Polaris Industries Inc. (NYSE:PII)
Wedbush Securities 2013 CA Dreamin' Consumer Conference Call
December 10, 2013 9:45 AM ET
Scott Wine – CEO
Richard Edwards – Head, IR
Rommel Dionisio – Wedbush Morgan Securities
Rommel Dionisio – Wedbush Morgan Securities
Good morning. It’s a pleasure to introduce our next company, Polaris Industries. Those of you who have been tracking our research know this is our industry’s top pick for the year in the consumer discretionary space and thanks to the efforts of the guys on the stage today for us [ph] to having made that our top pick. So without further ado, representing Polaris today will be Chief Executive Officer, Scott Wine; and Head of Investor Relations, Richard Edwards. Scott?
Thanks, Rommel, and good morning, everyone. Thanks for making time for us this morning. They’ve allotted me 30 minutes here. I’ll try to get through the presentation relatively quickly. I’d like to have as much time for Q&A as possible. Although I will tell you, I think we’ve got a pretty good story to tell.
For those of you that are not familiar with the company, we now – we finally got the number right. We have about 5,700 employees around the world. It’s almost double the number we had in 2009. So they talk about job growth, some of that’s come outside of North America and outside United States, but nonetheless strong job growth. And Rommel mentioned the success of the company.
There is no doubt that the strength of our company is our culture and our people, and part of the culture is how we focus our efforts in terms of shareholders and stakeholders. We are a consistent dividend paying company. The largest single shareholder of the company is our ESOP and we continue to have a strong profit sharing that is kind of consistent, for me, all the way down to the organization of what the core metrics are.
The chart the bottom left shows, we always had a very strong period of growth and there has been a few acquisitions in there that have given us different markets to address, but most of that’s been organically. We have consistently spent about 4% of our revenue growth in R&D, and if you just do the math, as revenue has more than doubled since ’09, we more than doubled our R&D spend, and that’s really what’s been fueling a lot of our growth.
As you can see by the graph at the top right, the off-road vehicles is the largest part of our business. It’s been the fastest growing parts of our business. Obviously, we’ve made a big investment in motorcycles not only with the new products in the Victory category but certainly with the launch of Indian this year. ATVs have been growing much faster this year than they have in the last five. And our small vehicle business, which is still small but growing with the addition of Aixam Mega is a much larger and more capable business for us going forward.
Parts, Garments and Accessories is our most profitable business and that has grown significantly faster in the overall company this year and which is helpful when you’ve got your highest margin business doing that.
The overall growth for the year has been solid, with the revenue going to up 15% to 16%, earnings up 20% to 22%. So pretty solid year on the back of several years of good performance, and again we’re continuing to invest to be able to do that. Someone pointed out this morning. We have reached what’s been our long-term goal to have net income margins get above 10%.
We set that goal – actually we set an 8% goal long time ago and then we moved it to 10%, but that’s a 400 basis point improvement over a five-year period in net income margin, which I think is one of the hardest and most important numbers to move and really is a great example of what the Polaris team has done from a manufacturing footprint perspective, a pricing and performance and mix perspective and really gives us an opportunity to continue to invest heavily in our future growth.
The financial metrics over the last three years. It’s been a good ride from a shareholder perspective, but really it’s been done the right way with margin expansion and good returns on equity and obviously good returns for shareholders. The dividends continue to increase. Obviously as revenue has grown, the yield is going down a little bit, but we are a consistent dividend paying company and we’ll continue to be well in the future.
Our strategic objectives have not changed. We put these in place five years ago. We do have a very succinct vision and strategy that we are consistently delivering on, with the objective to be a highly profitable $8 billion business by 2020 and the guiding principles and performance priorities.
These are something we review internally all the time to make sure that we’re not just focused on quarterly financial results, but making sure that we’re delivering them the right way every single day, but the strategic objectives, I mean being the best in Powersports PLUS. I mean that is a really what fuels the business is our ability to continue to win in Powersports. And as we’ve seen significant increase in the competitive nature, hopefully you’ve seen a consistent improvement in our product offerings which has allowed us continue to gain market share.
Growth through adjacencies. We love our Powersports business. We’ll always be in it, we’ll always invest in it, and for a long time, I suspect it will be the largest part of Polaris, but we do see a lot of opportunities for us to increase shareholder value and add growth opportunities through adjacent markets. Some of it’s organic. Military business is largely organic. Small vehicles is mostly been through acquisitions. And our BRUTUS, the commercial lineup has been another organic opportunity with the partnership with Bobcat.
So we do see a lot of opportunities for new adjacencies to give us opportunities to grow at a little bit countercyclical or at least less cyclical market than we have with our core Powersports business.
