Polaris Inc (PII) 2010 Q1 法說會逐字稿

Thank you. (Operator Instructions) It gives me great pleasure to turn the call over to Mr. Richard Edwards, Director, Investor Relations. Sir, you may begin your conference.

Thank you Joree, and good morning and thank you for joining us for our 2010 first quarter earnings conference call. A slide presentation is accessible at our website at www.polarisindustries.com/irhome, which has additional information for this morning's call. The speakers today are Scott Wine, our Chief Executive Officer, Bennett Morgan, our President and Chief Operating Officer and Mike Malone, our Chief Financial Officer.

During the call today, we will be discussing certain topics including product demand and shipments, sales and margin trends, income and profitability levels and other matters, including more specific guidance on our expectations for 2010, which should be considered forward-looking for the purposes of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the forward-looking statements. Additional information concerning these factors can be found in Polaris' 2009 annual report and Form 10-K, which are on file with the SEC. Now, I will turn it over to Scott. Scott.

Alright, thanks Richard. Good morning, everyone, and thank you for joining us. In January, we predicted a slow economic recovery and continued weakness in our core power sports industry. With the first quarter now behind us it looks like we got those calls right. At the same time, we committed to make growth happen no matter what the external environment presented. We made good on that commitment and earlier today, reported results for the opening quarter that put us firmly back on the growth curve for both sales and earnings, a trend that we expect to continue well into the future.

For the first quarter, Polaris delivered net income of $19.8 million and earnings per share of $0.59. Both numbers represent record first quarter results for the Company. The significant 134% and 120%, -- 127% respective increases, were certainly aided by a lower prior year comparison which included the $0.18 per share impairment charge for our KTM investment. The performance of the Polaris team cannot be understated, however, as the 34% increase in earnings per share, after adjusting for the charge, was driven by excellent execution which drove strong revenue and margin growth. Gross margins continued to expand up 170 basis points driven by product cost reductions, improved pricing and favorable currency movements.

We are pleased that we were able to accelerate profitable growth to start 2010. We actually expected the return-to-growth in the first quarter, but I am quite pleased that the team exceeded our expectations, and delivered a strong 16% top-line growth number. Despite a weak start to the year in our core power sports markets, and low consumer spending overall, we delivered on our commitment to make growth happen. We accomplished profitable growth by once again leading the industry in innovation and execution. Overall, Polaris retail demand was solid in the quarter and that drove a large volume increase with our expanding Max Velocity Program. Currency and pricing were also beneficial in the quarter.

As Bennett will detail in few minutes, our Off-Road Vehicle Division continues to gain momentum in both retail sales and market share growth. Snow sales were weak for us in the quarter and for the season. But we believe we have made the right investments to regain market share in the year ahead. Our Victory Motorcycle business outperformed the market and continued to deliver on their recovery plan. And our strategically important international business significantly outperformed our North American business with sales up 41%. As our International Team is on the gas and driving growth in key markets around the world. Our very profitable PG&A and Military businesses are also off to a very good start for the year. After six straight quarters of declining retail sales, it has been nice to see black numbers in most of our sales reports this year.

Overall, North American retail demand for Polaris products was up 9% for the first quarter of last year. ORV retail sales were up nearly 20% in the first quarter, with core ATV retails essentially flat, and consumer demand for our Side-By-Side products up significantly. Victory built off their momentum in Q4 and drove mid-teens percent retail sales growth in the quarter, and we expect that trend to continue throughout the year. It is important to note that these strong retail numbers were achieved in spite of a negative industry retail in every category. With the exception of snow, where retail sales were down about 20% in the quarter, we leveraged our product advantages and strong dealer engagement to beat the market. We like the early trends we see in the first quarter and our goal is certainly to win the retail battle throughout the year. While our first quarter success was certainly attributable to our laser focus on results, some of our best performance and efforts in the quarter will not show up until well into the future. We remain firmly committed to our three-to-five year strategy and are making significant investments to drive long-term profitable growth. Our strategy contains many opportunities for growth, but our first priority is to win in our core business, or to be the best in Power Sports Plus.

As previously noted, the ORV and Victory teams have momentum and with their focus on product and process innovation, I like both our short and long-term prospects to achieve high single-digit long-term growth in these businesses. We made good progress with our adjacency growth plans in the first quarter with the tuck-in acquisition of Swiss Auto, which added significant capability to our engine design and alternative product offerings. We have a healthy and growing acquisition funnel, but we continue to make value and process discipline our priorities on the acquisition front. Progress is very good with both our Bobcat strategic alliance and our Military business and we expect both to contribute to our growth throughout the remainder of the year.

Global market leadership is a major priority for Polaris in an area where we made notable investments throughout the recent downturn and continued to do so. We are receiving dividends on those investments, as our international team delivered over 40% growth in the first quarter. Share gains in Europe were strong for both ORV and Victory. I was recently in China to meet with several current and future partners and was encouraged by their excitement to work with Polaris. Our Chinese distributor will open the first Polaris retail showroom, in Beijing, early next month.

