it this quarter. It's been a great product, really well received. We had an initial allocation. We sold it out in about 7 minutes. We haven't released the second one, we will, but we're pretty sure it's already long sold at the dealers. The product is -- our goal -- you could electrify any product. If you were at our dealer meeting or our investor meeting, you would have seen that we had electric versions of every product we make, snowmobiles, ATVs, side-by-sides, RANGERs, RZRs. We've decided that we're going to let the customer kind of guide us to where we want to spend the resources. And in the utility space, that customer, that rancher, farmer, big land owner, winery owner, they have -- they know how long they run their vehicle in a given day so they know what they need for range. They have availability of charging because they've got barns and welders and access to power. They're not out in the middle of nowhere. They have a benefit. They like the electric product because it's lower maintenance, it's quiet around animals and things like that. And they've got an ability to pay. We see the same thing in the kind of commercial utility vehicle space where construction projects, municipalities and other folks are mandating that the project has some level of electric vehicles on it in these cities. So that's where our focus has been. That's what Kinetic is. But it's also, in our view, it's the best RANGER we've ever made. Some folks got to drive it at the investor meeting. It's a lot of -- it's got a ton of power, it's super quiet. It handles really well. It gives you really good both fast and slow movement capability because it's electric. And so it does the job really well, and I think that's why the reception has been so good. We're not trying to put tens of thousands in the market right away. We want to learn with the product, bring the dealer base along, bring the customers along. But we feel like that's going really, really well. And we'll continue and innovate from here in electric.

What's the latest on trends in the marine space and your position in it?

Yes. So our marine business is primarily pontoons through the Godfrey and Bennington brands, and then we have Hurricane deck boats. So marine retail, it's been a little tough to tell this year, I think, for everybody. We had a couple of years of people buying boats in nonnormal season. If you look back to January, Q1 of '22, we still had a lot of boats get registered at a time when people wouldn't normally register boats. People were buying boats, picking them up at the dealers, paying for them, getting them registered because they were afraid that dealers might sell them if they didn't. And now we're back to kind of normal seasonality. So you don't really see a lot of the boat registrations and sales come through until kind of a May time frame as people get ready for the Memorial Day holiday. Registrations have been -- as we see them on our warranty system, have been strong the last several weeks. So it's -- I think the industry -- Marine will be down for the year. I think that's kind of what everybody is calling for right now. I don't think it will be as down as much as it looked like in the first quarter because I think that comparators were a little bit unnatural to sort of COVID registrations. Plus the SSI stuff lags so much. State of South Carolina, we just reported like last week for the last 1.5 years. And somehow 2 months had no registrations, which doesn't make a lot of sense. So the SSI data is really tough to follow. But I think Marine's going to have an okay year. I don't think it will be a banner year, but Marine's coming off a couple of really good years. We'll see where it goes.

So in the minute we have left, maybe summarize what Polaris Adventures is all about and what it can contribute to your P&L.

Yes. So about 5 years ago, we looked at the rental space. A lot of people -- we're thinking about how do you get new people into the industry. A lot of people come into the industry or they first experienced in powersports as they rent a product, while they're on vacation. If you did that, a lot of the rentals were not great experiences. So we partnered with about 250 rental locations around the country. They're what we call Polaris Adventures outfitters. We provide them vehicles. They're new vehicles, current generation and well-accessorized. We've got a reservation system, damage waivers, safety waivers, safety -- all safety training. We provide that as a package. So it gives that new -- that first-time user a really great experience. During the pandemic, we weren't really marketing to those people to try to get them, to see if they wanted to buy a new vehicle because we didn't have any inventory anyway. So what you do is frustrate them. But now that we're through that, we're starting to do that. Some percentage of them, we think, will buy vehicles. Some will continue to be renters. For people that don't want to buy a vehicle, we also have Polaris Adventures Select which is a kind of membership program that you pay a monthly fee, you get access to vehicles, you can use your points at Adventure outfitters or you can have vehicle delivered to your house, delivered to a trailhead so you can use it without having to own it and store it and trailer it and do all those kind of things. So it's a growing part of the business and we think it helps bring new customers into the sport, into our brand, and we're pretty happy with where it's going.

Right on time. Thanks so much, Bob.

Perfect. Thanks, everybody. Appreciate you being here.

Thank you.