Fiscal and monetary stimulus continues to provide the backbone for accelerated economic growth. In recent months, (this report was prepared July 15, 2003,) two important catalysts for economic growth have been solidified:
1) President Bush signed into law a $350 billion tax cut package and
2) The Federal Reserve lowered the fed funds rate an additional 25 basis points to 1%.
The tax cut lowers the effective tax rate in several tax brackets and also the rate at which dividends and capital gains are taxed. These provisions provide additional income for individuals and should support further increases in consumer spending.
In addition to fiscal stimulus, the reduction in interest rates continued to drive mortgage rates to 45 year lows in July.
Rates have climbed slightly in August. However, refinancing activity remains relatively strong and continues to provide consumers with additional discretionary income.
Snowmobile Trail Insurance
In January 2003, thousands of miles of snowmobile trails were closed in New York due to a discovery that the insurance policies purchased by snowmobile clubs (which protect the landowner from liability) were insufficient due to an exclusion stating that the policy did not cover snowmobile accidents.
Obviously the primary concern of any landowner is accidents that occur on their property. Therefore, trails were closed off until an agreement was reached with the state and the insurance company.
The insurance company agreed to cover accidents, however, these policies expire at the end of 2003 and at this point there is no indication that they will be accepting new policies or renewing the existing ones.
New York is not the only state (e.g., New Hampshire) having difficulties finding insurance companies willing to write policies that contain “sufficient” coverage to protect landowners from liability. In states like New Hampshire and New York, which 90%-plus of all snowmobile trails are privately owned, adequate insurance is essential for the continued existence of its snowmobile trail riding industry.
There is potential that state legislatures could step-in and exonerate any liability for landowners, however this could take some time and lobbying efforts on the part of snowmobile clubs and manufacturers.
outlook for moderate growth
Overall, our thesis relating to each of the powersport segments (ATV, Sleds, PWC) continues to be that each of the segments in the long term should grow at least in-line to double the rate of overall gross domestic product growth.
We feel that growth in consumer spending as it relates to leisure and recreation is sustainable based upon two broad secular trends:
Specifically, we expect ATV growth over the next several years to approximate high single digits to possibly low double digits in a normalized economic environment, as this segment remains the most under penetrated of the three major powersports segments (35%-40% of purchases are from first time buyers).
Additionally, ATV sales appear less volatile as they are:
Snowmobile growth will continue to be highly correlated with winter weather patterns. However, long term (adjusting for a more normalized weather pattern in the Upper Midwest and Northeast regions) we feel this segment can grow in the mid-single digit range driven by favorable demographics and a high repeat purchase pattern of users (approximately 90% of sales are repeat buyers).
The PWC market likely bottomed in 2001 and should see, at worst, stability over the next one to two years as the economic environment improves and new four-stoke engine technology overcomes some impediments of governmental regulations. Long-term we see this market growing in the low single digits.
We recently conducted a survey of approximately 30 powersport dealerships, which helps us paint a picture of the current environment in three powersport markets: allterrain vehicles (ATVs), personal watercraft (PWC), and snowmobiles (sleds). Note, since there have been no significant developments or changes in the snowmobile industry since our late January survey, our snowmobile comments are a summary of our expectations which are based upon our previous survey results as well as ongoing conversations with manufacturers and dealers.
This survey is not statistically significant, however we believe that it provides meaningful insight into current and future market sentiment. In January of 2000, we instituted a numerical rating system on several critical questions to enhance the comparability of results and enable us to extract more meaningful conclusions from our survey.
Specifically, our rating system targets the three most critical issues in each market:
Dealers were asked to rate current season sales and inventory on a scale of 1 to 10, with 10 the to order size, we asked if upcoming orders would be “up significantly,” “up slightly,” “flat,” “down slightly,” or “down significantly.” A value between 1 and 5 was assigned to each response with one indicating “down significantly” and five indicating “up significantly.” Based on quantified responses, we then calculated averages for different regions of the nation and an overall weighted national average rating for each market.
Survey participation was geographically dispersed as follows: seven from Northeast/New England (New Hampshire, New York, Ohio, Vermont), seven from Central/ Upper Midwest (Illinois, Michigan, Missouri, Minnesota), eight from Mountain/Pacific (California, Colorado, Nevada, Utah, Washington) and seven from Southeast (Alabama, Arkansas, Florida, Georgia, North Carolina).
There should be no surprises for the snowmobile market heading into the 2003/2004 season. Excessive inventory carryover from a poor 2002/2003 season (retail units sales down 8.1% globally and 14.3% in the U.S.) will restrict original equipment manufacture (OEM) production allowing dealers to clear 2002/2003 model inventory.
Lack of significant snowfall in the important markets (Michigan, Minnesota, and Wisconsin) led to another disappointing season in 2002/2003. North America exhibited the greatest decline is units sales, down 14.3% which was partially offset by 17% growth in the international market (though the international market represents only 12% of total market).
For 2003/2004, we estimate that unit sales will be flat in North America and up just over 1% internationally.
Our estimates could prove conservative if early season snowfall materializes.
However, retail upside is limited due to the manufacturers' decisions to restrict production (in some cases 20% lower year-overyear) and concentrate on longer-term issues such as:
Longer term, we feel this segment can grow in the mid-single digit range driven by favorable demographics and a high repeat purchase pattern of users (approximately 90% of sales are repeat buyers).