A key tenet of our strategy is that we expect profitable growth not just higher sales. We are committed to using operational excellence tools to drive operating margin expansion and delivered a strong 150 basis point margin increase in the first quarter. We continue to see opportunities to drive productivity, and costs out, which will aid margins throughout the year. In all that we do, our focus is on driving shareholder value through consistent strong financial performance. With solid top and bottom-line growth in the quarter, we are on a path to deliver sustainable profitable growth for all of 2010. Based on our solid performance in the first quarter, and our improved outlook for retail sales and global demand, we are confident that we will exceed our previous full year 2010 guidance. With the strong product line-up and a team that is performing exceptionally well, not to mention rapid growth in Europe and our other International markets, we are increasing our full-year sales guidance to be up 8% to 11% over 2009. We are also raising our full year 2010 earnings per share guidance to $3.48 to $3.60 per share. With that, I'll turn it over to our Chief Operating Officer, Bennett Morgan, who will provide additional insights into our operations and business unit performance.

Thanks, Scott. I'm going to begin with Off-Road vehicles. Our Off-Road vehicle business, which represents 65% of our annual Polaris business, is off to a very strong start with first quarter sales up 16%. The ORV industry performed about as we expected in the first quarter with industry sales remaining weak, though we were encouraged by sequential improvement as we moved throughout the quarter. North America and ATV industry sales were down about 20% in the first quarter. Industry data is not shared for Side-By-Sides, but our best estimate is that relatively Side-By-Side industry sales are improving nicely, but it's not yet clear to us if the category grew in the first quarter. We would estimate Side-By-Side sales down slightly with improved velocity throughout the quarter.

Polaris ORV retail sales strengthened and grew nearly 20% over last year in the first quarter, exceeding our expectations with North American ATV retail sales essentially flat and Side-By-Side sales up significantly. We continued to gain a significant amount of market share in both ATVs and Side-By-Sides. Product innovation and an improved dealer business model, thanks to MVP, continues to help drive our success. The new RZR 4, which we introduced in the first quarter, and the Ranger 400 have gotten off to great starts at retail, but frankly, the growth is coming from a number of key products in both Side-By-Sides and ATVs, which is extremely encouraging. Dealer inventories are better than expected due to the strength of retail.

North American ORV dealer inventory is down 34% from last year with core ATV dealer inventory down 40%. As we continue to reduce inventory levels, expand MVP and retail sales improve, we actually have dealers reporting our supply is tight on a number of models. Dealer orders from both MVP and non-MVP dealers exceeded our expectations in the first quarter. As a result, primarily of the better than expected Polaris retail sales, we have ramped up ORV production to meet the higher demand. These increases will begin to hit dealer showrooms early in the second quarter and will continue throughout 2010 as demand dictates.

Our Military business continues to gain traction and our order backlog is up nicely year-over-year. There's -- the Bobcat strategic alliance is expected to begin realizing revenue in the second quarter, as our first shipments should begin. Bobcat is in the process now of introducing the products to its dealer channel and we remain very excited about the present and future of both of these growing adjacencies. As a result of the stronger than expected retail sales, the reduction in dealer inventories and solid order positions, we are increasing our sales guidance for ORV significantly to up 9% to 12% for the full year 2010.

Snowmobiles. Polaris snowmobile business concluded a mixed year. An early end of the riding season across the snow belt due to unseasonably warm weather in March, weakened first quarter industry sales. As a result, first quarter and full year industry retail sales were down low 20%s with Polaris retail sales down a bit more. So we lost a little bit of market share. Industry dealer inventory levels are improved with Polaris dealer inventory up slightly, but remaining at acceptable levels. We had a successful model year 2011 dealer show and product launch and we are encouraged for the upcoming season. We introduced 11 new models, which included expanding our Rush Pro-Ride rear suspension technology across a number of new models, and introduced an all new RMK chassis, that is the lightest, most durable, best handling chassis in the industry. We had consumer and dealer demo events throughout Q1 on the new products and both groups like what they rode. While not final yet, dealer orders across North America, and internationally, have met our expectations and pre-season consumer snow checks are more than double last year's amount. So, we are encouraged about the upcoming snow season.

On-Road vehicles and Victory motorcycles. On-Road first quarter sales, driven primarily by Victory, increased 83% off a weak first quarter '09 comparable. The North American heavyweight motorcycle industry remained weak with retail sales down about 20% for the quarter, though we did see some nice relative improvement in March. Victory continued its momentum from Q4 of 2009 in the first quarter, posting mid-teens percent retail sales gain, and picking up market share, particularly in the lucrative touring segments, as our new products continue to gain traction. The new Cross-Country Touring bike is off to an excellent retail sales start and dealers are anxiously awaiting the remaining model year 2010 shipments. During the quarter, Victory dealer inventory continued to decline, down 25% year-over-year. Our new initiatives in marketing distributions and operations, are making a difference in our performance and we are looking forward to the critical spring and summer retail months ahead. The LEV Electric vehicle business continues to focus on adding new dealers and penetrating new markets. We expect nice growth from LEVs, but it will continue to be the law of small numbers throughout 2010.

