The very large recall of RZR vehicles impacted Polaris 2nd quarter side-by-side revenue.
Polaris Industries reported fiscal year 2016 second quarter earnings with sales increasing 1% from the same quarter last year to reach $1,130.8 million. Net income was down 29% to $71.2 million, reflecting approximately $25 million in warranty, legal and recall costs. Here are some of the highlights of the earnings callrelated to small, task-oriented vehicles.
ORV (ATV and UTV) sales decreased 6% in the quarter with Ranger shipments flat and RZR/ATV shipments down
RZR retail was down significantly more than RANGER and that was anticipated given the impact from the recall
North American (NA) ORV inventory was down 8%
Demand for the new General line of UTVs is exceeding company expectations
The Huntsville, AL plant is ramping up Ranger and Slingshot production
NA retail market for side-by-sides was flat and declining for ATVs
Management reports losing a few points of side-by-side market share attributable more to their product lineup in the utility segment in a competitive environment
NA retail market for side-by-sides was flat and declining for ATVs
Polaris NA retail was down double digits for ORV for the quarter impacted by the large product recall as well as weakness in the oil and ag markets with side-by-side retail down high single digits
Product recall costs have been approximately $27 million for the first half of the year. The company has had a 30% response rate so far and the Consumer Product Safety Commission is targeting a response rate close to 80%
Global adjacent market sales increased 14% in the second quarter to $91 million including PG&A, driven by market share gains in Aixam and the added sales from the Taylor-Dunn acquisition.
Management reports that Taylor-Dunn’s “performance out of the gate, it’s been one of our best acquisitions yet” and they like what is essentially a made to order model along with synergies for the people mover segment with other global adjacent brands
The defense business was up over 30% and our PG&A related sales for the global adjacent division increased 21%.
Defense sales were up with the DAGOR vehicle gaining traction
Multix early sales have been disappointing but transmission issues were fixed during the 2nd quarter and the distribution network is expanding
Polaris will begin transitioning their RZR and Ranger lines to their retail flow management system to improve lead times and inventory management
ORV and Snowmobile sales are expected to decrease mid-single digits
Global Adjacent markets which includes GEM, Aixam, Goupil, etc. is expected to be up mid teens for the year with strength across brands
Are the luxury golf cars and high-end utility vehicles of Garia appealing to Polaris?
With Polaris’ recent acquisition of Taylor-Dunn it made me wonder if Garia might make a good target as well. The European based luxury brand could be appealing to Polaris for a number of reasons.
Brand Value – The Garia brand has been around for ten years, not as established as the recently acquired Taylor-Dunn brand, but still a significant amount of time. More importantly though Garia is a luxury brand. Particularly with their new utility vehicle lineup, a high-end line of utility vehicles could be a nice overlay on the existing Polaris brands.
International Presence – With it’s strong European presence Garia would fit nicely with Polaris’ international expansion efforts. Garia could provide both expanded distribution and manufacturing options for other Polaris small vehicle brands outside the US. At the same time, Polaris manufacturing facilities could be used to reduce the cost of Garia vehicles sold in the US market.
Golf Segment Entry – The golf car segment is a major piece of the global small vehicle market, but Polaris does not have a presence in it except for the small portion of GEM owners using their vehicles for golf. The problem with the golf car segment is that it has been declining or stagnant in the US for several years and will likely remain that way for the foreseeable future. The golf car fleet market is also very price conscious and has its own interwoven distribution channel that funnels used fleet vehicles to golf car dealers. In the private transportation portion of the market used vehicles at various levels of refurbishment provide a range of choices in competition with new vehicles. However, what Garia has the potential to do is offer Polaris an entry into the golf car segment while remaining above the fray. They could avoid the price battles and target just the luxury end of the market which would require only a limited and targeted distribution network. Of course the question is if there is enough of a market there to interest them.
Complementary Vehicles – Garia vehicles would provide Polaris with golf cars and personal transportation vehicles but at the luxury end of the market that could complement the GEM brand in the personal transportation segment. Similarly the new Garia utility line could provide a higher-end vehicles sold through a complementary distribution network.
Electric Vehicles – Similar to Taylor-Dunn, the Garia product line would offer Polaris an opportunity to leverage their electric powertrain expertise and spread development costs among a larger array of vehicles.
Quality – Both companies focus on quality and the customer experience. There could be some good opportunities for knowledge transfer at many different levels for both companies.
What could be some reasons for not acquiring Garia. First, maybe Garia does not want to be acquired or their price could be too high. Second, Polaris may not see the luxury end of the small vehicle market as large enough to pursue. While luxury markets are often global, the luxury end of the small vehicle market may not be large enough even on a global scale to appeal to Polaris. Third, Polaris tends to purchase strong, established brands. Is the Garia brand strong enough and established enough to meet their needs. Fourth, Polaris may want to avoid the slow or no growth golf car segment altogether, even if the luxury end offers some growth opportunities.
Taylor-Dunn is known for burden carriers and other industrial vehicles like the B-150.
