NEWS – Bennett Morgan: 100 Days Later

EDITOR'S NOTE: Bennett Morgan was named president and COO of Polaris Industries in April, and since then the 18-year Polaris veteran has been getting his hands around the new job. He helped open the company's $35 million R&D Center, worked with CEO Tim Tiller and CFO Mike Malone on putting together a strategic partnership with KTM, the Austrian motorcycle company, and met with Polaris dealers at their annual meeting to discuss the KTM deal and to launch the company's 2006 product lineup of ATVs and Victory motorcycles.
It's been a busy first 100 days. Powersports Business Editor Joe Delmont sat down with Morgan on Aug. 2, 2005, to talk about his first three months and to find out what we can expect going forward. The following Q&A has been edited for brevity and clarity.

Powersports Business: So, tell us in a word how the first 100 days has gone.
Bennett Morgan: The transition has been remarkably smooth. Fundamentally, I know the business and the people and the dealers and their concerns, as well as the competitors. It's a huge advantage. What's most overwhelmed me has been amount of genuine well-wishers from inside and from dealers and the supply base. The dealer network has been more positive than I could have hoped

PSB: What did you find most surprising?
Morgan: Actually, there were few big surprises because I've been so close to it; I've been on the executive team for eight years.

PSB: What changes do you plan to make?
Morgan: We are going to be more focused on the critical few things that are important. In the past, we had tried to be many things to many people. We're passionate, we just love to get after things and we did. Going forward, we're going to be more focused.

PSB: What does that mean? Give me some examples.
Morgan: There are couple a few things we're trying to do. First, build the greatest products. Polaris is a product company, and we've chosen to compete through innovation and industry leading quality. Second, provide opportunities to help our dealer base become more profitable. If we focus on those two things, we will continue to grow.

PSB: How will you help your dealers?
Morgan: We need to build great products so that customers come back time and again. And, second, we have to provide them opportunities to make money. Before, there was a tremendous amount of our energy spent trying to do too many things. You can't do 20 things well and even if you can, dealers can't handle that. It's too confusing.

PSB: That sounds pretty simple.
Morgan: Complex visions don't work because people can't assimilate them. Simple is good. Simplify and focus, and move with intelligent speed. I want to use speed more, but it has to be intelligent and focused; change for change sake is gone.

PSB: How will you handle the slumping snow market?
Morgan: Going forward, we have to balance rewards for shareholders and dealers. We have to right size the business model, but we're very capable of doing that. We've slowed down our snowmobile production levels. We'll work through this cyclical downturn; it's weather-related. We have to earn back the business of our consumers, but they will come back. Snowmobiles is a good business and we will stay in it in a big way. Snow is the heart and soul of this company.

PSB: North American snowmobile sales for 2004/2005 were off about 7%. That makes it nearly nine years of weak sales. How do you deal with that?
Morgan: First, we've gone through repeat cycles where people bank on snow and there hasn't been snow. You can't be faint of heart in this snow business. Inventories have built because customers have been waiting because of a lack of snow; some even have taken a hiatus from the sport. Inventories have grown and dealer and OEM profitability has dropped. There are fundamental reasons why we didn't meet our projections. The snowmobile industry has been through tougher times before; the challenge for OEMs is to balance risks and return for shareholders and dealers while building great products. We can do that.

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PSB: Let's talk about the KTM deal. How fast did it go down?
Morgan: It's actually a byproduct of splitting the (management) role because it allowed Tom (Tiller) and Mike (Malone) to work on developing the strategic partnership. We've been talking to the KTM guys for a number of years and there's a mutual respect. It's surprising how many similarities there are between the two companies. Talks started in earnest only about three of four months ago. Something like this couldn't have come about in three or four months if there wasn't an understanding of the two companies and of their cultures and values.

PSB: Describe their similarities.
Morgan: There are cultural similarities; we're both passionate about products. Both are 50 years old. KTM has an impeccable record - it's a financial and market success - and it's very true to its dealer network and true to what it's trying to accomplish. We both compete against the same competitors, the Japanese companies, and we've both been doing that for some time successfully.

PSB: Why else does the move make sense?
Morgan: We don't compete and we're very much complimentary businesses. It's a win for both companies and for the dealers and the suppliers. It won't increase competition among dealers; we're strong in ATV and they're strong in off-road and power plants. We can help each other and not get hurt.

PSB: How will the relationship work?
Morgan: Polaris has invested as a 25% shareholder of KTM. Both companies will operate independently, but there will be projects that we will work on together. These will be in distribution, production and product development.