Parts, Garments and Accessories. PG&A first quarter sales increased 8%, driven primarily by strong increases in the side-by-side accessory demand and our full year 2010 sales expectations have increased, due to increased ORV retail demand.

International. International had an excellent start to the year with first quarter sales up 41%. Driven primarily by strength in Europe and ORVs versus a relatively weak comparable. Global industry markets continued to strengthen in the first quarter with sales down high single-digits percent. The primary driver of our Polaris growth is similar to what we see in North America. Strong market share gains achieved through innovative products and strong distribution business model advantages. International inventory levels remain healthy. Perhaps even a little bit tight with some products and in certain markets due to the increased demand. We recently completed our international snow dealer meeting and response to the model year 2011 snowmobile products was positive. ORV shipments and sales in the long-term growth markets of China and Brazil, began in the first quarter. Our focus on global markets is paying off, and our expectations for international growth in 2010 has increased to 20% to 25%, and will continue to outperform the overall Polaris business.

Operational excellence. Operational excellence continues to make a big impact on our business and that of our dealers. North American dealer inventory continues to improve, down 29% from the first quarter of 2009 and down 13% from year end 2009. Polaris factory inventory declined by 27% and 65 million versus the first quarter of 2009. Inventories are very healthy, and as I've said in fact, are a bit tight in certain areas. We are using our advantages of speed, flexibility and our MVP business model to adjust quickly to the changing market conditions by ramping up ORV production as I discussed earlier. Overall dealer health for Polaris is improving. Our dealer count was flat in the first quarter, except for Victory which grew modestly, and the repossession activity is stable.

MVP continues to improve and produce results. The leaner working inventory levels are helping dealers better manage risk and profitability. Our ability to receive and respond to our dealers orders every two weeks, has allowed us to get a quicker jump on the positive changes in demand. Our focus on segment stocking has improved the representation of Polaris products in our dealerships and our market share is up significantly year-over-year in MVP dealerships. We are currently at 50% of our ORV volume and expect to add additional dealers as we continue to [learn], and improve this new business model. Gross profit margin expansion remains strong with a year-over-year increase of 170 basis points, contributing to the 280 basis point net income expansion for the quarter. Despite sequentially rising commodity costs, particularly in steel, oil and rubber, our product costs continue to come down thanks to our strategic sourcing effort and continued value engineering investments.

In addition, our continued strong investments in new product development and innovation, and our ability to get these products to market quickly, continue to fuel gross profit expansion. Our model year 2011 Snowmobile line has 60% new products and we expect another good year of product news this summer for model year 2011, for our ORV, On-Road, and PG&A businesses. With that, I'll turn it over to Mike Malone, our Chief Financial Officer.

Thanks, Bennett and good morning to everyone. We are very pleased with the results we reported this morning. We were pleasantly surprised by the magnitude of the acceleration of our retail sales, particularly in the month of March. As a result of our retail sales momentum, we are increasing our full-year guidance to reflect these positive trends.

Guidance for the full year 2010 is as follows. Total Company sales are now expected to increase 8% to 11% for the full-year 2010, with the individual businesses contributing as follows, Off-Road vehicles, are planned to be up 9% to 12%, a significant increase from prior guidance of flat to up slightly. With the growth coming from both core ATVs and Side-By-Side sales, in both North America and the International markets. In snowmobiles, we have refined our guidance to be approximately flat with last year, given what we are seeing from the initial dealer orders for model year 2011 snowmobiles. On-Road vehicles, the guidance is up over 50%, in line with our prior guidance as we see solid demand for Victory motorcycles. And our PG&A guidance has increased, as we now expect the PG&A sales to grow in the mid single-digit range, over last year's levels. Gross margins for the full year are expected to expand up to 100 basis points, unchanged from our previously issued guidance. I will give additional clarity on the reason for our confidence in expanding margins shortly.

Operating expenses are expected to increase in dollar terms, and as a percentage of sales, for the full year unchanged from our previously issued guidance. The increase is due to the incremental investments that we are making in our growth opportunities internationally, as well as, adjacent markets and business development activities. In addition, we continue to expect increased incentive compensation expenses in 2010, resulting from the reinstatement of certain planned contributions, that were either reduced or eliminated last year along with the higher stock price and the higher expected profitability generated in 2010. The income tax provision for the full year 2010 is expected to be in the range of 33% to 33.5% of pretax income, similar to our tax provision rate for last year, and unchanged from our previously issued guidance. Earnings per share for the full year are now expected to be in the range of $3.48 to $3.60 per diluted share, which is an increase of 14% to 18% compared to the $3.05 that we earned for the full year last year. Net income for the full year is now expected to increase in the range of up 19% to up 22% compared to last year. As I explained in our last earnings call, the percentage rate increase for net income is expected to be higher than the earnings per share increase, due to an anticipated increase in the number of diluted shares outstanding throughout 2010 compared to last year, which is resulting from the elimination of our open market share repurchases and a higher anticipated stock price this year.