Polaris Industries announced their acquisition of Taylor-Dunn, a leading manufacturer of industrial vehicles. Taylor-Dunn will become a wholly owned subsidiary of Polaris. It will continue to be a distinct brand and operate from its current headquarters and manufacturing facilities in Anaheim. Taylor-Dunn will become part of the Polaris’ Work & Transportation division along side GEM, Goupil, Mega and Aixam in the Global Adjacent Markets business.
Just last week I was telling my colleague Stephen Metzger that I thought Taylor-Dunn and perhaps even Garia would be good acquisitions for Polaris. Taylor-Dunn is an excellent fit for Polaris for the following reasons:
Brand Value – Similar to GEM before their acquisition by Polaris, Taylor-Dunn has a strong brand in a niche market that has not fully been exploited as innovation and product development has been relatively slow over the past decade.
Innovation & Knowledge – Polaris has a strong tradition of product innovation driven by customer research. This should pair well with Taylor-Dunn that can offer a deep knowledge of the industrial vehicle market.
Electric Powered Vehicles – The Taylor-Dunn product line provides another vehicle platform for Polaris to leverage their growing electric vehicle expertise. It provides not only revenue opportunities but more vehicles over which they can spread electric powertrain development costs.
Complementary Market – Polaris has been expanding into different segments of the small vehicle market, especially commercial markets, but does not have a strong presence in the burden carrier and industrial segments.
Distribution – Taylor-Dunn’s distribution network consists largely of material handling companies. Polaris has a limited number of dealers in this channel. This new dealer network provides an opportunity for Polaris to place their other Work & Transportation brands such as GEM into this distribution channel.
International Presence – Taylor-Dunn has approximately 50 distributors outside the US and Canada. Polaris has been expanding their sales and manufacturing assets internationally in the small vehicle market. In the future, they could use their international manufacturing facilities to make Taylor-Dunn vehicles more cost effective in foreign markets.
Efficiency – Part of the Polaris success story has been their cost efficiency in many aspects of their business. There is likely some good opportunities for knowledge transfer and some fat to be trimmed at Taylor-Dunn.
The 2016 Wildcat 4X, a higher priced ($20,999 MSRP) model in the Arctic Cat lineup, is expected to improve the company’s revenue in the rest of the fiscal year.
Last week Arctic Cat reported their financial results for the second quarter of fiscal year 2016, which ended on September 30, 2015. Arctic Cat reported quarterly revenue of $211.2 million and net earnings of $11.2 million compared to $262.5 and $15.4 for the prior year quarter. Management noted currency headwinds, especially in Canada, a competitive market and softer than expected retail sales in the ATV/UTV market. Therefore, the company’s management lowered their fiscal 2016 full year guidance. The following are some the highlights from the earnings call related to the side-by-side/utility vehicle market.
Sales of ATVs and ROV side-by-sides increased 1.7% to $70.8 million from $69.6 million in the year ago quarter driven by Wildcat side-by-sides.
A key marketing initiative was started with a five year product development and marketing agreement with racer Robby Gordon and Todd Romano, and their SPEED RMG brand. The initiative specifically targets technology development for the Wildcat side-by-sides to produce new products and accessories.
For full year fiscal 2016 management expects ATV/side-by-sides sales to increase mid-single digits percent.
For the quarter, the industry retail sales were flat to up low single-digits for ATVs and side-by-sides and Arctic Cat was similar overall but with more strength in side-by-sides.
Year-to-date Arctic Cat was up low double digits for side-by-sides retail sales.
Management is terminating under-performing dealerships while adding dealers in open territories.
Comment: Both Polaris and Arctic Cat have reported slower than expected growth in the side-by-side market, as well as, increasing competitiveness. While the market is still expected to grow, the rate of growth may be more mid-single digit percent rather than double digits or even high single digits.
John Deere has broken ground on an expansion of their Horicon, WI manufacturing facility to increase their production capacity for Gator utility vehicles. The 388,000 square foot addition will allow the company to move Gator production in-house from a contract facility, which will improve manufacturing efficiency and facilitate more vehicle customization. John Deere is investing $42.9 million in the expansion and receiving $2 million in tax credits from the state of Wisconsin. The Horicon plant currently employs 1,100 people and will add 80 more when the expansion is finished at the end of the 2016 or beginning of the 2017. Learn more: JSOnline.com
Comment: Earlier this year Kubota also moved ahead on an expansion of their utility vehicle manufacturing facilities in the US. Both Kubota and John Deere compete in the farming market segment and other markets for work utility vehicles. These investments indicate that the UTV market is growing and that major manufacturers expect it to continue going forward. The John Deere expansion may be an indication that increased vehicle customization is a trend moving forward.
Polaris Industries reported financial results for the third quarter of 2015, with sales increasing 12% to $1.45 billion and income increasing 10% to $155 million. The following are some of the key points from the earnings call related to the utility vehicle market:
From CEO Scott Wine “…the off-road vehicle space is quite healthy, as competitive activity is more intense than in any time in my seven years with Polaris.”
