Second Quarter 2018 Earnings Results

Transcription

1 POLARIS INDUSTRIES INC. Second Quarter 2018 Earnings Results July 25, 2018

2 SAFE HARBOR & NON-GAAP MEASURES Except for historical information contained herein, the matters set forth in this presentation, including management s expectations regarding 2018 future sales, shipments, net income, and net income per share, operational initiatives and impact of tax reform, and tariffs and commodity costs are forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially from those forward-looking statements. Potential risks and uncertainties include such factors as the Company s ability to successfully implement its manufacturing operations expansion initiatives; product offerings; promotional activities and pricing strategies by competitors; economic conditions that impact consumer spending; acquisition integration costs; product recalls, warranty expenses; impact of changes in Polaris stock price on incentive compensation plan costs; foreign currency exchange rate fluctuations; environmental and product safety regulatory activity; effects of weather; commodity costs; freight and tariff costs; changes to international trade agreements; uninsured product liability claims; uncertainty in the retail and wholesale credit markets; performance of affiliate partners; changes in tax policy and overall economic conditions, including inflation, consumer confidence and spending and relationships with dealers and suppliers. Investors are also directed to consider other risks and uncertainties discussed in documents filed by the Company with the Securities and Exchange Commission. The Company does not undertake any duty to any person to provide updates to its forward-looking statements. This presentation contains certain non-gaap financial measures, consisting of Adjusted sales, gross profit, income before taxes, net income and net income per diluted share as measures of our operating performance. Management believes these measures may be useful in performing meaningful comparisons of past and present operating results, to understand the performance of its ongoing operations and how management views the business. Reconciliations of Adjusted non-gaap measures to reported GAAP measures are included in the Appendix of this presentation. These measures, however, should not be construed as an alternative to any other measure of performance determined in accordance with GAAP. Q2'18 Earnings 2

3 POLARIS INDUSTRIES INC. Second Quarter 2018 Earnings Results Scott W. Wine, Chairman & CEO July 25, 2018

4 SECOND QUARTER 2018 SUMMARY Financial results continued positive momentum N.A. retail sales up 6%; ORV up mid-single digits %; Side-by-sides up mid-single digits % Indian motorcycles up mid-single digits % New product demand strong; RANGER XP 1000, RZR Turbo S, RZR RS1, Indian Chieftain Elite Announced Boat Holding acquisition; solid addition to portfolio Tariff and commodity pressures intensified significantly; offsetting for now Q2'18 Earnings Positive Momentum Going into 2 nd Half of Year 4

5 NORTH AMERICAN POWERSPORTS RETAIL SALES Polaris Retail Sales Year-Over-Year Retail % Change (units) +6% Motorcycles ORV Q2 18 Retail Sales by Business (vs. Q2 17) POLARIS INDUSTRY Off-Road Vehicles mid-single digits % flat (estimated) Side-by-Sides mid-single digits % -3% Snowmobiles ATVs mid-single digits % Q Q Polaris N.A. retail up 6% for Q2 18 ORV strong; new products, improved Oil/Gas/Ag regions Indian retail up mid-single digits; strong Scout/Scout Bobber sales Polaris promotional expense per unit down year-over-year in Q2 North American Industry retail down low-single digits % ORV flat; motorcycles down Motorcycles low-single digits % mid-single digits % (900cc & above) Indian Slingshot Snowmobiles (season-end Mar 18) mid-single digits % mid-single digits % (off-season) (off-season) Retails Sales Accelerated in Q2 Improved Execution / New Product Availability Q2'18 Earnings 5

6 NORTH AMERICAN DEALER INVENTORY Polaris N.A. Total Dealer Inventory Q2 Total N.A. Dealer Inventory Year-over-year % Change in Units Rolling 4 Qtrs Ending Q2'17 Rolling 4 Qtrs Ending Q2'18 +10% 0% +6% +5% -1% +10% +6% excl. snow Q3 Q4 Q1 Q2 Q Existing ORV Models New ORV Models Snowmobiles Motorcycles Q Polaris Q N.A. dealer inventory up 10% vs. Q2 2017; up 6% excluding Snow (off-season) ORV up due to improved new product availability Indian Motorcycles & Slingshot down; moderating shipments in weak market Side-by-side RFM improving delivering cadence Dealer Inventory Adequate in Total, Excluding Snow; Product Mix Improving Q2'18 Earnings 6