Year-to-date retail sales through June are down 0.4%, following a strong 10.6% gain in June, and we feel comfortable that a second half recovery in the ATV market in 2003 will materialize and that our growth assumption of 5.3% is achievable. Economic acceleration expected in the second half of 2003 will drive demand, and increased consumer confidence should coincide with economic growth.
Based on industry unit sales back to 1982, ATV retail unit sales show a relative immediate correlation to consumer confidence. Clearly the data demonstrates that changes in consumer confidence have more of an immediate and not lagging impact on retail sales. Our dealer rating for sales improved to 7.2 overall versus 6.5 in January and many dealers noted that sales accelerated in May/June versus earlier in the year.
The largest positive change occurred in the Northeast, which improved to a sales rating of 6.7 from 4.6, expected due to the poor weather experienced in the region during the first quarter. The Southeast (7.5 versus 6.0) and Mountain/Pacific (7.4 versus 7.0) regions also showed modest improved in dealer sales ratings, the only negative change occurred in the Upper Midwest (7.3 versus 8.4).
The deceleration in sales in the second half of 2002 and continuing into the first part of 2003 has caused dealers to monitor inventory levels more carefully. Therefore, despite the weak sell-through, dealers indicated that inventory levels remain manageable with a dealer rating of 7.4, down slightly from January and September 2002 rating of 7.5.
Major competitors Honda and Yamaha, while ceding a point or so of market share, and Polaris remain rational with regard to promotions and production. In general, financing incentives within the industry remain relatively constant on a yearover- year basis.
Barring further deceleration in consumer attitudes or expected order levels, we do not anticipate dealer inventories will be a major concern for 2003.
Our dealer rating for anticipated orders of 3.4, was a slight improvement from 3.3 in January and a decline from 3.7 last September. Though only halfway through 2003, this indicates an anticipated increase in ATV orders for 2004, which will drive continued moderate growth in the ATV market. Again, we are not hearing of significant demand correction, but continued tempered optimism for 2004. Therefore, we believe that 2004 retail unit growth of 6% is achievable.
Competition remains tight among manufacturers, especially among the top three: Honda, Yamaha, and Polaris, which effectively control 80% of the total market. We believe that Honda will continue to cede share to Polaris in the heavyweight segment and that Suzuki and Yamaha could potentially pick up some share based upon dealer conversations with their performance in the ATV sport segment.
Depending upon the Japanese manufacturer’s levels of incentives/promotions, we anticipate that Polaris will again be targeted for its leadership in the automatic utility market.
Looking beyond the current economic/weather concerns, we believe ATV growth over the next several years will approximate high single digits to possibly low double digits in a normalized economic environment as this segment remains the most under penetrated of the three major powersports segments (35%-40% of purchases are from first time buyers) and serve a wider variety of purposes when compared with snowmobiles and watercraft.
One reoccurring theme mentioned by several dealers is the secular shift in attitude by consumers to spend more time with the family, translating into a sustained demand for ATVs. This transformation could be a direct result of the terrorist attacks, prompting many families to substitute vacationsto purchase ATVs, in which they are able to experience the enjoyment of ATVs more often than a one-week vacation with the family.
The first half of 2003 was a very difficult environment for the powersports industry, and especially for the Personal Watercraft market. Poor weather in many northern states and uncertain economic conditions depressed the momentum that the watercraft was experiencing in the second half of 2002. Sales in some Midwest and New England states declined as much as 25%.
However, based upon expected acceleration in economic activity in the second half of 2003 and 2004 and dealer responses, we feel that growth in the 1.5% to 2.5% range for 2003 and 2004 is reasonable. Dealers surveyed reported a sales rating of 6.7, a dramatic increase from the 4.5 rating in September 2002 and the highest rating since January 2000.
Dealers noted that there was a lot of demand for the new four-stroke engine models, which are available from most manufacturers in 2003 (all will have 2004 models with four-stroke engines). The most dramatic turnaround was experienced in the Southeast region with a sales rating of 8.2 versus 3.0 in September 2002. Rainfall in the South during the winter months replenished low water levels improvingr PWC riding.
Another positive development for the industry was the recent announcement that three national parks reopened to personal watercraft in time for the boating season, Lake Mead (Arizona/Nevada), Lake Powell (Arizona/Uah), and Assateague Island National Seashore (Maryland/Virginia).
Thirteen other national parks are looking into scientific analysis of the effects of personal watercraft and could potentially re-open to PWC. Indications from dealers signal increasing comfort with existing retail inventories, which have materially improved over the past four surveys.
Our dealer inventory rating improved to 7.9 from 7.4 in January 2003 and 6.9 in September 2002. Despite lower sales, the improvement was due to manufacturers and dealers having less product available for the season. As indicated in prior surveys, we feel the “age” of the units in the field has continued to improve year-over-year. This should provide comfort for dealers to take on a modest number of additional units for 2004.
Dealers remain somewhat cautious on new orders due the precipitous decline in sales from the market peak in 1995 (233,000 units) to its trough in 2001 (121,000 units) remaining fresh in their minds. Dealers indicated that they will likely order slightly more units in 2004 with a rating of 3.1 versus 2.9 in January 2003 and 3.2 in September 2002.
The four-stroke models will account for a majority of the increase in orders, or at least offset a decline in two-stroke models. Positive developments including economic outlook, improving regulatory environment, and favorable weather conditions lead us to believe that growth in 2003 is achievable. From a market share position, we believe Bombardier will continue to lead the PWC market in 2003 (first quarter 2003 share was 51.7% versus 42.2%) with Yamaha and Honda also gaining share with Polaris losing ground due to its late entry into the four-stroke market.