Global market leadership. If you were giving us a grade in the five years since I’ve been here that would be the lowest mark. We set a goal to have a third of our sales outside of North America and we’ve gone from 15% to 14% over five years. Now we’ve added several hundred million dollars of revenue growth. We’ve put significantly more capability in place, but nonetheless the percentage of sales has gone down as North America has grown a little bit faster than that.
Ultimately becoming a LEAN enterprise is a tremendous opportunity for us as a company, not only from a margin expansion perspective, but from an opportunistically deliver higher quality products faster to our customers, higher dealer velocity and ultimately stronger financial returns. And this strategy has stayed in place. The strategic objectives has not changed, it will not likely change because we see a long-term growth opportunity by continuing to execute and deliver on these plans.
Obviously a large part of our success over the last few years has come from market share gains. The fact is our industry is growing nicely this year, but 2013 is the first time that we’ve seen, what I’ll call a healthy growth in the industry. So really what’s driven our performance since 2009 has been market share gains, which have been considerable and consistent.
Even if you look at 2013, which is probably the most competitive our industry has been from our perspective in quite sometime, and we were still able to gain market share in the first half of 2013 when our competitors had all new products and we didn’t bring a new product until we had our big dealer show in July of this year. So being able to deliver market share gains when the competitors introduce products and we don’t gives us confidence now that we’ve launched 24 new products in 2013. And that number is continuing to grow as we continue our investment in R&D throughout the year.
Obviously for those of you that have an opportunity to visit our R&D center in Wyoming, Minnesota, we’ve got 500 or 600 engineers, and really almost an automotive like capability to design new products. We’ve got great testing capability there. And as we’ve doubled the capability of that building facility, we’ve almost doubled the capability that we have to drive new product growth. And ultimately that R&D spend again as I said earlier is consistently been at the 4% of revenue level. You should expect better products, more products and ultimately that’s continued to fuel growth in the company.
The Vitality Index is just what percentage of our revenue over the next three years is expected to become from products that are introduced in last three years. And we do feel good that that Vital Index, we continue to bring new products which fuels our growth and again that investment is not going to decrease as we go forward.
2013 has been the biggest year of new product launches in the investments that we’ve ever had. Obviously perhaps the most prominent of that has been the re-launch or the launch of the Indian Motorcycles which we bought in 2011, 27 months later brought three new bikes back and while we’re really excited about the growth opportunity in Indian affords to help us grow and expand our motorcycle business, so we cannot underestimate the impact of our new products in our off-road vehicle category has been as well, not just in side by sides where the RANGER 4 and the XP 1000 have been the lead drivers, but new ATVs have been very well received.
And again across the board from snowmobiles, which is our smallest product category from a vehicle standpoint except for small vehicles, but we’ve brought great new innovation there, and in fact, I get to sneak out and ride next week for a little bit.
But Indian has really been the big push that we’ve had from a brand building perspective.
We’ve been in the motorcycle business for 15 years with Victory. That product has received numerous awards and it’s been a great growth platform for us for last year’s but really the opportunity that we have with Indian is significant, the reviews that we’ve had from the trade rags has been phenomenal.
And really I think as people look at the bikes, they realize that we've done something special here, but as we’ve had more than 15,000 people take test rides, I think what we’re finding is the bikes actually ride better than they look and that’s helping us bring out our dealer network and really its ramped up our product capacity, the quality of the bikes coming off the line.
The quantity is not been quite as high as I would like so far, but the quality has certainly been at a very high level and the customer satisfaction, the net promoter scores if you will have been fantastic.
And is this the video, Richard? All right, I’ve clicked this, let's see if it works. Here we go. Do we have volume? They are good pictures. Richard, do you want to say anything as we go through this?
So that’s been a lot of fun, the energy and effort we have. It’s nice that you got to see Steve Menneto. Steve is Vice President of Motorcycles for us, and he is leading a really strong team. And the work that they are doing to bring this brand back to life, the right way. And I think what we’ve done is taken particular care to deliver this is the right way and we could have signed up 200 or 300 dealers by now if we would just take anybody that came. And that’s one of the lessons we learned from Victory not to do that.
So whether it’s how the bikes are coming off the line or how we’re signing up dealers or what type of ads that we’re running. We’re taking particular care to do everything in the right way and we are very excited about the potential in that business. But again Motorcycles is still a fairly small part of our business. It’s going to grow faster next year certainly than the overall business, but really off-road vehicles is the 800-pound gorilla for us and fortunately that had continued to grow both market share, retail and overall revenue quite nicely.