7 BOAT HOLDINGS ACQUISITION #1 seller of Pontoon Boats in U.S. ~26% market share in 2017 Acquisition closed July 2, 2018 Supports Polaris long-term growth and profitable goals Will operate as a distinct business Integration team in place #3 Pontoon Brand #1 Deck Boat Brand Sterndrive/ outboard boats 30% M FY 17 Sales 70% #1 Pontoon Brand Jake Vogel CEO Boat Holdings 2 nd generation leader 10+ years of boat experience Broadens Polaris Powersports Portfolio of High Quality, Enjoyable Outdoor Products Q2'18 Earnings 7

8 MULTI-BRAND DISTRIBUTION CENTER Fernley, Nevada Aftermarket and Polaris PG&A Open Q ~500,000 sq. ft. distribution center Will service entire west coast in 1-2 days Fernley, NV Multi-Brand Distribution Center Fernley, NV Will Significantly Improve Polaris PG&A / Aftermarket Delivery Times to Customer Q2'18 Earnings 8

9 TARIFFS IMPACT 232 Steel / Aluminum Raw steel & aluminum Polaris procured CHINA Youth vehicles, steel, aluminum, components Steel, aluminum MEXICO Steel, aluminum CANADA ~$40M* FY 18 Impact Canada Retaliatory Tariff, Boats Steel, aluminum EU Retaliatory Tariff, Motorcycles EUROPEAN UNION Steel, aluminum REST OF WORLD Components supplier procured Suppler price increases market driven 301 List 1 Youth vehicles China produced Components Polaris and supplier procured Supplier price increases market driven Retaliatory Tariffs Motorcycles / Boats Undefined Potential Future Risks (not in guidance) 301 lists 2 & automobile/auto parts; may impact RZR/RANGER/TAP NAFTA re-negotiations Other retaliatory actions from effected countries *Estimated based on items included and the effective dates of the changes as we understand them today. Assumes no mitigating pricing or sourcing actions and is subject to change as events continue to develop. Trade Wars Generating Significant Cost Pressures & Uncertainty in Marketplace Q2'18 Earnings 9

10 POLARIS INDUSTRIES INC. Second Quarter 2018 Earnings Results Mike Speetzen, EVP Finance & CFO July 25, 2018

11 Q FINANCIAL RESULTS $ in millions, except EPS SALES NET INCOME EPS GAAP ($/% Change) $1,503 10% $93 49% $ % ADJUSTED* ($/% Change) 11% $1,359 $1,505 $78 47% $115 $ % $1.77 Q Q Q Q Q Q Strong ORV, Adjacent Markets including PG&A & International sales growth Average selling price is up 2% (excluding Victory) Lower tax rate driven by U.S. tax reform and excess tax benefit from stock options exercised *See GAAP/Non-GAAP Reconciliation in Appendix Solid Q2 Results Demonstrate Improved Execution Q2'18 Earnings 11

12 OFF-ROAD VEHICLES (ORV) / SNOWMOBILES Q ORV/Snow Segment Sales* ($ millions) $846 17% $991 $846 17% $993 Off-Road Vehicles 19% Snowmobiles 21% PG&A 13% MILLION Q GAAP* Q GAAP* Q Adjusted* Q Adjusted* New product demand strong; availability improved Promotional spending per unit down year-over-year Average selling price for ORV up 3% *Adjusted Results: See GAAP/Non-GAAP Reconciliation in Appendix Solid Growth Driven by New Product Introductions Q2'18 Earnings 12

13 MOTORCYCLES ($ millions) Q Motorcycles Segment Sales* $198 13% $171 $192 10% $172 Indian Slingshot 13% PG&A 8% MILLION Q GAAP* Q GAAP* Q Adjusted* Q Adjusted* Mid-size (Scout / Scout 60 / Scout Bobber) sales remain strong Heavyweight sales down weak industry Indian gained market share in a down market Average selling price down 6% (excl. Victory), mid-size mix shift *Adjusted Results: See GAAP/Non-GAAP Reconciliation in Appendix Indian FTR1200 Custom Concept Indian Motorcycle Market Share Gains Continued Q2'18 Earnings 13

14 GLOBAL ADJACENT MARKETS (GAM) ($ millions) Q GAM Segment Sales $97 17% $113 Commercial, Gov t/defense, & Aixam 18% PG&A 11% MILLION Q Q Growth driven by Goupil and Government/Defense business PICNIC demand solid for Goupil vehicles Strong orders for Police/Fire and Defense vehicles Polaris Adventures on plan and gaining momentum ~50 outfitters signed to-date Goupil and Government/Defense Driving Growth in Adjacent Markets Q2'18 Earnings 14