As Bennett mentioned, the gross profit margin percentage generated for the first quarter was 26.2%, 170 basis point improvement over the first quarter last year. The primary drivers of the improvement in gross margins, in the first quarter, was the ongoing focused attention on taking costs out of our product from an engineering perspective, higher selling prices and favorable currency movements offset somewhat by a modest increase in sales promotions costs. For the full year 2010, we expect the improvement in gross margins to continue. We're confident in our guidance, of up 100 basis points expansion, given the success we have experienced in taking costs out of our model year 2010 products and the expected additional reduction in product costs for model year 2011. Also, we expect continued benefits from higher selling prices related to innovative new products, lower warranty costs as the year progresses and currency rate favorability, in spite of anticipated higher commodity and sales promotion costs throughout 2010. Our income from financial services for the first quarter of 2010 decreased 3% primarily due to lower dealer inventory levels, offset somewhat, by higher interest rates paid to Polaris acceptance by both Polaris and our dealers during the first quarter compared to a year ago. For the first quarter we financed about 33% of Polaris products sold to consumers in the United States.

Through our retail credit programs with HSBC, GE, and Sheffield all combined, which appears to have stabilized at these penetration rates. The approval rate, in the first quarter 2010, was 53% compared to 44% for the first quarter of last year. We continue to believe that the retail credit market, for power sports products, has stabilized and retail credit availability to our dealers and consumers remains at acceptable levels. For the first quarter 2010, the wholesale portfolio related to the floor plan financing of dealers in the United States, was approximately $498 million, a decrease of 24% from the $651 million at the end of the first quarter last year, reflecting the decline in the dollar amount of the dealer inventories. Units outstanding in the portfolio decreased 25% in the first quarter. Credit losses remain very reasonable, averaging less than 1%. And during the first quarter we experienced just a modest number of dealer failures, repossessions of inventory and credit losses, as expected, and these issues remain well within our expectations. For the full year 2010, we expect total income from financial services, including each of Polaris acceptance, retail credit, and other financial services activities, to be similar to 2009 which is unchanged from our prior guidance.

Moving now to the balance sheet, and liquidity profile. Our debt position finished at $200 million at the end of March, down $44 million from a year ago. Cash balances finished the quarter at $124 million, up from just $18 million a year ago. We continue to have ample borrowing capacity, under our attractively priced $450 million banking arrangement, which expires in December of next year.

As Bennett mentioned, factory inventories at the end of March were $180 million, a 27% decrease from a year ago. With our recent increase in ORV production for the balance of 2010, we now expect factory inventory levels to be comparable with 2009 by the end of 2010. For the first quarter 2010, our investments in capital expenditures and new product development tooling was $8 million, which is 41% lower than a year ago. For the full year we still expect our appetite for capital expenditure spending to be in the range of $50 million to $55 million, which is unchanged from our prior guidance. Depreciation continues to be expected in the range of $65 million to $70 million. Operating cash flow provided by operating activities, was actually positive $3.8 million for the first quarter of 2010, a significant improvement from a use of cash of $33 million in the first quarter of last year.

Working capital requirements were significantly lower in the first quarter, this year compared to last year, particularly for factory inventory. We expect cash flow provided by operating activities to continue to improve throughout 2010 compared to last year. During the first quarter there were no open market share repurchases under our stock repurchase program. The shares repurchased totaling, $27 million during the first quarter, related solely to employee stock option exercise activity. Our expectation for the use of excess cash flow continues to be directed towards any potential acquisitions, that make sense for the Company, rather than open market share repurchases. The Company paid dividends during the first quarter totaling $13 million. In addition, today the Board of Directors approved the regular quarterly cash dividend of $0.40 per share, payable on May 17, to shareholders of record on May 3. The payment of dividends remains one of the important ways Polaris continues to deliver value to our shareholders.

Our expectations for the second quarter 2010 are as follows. Full Company sales are expected to increase in the range of up 14% to up 17% from the $345.9 million for the prior year. Earnings are expected to be in the range of $0.63 to $0.67, per diluted share for the second quarter, an increase of 19% to 26% over the second quarter EPS of $0.53 a year ago. In conclusion, we are very pleased with our first quarter results and given this excellent start to the year, we have increased confidence that we can deliver a very solid profitable year in 2010. At this time, I'll turn it back over to Scott for some concluding comments.

Thanks, Mike. As Mike concluded, we do feel like we had an excellent start to the year which has positioned us well for the balance of 2010. I have to admit though, that we like our current outlook significantly more than the challenges we faced in 2009. But despite progress, we still do not expect a strong economic recovery. We have a conservative outlook for the Power Sports Industry and are predicting continued industry retail sales declines in North America and Europe. This outlook is primarily driven by expectations of continued high unemployment, weakness in the housing market and general unease about increased government regulation and taxation. We do not look for excuses, however, and as we demonstrated in the first quarter, we can react fast and we'll be poised and ready to aggressively take advantage of any improvements that materialize in our end markets.