ORV sales which includes UTVs and ATVs grew only 3% in the quarter
Market headwinds from the oil and agricultural sectors as well as Canada
ORV sales were led by global RZR shipments and stronger U.S. sales, partially offset by continued weakness in Canada, along with unfavorable international currencies.
ORV sales were up 5% year to date
Polaris gained share in both UTVs/side-by-sides and ATVs
Side-by-side retail grew low single digits which slightly outpaced the industry
New product introductions from many manufacturers is intensifying competition
The sport utility market has been stronger than the recreational utility market for side-by-sides for Polaris and the industry
Global Adjacent Market third quarter revenues increased 10% and year-to-date revenue is up 4%.
European Work and Transportation declined mid-single-digits percent, due primarily to currency weakness and some softness in Goupil and Mega.
The European quadricycle industry remains flat year-to-date with Aixam retail up modestly and increasing market share.
Third quarter defense revenue increased over 50%, driven by strong momentum for MRZRs and increasing international demand.
Year-to-date defense sales are up high-20%s.
International revenue increased 1% in the third quarter with strong growth in Indian and RZR brands and in the Latin American region, but somewhat offset by weak currencies, which led to revenue declines in Europe and Australia.
Multix, the new product through a joint venture with Eicher Motors, is now in market and initial consumer satisfaction is encouraging.
Construction of the the Huntsville, AL ORV manufacturing plant is on schedule to start production in Q2 2016 with a focus on creating production capacity for the Ranger product line.
From CEO Scott Wine, “While competitive offerings and promotional efforts expand, we anticipate slightly slower growth in the powersports industry in general, and the side-by-side segment in particular.”
Global Adjacent Markets will look for appropriate acquisitions.
Utility vehicles like the Kubota RTV400Ci will be built in a new manufacturing facility starting in 2017.
Kubota Tractor Corporation (KTC) and Kubota Manufacturing of America Corporation (KMA) announced plans to invest approximately $80 million in their Gainesville, GA manufacturing operations to increase production of utility vehicles, sub-compact tractors and turf products. The investment includes a new 502,000 square foot facility close to existing facilities for the production of RTV utility vehicles, as well as, upgrades to their existing facilities to enhance production for sub-compact tractors and turf products. The new facility will have the capacity to produce 50,000 utility vehicles per year. Construction is expected to begin in September 2015 and mass production in spring of 2017. Learn more: Businesswire.com
Comment: Kubota joins Polaris and Arctic Cat as the latest utility vehicle manufacturers to announce sizable investments in new and/or upgraded manufacturing facilities. This indicates that manufacturers are optimistic about the overall market in general and their products in particular. It also indicates that competition in the utility vehicle market will continue to be fierce and likely become more intense as these manufacturers will have to increase sales to generate returns on these sizable investments. SVR estimates that Kubota sells approximately 20-30 thousand UTVs a year in North America.
Arctic Cat recently announced that they plan to invest $27 million in their Thief River Falls and St. Cloud, Minnesota manufacturing facilities. The bulk of the investment will be in Thief River Falls where a new state-of-the-art paint line will be installed and other improvements made. In St. Cloud Arctic Cat’s engine manufacturing and assembly capabilities will be expanded. The paint line will be used for the company’s recreational off-road vehicles. The investment is expected to result in an additional 50 jobs. Learn more: Arcticcat.com
Comment: This is another sign of the aggressiveness of the new CEO Christopher Metz who came in at the end of last year. Previously, after some sales and inventory problems with their ATVs, he immediately took a write down and quickly moved to reduce inventory rather than slowly trying to reduce the inventory over the next year or more. With companies like Honda and Yamaha renewing their UTV efforts, strong competition from Chinese manufacturers like Kymco and CFMoto and continuing efforts by Polaris and Can Am, Arctic Cat needs to continue to invest in their UTV product line in order to just maintain their market position, let alone improve it.
Polaris Industries recently purchased the Pro Armor Brand of ATV and side-by-side accessories from California-based of LSI Products Inc. and Armor Holdings LLC. Pro Armor had sales of $15 million last year. The company will continue to operate and develop products independently at their Riverside, CA location. Polaris has been collecting brands of late for its’ Parts, Garments and Accessories (PG&A) division including acquisition of KLIM branded snowmobile and motorcycle clothing and Kolpin Outdoors, another UTV/ATV accessory manufacturer. Learn more: Startribune.com
Comment: Accessories account for over 50% of Polaris’ PG&A revenue which reached $611 million in 2013 and has nearly doubled since 2009 when it was $313 million. In 2014 management expects PG&A revenue to increase another 20%. Increasing sales of this division has been a strategic objective of the management and they have executed on that objective through both organic growth and acquisition of existing strong brands. Accessory spending on high performance UTVs is quite high, averaging around $1,500 and often ranging thousands of dollars higher. In a recent presentation to the investor community Polaris reported strong increases in dollars spent on accessories per vehicle for both Rangers and RZRs.