My colleague Stephen Metzger discusses Club Car’s product development strategy in a new article. In particular, he analyzes Club Car’s partnership with AEV Technologies and the resulting offering, the Club Car 411 utility vehicle. Rather than develop the vehicle in-house, which Club Car has the capabilities to do, they decided to go outside. Is management embracing a new approach to product development or is this just a one-off exercise? In addition, an interview with Brian Rott, President Cart Mart in California, discusses how the 411 fits in the market.
Club Car 411 Overview
Earlier this year Club Car introduced the Club Car 411 utility vehicle, an all-electric vehicle for cargo services and low speed logistics. The 411 is the result of a partnership between Club Car and AEV Technologies, a manufacturer of light-duty battery-electric vehicles. The partnership combines AEV’s expertise in design and manufacturing with the dealer network and brand power of Club Car.
Club Car 411 Target Market
The Club Car 411 is targeting the space between full-sized trucks and smaller golf car based utility trucks. The partners designed the vehicles to have a lower cost of acquisition, operation and overall ownership while meeting the demand for clean energy vehicles. Typical uses would be on corporate and college campuses, in warehouses and as part of municipal fleets.
The Club Car 411 comes in three basic configurations: a van box, a pickup with sides and a flatbed. The vehicles have a curb weight of approximately 2,100 lbs depending on the configuration and a payload capacity of 1,100 lbs. As an LSV the top speed is 25 mph and it has a range of 50 miles. A 10 Kw, 13.4 hp AC motor paired with a 240A AC controller powers the rear-wheel vehicle. The six sealed lead acid batteries provide a range of up to 50 miles.
Standard Features & Options
Standard features include a backup camera, 7″ LCM display, reinforced ABS body panels and cabin heating. The 411 has a reinforced steel chassis, 4-wheel, hydraulic disc brakes and power assist steering. Options include fleet management systems including GPS and geofencing.
This is a curious move by Club Car. Clearly the vehicle fits with their existing customer base and dealer network, but rather than develop the vehicle themselves they partnered with AEV Technologies. I speculate that the partnership reduces Club Car’s development costs and associated risks. For AEV, the partnership gives them access to a large customer base. AEV Technologies also makes a three wheeled vehicle similar to the Arcimoto FUV. Therefore, if the FUV makes inroads into Club Car’s PTV market then they could have a ready for market vehicle to compete against it.
Marc Cesare, Smallvehicleresource.com
BRP Quarterly Results Overview
BRP reported another strong quarter with revenues increasing 17% year over year to $1,334 billion (CA). Year-Round Products segment sales drove the BRP quarterly results for the first quarter of their 2020 fiscal year. In addition, sales increased across US, Canadian and International markets. Management reported that the company’s retail growth outpaced or at least matched industry growth around the globe.
UTV Related Highlights
The following are some of the highlights from the BRP quarterly results as they relate to the UTV market.
- Similar to other OEMs, BRP noted that snowbelt weather hindered retail sales early in the quarter but rebounded later
- Weather delayed sales rather than being permanently lost
- Side-by-side North American retail sales increased high single digits compared to mid-single digits for the industry
- Retail sales could have been higher except for constrained Defender UTVs supply
- Management reported strong promotional activity from competitors during the quarter but the environment is improving
- Side-by-side retail sales for the season(~ 10 months) are up high teens %
- Globally, BRP side-by-side average selling price is flat and up slightly for YTD and quarter respectively
- Defender sales have been particularly strong and supply remains tight
- Management reports taking the most side-by-side market share in the industry for the season in both utility and sport segments
- Market share is up in Middle East and Asia-Pacific regions as well
- Do to supplier locations, China related tariffs minimally affect costs
- BRP is launching a new side-by-side platform in June
- Increased production capacity will be online
- Management increased their guidance for FY2020 results, predicting revenue to increase 9% to 13%
- Guidance for Year-Round Products which includes side-by-sides is for a 14% to 19% increase
Learn more: Earnings call transcript (seekingalpha.com)
BRP continues to be the main challenger to Polaris in the side-by-side market. Between the two of them they control around 60% of the market. With both growing market share for the most part, many of the other manufacturers are likely suffering. The success of the Can-Am Defender line, particularly in agriculture markets, is likely hurting companies such as Kubota and John Deere.
