By Matt Gruhn and Dave McMahon, publisher and senior editor
As we spoke in his office the day his company announced record first-quarter earnings, it was easy to forget that the economy at large is still recovering from the recession, not to mention the fact that the powersports market has merely stabilized but remains relatively weak.
Yet Polaris didn’t just boast record earnings that morning. It more than doubled its previous record earnings for the quarter set a year ago.
The day before the earnings release, Wine also announced that Polaris had acquired the iconic Indian Motorcycle brand to bolster its already impressive lineup of powersports offerings. And, due to “stronger than projected growth,” the company also saved 50 jobs at its Osceola, Wis., plant. Polaris was planning to close that facility in favor of moving some manufacturing to Monterey, Mexico.
Two months prior to these announcements, Wine had the pleasure of announcing that Polaris will share a record $13.6 million with its employees.
Just one month prior to that, Polaris announced a record net income for its 2010 year-end operations at $147 million. And on the way — despite operating in an industry that saw roughly half of the new unit sales as it had experienced just two years prior — Polaris’ sales revenue hit a record high of $1.9 billion, eclipsing the 2008 mark by some $43 million.
So it should be fair to ask: What’s next?
“It’s being the best in powersports,” explained Wine, “plus growth of adjacencies, global market leadership, operations competitive advantage and financial performance. It’s that simple.”
The complexity of that statement — and the well-thought-out strategy behind it — is far from simplistic until you spend an hour or so talking it through with Wine. And what you find is that it is, in fact, his very ability to simplify such a detailed global strategy and to motivate his team around it that makes him such an outstanding leader.
It’s also a big part of the reason that Powersports Business has named him its 2011 Executive of the Year.
The maniacal metrics man
If there’s a backbone to the success of Polaris of late, it’s found in the company’s “maniacal” approach to monitoring its key metrics. As a student of leadership, it’s not surprising to hear Wine comment that “you get what you measure.” What is surprising, however, is that the day prior to and the day of the Q1 earnings conference call, because of a computer glitch Wine was without access to his most-preferred metric: retail sales activity.
On a normal day, he has access to an hourly, even minute-by-minute, report on the company’s retail sales for North America. He uses the information to keep in touch with his sales force and identify problems and reward successes as soon as possible. It also gives him the ability to downplay economic concerns on the earnings conference call.
“If I read the newspaper, I’d be worried,” he told an analyst who asked about concerns over gas prices and other economic factors. “But I look at my retail, and I feel pretty good about it.”
The real-time access to such data hasn’t always been a focus for Polaris. In fact, the importance of retail metrics really got started by Bennett Morgan, Polaris president and COO, back in 2006. At that point, the company shifted from measuring wholesale as its benchmark for success to a “maniacal focus on what we’re retailing.
“We lost our way on the balance between the retail and wholesale,” said Wine, who joined Polaris in September 2008, “and we paid a huge price for it. I had the luxury of not being here for that, but I often say that I think it may be the best thing that ever happened to this company.”
Polaris dealers have seen a great benefit from the manufacturer’s evolution since then. From a subjective viewpoint, Polaris saw itself as worst in the industry in relations with dealers around 2005 and 2006, largely, they believe, because of dealer inventory issues. In that period, demand for ATVs had fallen off, and Polaris hadn’t scaled its shipments back fast enough, causing dealer inventories to climb. And eventually, Polaris’ stock took a hit.
Morgan, who was named Powersports Business’ Executive of the Year in 2009, became the champion of the reinvention of Polaris beginning in 2006, refocusing the company on the retail metrics and creating a new method of doing business along the way. It required changes in manufacturing and supply-chain processes. And it took a different mindset, in addition to the monitoring of a new set of metrics, to operate its business.
It’s been a huge shift for the company. “A cultural shift,” Wine said. And, he adds, it’s been the driver of the tremendous long-term financial results the company has posted.
“But more importantly,” he said, “it’s just the way you’d love to run a company, where every stakeholder has benefited from that, including the dealers.”
