From the Polaris 2016 fourth-quarter and full-year earnings call, held on Jan. 24 with financial analysts: CEO Scott Wine and CFO Michael Speetzen on dealer margins, inventory, prospects for Indian and Slingshot…and politics.
MARGINS
Polaris Chairman and CEO Scott Wine said he anticipated dealer margins in 2017 to increase from 2016 levels. “The warranty cost alone gives you the benefit, but… [the] promo cost is elevated in the first half [of 2017] relative to where we were in the first half of 2016. As we get into the back half [of 2017], two things happen: one, we start to lap the high promo cost, so that stops being a headwind, and then we also start to see volumes improving slightly.
We’re going to have to rely a little bit more on promotions than we have previously.”
In the short-term, as Polaris focuses on quality and safety issues, “we’re going to have to rely a little bit more on promotions than we have previously,” Wine said. “We do believe that’s transitory.”
Wine added that Polaris will not wait for a model-year change to improve quality and reliability of the RZR platform.
INVENTORY LEVELS
“We think the aggregate inventory level is essentially right. We think that there are opportunities to improve the inventory levels for some models…but we don’t believe that is the main driver of dealer profitability at this point. We will not take another step down in dealer inventory, but will make sure that we have the right inventory at the right time to give our dealers more of a competitive advantage over time,” Wine told analysts on the Jan. 24 call.
We think the aggregate inventory level is essentially right.”
“But there [are] a lot of things that we need to do,” Wine continued. “It’s how we manage warranty, it’s how we manage and deliver our promotion costs. And ultimately it’s getting back to providing volume growth. If you look at the plans [from] Matt Homan, on the business side, and Tim Larson, on the marketing and sales side, they have really done a good job of identifying those opportunities where we can help our dealers, along with us, to get back to profitable growth, and you’ll see us take a lot of those steps in 2017.”
Added CFO Mike Speetzen: “We anticipate dealer inventory to be flat for [in 2017].” Moreover, “overall financial services income is going to be under pressure next year. The bulk of that is being driven by the dealer inventory position, but we do anticipate lapping more aggressive retail penetration than we had in 2016.”
INDIAN
“We’re right at about…. 200 dealers. We don’t want to add dealers to create growth,” Wine said.
We don’t want to add [Indian] dealers to create growth.”
“We want to make sure that our dealers are growing profitably as we are, and we want to make sure that we’re adding the right dealer at the right time. So we’re right at that 200 mark…and that’s about halfway to where we think we will be – in the 350 or 400 range over time.”
SLINGSHOT
“Slingshot has been a profitable business for us… The quality and recall issues that we’ve had to deal with are unhelpful, but we are projecting growth in 2017, and now that Steve Menneto has just Slingshot and Indian to focus on, we are comfortable that we will bring out the right vehicles and products to get this business to be able to drive growth – long term, profitable growth for the company,” Wine said.
Slingshot has been a profitable business for us.”
“I have always said that, in this industry, you really need to get to that 12,000 or 13,000 unit volume number before you have confidence that you’ve got a long-term growth business,” Wine continued. “Victory never got there. We’ve got to push Slingshot there. So what you’ll see throughout 2017 is continued focus on improvement of quality and performance of the vehicle, but also a concerted effort to expand the awareness.
“So certainly lots of opportunities, but work to do,” Wine noted.
DEALER RELATIONS
“Overall, [dealer] sentiment is not where we wanted to be,” Wine acknowledged.
Overall, [dealer] sentiment is not where we wanted to be.”
“I will say that obviously we did way more recall activities than we wanted to, but…I think [we] actually improved sentiment somewhat with how we handled the recall,” he continued. “Some of our dealers made a good bit of money, they brought new customers back into their shops, and I think we handled it reasonably well. During that process we also saw many other opportunities where we can improve the relationship and the services that we provide to our dealers, and that’s going to be one of our big corporate priorities going into 2017.”
POLITICS AND TRADE
The majority of RZR products are produced out of Polaris’s Monterey, Mexico, facility. “And the U.S. percentage of that is two-thirds or higher,” Wine noted.
We’re watching it closely but confident that rational heads will prevail.”
Any government action that would impact RZR manufacturing and import would be “very hurtful,” Wine said. “But our position on this is that there [are] a lot of really smart people in the new administration. Congress understands economic issues very well. We do not believe that they’re going to take an action that could be detrimental to the U.S. economy. So we’re watching it closely but confident that rational heads will prevail.”