Polaris Industries' CEO Hosts Analyst And Investor Meeting (Transcript)

Polaris Industries Inc. (PII)

2012 Analyst and Investor Meeting Call

July 31, 2012 10:00 AM ET

Executives

Scott Wine – CEO

Bennett Morgan – President and COO

Michael Malone – VP-Finance and CFO

Richard Edwards – Director of IR

Matt Homan – VP, Europe, Middle East, Africa

Mike Dougherty – VP, Asia Pacific, Latin America

Suresh Krishna – VP, Global Operations & Integration

Steve Kemp – Chief Technical Officer

Scott Swenson – VP, Small Vehicles

Steve Eastman – VP, Parts, Garments & Accessories

Steve Menneto – VP, Motorcycles

Dave Longren – VP, ORV & ORV Engineering

Mike Jonikas – VP, Snowmobiles, Sales & Marketing

Presentation

Richard Edwards

If we could get everybody to have a seat, we’re going to get started in a few minutes. Okay, let’s get going, so we can try and stay on schedule. First of all, I just want to thank everyone for coming to our Analyst Investor Meeting. We know it takes a little bit of time to travel, a couple of days and be away from the office, and it’s a kind of busy earnings season. So we certainly do appreciate you spending some time with us yesterday and today.

So today we’re – this morning here we’re going to have a number of presentations. You’ll get an opportunity to listen to some of the operating guys and then ask some questions after their presentations. I would ask that you kind of hold your questions until the end of each presentation, so let each of the presenters kind of get through their presentations and then we’ll have some time after each of the presenter’s presentations – for you an opportunity to ask some questions. So kind of write your questions down and hold them until the end of the presentation.

The restrooms, if anybody is looking for that, just across the hall, if you go out that back door and go across the hall you can find the restrooms. We’ll have a break time midway through that point in time. And then we should be ending up around noon today. We’ll have lunch come in this room. We’ll have some boxed lunches, so you’ll have about an hour, so a little over an hour. So you can either stay here, you can go back to your rooms if you want to change, if you’re going to the ride site you can change, if you want to do that, not necessary, but you can do that if you want to.

And then come back here and meet in this room, and then we’re going to walk over to our Indian Experience Truck. We’ve got our semi-truck that has some historical Indian information in it. So we’ll walk through that before we go to the demo site. And then we’ll get on the buses and go over to the demo site for those who are going over to ride some of the products later this afternoon.

The presentations are being webcasted this morning so just be aware of that. If any of you, if you have your cell phones, if you could just put them on vibrate that would be appreciated so we’re not hearing any of the ringing going on. And I think with that, I’ll just have to give you the disclaimer. This is you info, we’ll be talking about a lot of information that may be considered forward-looking. So it may change as things change, so just be aware of the normal disclosure rules.

I think with that we’ll start with our CEO, Scott Wine.

Scott Wine

Thanks, Richard. First of all, thank all of you for making the time to come out here to Vegas. I know for Hovorka this is a great place for him to come whenever he can, but appreciate everybody making the chance to come out.

I’m just going to go back, to put the day in perspective and give you an idea how it’s going to flow, Richard just took half of my time and I only had ten minutes. But that’s actually by design because if you look at the lineup here, this is really the best opportunity I think you have all year to not only listen to, but also ask questions to our entire executive staff and we went through a similar exercise. Now I can tell you we pulled out or edited quite a few of the slides but, we went through our long term strategy session with the board last week and these guys do really well on their feet and can answer and really engage you in a lot of questions. So please take advantage of that.

Let’s see. Quickly just looking at where we’re through the first half of the year, obviously a little better in most categories than we expected. Revenue up 25%. GDP was up point and a half the second quarter. So we’re continuing to outperform the softening revealed last night. We’re absolutely staying on the gas, not trying to give anything up. But really it’s still largely making growth happen rather than having too much wind at our back. The industry is beginning to show, are doing better than they have in quite some time and we’re trying to ride that wave to the extent we can.