Tariffs Hit Polaris Hard
In a recent interview with CNBC Polaris CEO Scott Wine commented on the affects of the tariffs on the company. He stated that the increase to 25% would be “catastrophic”. The company previously estimated that they would cost the company $40 million in the last fiscal year. At the 10% tariff level they were guiding towards an approximately $90 million hit for the current fiscal year. However, at the 25% level that would jump to $195 to $200 million. In addition to these China specific tariffs, other aluminum and steel tariffs hurt the company as well.
Polaris More Exposed
Polaris is in a particularly tough spot with the tariffs because of their supply chain relative to the other major UTV manufacturers. The major Japanese OEMs, Yamaha, Honda and Kawasaki, mainly source their imported parts from Japan and thus avoid the onerous China tariffs. Can-Am produces products in Canada and Mexico and therefore, are less exposed to the tariff regime as well. Polaris on the other hand sources more of their components from China.
Farmer Segment Exposure
UTV manufacturers exposed to the farm segment are likely to suffer as well. Farmers report lower commodity prices and higher equipment prices. The tariffs are increasing farm equipment prices in the range of 20% according to some farmers. Although this refers to large pieces of farming equipment, if farmers are not spending on these large pieces and trying to cut costs in general, they are likely forgoing UTV purchases as well. John Deere and Kubota are likely the most effected brands as this is a strong segment for them. However, Can-Am could possibly be feeling an impact in their Defender line and Polaris in their Ranger line.
Some Value Brands Vulnerable
In the past few years value brands have made inroads at the lower end of the price scale. Many of these companies are sourcing parts or vehicles from China. For example, CFMOTO is based in China. In addition, Cub Cadet UTVs are manufactured by Hisun in China. Given their value pricing approach, the tariffs are likely putting some pressure on these companies. If they have to raise their prices too much, they lose their value proposition in relation to the major brands in the market.
Can-Am Earnings Call Summary
Can-Am earnings were strong for the fourth quarter and fiscal year for 2019. Annual revenues increased 18% from $4.5 billion to $5.2 billion (CA$) and quarterly revenues jumped 23% to $1.5 billion. The following are highlights from the recent earnings call.
- North American powersports retail sales excluding snowmobile sales grew 19% while the industry decreased low single digits in the fourth quarter
- North American side-by-side sales increased high teens while the industry increased single digits
- Can-Am grew market share in side-by-sides
- Increased UTV production capacity by 30% at Mexico facilities with another 50% capacity increase planned for the coming year
- Continued to introduce a new side-by-side model every six months following their long term plan
- Side-by-side market remains competitive with promotions or “back end” money going to dealers to reduce net pricing
Can-Am Earnings Guidance for FY2020
Management is expecting continued growth for fiscal year 2020
- Annual revenue is expected to increase 7-11%.
- Year-Around Products revenue is expected to grow between 12% and 17% driven primarily by side-by-side models.
Learn more: Seeking alpha.com (Earnings call transcript)
Can-Am has grown into the main rival to Polaris in the North American side-by-side market. They have continued to gain market share for several years and have separated themselves from the rest of the pack chasing Polaris. They are the only company that has been able to match the market leader’s level of new model introductions. The development of their Defender product lines to pursue the utility vehicle segment has been a key to unlocking more growth. The complete Can-Am side-by-side lineup now comes close in size and segment coverage to the Polaris armada. Can-Am appears to be running on all cylinders and I would expect them to continue increasing revenue and market share.
A recent article speculated that Ingersoll-Rand’s acquisition of Precision Flow Systems could pave the way breaking up the conglomerate. Club Car is one of the pieces that seems a poor fit with the rest of Ingersoll-Rand. If this is the case, then Polaris Industries might be a good suitor.
The Pros for Acquiring Club Car
A strong international brand
Club Car has a number of characteristics that match previous Polaris acquisitions. First, Club Car is a leading brand, if not, the leading brand of the three major golf car manufacturers. Second, it is an international brand. Third, Club Car participates, in part, in a fragmented industry. Therefore, Polaris would have an opportunity to use their resources to establish a more dominate market position. While the golf car fleet market is primarily a three company affair, Club Car, E-Z-GO and Yamaha, the non-fleet personal transportation vehicle (PTV) and light utility vehicle markets are more fragmented markets. Fourth, a large installed base of vehicles forms the basis for a substantial parts and accessories business. This was a key reason for the Polaris purchase of Taylor-Dunn.