15 AFTERMARKET ($ millions) Q Aftermarket Segment Sales Transamercian Auto Parts $224 1% $227 TAP 1% Other Aftermarket 8% MILLION Q Q TAP 4-Wheel Parts retail store sales improved TAP Proprietary brand sales down due to late Jeep Wrangler shipments and delayed product development new products released in June Countermeasuring to improve results in 2 nd half Other Aftermarket brands up, increase driven by Klim/Kolpin Expect 2H Improvement from Improved Execution / Pricing Actions Q2'18 Earnings 15

16 INTERNATIONAL Q International Sales* ($ millions) $191 GAM 7% (cc +3%) $204 GAM ORV / Snow 3% Motorcycles 9% $134 EMEA +11% (cc +4%) $148 Motorcycles ORV / Snow Motorcycles ORV / Snow Q Q MILLION Global Adjacent Markets 12% Q Q EMEA growth continued strong, particularly France/Scandinavian region ORV and motorcycles drivers of growth EU trade war significant risk, working alternatives Latin America $20-1% (cc +3%) $20 Asia Pacific (includes Australia/New Zealand) $37-3% (cc -4%) $36 *Included in respective reporting segments cc = constant currency Q Q Q Q International Q2 Results Strong; Tariffs Concerning Q2'18 Earnings 16

17 PG&A ($ millions) Q Core Parts, Garments & Accessories (PG&A) Sales* 11% $215 $193 ORV / Snow 13% Sales by Segment Motorcycles 2% MILLION Adjacent Markets 11% Q GAAP Q GAAP Strong accessory growth - all businesses Fill rate > 95%; stock-outs improving New west coast distribution center opening in 19 Will shorten delivery time further Implemented price increase and freight surcharge Somewhat offset tariff cost pressures Accessories 18% Sales by Category MILLION Apparel 54% Parts 3% *Included in respective reporting segments Solid Q2 Performance; Countermeasuring to Offset Tariff in 2H 2018 Q2'18 Earnings 17

18 FULL YEAR 2018 GUIDANCE (in millions, except EPS) SALES GROSS PROFIT MARGINS (% of Sales) OPERATING EXPENSE ($ / % of Sales) TAX RATE Adjusted EPS** 2017 Actuals Adjusted* Intangible Amortization $5, % - $1, % (26) (0.5%) 30.5% - Revised 2017 Actuals $5, % $ % 30.5% $5.10 $4.85 $ Guidance** 11% to 12% 60 to 80 bps 130 to 140 bps (% of Sales) ~22% $6.48 to $ % to 29% Guidance Change Increased Lowered Improved Lowered Narrowed/Revised Boats +$260 to $270M Pricing actions Improved demand Tariffs/commodity/Boats Logistics Intangible amortization Boats op expense lower Leverage Stock-based comp tax benefits Intangible amort. $0.28 per share Boats $0.10 per share Additional Expectations Financial Services up low-single digits % (unchanged) Interest expense up due to debt levels / rising interest rates (increased) Share count up ~2%, dilutive impacts (unchanged) Foreign Exchange slightly favorable at current spot rates lowered (unchanged) *See GAAP/Non-GAAP Reconciliation in Appendix **See Appendix for discussion regarding non-gaap adjustments excluded from 2018 guidance Full Year 2018 EPS Guidance Narrowed / Adjusted for Acquired Intangible Amortization Q2'18 Earnings 18

19 2018 FULL YEAR GUIDANCE BY SEGMENT ORV/Snowmobiles Motorcycles Global Adjacent Markets Aftermarket Boats ($ billions) ($ millions) ($ millions) ($ millions) ($ millions) high-single digits % Increased New Segment (effective 7/2/18) $3.6B PG&A PG&A Snow Snow $574 PG&A low-single digits % Lowered PG&A $397 PG&A low-double digits % Increased PG&A $885 mid-single digits % Unchanged $260 to $270 ORV ORV Indian Slingshot Indian Slingshot Commercial Gov t/ Defense Commercial Gov t/ Defense Aixam Aixam FY 2017 FY 2018 Guidance FY 2017 Adjusted* FY 2018 Guidance FY 2017 FY 2018 Guidance FY Guidance 2018 Guidance *See GAAP/Non-GAAP Reconciliation in Appendix ORV & GAM Improvement Continues, Plus Addition of Boats Q2'18 Earnings 19