Snowmobiles are a little bit flat. We’re going to have a decent year of snow, it looks like at this point, and obviously that will help, but really the numbers from revenue are not going to change. It’s just going to be a retail play from here on out. And Parts, Garments and Accessories, as I mentioned earlier, both organically as we’ve designed more integrated products and accessories has been a nice growth platform. The addition of Klim, the world leader in performance apparel for snowmobiles, and ultimately an opportunity for us to transform that across, so the category has been nice for us as well.
I talked about our strategic objectives. We’ve made solid progress there. The acquisitions from Indian on down to Goupil, GEM and Aixam Mega, now Klim, have really given us an opportunity to get into to many new markets. And as we’ve done that, ultimately you’re going to see our reliance on Powersports. Now Powersports is in many ways been the gift that keeps on giving for us as we’ve continued to gain share, but we are not relying on that for the long-term and that’s what the adjacent market growth is about, is how we get in both organically and inorganically to some of these opportunities for long-term profitable growth in the future.
And these are just some of the examples of the adjacent growth drum. Our military business has had a rough couple of years from a revenue growth perspective, but we’ve taken that time to not only expand our product portfolio but to expand our customer penetration as well. So even with the threat of further sequestered cuts, we have the best range of products that we’ve ever had to that industry and a great opportunity for us to continue to set the platform. Eventually the Fed spending is going to turn around and we’re going to extremely well positioned with our family of vehicles to take advantage of that.
The small vehicles business, it’s GEM, Aixam Mega and Goupil right now really gives us an opportunity to take this what we look at is a $4 billion market space and ultimately drives the performance and innovation that customers are looking for there. We’ll have approaching a $200 million in that category next year. And the GEM business has actually been the fastest retail growth of any product category we have this year. So the team is doing a nice job but certainly a long, long way to go for that business to ultimately to where it wanted to be.
Our commercial business with partnership, not a joint-venture but a partnership with Bobcat has been a slower ramp-up than we would like, part of that is finding the right distribution points, ultimately getting the partnership to deliver all the catchments at the right time for consumers. I just had the opportunity to use my new BRUTUS with the snow thrower on it before I came out here and it works quite well.
So lots of opportunities in these adjacent markets, but they are not yet contributing the revenue growth or the operating profit that we think they have the potential to.
I mentioned global market leadership is one of the lowest grades that I would give ourselves or give me personally over the last five years, because we’ve not met our specific goal of a percentage increase in our revenue outside of North America, but the investments that we’ve made, the partnership with Eicher in India, the investment of a new plant in Poland, building teams and putting up businesses in Brazil, India and China is giving us a great opportunity and really the potential for that business to grow significantly is high.
The fact that we’re delivering growth in Europe right now is amazing. Our team has done a fantastic job. And as Indian – believe it or not, the Indian brand is very strong in Europe and ultimately should drive strong growth for our motorcycle business there next year.
Operational excellence. Ultimately, our product innovation doesn’t make a bit of difference if we can't get our factories and our supply chain to delivered on time, and what Suresh Krishna and his team have done as we’ve ramped up our capacity quite significantly. Our Monterrey facility we’ve put in place several years ago, now makes almost 70% of our RZR products at the quality level that is higher – higher than our other plants, so great opportunity to for us to get better, incredibly proud of our safety record. We asked our employees a few years ago to embrace a different philosophy on safety and I think that’s just an example of what the culture of the company can do when we get everybody focused on the right thing.
So ’14, during our earnings call, we gave our initial thoughts. And we’re not expecting significant rebound in the global economy, I mean I think Europe is going to stabilize and start dropping too much, but every now and then I get reminded from our employees in Spain, they can still get a lot worse.
Competitive pressure was high this year. We expect it to be high next year. My philosophy is that competition is good for consumers and it’s ultimately good for us because it continues to help us drive the better product into the category. We do expect to make more progress in our LEAN journey next year. We’re making big investments in that area. We need it from a capacity standpoint. And really it’s a significant step up in that effort, that’s at the really beginning of a decade long journey that we think can deliver significant value for consumers, for our dealers, for shareholders, our employees and everyone.
So next year is not going to be dramatically different than this year, although we’d certainly like to see an economic turnaround. I think we’re going to come in below 2% again for U.S. GDP and I don’t see any signs of Washington getting their head out of there, you know what, so they can give us a chance for anything better. So, that’s our thoughts for ’14. And we’ve got about 10 minutes for questions. Anyone? Sure.
[Inaudible - Microphone Inaccessible].
So the question if you couldn’t hear is what is our plan for distribution for the Slingshot product? Just to summarize.
We have not communicated any of our launch plans for Slingshot yet. In fact, it was a little bit out of the ordinary for us. We didn’t intend on even announcing that we were going to bring the product to market, but when we filed the patents and the trademarks, it got picked up and at some point we had to acknowledge what was going on. So we did say we’re going to bring the product to market in ’14.