Club Car complements Polaris vehicle portfolio
A large portion of Club Car vehicles sold are electric and would fit well with the Polaris EV portfolio. Other EVs in the Polaris portfolio include GEM, Goupil, Taylor-Dunn and Aixam. Polaris could spread their battery and EV powertrain development costs over a larger number of vehicles. In addition, Club Car’s end markets and distribution network would complement current efforts by Polaris. Their PTVs would complement the street legal GEM vehicles and their light utility vehicles would complement the more heavy-duty Rangers.
In addition, the golf manufacturer’s dealer network would expand Polaris’ footprint. While there is some overlap with the GEM and Taylor-Dunn dealer networks, there would also be a large number of additional dealer locations in the US and internationally. Furthermore, these dealers could be used to expand the GEM and Taylor-Dunn distribution. Club Car end markets such as golf courses, resorts, colleges, airports and other institutions would also take Polaris into new markets or broaden their vehicle offerings where they overlap.
The Cons for Acquiring Club Car
Is there enough growth?
Polaris looks for acquisitions in growing markets and/or traditionally strong but neglected brands that they can leverage. In the case of Club Car, the fleet golf car market has been declining for a number of years. The PTV and light UTV markets are growing but not at really high rates and are a smaller part of the business. Club Car isn’t necessarily a neglected brand but is somewhat lost among much larger Ingersoll-Rand businesses. In contrast, Polaris might be able to focus more attention and resources and make a strong brand even stronger.
Another acquisition to swallow
Polaris has already made a number of acquisitions in the past year, adding Boat Holdings and the Marquis-Larson Boat Group to start a new boating business. Acquiring Club Car would require more management time and focus to successfully integrate the business into Polaris. In addition, the purchase would likely add additional debt to their balance sheet. Polaris management might want to finish integrating their recent acquisitions before adding another piece and avoid increasing their debt.
What Will Polaris Do?
A strong argument could be made that Polaris should acquire Club Car if it’s for sale. The key questions are whether the management perceives if there is enough growth in the market, and do they think they can use their resources to drive more growth. The combination of the PTV and light UTV markets along with the parts and accessories business may offer enough potential. Timing may also be an issue. Any down turn in the economy, which some are predicting, would hurt Polaris. Discretionary income drives a significant portion of their sales.
Marc Cesare, Smallvehicleresource.com
Polaris Q4 2018 Earnings Overview
Polaris reported another strong quarter and full year with 4th quarter sales of $1.6 billion, up 14% from last year. Full year sales topped $6.1 billion, up 12% from the prior year. The ORV/Snowmobile segment reported sales of $1.1 billion for the quarter, an increase of 7% year over year. The ORV portion declined 2% as the company had a tough comparable with the prior year’s quarter. On a negative note, management expects tariff and trade war costs to total between $110 to $120 million company wide for fiscal year 2019. They will hit the ORV and Motorcycle businesses the hardest. A significant portion of the Q&A on the call revolved around tariff and trade war costs. A summary of the earnings call highlights related to the STOV market follow.
Polaris Earnings Call Highlights
- Polaris side-by-side retail sales increased mid single digits % while ATV retail sales decreased mid single digits %
- Average selling price for the ORV segment increased by 7% but were partially offset by tariff, logistics, and commodity costs
- Polaris gained market share in the side-by-side market for the quarter and the full year
- Management believes they are gaining share from Japanese competitors and Arctic Cat, now owned by Textron
- Global Adjacent Markets revenue increased 4% to $122 million on the strength of commercial, government and defense and Aixam businesses.
- Polaris increased wholegood prices 3.5% for the ORV/Snowmobile segment at the start of 2019 to counter tariff and trade costs
- Revenue for ORV/Snowmobile and Global Adjacent Markets segments are expected to increase mid-single digits % for fiscal year 2019
- Management does not expect to enter into electric powered markets until there is large consumer demand. Their response pertained to motorcycles but appears to be their general philosophy.
Learn more: Earnings Call Transcript (seeking alpha.com)
Tracker, a leading boat manufacturer, and Textron Specialized Vehicles are forming a partnership to produce UTVs and ATVs and sell them under the new Tracker Off Road brand. Tracker is part of the White River Marine Group that includes Tracker, Triton, and Ranger boats, as well as Bass Pro Shop and Cabela’s. The Tracker Off Road vehicles will be sold through select Ranger, Triton, and Tracker, and other independent dealers, as well as at Bass Pro Shops and Cabela’s locations. They will be built at the Thief River Falls, Minnesota plant that produces Arctic Cat vehicles.