I have quickly come to appreciate the passion and power of this Polaris team and believe that we are in the very early stages of reaching our potential for growth and margin expansion. Whether we are innovating new RZR products for mountain snowmobiles or engineering costs out of a Victory or a Sportsman, we are committed to delivering value to our customers and returns to our shareholders. Expect us to work hard to deliver continued strong results in Q2 and beyond. With that, I will turn it over to Joree to open up the line for questions.

Thank you. (Operator Instructions) We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Greg Badishkanian with Citigroup.

Great quarter, guys. And just a few questions here. First, just maybe a little bit more in terms of retail demand or consumer demand for the Side-By-Sides. What do you think is driving sales there? Is it product innovation? Is there an overall pickup in the consumer? Why do you think we're seeing so much strength there?

Greg, it's Scott. I don't think -- we did see some trending towards better retail demand for the industry in March. But really for the overall quarter, I think it was clearly Polaris leading the way and as we always say it was based on innovation. Whether it -- the early demand for the RZR 4, as Bennett talked about, was very strong. But really, across the product category, we think that our product advantage is sustainable. Certainly MVP is a big help. Our dealers are very, very engaged in driving retail. So, with the product advantage, and MVP helping the dealers be more engaged, I think that's really the two primary drivers.

Great and then just with respect to guidance for the year, what are you assuming in terms of a macroeconomic backdrop? Are you assuming an improvement -- a nice improvement throughout the year, kind of a stabilization, or what are you assuming there?

We said three or slightly less than three GDP growth, and I think that's still where we are. We might see a little bit more sporty growth in the second quarter, but I think the outlook for the year is probably still in the 3% range.

Right. Good. Maybe just finally, a little bit on the promotional environment and sort of retail sales trends or, excuse me, the inventory levels and promotions. Just kind of across the board at your competitors. Are they much more aggressive than they were last quarter, about the same? How would you categorize that?

Greg this is Bennett. I'd say it's fairly similar to what we've seen in the last few years. It remains aggressive in ATVs. So, I think it's up modestly there. Side-By-Sides are relatively flat. We're encouraged, though, because I think our competitors have made progress on their inventory levels that had been in their distribution centers and sometimes, which was difficult to capture from a promotional standpoint. While promotions remain aggressive, they're within our expectations. My sense is that inventory levels across the industry are getting healthier and thinner. Which I think bodes well for everyone.

Great. Thanks, so much.

Your next question comes from the line of Scott Hamann with KeyBanc Capital Market.

Good morning, guys. Just a question on gross margin guidance. It seems like with ramping production and some of the out-performance we saw in some categories, or buckets in the first quarter, I was a little surprised that the full year hasn't increased so can you kind of walk through, maybe some of those buckets, that might be pushing the other way and how you expect the rest of the year to fall out?

Sure, Scott. This is Mike. Our guidance, as you note, is unchanged. It's up to 100 basis points in gross margin expansion. There's a couple factors. Bennett mentioned the commodities are escalating. That's an uncertainty that we don't really have much predictability over and we're experiencing some pressure there. We expected that frankly, but there's a little bit more pressure there than what we had anticipated early in the year. You did mention that our production is ramping up and that's true. But we have a very variable cost structure in our manufacturing operations, which served us extremely well last year, as the volumes came down. But although not all, most, all those variable costs will come back as our production increases. So we're, at this point in time, we're not moving the gross margin guidance and we'll see how the second half of the year progresses by the time we get there.

And if I can just add Scott, Scott Wine here, we are extremely committed to margin expansion. I don't think we've made that a secret at all. But we are also looking at this as an opportunity to make some investments in our future. So, whether it's in the new product category or other growth areas, don't think that we're not also skimming a little bit to increase our investments to drive future growth.

Okay, great. Just a follow-up on Victory. You had talked in the past about obviously making several changes to make that business profitable. So, I guess the question is, what specifically have you kind of accomplished in terms of taking some product costs out there? I know you've done some new things on marketing, so where are we on Victory? Are we quite to profitability yet? What is left to be done?

We don't disclose product line profitability and we've said we had a lot of work to do with Victory. We're quite pleased, honestly, with where the team has us at this point. One of the key areas where we felt like we had to drive, and really it's been almost a maniacal focus for us, was accelerating retail. So, as you think about Victory, the primary thing to see is how we're doing on year-over-year retail and through the first three-and-a-half months we feel good about that. I will tell you that some of the other categories I think the positioning that the team has, you can go out and look at the new Fuel It Campaign online, is very -- is resonating quite well. The product cost, the guys are working very hard to make sure that we maintain our great Victory quality, but also take out some of the costs there. So, across the board pricing is better. The new Cross Bikes look good. As I said before, there was eight or nine different things and we're hitting on each of those. But I think, if you want to look at a test of what's going on, just look at the retail numbers.

Great, thanks.