It is classified as a motorcycle and that’s how – it’s classified as three-wheeled vehicle, but we have not said publicly what I just – in fact, internally we don’t – we’re still having some discussion about what is the proper way to do that.
I will tell you that it fits very well with the innovative nature of our Victory business, but I also believe that many consumers that own our RZR product are also going to be owners of a Slingshot. So it’s an interesting opportunity for us. That’s the reason we’re making the investment.
Can you talk about no-pressure tires?
No-pressure tire, we refer to those as non-pneumatic tires, but I know what you are talking about. We bought Resilient, which is a small company in Wisconsin year and half ago. And we have been working diligently to figure out the right opportunities for that. The number one customer issue for many of our side by sides is flat tires. If you’ve done any riding at all and you get out in the noon [ph], you hit over a rock and the tires go bad and almost everybody that rides carries a spare.
So it’s a great opportunity for us, but figuring out the manufacturing process and figuring out the change in our own suspension that we had to do, to do that is taken us a little bit of time. Military is thrilled about it, and we just launched in our first consumer product a few weeks ago. So we’re excited about the opportunity and looking for that to be a long-term nice contributor to the company.
And would you continue to look – build the business outside of the internal supply? In other words, are you going to be a merchant supplier of non-pneumatic tires?
We are not going to become a tire company, I will tell you that. We have been approached about some companies that would like us to provide tires for their vehicles and I think where it makes, we’ll do that. We are addicted to profitable growth. And if we see opportunities for long-term profitable growth, general bet is that we’re going to take advantage of it. Yes, ma’am.
[Inaudible - Microphone Inaccessible]
So the question was I mentioned competitive pressures to especially continue in ’14 and what type of competitive pressure do we see in ’13 and how does that relate to ’14?
Really there was competition across all of our product categories last year. Early in the year, the pressure in the sport rack side by side market, our RZR product category was very high. You had two or three competitors bringing what they thought were going to be industry leading products, we quickly proved that wrong.
There was not much news in ATVs. We were the news leaders in ATVs this year and that’s helped us gain market share of our number one position. Snowmobiles, there was a good better news from – there is only really two other competitors now that Yamaha and Arctic Cat are working together, but there was good product news there and I think that will continue next year.
Harley-Davidson had their biggest product launch ever last year and I doubt they will have anything like that. I mean they’ll bring new products but nothing like that next year, but again I think product news helps the industry, and ultimately, we’ve seen consistently it makes us a better company.
[Inaudible - Microphone Inaccessible].
Yes, so the question was, I talked about Indian growth here in the United States, but what does it look like outside of United Sates?
Little factoid being that the only two dealerships – actually we’re starting our third, we’ve got 1,600 dealers in North America, another 1,000 in Europe. So just call our distribution, our dealer count 2,600, 2,800 worldwide. We own three. All three are in Australia. So we simulcast the launch of Indian Motorcycles from Sturgis down to Australia. We had several hundred orders placed that night and really the – and in Europe, because there were so many bikes, Indian motorcycles during World War I and World War II shipped over to Europe and then they continued to be ridden after the World War people, so there is a great following of the Indian in Europe as well.
Japan is a great market for us as well and that’s gone extremely well. We’re going to have about 70 dealers outside of North America to start next year, and I think that will ramp-up throughout the year. The challenge is getting them bikes. It’s a little bit longer. You can't airfreight motorcycles very cost effectively, so we end up finding the right avenues to get them shipped over and that is ramping up nicely, and I think by the spring riding season most of those dealers will have bikes, but great, great market share opportunities specifically in Australia as we start out ’14.
Second question, very good.
[Inaudible - Microphone Inaccessible].
So the question was that I mentioned I’d like for Indian production to be faster and what are some of the obstacles with it?
Really, I mean this was – probably we knew, we were going to we have, because of the pent up demand the high interest in Indian, you’re starting from zero there, which is naturally going to be a desire for more products than we could deliver initially. We have starting up a new line whether it’s a new ATV line or a new side by sides, and there is always just some difficulties.
In many cases, our suppliers were suppliers that we’ve used with Victory, but because we were bringing back Indian Motorcycles for the first time at Polaris and because there had been quality concerns with Indian from previous owners of the brand, we had a very, very high attention to detail to ensure the bikes were right. So the primary obstacles were just our own focus and attention to ensure the highest levels of customer satisfaction.
And sometimes that meant going back to suppliers and saying that’s not good enough. Sometimes that meant extra inspections on the bikes and we’re just working through that as we get up to rate [ph] and we’re seeing that consistently getting better week-by-week. I mean the biggest obstacle is ourselves.
Anyone else? All right, thank you very much.
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