Tracker Off Road Product Lineup
The Tracker Off Road lineup includes four ATVs and four UTVs. The ATV line includes entry level youth and adult models and two more models with more features and capabilities. This lineup should be able to target a wide swath of the ATV market. The UTV lineup includes a personal transportation vehicle (PTV), and three models currently sold under the Prowler nameplate: the Prowler EV, Prowler Pro and Prowler Pro Crew. The corporate presentation also mentioned the potential of selling the Wildcat XX and even snowmobiles through the same distribution network.
The Textron Tracker partnership continues the trend in the UTV market of brands expanding beyond their traditional distribution networks. Typically, an established UTV brand partners with a traditionally non-UTV brand. They either re-brand existing models or develop similar but unique models to sell through the partner brand’s distribution network. Previously, major UTV brands have used this approach to gain access to farm equipment and outdoor power equipment distribution networks. In this case, Textron is tapping into marine distribution and outdoor apparel networks. In a similar vein, Polaris and Can-Am have recently acquired boating manufacturers. Primarily these acquisitions diversify their powersports portfolio. However, it would not be surprising to see them sell a select range of off-road vehicles through these marine networks. If the dealers believe they can make a profit and there is no territorial conflict with the traditional powersports dealers then these networks expand their geographic footprint and reach.
Marc Cesare, Smallvehicleresource.com
Financial Results Overview
Tariff questions dominated the Polaris Industries earnings call to discuss their Q3 financial results for fiscal year 2018. The manufacturer of the RZR, Ranger and General side-by-sides reported adjusted revenue of $1,653 million, an increase of 12% from $1,480 million from third quarter 2017. Net income increased 21% from $98 million to $118 million. (Financial figures are compared to Q3 2017 unless noted)
STOV Segments Perform Solidly
Overall ORV/Snow segment revenue increased 3% from $1,007 million to $1,036 million. Lower snowmobile revenue was more than offset by a 12% increase in ORV revenue. ORV includes UTVs and ATVs. North American (NA) retail sales, driven by side-by-side sales, increased 1% in the quarter against a tough comparable. In comparison, management estimated that industry wide NA ORV sales improved low single digits for the quarter. Polaris side-by-side market share for the quarter remained the same.
The average selling price of ORVs overall increased 5%. Management reports that the initial launch of the 2019 model year was successful with good response from consumers and dealers. In particular, the new Ranger XP 1000 variants drove sales. Furthermore, the company’s inventory management system, RFM, is producing results with the best side-by-side delivery performance to date. In addition, lower promotional costs accompanied the stronger sales. Comments on individual markets indicated that the oil and gas customer segment improved while agriculture decreased some.
Global Adjacent Markets Gain
The Global Adjacent Markets (GAM) segment made solid gains as well. Sales increased 5% from $92 to $98 million. This segment includes vehicle sales to commercial, government and defense clients in addition to Aixam quadricycle sales in Europe. In addition, the GAM segment includes vehicles like Ranger and Brutus UTVs, military RZRs, GEM electric vehicles, Taylor-Dunn industrial vehicles and Goupil electric vehicles based in France. Management reported solid sales for Goupil vehicles and strong orders from fire and police departments, and other government agencies.
ORV and GAM Drive International Growth
Sales to international markets jumped 10% with a strong showing from the ORV/Snow segment, up 9%, and the GAM segment, up 6%. Looking at sales by region, the Europe and Middle East drove overall international sales while Latin America increased only slightly and the Asia Pacific region decreased.
Full Year Guidance Improves
Polaris increased their guidance for the ORV/Snow segment. They now expect a low double digit increase in sales.The GAM segment should increase sales by low double digits, which is unchanged from previous guidance.
Tariff impacts raised expenses by $8 million for the quarter and are expected to total $40 million for the year. The renegotiated NAFTA deal, the USMCA, is expected to have a neutral effect. However, the 301 tariffs, especially the upcoming List 3 tariffs could have more severe repercussions. Currently, the company is dealing with List 1 and List 2 tariff impacts. Polaris is at a disadvantage related to 301 List tariffs because their main competitors produce their vehicles in Mexico or assemble them in the US using Japanese parts. Therefore, these companies are not subject to the same tariffs.