Your next question comes from the line of Ed Aaron with RBC Capital Markets.

Thanks. Great job on the quarter, guys. I just wanted to kind of circle back on guidance for the year. Could you give us a sense of what your North America retail growth assumptions are underlying that guidance? I know you mentioned you thought the industry would be down, but obviously, you're trending higher so what kind of North America retail growth are you factoring in there for you?

Well, I think we're expecting North America to grow. We're expecting our international business to grow. We expect retail, for us, to be up kind of across the board, in all products. We didn't really address snowmobiles. But all other product we're expecting our retail to expand year-over-year, which is different than the guidance we were talking about three months ago. We had -- it was more flattish and we're seeing significant acceleration here in Q1 and we think that trend line and momentum will continue.

I can add on a little bit. This is Bennett. We've seen modest improvement in our guidance, modest improvement in ATVs, but we don't want to get ahead of ourselves, although we're very excited about how we performed in the first quarter. Side-By-Sides, we've become a little bit more bullish. So, we've taken, certainly some increases there, as well. But, I think the one thing people got to remember is, the first half of the year last year was challenging for us. We had, what we would call easier comparables, so as we move to the second half of the year, we're expecting more moderate growth because of more stout comparables particularly in the fourth quarter. And I think that's what the guidance reflects at this time.

Would you expect that your shipment growth will be faster than your retail sales growth in North America when you consider the destocking that happened last year and the fact that inventories are now kind of at those low levels?

No, I wouldn't. As we told you coming into the year, we're quite pleased where we've been on this progress on inventory reductions. But, we told you we expected to continue to take inventory out of the channel through calendar year ten. We're actually ahead of that plan, but we'll continue to do that as we go forward. So, I think the part that you may sense from us is we're getting a little closer to this natural balance of retail equals ship, whereas the past couple years it's been ship, has been less than retail. But, I don't expect us to start over shipping retail at all. I would be -- want to be pretty clear about that that is not how we expect to run the railroad.

Okay. Last question, if I could? Just on the gross margin guidance, it sounds like most of the production ramp is coming from Side-By-Sides, which tend to be a bit higher margin than some of your other product categories. So, does the mix outlook look a little bit more favorable now than it did 90 days ago?

Ed, I will take that and maybe Mike or Scott can jump on. I think, again, just so everybody is clear, we're pleased with what we've seen on Side-By-Sides. We're also very pleased with what we've done on ATVs. And ATVs we are take production increases on ATVs, which is a notable change from what we've seen from the last three or four years. So, we're encouraged by that. And I wouldn't miss that in the story. The mix actually is, frankly fairly neutral, because if you looked at our performance the last couple years, it's been generally Side-By-Side driven. So, not nearly as much as you might think, even though we're certainly taking some significant Side-By-Side increases.

I will add a little bit, just more directly. We are going to see some mix -- we're going see a better mix than we had in our previous guidance but not significantly.

Fair enough. Thanks, guys.

Your next question comes from the line of Scott Stember with Sidoti & Company.

Good morning. Could you guys talk about the opportunity in China? It sounds like next quarter we are going to start to see some incremental sales from that. Could you just talk about the size of the dealer chain there and what kind of a ramp-up we could look for over the balance of 2010 heading into 2011?

Just to be very clear, we're in the very early stages of entering the Chinese market. I was there two and a half, maybe three weeks ago. We've got a great distribution partner, very very large Chinese automotive company that has significant off-road experience. They will open their first showroom, I guess early May. And we really like the potential there to go after that middle-class market. I think the sales will be well below $10 million for 2010, but with significant upside potential over the next several years. One of the things we've learned, Polaris has a very successful track record of expanding internationally. One thing is to not get ahead of ourselves and make sure we do the foundation right and I think we're off to a very good start in China. We'll have a lot more to report on that in the quarters ahead.

And maybe just talk about the Bobcat. I know we're going in two phases here. The first phase coming up pretty shortly. Could you talk about the second phase which is the joint product that you guys are producing together?

Yes. Scott this is Bennett. That's on track. Bobcat and Polaris continue to make investments on it. The project is proceeding essentially as we plan and as we expected. It's not until future years, we don't discuss too much about future model introductions other than we have alluded to, that it will -- likely will be a co-developed product kind of building on the advantages of the industry leader and compact construction equipment and that leader in off-road vehicles and expect that over the upcoming years. But certainly not in 2010, though.

Okay, and just lastly, can you talk about the Breeze? What you're seeing, how many communities you have that rolled out to right now?

We're now in about 13 different communities. So the dealer expansion continues. It's still, like I said in the remarks, it's the law of small numbers. The master planned community market has actually been -- was hurt quite badly through the recession with a lot of the fixed income customers and then the move with some of the government tax credits to 25 miles per hour vehicles. So, our retail is generally low but it's not meeting our expectations at this point. It's relatively close. So, we are aggressively looking to continue to add dealers and potentially investigating additional new product options to continue to grow in what we think is a long-term, not necessarily a short-term, a long-term exciting market for us.

