CEO: Polaris forging ahead after 'difficult and challenging' year

CEO Scott Wine said Polaris Industries is a better company as it exits this "difficult and challenging year," which was plagued by massive vehicle recalls and plunging profits.

It's a statement he plans to prove this year.

"While prospects have certainly improved for our power-sports customers to enjoy [a] better economic environment, Polaris is entering 2017 with a strong commitment to returning to profitable growth through consistent execution and aggressive innovation," he told analysts during a conference call Tuesday after announcing that fourth-quarter profits plummeted 43.5 percent.

The company's stock ended the day down $1.14 at $86.41.

For the quarter ended Dec. 31, Polaris enjoyed a 10 percent sales bump attributed to its recent acquisition of the Transamerican Auto Parts retail chain. Total sales for the Medina-based maker of ATVs, motorcycles and snowmobiles reached $1.22 billion in the quarter. Profits, however, fell to $62.6 million, or 97 cents a share, from the same quarter a year ago. On average, analysts polled by Zack's Investment Research had expected earnings of $1.15 a share.

The company has suffered massive recalls and costs related to fixing fire risks found within its line of off-road vehicles and its Indian and Slingshot motorcycles.

While total off-road vehicle, snowmobile and garment sales improved 5 percent to $905 million during the fourth quarter, off-road vehicle demand fell in North America. And the entire segment faced additional promotional spending and increased warranty costs due to the recalls. Polaris said Tuesday that it is 70 to 80 percent done repairing 901,000 recalled RZR and RZR Turbo vehicles.

Polaris' small but fast-driving motorcycle business saw sales fall 35 percent to $105.7 million during the fourth quarter. That surprised analysts who expected motorcycle sales to drop just 25 percent in what is admittedly a soft market.

Wine said recalls were also partly to blame for the drop in motorcycle sales. Sales of Polaris' three-wheel Slingshot motorcycle were "severely constricted" by a recall during the fourth quarter. The motorcycle division also faced a tough comparison because a factory issue in summer 2015 pushed bike shipments into the fourth quarter of that year, he said.

Still, the company announced earlier this month that it would discontinue its Victory line of motorcycles. Wine told analysts Tuesday that the decision makes sense.

"Indian Motorcycles continue to outpace the industry with retails up nearly 20 percent in the quarter and slightly higher than that for the year," he said. "Victory and Slingshot retail [sales were] down for the fourth quarter lowering overall motorcycle retail performance to down mid-single digits."

As a contrast, snowmobile sales jumped a healthy 13 percent as the company improved its shipping and the timing and mix of higher-priced products. The company's new Transamerican Auto Parts purchase also increased sales by $108.7 million during the quarter.

Polaris will begin recording Victory-termination costs this quarter. The one-time costs will be recorded on Polaris' income statement and will not be included in adjusted earnings guidance for 2017.

The full-year 2017 forecast for adjusted earnings is $4.25 to $4.50 per share, the company said, with sales expected to rise 10 to 13 percent to reach $4.97 billion to $5.1 billion.

Adjusted full-year earnings for 2016 fell 50 percent to $226 million, or $3.48 per share. Full-year revenue fell 4 percent to $4.5 billion.

Including one time items, 2016 net income fell 53 percent to $213 million, or $3.27 a share.

"Off-road vehicles were down over $300 million year-over-year," Wine said. "And on top of recall-related shipment reductions, we also lost market share, [had] a negative mix impact, battled unhelpful currencies and reduced dealer inventory."

UBS equity analyst Robin Farley said in a research note to investors that Polaris' guidance for 2017 was below Wall Street's consensus estimate and "seems surprisingly low to us." She said the company didn't seem to factor in lower future recall costs or the associated cost of winding down the Victory motorcycle brand. She noted that her office considers the forecast as "under review."

Polaris Chief Financial Officer Michael Speetzen, however, said several key customer groups are still facing economic downturns, including traditional buyers tied to the oil, gas and agricultural markets.

Dee DePass • 612-673-7725