As the “new guy” in 2008, Wine explains, he believed there were a few dealers who thought, “this guy’s going to come in here and screw this up.” Instead, he received what he says were regular warnings that he could never let those problems happen again.
Then the recession hit, and as sales tumbled, many people watched Polaris closely to see if it would have the ability or willingness to continue to hold back shipments when that was going to create a negative impact on the corporation. And the strategy proved its mettle, as Polaris took dealer inventory down by 25 percent in 2009.
With nearly five years behind it with this strategy, Wine says the company is just now getting to the point where it doesn’t want to take more inventory out of the channel. As evidence of that, in the first quarter of 2011, Polaris’ field inventories dropped again, by more than 7 percent, and Wine suggests Polaris is about where the company wants to be in regard to dealer inventory levels.
“We call it equilibrium,” he said. “We are very close to where we want to be, in aggregate. There are specific models that we still have to pick some out of inventory, and some models we need to put some in, but in aggregate, we’re about where we need to be.”
More metrics that matter
Financially, Polaris is most certainly where it needs to be.
The company’s record revenues and profitability stunned even the analysts who watch Polaris the closest.
“Expectations were high,” wrote RBC Capital Markets analyst Edward Aaron in his report following the quarterly earnings release, “but no one was expecting a beat anywhere near this magnitude.” Indeed, even Wine said it “surpassed even our highest expectations.”
The “how” behind such success begins, of course, with that focus on metrics. The company hasn’t always been so profit-focused, though. Sure, profitability has always been important, but the focus on its net income margins hasn’t always been of significant importance. In fact, the company didn’t even measure net income margins not so long ago.
“Now we measure it,” Wine said, “and we’re knocking it out of the park.”
In the first quarter of 2011 Polaris’ gross margins climbed 210 basis points, and its net income percentage was 8.8. Its record total net income for the quarter was $47.3 million, compared to $19.8 million in the first quarter of 2010, the previous record set at the height of the recession’s impact.
“We came through the recession, and we added an element of profitability focus to what had always been a strong focus on growth and innovation,” Wine explained. “What you’re seeing now is the manifestation of that. We took cost out of the product. We took cost out of the supply chain. We took cost out of the overall corporate structure. Yet we stayed very focused on innovation. That gives you a valued product in the market and a more lean business model. And as growth comes, that’s what drives the very large growth and profitability.”
Its aggressiveness, even when the market and the economy at large were struggling, was a key factor in the position Polaris sees itself in today. And as Wine explains it, Polaris also had some help from its Japanese competition, as well. With the dynamics and strength of the yen, in addition to the strength of their motorcycle businesses in non-North American parts of the world, the Japanese manufacturers “were doing really well.”
“If you’re sitting in a board room in Japan in the beginning of 2009 and you have to make a capital allocation about whether to develop a new bike for Indonesia or India or China or a new ATV for North America, what would you do?” he asked, suggesting the OEMs chose the former of the options. “They made really, really good decisions. But we didn’t have that luxury. We couldn’t get there. So we said, ‘We’re going to drive new products for this market,’ and we made significant investments when other people didn’t.”
The investments worked.
Consider, as the No. 1 share leader in the off-road vehicle segment, Wine says the company gained additional share in both side-by-sides and ATVs in the first quarter of 2011, increasing its overall sales by 55 percent. He also suggests that the company’s snowmobile division was the largest-share-gaining OEM for the 2010-’11 season, and its retail sales in the sector were up more than 30 percent, while dealer inventories dropped to their lowest levels since 1995, down some 40-plus percent compared to last year.
While its North American Victory sales were down slightly, worldwide sales totals increased modestly. Its on-road division as an overall unit was up 77 percent for the first quarter. And its PG&A division grew by 19 percent from the year-ago quarter.
“What’s been rewarding for me is that we saw potential, and we’re executing on it,” Wine said. “We put muscle behind things, and it’s nice to see them deliver. And a lot of times, you see companies ‘squeeze the lemon’ too much. They’re getting all the juice out, and there’s nothing left. We’re putting major investments into R&D, so we can continue to drive innovation and growth. We haven’t done these things at the future expense of the company.”