Okay, that's all I have. Thank you.

Your next question comes from the line of Craig Kennison with Robert W. Baird.

Good morning and congratulations. Thanks for taking my question. Most of mine have been addressed but maybe I'll just follow up on Greg's question. Bennett, is there a consistent macro theme at all to the consumer trends you're seeing? In other words, are you seeing stronger growth in affluent consumers or first time buyers in recreation or commercial? Is there any theme that you can detect on a macro basis?

On a macro basis Craig, and again the other guys can jump in, I wouldn't tell you we're seeing anything new and exciting in the first quarter. I think generally speaking, the more affluent customers have been the more resilient ones through the downturn. I think that we're still certainly seeing that trend. First time buyer numbers are still -- they are still fine by our measurements. We haven't seen significant erosion. You know the people that are the -- at the lower end of the scale are still struggling to get credit, and different things like that. So, that group has been hurt, been hurt worse, but in general, I wouldn't tell you we've seen anything market other than we are starting to see -- and it's a little too early to declare any kind of victory. We are seeing some directional improvement as we get into the season on retail, in generally all of our products.

If I can add something? It's interesting that we introduced in the quarter a very high-performance, high-priced RZR 4 product -- relative to our other Ranger (multiple speakers) Yes, in terms of value. But ASP is quite a bit higher than our other products. We're thrilled with the retail performance of that. At that time same time, we're thrilled with the retail performance of some of our value plays. There's Sportsman 500 HO ATV is selling extremely well. That's value priced. As well as, our new Ranger 400, which is our first value priced Ranger product. So we're kind of seeing it on both ends of the price point spectrum with very strong retail performance.

Mike, just a follow-up. In some recreation categories, we've seen credit easing a little bit in some credit tiers, from the slide on slide 20 it doesn't appear much movement there. But in real time, are you seeing easier access to credit and is that partly a factor of behind the retail strength?

I don't think so, Craig. I think we're stabilized in the retail credit environment. I don't sense that it's getting a lot better. I think customers are understanding who's going to get credit and who isn't and the lower rung credit score customers aren't necessarily trying to get the credit that they perhaps were in the past. So, I think it's stable. I don't think it is getting a whole lot better. It's certainly not getting worse. But I don't think retail credit is driving the significant trend improvement on retail.

We're not seeing any declines in FICO scores getting approved. No one is leaning in and buying down at this point.

Finally Scott, just to follow up. The acquisition you did in Switzerland seems very strategic. You brought in a lot of talent, but from a revenue standpoint, not a huge impact. Is that more typical of what you expect going forward on the acquisition front or was that just the nature of the beast?

I think that was just exactly how acquisitions work. You don't always plan. If I was -- that's not the typical acquisition we're going to do. But when something falls in our lap, that's that attractive, we're not going to turn our heads and say we're not interested. We really like what Swiss Auto will bring to Polaris both in 2010 and beyond, but no, certainly don't expect us to make those kind of acquisitions regularly.

Thanks. Congratulations.

Your next question comes from the line of Tim Conder with Wells Fargo.

Congrats again, also, gentlemen.

Thanks, Tim.

Couple of things here. Bennett, back to a previous question on the channel inventories. You said, in general, you are going to be continuing to reduce those throughout the years, the plan. Was that primarily on the core ATVs or in maybe some of motorcycles -- or are you still looking on the sleds also? Sounds like Side-By-Sides, that's a non-issue given the strength we're seeing.

I think, Tim, you're pretty close. We were continuing -- going into the year plan to continue to work our core ATV inventory down modestly. Same thing in Victory. Side-By-Sides has been frankly pretty healthy in a natural state, pretty much for most of the last several years, so we didn't have a lot of work to do on that. And sleds, (inaudible) acceptable levels with our focus on that in a perfect world those would be a little bit lower as well. So, in a perfect world we would aspire to get that down a little bit. But, my sense is we're getting pretty close. As volume picks up, that may start changing a little bit of our view of that. Not so much that we will start to, like I think Ed asked, if we're going to start over shipping retail. But certainly as velocity increases, higher inventory levels in some cases may be appropriate.

And again, you have clearly proven that good product and with the MVP program, really negates some of what your Japanese competitors are doing, but broadly from the industry perspective, how close do you think the Japanese are to really kind of getting the mess of their inventory muffed up?

I think they're getting much closer, in all honesty. The issue I think there, frankly with the model they're running, is it's a little difficult for them to respond real time. So, they make adjustments almost a year in advance and they might go too heavy, they might go too light. In some cases they may have overcut back on certain models and certain products here right now. I still think there are non-currents to be cleaned up in a number of our Japanese dealerships, but compared to where we were a year ago, or even two, I would characterize it as much improved.

Okay. And then on your slide presentation, slide number nine, where you're talking about the Off-Road vehicle division, and I apologize if I missed this, but in your FY 10 guidance, the orange section at the top, what was that? What's that piece of the bar alluding to?

That's meaning to indicate the range of the increase, the range from 9 to 12.