20 GROSS PROFIT MARGIN GUIDANCE Gross Profit Margin Q % 25.6% 26.8% 25.9% Adjusted* Gross Profit Margin FY 2018 Guidance Down 60 to 80 bps Decreased Q GAAP Q GAAP Q Adjusted** Q Adjusted** FY 2018 Guidance VIP Warranty F/X Promos/Price Tariffs/Commodities Logistics Product Mix VIP Warranty F/X Promos/Price Boats Tariffs/Commodities Logistics Product Mix Q GAAP Q GAAP Q2 ACTUAL Q Adjusted* Q Adjusted* FY 2017 GAAP FY 2017 Adjusted* 2018 GUIDANCE 2018 Expectations YoY Directional Change from Prior Guidance ORV/Snow 31.5% 30.0% 31.5% 30.1% 29.5% 29.6% Lowered Motorcycles 10.7% 14.4% 15.6% 14.5% 2.9% 13.0% Unchanged Adjacent Markets 21.9% 24.8% 26.3% 24.8% 23.9% 26.7% Lowered Aftermarket 26.7% 25.5% 26.7% 25.5% 25.5% 26.9% Unchanged Boats High-teens % New Segment *See GAAP/Non-GAAP Reconciliation in Appendix **See Appendix for discussion regarding non-gaap adjustments excluded from 2018 guidance Gross Profit Margin by Segment KEY: Improvement Headwind Neutral 2018 Gross Margin Reduction Driven by Increased Tariff / Commodity Costs Q2'18 Earnings 20

21 Q FINANCIAL POSITION & 2018 EXPECTATIONS Cash Drivers ($ millions) ($ millions) $138 +$165 -$76 -$105 +$201 -$192 +$51 $182 Capital Summary June 2018 Variance to June 2017 Cash $ % Debt /Capital Lease Obligations $1,113 +4% Shareholders Equity $ % Total Capital $1,991 +4% Cash YE 2017 Operating Activities Dividends Capex Net Debt Share Repurchase Other Cash Q Debt to Total Capital 56% Flat ($ millions) $263 Operating Cash Flow -37% $165 YTD 2017 YTD 2018 $580 Down High-single digits % (Improved) FY 2017 FY 2018 Expectations Q Summary Operating cash flow down as expected, but slightly improved Factory inventory up, model year change over FY 2018 Expectations Cash Flow expectations improved: Cap Ex higher than 2017; distribution/tooling Op cash flow lower; timing of accrual payments & higher w/c needs Q2'18 Earnings Continued Strong Financial Position Net Debt Improving 21

22 POLARIS INDUSTRIES INC. Second Quarter 2018 Earnings Results Scott W. Wine, Chairman & CEO July 25, 2018

23 CLOSING COMMENTS First half financial results strong with improving execution U.S. economy and off-road vehicle market, particularly side-by-sides, remains robust Global trade war bringing uncertainty and significantly higher cost pressures Supply chain initiative on pace; logistical phase accelerated given cost pressures International business growth continuing New Boat asset brings another financially solid leg to the Polaris Powersports portfolio Q2'18 Earnings Polaris Underlying Business Performance Improved; Global Trade War Concerning 23

24 POLARIS INDUSTRIES INC. Second Quarter 2018 Earnings Results Thank You QUESTIONS?

25 APPENDIX NON-GAAP RECONCILIATIONS NON-GAAP RECONCILIATIONS - SEGMENTS 2018 GUIDANCE ADJUSTMENTS Q2'18 Earnings 25

26 NON-GAAP RECONCILIATIONS Reconciliation of GAAP "Reported" Results to Non-GAAP "Adjusted" Results (In Thousands, Except Per Share Data; Unaudited) Key Definitions: Throughout this presentation, the word Adjusted is used to refer to GAAP results excluding: TAP inventory step-up purchase accounting / integration expenses, corporate restructuring, network realignment and supply chain transformation costs, EPPL impairment, gain on Brammo investment, and impacts associated with the Victory Motorcycles wind down. Adjustments: (1) Represents adjustments for the wind down of Victory Motorcycles, including wholegoods, accessories and apparel (2) Represents adjustments for integration and acquisition-related expenses and purchase accounting adjustments (3) Represents adjustments for corporate restructuring, network realignment costs, and supply chain transformation (4) Represents adjustments for the impacts of tax reform and non-recurring litigation expenses (5) Represents adjustments for the impairment of the Company's equity investment in Eicher- Polaris Private Limited (EPPL) (6) Represents a gain on the Company's investment in Brammo, Inc. (7) Represents amortization expense for acquisition-related intangible assets (8) The Company used its estimated statutory tax rate of 23.8% and 37.1% for the non-gaap adjustments in 2018 and 2017, respectively, except for the non-deductible items and the tax reform related changes noted in Item 4 Q2'18 Earnings 26