PSB: Will dealers sell each other's products?
Morgan: No. The only way that a Polaris dealer can sell a KTM product is if the dealer becomes an authorized KTM dealer. Then he can sell both. But a Polaris dealer won't be able to call us and order KTM products from us directly. There are about 150 dealers worldwide that sell both lines, 100 in the United States and the majority of the remainder in Europe. It's still too early to determine what will happen to both groups of dealers.

PSB: What about manufacturing?
Morgan: Both have world-class labor forces, but it's still so early we can't really talk about these things. In the simplest phase, they could assemble ATVs for us in Austria. Some of our parts come from European suppliers, so it makes some sense for us.
PSB: Does Polaris have extra capacity here?
Morgan: There is additional capacity at Spirit Lake, Roseau and Osceola. Some of the capacity we gained when we stopped producing PWC has been taken up by Victory and ATVs.

PSB: Would you use KTM powertrains in Polaris machines?
Morgan: Again, it's too early to tell, but we do compete against multibillion-dollar global engine companies, and gradually we would like to build more of our own engines. KTM produces lightweight, high performance powertrains with four-stroke engines. The areas of our business where you would see the most potential synergies early would be in the ATV business and the motorcycle business.

PSB: How many of your power plants do you produce today?
Morgan: Approximately 40%. We want to focus on things we do very well, and we would never build 100% but we want to increase our capability.

PSB: Would you consider dropping a KTM powertrain into the Predator.
Morgan: Yes, there could be a possible application with the Predator.

PSB: You just opened a $35 million R&D facility in Minnesota. How closely will you be working with KTM on R&D?
Morgan: A lot of people are trying to take this further than it is. We're two independent companies that will cooperate on a number of important projects. We both have to be interested, in order to take it further in two years. For the short term, we'll just be working on projects.

PSB: Is the deal completed now or are there government approvals pending?
Morgan: There are some government approvals. But we expect those approvals to come this month.

PSB: You recently held a meeting with your dealers and KTM operated a display booth. How did your dealers respond?
Morgan: More positive than we expected and we expected it to be positive. They see the strength of each brand. Several Polaris dealers likely will become authorized KTM dealers and vise versa. Obviously there's an opportunity for KTM to increase its market share in North America.

PSB: Did you announce any new promotions at the meeting?
Morgan: We launched the 2005 Factory Authorized Clearance, beginning at the dealer meeting July 21. We did it last year, and it was very successful. It's designed to provide a profitable transition plan to clear out end of model year inventory; it's really an inventory management tool. There was plenty of excitement around that announcement.

PSB: What did dealers like most about your 2006 lineup?
Morgan: The dealer reaction was the strongest to the Sportsman X2 that is powered by a 499cc engine and can be converted for two-up riding. The 300cc is about 7/8 the size of a Sportsman. We've taken independent rear suspension (IRS) down to a price point where it's never been. (See a complete report on the 2006 ATV lineup in the July 25, 2005, issue of Powersports Business magazine.)

PSB: Polaris recently joined the Specialty Vehicle Institute of America (SVIA). Polaris had been the only major OEM not participating. Why the change?
Morgan: It's been a long time coming, and we're delighted to be part of it. Safety is a preeminent concern at Polaris, and it's helpful for all major OEMs to be aligned on the same side of the fence. The industry issues we face today are greater, and it became more and more obvious as the largest American manufacturer of ATVs that it was absolutely the right thing to do so we could have collective industry voice. We felt we could help our customers and dealers way more if we could be together with the SVIA.

PSB: Why didn't Polaris join previously?
Morgan: We felt very, very strong about our training program, and it was still hard for us to let that go. But our dealers felt that was a tremendous burden on them. The SVIA does a tremendous job of training and it's cost effective.

PSB: How do you see the powersports industry from your new position?
Morgan: We see the competitive environment getting gradually tougher over the next couple of years. But the market is still growing and there is still volume to be had. We see growth in North America; it will be modest but there are still opportunities for Polaris to grow.

PSB: How can Polaris grow in this
environment?
Morgan: If we focus on building great products and providing opportunities for our dealers to profit, we will continue to grow. And we can do it by getting into new segments. The Hawkeye with its 300cc auto (4x4 and 2x4) is a segment we've never been in before. We do it through great products and innovation that's how we compete; doing it the same old way, you aren't going to win.

PSB: Can Polaris compete with giant international OEMs in a slow growth environment?
Morgan: There are plenty of opportunities to grow. We'll grow by new appeals to customers and by entering new segments. The Victory train is rolling; that business looks fantastic, and I couldn't be prouder of that team. The Ranger business is fantastic and PG&A business is great.

- Joe Delmont

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