Tariff Mitigation Plans
Management laid out a three pronged approach to mitigating the potential List 301 tariffs. First, they will try to negotiate with their suppliers to share some of the increased costs. Second, they may increase prices. Thirdly, they hope to lobby the current administration to obtain an exemption from the tariffs. Polaris argues that the tariffs are primarily hurting them, but they are the only US based manufacturer among the major players in the market. Furthermore, the company has been increasing their US based manufacturing. At this time, Polaris is not providing any specific quantitative guidance for tariff impacts for 2019.
Other Future Factors
For the powersports market in general, management expects that there will be a need to increase pricing to offset inflation, tariff impacts and increasing commodity and logistics costs. Furthermore, management stated, “As the industry leader, we’re not afraid to lead on price.”
The newly launched Factory Choice program, which gives the customers and dealers an opportunity to make differentiated vehicles from the factory and has been popular, gives Polaris optimism. The program should help drive sales in the future.
The dealer inventory profiles produced under the RFM program this year for side-by-sides significantly improved product availability. The increased availability bolstered sales, raising similar expectations moving forward.
Learn more: Polaris Earnings Call Transcript (Seekingalpha.com)
This was another solid quarter for Polaris. The sales increases for side-by-sides were not gangbusters at first glance, but they are being compared to a really strong third quarter in 2017. The new 2019 vehicle lineup should drive sales more fully in the fourth quarter. The GAM segment is slowly growing into a significant business and could become a $500 billion business in about two years. On a cautionary note, the tariff impacts could slow progress for Polaris, especially in contrast to fast growing and Canadian based Can-Am. Increased pricing could potentially hurt sales, although as a premium brand Polaris can pass on some pricing. The other alternative is that they will take hit to their margins and generate less income.
Textron 2018 Q3 Earnings Results
Textron, Inc recently reported fiscal year 2018 third quarter earnings. They point to a struggling Arctic Cat brand which was acquired in early 2017. The company embedded the Arctic Cat brand under their new Textron Off Road brand in their Specialized Vehicle business, which is part of their Industrial segment. Specialized Vehicles also includes E-Z-GO golf cars, Cushman utility vehicles, towing tugs among other small, task-oriented vehicles. Management reported that poor Specialized Vehicle results hurt the Industrial segment that in turn reduced overall quarterly performance for the company.
Weak Performance but Faith in the Product
The Q&A part of the earnings call pointed to problems with products formerly sold under the Arctic Cat brand. CEO Scott Donnelly remarked that “…the most fundamental challenge in the business is around particularly the dirt side, the consumer side of that business and that’s the area that where we need the most work”. Furthermore he noted that,
” Industrial, segment profit was breakeven primarily due to unfavorable operating performance in specialized vehicles. Specialized vehicles has undergone significant change over the past two years, as we have expanded the product portfolio. While we’ve seen increasing revenue in the segment, we haven’t seen the planned level of growth or do the operating levers necessary to support the expected returns.”
Nevertheless, management remained positive about future performance and confident of the products they are putting on the market. Donnelly further stated,
“We’ve got great feedback from customers, the performance side we don’t have a product problem I mean we have still gaps which again as I said we’re working on it as we go forward but I think the progress on what the product is and how the product is performing we’re very pleased with.”
The management expects better performance in the fourth quarter.
Sales Channel Issues
Additional management comments indicated other issues in the sales channel may be limiting performance. Management noted the need to manage the channel but that some dealers are doing very well. Overall the retail sell through did not meet expectations. Furthermore, management allocated more funds to product discount programs to reduce inventory. In addition, management expressed a desire to improve the sales tools that help customers get to the product.
Pricing Changes Reflect Sales Issues
The pricing changes across the Textron Off-Road vehicle lineup from 2018 to 2019 reflects the poorer than expected retail performance. Management reduced prices for nearly every model, slashing prices for the Wildcat side-by-sides the most. Wildcat price cuts ranged from $500 to $2,500 with most at least $1,000. In contrast, many other manufacturers maintained pricing or slightly increased pricing by around $200 in most cases.
Textron Earnings Call (Seekingalpha.com)
If management likes the product and some dealers are doing well, it sounds like it may possibly be a dealer issue. Either dealers are in the wrong location or they are not performing well. The management’s comments about getting customers to the product raise additional potential issues.
“I think in general how we manage that channel is something that frankly we just haven’t done as well as we should have. And our sales tools and how easy we make it for perspective customers to figure our product, have access to the dealers, have a natural way to help customers move to our product is just something we didn’t do well.”
This could cover a lot of ground from advertising to website performance to in-store marketing material to how dealership personnel interact with customers from first contact to sale.
Marc Cesare, SVR