27 NON-GAAP RECONCILIATIONS - SEGMENTS Non-GAAP Reconciliation of Segment Results (In Thousands, Unaudited) Three months ended June 30, Six months ended June 30, SEGMENT SALES ORV/Snow segment sales $ 990,841 $ 845,508 $ 1,823,405 $ 1,569,611 Restructuring & realignment (3) 1,659 2,129 Adjusted ORV/Snow segment sales 992, ,508 1,825,534 1,569,611 Three months ended June 30, Six months ended June 30, SEGMENT GROSS PROFIT ORV/Snow segment gross profit $ 297,221 $ 266, , ,109 Restructuring & realignment (3) 1,659 2,129 Adjusted ORV/Snow segment gross profit 298, , , ,109 Motorcycles segment sales 171, , , ,286 Victory wind down (1) 798 (6,157) 249 (1,053) Adjusted Motorcycles segment sales 172, , , ,233 Global Adjacent Markets (GAM) segment sales 113,418 97, , ,577 No adjustment Adjusted GAM segment sales 113,418 97, , ,577 Motorcycles segment gross profit 24,672 21,116 41,240 1,235 Victory wind down (1) (874) 8,852 (822) 47,415 Restructuring & realignment (3) 1,185 1,185 Adjusted Motorcycles segment gross profit 24,983 29,968 41,603 48,650 Global Adjacent Markets (GAM) segment gross profit 28,107 21,216 59,365 49,314 Restructuring & realignment (3) (11) 4, ,303 Adjusted GAM segment gross profit 28,096 25,519 59,799 53,617 Aftermarket segment sales 226, , , ,228 No adjustment Adjusted Aftermarket sales 226, , , ,228 Aftermarket segment gross profit 57,747 59, , ,482 Acquisition-related costs (2) 53 12,950 Adjusted Aftermarket segment gross profit 57,747 59, , ,432 Total sales 1,502,532 1,364,920 2,800,005 2,518,702 Total adjustments 2,457 (6,157) 2,378 (1,053) Adjusted total sales $ 1,504,989 $ 1,358,763 $ 2,802,383 $ 2,517,649 Corporate segment gross profit (22,571) (18,014) (48,929) (38,263) Restructuring & realignment (3) 3,212 8,089 Adjusted Corporate segment gross profit (19,359) (18,014) (40,840) (38,263) Total gross profit 385, , , ,877 Total adjustments 5,171 13,208 11,015 64,668 Adjusted total gross profit $ 390,347 $ 363, , ,545 Adjustments: (1) Represents adjustments for the wind down of Victory Motorcycles, including wholegoods, accessories and apparel (2) Represents adjustments for integration expenses and purchase accounting adjustments (3) Represents adjustments for corporate restructuring, network realignment costs, and supply chain transformation Q2'18 Earnings 27

28 2018 GUIDANCE ADJUSTMENTS 2018 guidance excludes the pre-tax effect of acquisition integration costs of approximately $25 million to $30 million, supply chain transformation and network realignment costs of approximately $20 million to $25 million and the remaining impacts associated with the Victory wind down which is estimated to be approximately $5 million. Additionally, 2018 guidance excludes the pre-tax gain of $13 million related to the Company's investment in Brammo and charges of $23 million, including the impairment of the Company's equity investment in the Eicher-Polaris joint venture in India and related wind down costs, recorded in the first half of Additional costs associated with the wind down of the joint venture, if any, are expected to be immaterial for the remainder of Intangible amortization related to all acquisitions has also been excluded adjusted sales guidance excludes any Victory wholegood, accessories and apparel sales and corresponding promotional costs as the Company is in the process of exiting the brand. The Company has not provided reconciliations of guidance for adjusted diluted net income per share, in reliance on the unreasonable efforts exception provided under Item 10(e)(1)(i)(B) of Regulation S-K. The Company is unable, without unreasonable efforts, to forecast certain items required to develop meaningful comparable GAAP financial measures. These items include costs associated with the Victory wind down and acquisition integration costs that are difficult to predict in advance in order to include in a GAAP estimate. Q2'18 Earnings 28