The gross profit number being flat, obviously some headwinds there. Truthfully we expect to do better than that. That much currency hit in one short period of time was a little more than we could get after, but over the long term we’re still relentlessly focused on driving up margin expansion.

Net income, the percentage continues to move up. That’s been something we’ve been laser-focused on and we expect to see that continue to migrate north throughout the rest of the year. And obviously continuing to drive shareholder return has been good for us. As you can see where we were last year, continuing to make momentum.

Long term shareholder returns is really the key. We obviously understand that no matter what we do we can’t dictate how the market reacts, but we know if we continue to put up the fundamentals, over time we’ll be rewarded for it. And I think you can see in the five-year chart, we have been.

Don’t forget, we still pay a healthy dividend given where the stock price is, we’re right about, above or below 2% after that 64% increase we did this year. So we’re very committed to a disciplined capital allocation model. I will tell you that as we look forward, some of these tax increases and the dividends ultimately are taxed to 35% of the corporate level and 43% going out the door. We may rethink these healthy dividend increases, but we’re committed to rewarding our shareholders that way.

Return on Invested Capital. This is one where not only do we beat our peer group by a mile, but you can also see almost any company out there or industry, industrial average you’ll see we’re way ahead and as we continue to invest, don’t think we’re going to lose the discipline we’ve had to continue to drive these returns.

This is something you probably don’t see very often, but we at every single leadership team meeting we review these because my belief is that if we continue to put up good net income numbers and good top line growth number that can happen over the short term. But if we let these fundamentals start to drift south, we’re going to feel the pain. So we work very hard to make sure that we never let ourselves get our eyes off this. So best people, best team, you’ll see that today, you’ll see it as you talk to our people out in the display room, you’ll see it at the ride site today. Really it’s the people who that make up the difference at Polaris. We’ve added over 2000 employees over the last couple of years and as we’ve added we’ve actually gotten stronger.

Safety and ethics, these are two things, no matter what we do, the safety of our employees and the safety of our customers and the high ethical standards, especially as we get into new products and new countries where their laws and regulations and culture is a little bit different, we need to make sure that we maintain that high focus on safety and ethics.

Customer loyalty, for those of you that covered us a few years ago, we had a lot of, we tested our customer loyalty when we had some of the 800 engine problems with our snowmobiles. So we worked hard and got through that and we’re gaining share in snowmobiles and are doing quite well in that category.

Customer loyalty. That net promoter score that we continue to drive helps make the company sustainable growth platform. And growth’s important, margin expansion’s important. People ask a lot of times, how far can gross profit margins go? For me it really is driving that nut number more than gross profit numbers. But we’re a long, long way from what we can do with gross profit margins.

Project quality leadership, Longren mentioned it last night if you heard his comments. Not only did he have a lot of cool stuff, the scrambler and the 900 are just great, great products, but he mentioned that the product pipeline going forward is better than it was going back and that’s absolutely true. We’re committed to leadership in terms of both product and quality.

In operational excellence you’ll hear from Suresh today. You heard from Steve talk about Retail Flow Management. Great example. If you think about what the other guy, the other big guy in the motorcycle industry have done, major ERP implementation, major factory restructuring. We’re doing the same thing. We’re getting costs down, we’re getting lead times down, we’re improving quality and all we did is put a cost structural team together and gave them some resources and said go. I think you’re going to be really surprised at what Menneto and Suresh and the team do with our motorcycle business.

The strategy hasn’t changed. This is our fourth year of really driving this hard, and remember, this is in priority order and we’re absolutely committed to it. Rather than me walk through it, I’m actually going to step down, but just keep this slide in mind and as you’re listening to the various guys get up here and talk to you, you’ll see how every single element of this strategy is a key focus for the company. So with that Mr. Morgan, I think you’re up.