Okay. And of that, gentlemen, any color in dollar terms or percentage of Side-By-Sides that the Military business represents?

We probably won't give that color, Tim. I would tell you that Military business will be up nicely year-over-year. There's nothing that's changed here over the last 90 days. We feel good about where we are in the Military after 90 days. And you'll see contributions from both ATVs and Side-By-Sides. And as we have indicated, directionally, a little bit more towards the Side-By-Sides. But certainly ATVs will be growing as well. That's about as far -- as much as you're going to get us from.

That's fair. On the receivables, Mike, everything great, but the substantial increase in receivables? Just a little color there?

As you know, Tim, most of our receivables relate to outside the United States, that we carry on our books. Our Canadian business is up a fair amount year-over-year. If you recall last year, we brought on more of those receivables on our books for a longer period of time from the GE relationship as part of that negotiation, as well as, outside North America our sales are up 41%. Some of that 41% is still sitting in receivables.

Okay. Lastly, thanks for the time here on the color? Just any more parsing of FX on the gross margins, SG&A, and the EBIT lines in particular? I know you gave sales.

Yep.

No.

You got what you are going get. Just to reiterate, they're on the slides here, but in case some of you don't have the slides, our -- the currency impact on our top-line sales in the first quarter was 4% of the 16% total sales growth was related to currencies, and then specific to our international division, where sales are up 41%, about 10% of that 41% is due to the currency movement.

But nothing as far as EBIT impact or anything?

Positive.

Positive, okay. Thank you, gentlemen.

Thanks, Tim. Next question.

Your last question comes from the line of Bob Evans with Craig-Hallum Capital.

Good morning and congrats on a great quarter as well. Can you comment a little bit more in terms of MVP? The dealers that we've talked to, maybe that was the one greatest complaint in terms of being able to get the product they wanted in a timely fashion and I know you're adjusting production, what are your general -- what are the lag times there, if you will, in terms of dealers getting what they want and maybe just get a little bit more color?

Okay. Bob this is Bennett. As you know in the process right now, we're in there every two weeks. What we're doing is generally committing to a ship to essentially within 30 days of that. Currently in the vast majority of instances we're inside of that. There are some products we've been tight based on the increased demand over the last three, four months which we're responding to.

I think the other thing that you're -- that, in all honesty, that people are hearing in the surveys, and that we have seen when I've been out there, is this is a dramatically different environment for these folks. The past, the typical power sports business model has been you order less frequently and you have boxes and boxes of these things so they're used to having 20 Sportsman 500s sitting there ready to go. Now they're in a situation, now, where they're down to two or three, what I would call very healthy working inventory stuff, with stuff planned to come to them because they're ordering more frequently, more shipping. But that's a little bit more uncomfortable, particularly, as retail starts to improve for our dealers. And I think, so, that's part of the natural progression as we lower the water level on inventory and people get used to a new business model and MVP as sales increase, is there gets to be a little tension. Can we be quick enough to feed their retail sales? And, while I think we will tell you we are working very, very hard to make sure we're faster, and making sure we've got production matched, and make sure our logistic systems are responsive, we're making those improvements. And I think we feel pretty good about where we're going to be as we move forward.

Okay. As you look at Q2 your guidance for sales up 14% to 17%, should we expect, kind of, in terms of where the growth is coming from similar to Q1? Or what might be a bit different as we look Q2 versus Q1?

I don't think -- I mean, I think we're going to continue to be strong internationally, but I don't think you're going to see up 40% in that market. You will probably see a little bit more balance between our domestic and international growth. But really across the business, we're seeing strength in demand, so I don't think that's going to change. I think you might just see a little bit on a global perspective where it comes from.

Okay. Mike touched on this a little bit. But the market share that you did get this quarter, and you expect to get, what, if you are going to narrow it down to particular models or segments, where would -- what would be the top two or three?

Boy. Like I said, it's good. And we're getting it from multiple places. I would tell you within the Side-By-Side line, we're getting it everywhere. We're getting it in RZRs. We're getting it in the Rangers. We're getting it in the Ranger 100s. We're getting it with the new 4s. The Crew's doing well. I mean, I can't pick one or two there. In the ATV category, our new Sportsman XPs with the 850s and 550s are doing very well. And as Mike alluded to, our old tried and true Sportsman 500 HO value priced is doing extremely well. So, I would tell you those would be kind of the key categories that we're seeing it. And we can't forget the Cross-Bikes are still doing well. The new Cross Country has been very well received in the touring segment.

Final question. Acquisitions, you touched on it, but still expecting to do an acquisition by the end of the year at least?

We're very busy on the acquisition front. You know it takes two to dance. We are extremely committed to making sure that we don't buy to get bigger that we're going to accelerate profitable growth. We see lots of opportunities to get there, Bob.

Okay, thank you.

Okay, thanks. That's all the time we have this morning. Want to thank everyone for participating and we look forward to talking to you again next quarter. Thanks again. Good-bye.

This concludes today's conference call. You may now disconnect.