Expectations remain high
The future of the company, in fact, seems to strengthen with every quarter of positive earnings. The multi-pronged strategy Polaris follows calls for it to be the “best in powersports.” And that success fuels everything else.
The Indian Motorcycle acquisition seems destined to be the first in a string of acquisitions that will help Polaris continue to strengthen itself. Wine told analysts, “Just because the Indian acquisition was the first one announced doesn’t mean it’s the only one.
“We’ve got plenty of room on the balance sheet to do whatever our appetite allows us to do,” he continued. “We’re looking to get into markets that are likely to grow faster. Through actions, rather than words, we’ll demonstrate where we’re going.”
Where Polaris is going is really a global answer. And that’s exactly why Wine was brought in to lead this team.
With a strong leadership team in place and an incredible group of employees that Wine referred to throughout our conversation (“You shouldn’t be talking to me. You should be talking to the guys who make this happen. I cannot say enough about this being really an award that recognizes the broad leadership team here at Polaris.”), Wine’s international experience matched well with Polaris’ desire to expand its global presence. And today, with 15 percent of the company’s sales coming from outside of North America he suggests that Polaris is at the very low end of the sales potential and expectations there.
“That number needs to at least double,” he says. “The problem is we’re growing in North America so fast that it’s really hard to do.
“So the global market leadership perspective is really important to me. I think we need to give ourselves access to parts of the world that are going to grow faster than we’re going to grow in North America and Western Europe. You’ll see us make a lot of investments there.”
One such investment was made in 2010 when Wine made the decision to begin manufacturing operations in Monterey, Mexico. While it was a controversial decision and production had just begun at the time of our visit, Wine knows that “to be a global company, to be a leader in North America, and to think that logistically or operationally that it makes sense to have all your production capabilities in three Midwestern states, you can’t get your head around that.”
In the end, Polaris expects to get $30 million annually out of the move to Mexico. And while Wine & Co. has proven its ability to outperform analyst expectations, the analysts suggest that the additional profit Polaris will realize could be more than that $30 million.
“We feel very confident that we’re going to deliver high quality products to our customers and ultimately value to our shareholders,” he explained. “But we’re not going to spike the ball before we get past the 50-yard line.”
The extraordinary results, coupled with such a conservative approach, is what continues to fuel growing expectations of the company. Many times throughout Wine’s tenure as CEO, the company has out-performed its projections, beating even Wall Street guidance by surprising margins.
“What happens is everybody wants us to predict and project that everything is going to be perfect going forward,” Wine said. “We take what I’ll call a pragmatic concern and take what’s happened in the competitive environment. We didn’t have as much promo costs as we thought we were going to have in the first quarter, so we projected that the first quarter was better than last year, and we’re predicting the rest of the year’s not going to be.
“They think, ‘Oh my gosh, how could you guys say that?’ Well, we’re happy that the first quarter was better, but we’re not going to put a plan together that says it’s going to stay that way. It’s partially just the pragmatic approach we take to the business.”
So we’re back to the original question: What’s next? Well, Wine is confident in his strategy. The complexity of it, stated earlier, is simplified when he says, “We’re going to win in powersports by being the best in powersports.” And he adds to it, suggesting that he’ll continue to fund investments in other areas, in adjacent markets, to give the company diversity beyond the cyclical nature of the powersports sector.
That diversity will come via its relationship with Bobcat, the military, electric vehicles and acquisitions, some of which Wine expects to become evident in the coming months.
“You’re only as good as your last meal,” said Wine, who used to work in the restaurant business. “I think I’m most proud of the fact that we delivered exceptionally good results. But the fundamentals behind those are saying that we can continue to drive value for our shareholders and our stakeholders.
“I told the team that there would be zero tolerance for over-confidence or arrogance. We aren’t celebrating. It really is an organization that’s, ‘OK, what else can we do? How can we make this even better?’ Polaris is still on the gas.” psb