Polaris seeks new growth areas – February 12, 2007

By Steve Bauer
Managing Editor
After weathering a year of disappointing ATV and snowmobile sales and the loss of its international partnership deal with KTM, Polaris Industries admits it must look outside its core business in order to continue growing.
To do that, the company will continue to pursue international growth without KTM, increase its share of the military market with its Polaris Defense division and pursue a yet-to-be-announced adjacent market opportunity, which could be off-road motorcycles.
“We don’t expect we’re going to see tremendous growth in the snowmobile or ATV markets,” Polaris CEO Tom Tiller said in an interview with Powersports Business. “It has been a very rough year for snowmobiles, and a lot of that has been driven by the weather. But if you look at the (snowmobile) numbers the past 10 years, the market has been in a steady decline. With ATVs, the industry has been down about 4 to 5 percent per year. So the markets are shrinking and we recognize the need to generate growth from new areas.”
Polaris’ strategy is designed to grow the company’s sales by $500 million by 2009. The initiative sets a three-year target of $2.2 billion in sales, with a $150 million of that being income, along with $4.25 earnings per share. To meet its goal, Polaris plans to maintain a 10 percent per year growth in sales and profit.

A Military Market
The company’s plans to increase its presence in the military segment with its Polaris Defense division is an adjacent market opportunity Tiller thinks will generate $50 million in revenue in three years.
“I think there’s a nice opportunity there to partner with that customer. Ever since Sept. 11 we’ve been working with the military, and that’s an exciting part of our plan. We think the military market has the potential to be an interesting market for us, giving us an opportunity to use our research and development to produce ATVs and utility vehicles specifically designed for the U.S. military.”

Big Expectations
Tiller says Polaris also expects to generate a combined revenue of $200-$400 million in three years by continuing to expand its Victory motorcycle line, and entering the utility vehicle market with the company’s new Ranger.
“We’ve put a lot of time and money into development of new products, and it takes some time for that stuff to come to fruition,” he said. “I think a couple of the new products that include our product investment were introduced this week, the Victory Vision and the Ranger Razor. If you look at the motorcycle for example, it almost has the fit and finish of a luxury car. The research and development investments that we’ve made during the past five years are starting to pay off, and the reaction has been overwhelmingly positive. It gives us encouragement to introduce class-leading products, which you’ll continue to see in the future.”
As far as continuing to develop the company’s motorcycle line into such segments as off-road, the company has hinted that the possibility has been discussed.
“There are no imminent plans (for production), but every day I think about that and I’m sure Tom Tiller and our board of directors would like to see us have a more global motorcycle business,” said Mark Blackwell, vice president of Victory with Polaris.
“Our vision is to have a big motorcycle business,” Blackwell continued. “Today we’re involved in touring and cruising, and obviously if the deal with KTM had gone through, Polaris would have covered roughly two-thirds of the motorcycle segments. That deal obviously isn’t happening, so does that mean it’s the end of our visions for motorcycles? Absolutely not. We’re not going to rush into 27 different directions overnight, but during the next few years we’re going to look at other ways we can develop things.”
Blackwell says there are three directions the company has considered going if it decides to branch out to other segments of the motorcycle industry: organic growth, an acquisition or a type of strategic alliance or partnership.

Going It Alone Overseas
One hurdle Polaris faced last year was the loss of KTM as a partner to help grow its international presence. Even with KTM’s departure, however, Tiller says Polaris will continue to pursue growth opportunities overseas on its own.
“We think there’s an opportunity to grow our company by $50 million by continuing to pursue market opportunities overseas,” Tiller said. “Losing KTM certainly hurt, but long before they came on the scene we’d grown our international business by a factor of three during the past 10 years. We were hoping that KTM could help us do even more, but we’ve demonstrated an ability to grow the company very nicely outside of North America. So we’re going to do it on our own like we’ve been doing the past 10 years. Is it going to be easy? No. Are there going to be tough competitors? Sure. But we think we have a good business and can make it better.”
One of the other anticipated facets of Polaris’ partnership with KTM was the construction of a manufacturing plant in Europe, which has now been placed on hold. But Tiller says there’s certainly a possibility of building a new overseas facility if the company meets its revenue goals.
“One of the real financial drivers for building a manufacturing facility in Europe were the duties for ATVs, many of which have been rescinded, so certainly for the immediate future we think we can support the market fine out of North American facilities,” Tiller noted. “As the scale gets bigger at some point we will need a factory. But there have been some pretty important changes in terms of the regulatory situation as well, so right now I wouldn’t expect anything from Polaris in the next 12 months in terms of announcements.”
Time will tell if Polaris’ new strategy turns out to be a profitable one, but Tiller has confidence the company is making the best decisions to ensure Polaris’ future remains bright.
“Right now it’s a challenging time in the powersports business for everyone, from the dealers to the manufacturers,” Tiller said. “We’ve had a sluggish economy, there have been 17 interest-rate increases and the snowmobile and ATV businesses are under pressure. But just like any good dealer out there is asking what can I do to make my business succeed, that’s what we’re trying to do. That’s a good thing obviously for Polaris as a company, but it’s also a good thing for our dealers, and we’re excited about the future.”