Dec. 1, 2008 – An Aggressive agenda

By Neil Pascale
Editor
MEDINA, Minn. — Broadening its international footprint. Increasing military sales. Taking an aggressive look at acquisitions.
Those are three subjects of immediate importance to Polaris Industries as well as areas of expertise for its new leader, Scott Wine. The CEO, just the third in the company’s past 27 years, addressed each of those key topics in a recent sit down with Powersports Business in his first interview with the powersports industry.
Wine foresees not only a higher percentage of the company’s revenue coming from overseas in coming years but also from a more diverse area. In the nearly hour-long interview, he also cited his belief in pursuing overseas partnerships, despite Polaris’ failed attempt with Austrian manufacturer KTM, and hints at the company becoming potentially more aggressive in acquisitions.
Wine also touched on the company’s utter lack of interest in following a Harley-Davidson path of developing a retail financing arm despite the recent upheavals in the U.S. financial sector and the company’s ongoing lawsuit with one of its finance partners, HSBC. He also discussed Polaris’ ongoing efforts to change its national dealer distribution program.
Through it all, the former aerospace and defense industry executive praised his predecessor, Tom Tiller, and expressed confidence in the company’s staff and the direction it was headed. “Polaris is not sticking our head in the sand right now,” he said, “by any stretch of the imagination.”

Looking abroad
Currently, the international market represents a growing business for Polaris, with 31 percent of its third-quarter revenue derived from overseas. Wine believes that figure will climb in the coming years to somewhere between 33-40 percent as the company seeks to open up additional markets. Currently Polaris relies heavily on Europe, which accounts for 85 percent of its international revenue.
“I think what you’ll see is we’ll have a more broad-based global business rather than dominantly European,” Wine said.
That already includes opening up a dealership in Australia — the company’s first-ever direct-to-retail operation — as well as expanding into Germany with Victory Motorcycles and looking to the Far East. Polaris is considering expanding its operations in China, which currently amounts to a single purchasing office.
“Even with the declining economy they’re dealing with, I’ve spent enough time in China to know if you bring good products in, there is a market for them,” Wine said. “I think we need to find the right opportunities.”
Long-term, Polaris also will look for opportunities in South America, especially Brazil. It’s all part of an effort to get the company to become truly global, something Wine believes goes beyond just sales and distribution.
“What I’ve talked to the team about is we’ve been very successful at designing products for the North American market and then adapting those for international markets,” he said. “True international companies typically design for the international markets there and ultimately manufacture in markets they are in. And that’s what I think you’ll see us move toward longer term.”
The actual manufacturing part of that is expected to become a cost-savings measure once the company’s annual international revenue approaches $500 million, a target Wine sees as a few years off.
“It doesn’t mean necessarily a restructuring of what we have here, but adding to what we do in Europe,” Wine said of Polaris’ manufacturing. “Whether it’s final assembly, I’m not sure how that would work. But I would see that in our future.”
Something else Wine sees as possible for the future is additional international partners. In 2005, Polaris began an arrangement with KTM Power Sports AG, purchasing nearly 25 percent of the Austrian manufacturer’s stock. But in 2007 KTM decided to pull out of the original arrangement.
“I’m of the belief that there is a lot value in having partnerships,” Wine said. “First of all, GE Motors is our partner in Italy. And they’ve been a phenomenal partner, not only on an equity basis but on a distributor basis.
“I think there is a lot to be added from having a partner that knows the local market. The key for us is going to be distribution. I don’t want to have to go into Asia or South America and establish our own distribution network. So if we can find a partner that can help with that, it would certainly be interesting to us.”

Acquisitions
Another interesting factor for Polaris, believed to be the market-share leader in side-by-side sales in the United States, is how aggressive the company will become in acquisitions, something Wine oversaw extensively in his last position. As president of Fire Safety Americas, a unit of Hartford, Conn.,-based United Technologies Corp., Wine was involved in seven acquisitions in his 16 months there.
“Tom (Tiller) and his team looked at a ton of things,” Wine said of acquisitions. “KTM was the one they got the closest to but there were a whole lot that were looked at during his tenure here.
“I suspect we will continue to look and I would be very surprised if we don’t execute on (acquisition) activity over the longer term. That’s not something we feel like we have to do right away but I feel there are opportunities for us.”
The state of the economy and its effect on related companies could accelerate that process. “It certainly doesn’t hurt,” Wine said of the economy’s role in the acquisition environment. “We’re not looking to pull the trigger on anything anytime soon but this is a favorable environment for us right now.”

Retail financing
Wine doesn’t mince words when discussing the interest, or lack thereof, Polaris has in developing a retail or wholesale financial lending arm, much like Harley-Davidson or Honda Motor Corp. possess.
“Our interest rounds to zero,” he said.
The topic has come up not only because of the volatility of the U.S. financial market but also what occurred earlier this year. Polaris sued HSBC Bank Nevada in federal court, saying the finance company threatened to drastically tighten its retail credit standards at Polaris dealerships and in so doing, jeopardized hundreds of millions of dollars in retail sales. To ensure that did not happen, Polaris agreed to forgo its financial service fees, at a cost of millions. It later sued.
Despite those circumstances, Wine said he feels confident about Polaris’ current finance lending partners.
“We have good partners with GE and HSBC despite the legal issues, which I think are close to getting behind us,” he said. “We feel very comfortable that our contracts with both HSBC and GE will carry us forward for the next three years.”
Why doesn’t the company have any interest in pursuing financial lending?
“It’s just not our area of expertise,” Wine said. “We prefer to let people that are experts at handling and managing that risk handle and manage that risk. We want to focus on building great products for our customers.”
Wine also noted the company’s unwillingness to pursue starting a lending division in the past “is somewhat bearing fruit right now.”

Distribution program
Polaris has been testing a new dealer distribution program that would significantly increase the number of opportunities for dealers to place orders on new units. Polaris started the pilot program about a year ago with about 30 of its dealers and has since expanded that to approximately 150 dealers in the Northeast and in Colorado. Wine sees the number of dealers coming into that new program expanding next year.
“You’ll see a much broader penetration throughout 2009,” he said. “As we go into 2010, I would be surprised if we’re not at more than 50 percent of our dealers. It’s probably not a system that’s going to work for every dealer. At a very low volume (of units), it may not make sense for them. We’ll have to feel that out.”
Polaris is proceeding slowly on the program to ensure its district sales managers have the necessary tools to adequately use the system. Wine notes the new distribution program is bringing tremendous change to that side of the business, even more so than what’s been occurring in manufacturing due to the company’s efforts to improve its supply chain.
“We’re having to change our internal processes on the commercial side probably as much if not more so than on the manufacturing side,” he said.
Both figure to play huge roles in how Polaris fares in Wine’s first full year at the helm.
“I don’t think we’re going to have a great 2009, but I’m not willing to cut a bunch of muscle just with the anticipation it’s going to be a disaster,” Wine said. “We will stay very close (to the market) and take whatever action is necessary to manage through this.”