Bennett Morgan

You’re a well-oiled machine. All right, good morning everyone. What I want to try cover here within the next few minutes and stay on time for the guys really is just kind of frame up the strategy. And for those of you that saw last night, I obviously put some of what you saw on context. So as Scott mentioned we’ve had a really good first half. It hasn’t been perfect by any means but we’re very delighted where we’re on the top line and the bottom line. Our businesses are performing well. Retail spent 17%, pretty much consistently throughout the first half of the year and as we come up against tougher competition and tougher comparables we feel really, really good about that and as you saw the new product launch stuff that we unveiled last night we feel very, very good about our ability to sustain retail as we head into the second half of the year.

Our core businesses are all performing I think at a very high level. ORV has again continued to outperform. We’re getting great momentum in motorcycles and frankly Mother Nature wasn’t kind to the snowmobile business. But where we were able to end with retail being flat and orders really below expectations and inventory is a little higher, but overall in a manageable condition. Our snowmobile business is frankly much better than we anticipated as we went through the snow season. So we feel really good about where we’re in the core. Our PG&A Business which is our most profitable business at the margin level seems to be picking up momentum as we’re going through the year. We had a very good second quarter and the sales rate seems to be picking up almost each and every month. So that’s very encouraging. We’ve got some great new products.

International’s a little choppier than it’s been the last couple of years. It’s just been kind of climbing to the moon. It’s up 13% year-to-date but it’s tougher in Europe and we’re still up in Europe, but we can clearly see some pressure there and we’re monitoring that very, very closely. And then we’re seeing really nice growth at Asia-Pacific and Latin America is relatively small, but we think that’ll get going so we’re not too concerned about that.

The Monterrey plant which was a major, major initiative for us as you guys know over the last couple of years is really performing at a very high level. In many ways thank God we have Monterrey. We would have not been able to do all the growth that we’ve had without the Monterrey capacity situation that we’ve had and frankly we’re continuing to lean on that plant to deliver more and more product. They’re giving us great quality which is I think where a lot of people were very concerned when we brought on the Mexican Plant was could we do what we do up in the US? And frankly we’ve been able to do that and it’s paid so far. So we’re very, very pleased about that. It’s profitable and the things that we’re really grinding on Suresh and his team there is continue to drive the productivity level so that we get every ounce that we can out of that team.

And as you can see, acquisition and partnership activity is quite high based on the announcement we had last week with Eicher and I can assure you that’s not the only thing in the pipeline. So we feel really good about ’12 right now folks. I mean it should be another record year and we feel like we’re well positioned for the second half.

I wanted to just take one slide just to kind of frame up, things have changed a lot at Polaris. We’ve been evolving. We like to use the word transforming. I think that’s our new favorite word as somebody said. But lots and lots of change over the last couple of years. And from my perspective and maybe what like you guys get is the power sports market is growing again and that’s kind of flipped on us. We had about five years in a row where the power sports market was declining and frankly over the last 12 months the aggregate market has been up pretty much each and every month. So I think we got a legitimate trend line going here even with a tough snow season where there was no snow. So that’s very encouraging.

We’ve grown about $1.5 billion so we’ve doubled the size of the company here over the last couple of years. And frankly with all that success capacity is no longer free that we’re clearly going to be making more investments and managing capacity as we go forward. It’s absolutely necessary. Scott mentioned that we’ve added 2,200 new people over the last couple of years. So half of our team is new and you guys know that we pride ourselves on being a very strong, powerful culture. We’re bringing a lot of new perspectives, new capabilities into the organization. And then we’re leaning on that culture to make sure we can indoctrinate people into the Polaris way as we go through that.

We’ve become way more global. Almost 1,300 new people are frankly international folks. A lot of those folks are in Monterrey, but we’ve got new subsidiaries really across the globe in places like Brazil, India and China. We’ve got a headquarters in Europe. And so we’re becoming a much more global organization than we were maybe through the downturn and our appetite remains quite high. We’re aggressive folks and we continue to see lots of opportunity and we’re using our kind of unprecedented levels of success to invest back in ourselves and our future.

So here is one of our favorite charts for a while we took that off the thing but we brought it back because we’re so proud of it. We’ve had nine consecutive quarters of double digit retail growth and that’s a phenomenal number and it’s a real bell weather to say, how is our business going to continue to perform. And as we’ve gone through the list the first half of this year it’s been as solid as a rock. So we’re very, very encouraged with the retail trends.

A lot of you guy saw the show last night so I’m not going to belabor it, but significant product news. We pride ourselves on always outdoing the industry and frankly in totality almost, but the Ranger XP900 is going to be a huge product for us. The midsize 800, I know it’s still based under, is going to be very compelling. The Scrambler 850, everybody that’s ridden that product just raves about it. It’s really our first significant ATV launch in a long time. And obviously is what Steve has with boardwalk and the new RFM and all the branding stuff we’re doing. It’s a big year news and should be a real positive second half catalyst for us.

This chart really, what I wanted to talk a little bit about is we’ve doubled the size of the company and we’ve been able to make sure we leverage it at the bottom line, but we’re taking on unprecedented levels of success. We see lots and lots of opportunity on our core and in new business and we’re investing that back into R&D really to fuel our future growth. So one of the nice things about being consistently high performer right now is we’ve been able to stay on the gaps in engineering and again as Scott just mentioned our product pipeline is awesome.

We’re proud of what we introduced yesterday, but we got great stuff in the pipe and very excited about that driving future Polaris growth for many years to come. I’m not going to spend too much time on this chart, but just going back to the strategy, again as I mentioned earlier our core businesses are really, I would say very, very, anywhere from a very solid shape to outstanding shape right now as we head into the second half of the year and just kind of reiterating where we’re from a sales and guiding standpoint.

On the adjacency side again we continue to place these strategic bets across our portfolio and they continue to build and grow momentum. You saw the very moving military opening last night which was just fantastic. I think even more exciting is the business is growing and we’re seeing more and more opportunities. Our customer relationships are just frankly getting much deeper with special operations forces and a number of customers through the world. We’ve got a new military RZR that Dave or Rich will probably talk about a little bit later today which has been receiving some really early positive reads. And we acquired resilient technologies which is just a small company in the pneumatic tires and you can’t really see it too well but I think we showed that when we were in Monterrey and that is a really neat technology and again just one more example of how we’re taking technology along with customer penetration and really, I think really going to blow the top off the military business over the next few years.

Bobcat is alive and well. Maybe we’ve been talking about that one too long. That’s what Mike and Richard say now. We keep saying its coming, its coming. We’re really right on schedule. It takes time to build the product right and calendar year ‘13 frankly was the plan on the launch.

The partnership is working very well. Bobcat’s dealers inventories are in good shape. They are actually growing. That’s not their core business, so we continue to try to help teach them how to retail side-by-sides. But we’re very pleased where we’re and things are good and when we bring the core developed product out, that will be the next level on the Bobcat partnership as we go forward.

And then on our electric vehicle business, I think we’re really starting to see some traction. GEM orders were up 70%. We’re doing a really good job of adding distribution within our channel. I think we’ve added over 115 of them so far over the last 12 months. There was a lot of interest. Just before the show we were in a GEM prospect meeting. There were a lot of dealers in attendance and I think we’re going to continue to be able to add positive significant distribution to that business.

And the Goupil side, they are up 20%. We’ve got a new kind of series 5 hybrid product that we launched in France. It’s a little tougher because primarily our European business and so a lot of their customers are B to G kind of customers and so with the austerity issues and some of the economy issues there some of the customers have been a little bit slow. But so far they are continuing to grow and the integration of Goupil into Polaris has gone quite well. The productivity is way, way up in the plants and again this is a space that we see tremendous opportunity over the long term and we try to do it in the Polaris way. We’re jumping in with both feet, getting early cycles, learning and we’ll continue to innovate and grow that space. And when that market eventually pops sometime over the next few years, we think Polaris will be in the prime up position to take advantage of that. That really kind of what we’re thinking.

Read the rest of this transcript for free on seekingalpha.com

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