Polaris Inc (PII) 2010 Q2 法說會逐字稿

Good morning. My name is Kayla and I will be your conference operator today. At this time, I would like to welcome everyone to the Polaris second quarter earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. (Operator Instructions) Thank you. Mr. Edwards, you may begin your conference.

Thank you, Kayla. Good morning and thank you for joining us for our 2010, second quarter, and full year, 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 projections 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, we'll turn it over to Scott. Scott?

Thanks, Richard. Good morning everyone and thank you for joining us. With the first half of 2010 now behind us, I'm very pleased with the performance and resiliency of this Polaris team and the momentum that we are building. The results we reported earlier today demonstrate that Polaris is squarely back on the growth trend driven by market share gains that enable us to more than offset uncertainty in the economy and a sluggish power sports industry. Based on our results, and positive outlook for the remainder of the year, we are again raising our full year guidance for both sales and earnings per share. We continue to invest heavily in our growth and diversification efforts, which we expect to support our performance in the seconds half and the years ahead.

While I believe the future is bright, the results of the recently completed quarter certainly deserve attention. For the second quarter Polaris delivered net income of $25.6 million and earnings per share of $0.75. The earnings per share is another record performance marking the best second quarter results in the history of the Company. The significant increase in earnings is rewarding because it is largely driven by top-line growth, not just efficiency and cost reduction efforts. As the 210 basis points of gross margin expansion shows, we are not losing our focus on productivity, but are actually leveraging our cost position to drive market share gains and growth. The acceleration of sales growth in the second quarter was encouraging and the sequential increase to 25% from 16% growth in the first quarter reflects strong consumer demand for our products.

The strength of our RANGER and RZR platforms continues to lead the way on growth both domestically and in our international markets. With solid ATV demands, and the lowest overall dealer inventory since 1998, ORV sales to dealers were up $80 million in the second quarter. Victory motorcycles continue to show improvement as well, with sales up nearly 50%, as consumer demand for the Cross Roads and Cross Country Touring bikes helped us take advantage of a low prior year comparable. Despite a turbulent European economy, Polaris International, posted a strong 32% increase in sales. While slightly lagging product sales, our highly profitable PG&A business also posted a strong 8% growth. With demand well ahead of our original expectations, we are ramping up production to ensure our dealers have the products that consumers want.

With our Max Velocity Program, solidly in place and dealer inventory approaching targeted levels, our focus on retail has never been tighter. Driven by product innovation, and strong execution across the enterprise, overall North American retail demand for Polaris products was up 13% from the second quarter of last year. ORV retail sales were up about 15% in the second quarter. ATV retail sales were down slightly less than 10% and consumer demand for our side-by-side products was up significantly. Victory, again, outperformed the weak heavyweight motorcycle industry, posting its third consecutive quarter of retail growth up just over 10% for the quarter. We are seeing strength in almost all geographical regions in the United States and Canada, and with the strong model year '11 product lineup that we will unveil next week, we certainly expect to win the retail battle throughout the remainder of the year.

Shifting gears for a few minutes from the tactical battle to our long-term strategic priorities, I am pleased to report, that we are not letting the urgent issues of the day prevent us from driving forward with the important opportunities for tomorrow. From our investment in international growth to the challenge of realigning our manufacturing footprint, we are working hard to position Polaris for a future of profitable, sustainable growth. The fuel for our overall strategy is still our Core Power Sports business, and our commitment to being the best in Power Sports Plus remains priority one. Whether it's designing and launching new products for new markets or improving the quality and performance of our current lineup, we are making the best and playing to win in each of our businesses. Our adjacency growth plans call for both organic and M&A activity to open up new channels and markets for growth and diversification. We launched our new products, for Bobcat in the second quarter, and made important progress with several key military initiatives. So, our internal development efforts are also progressing well.

I was recently in Switzerland to visit our new Swiss auto team, and am confident that they will play an important role in Polaris Power Trains, and provide products and technology to enable us to penetrate new markets. Our acquisition funnel is strong, and I like our prospects for creating new opportunities for growth and value for shareholders, as we add smart and disciplined M&A to our growth plans. As we continue to deal with the uncertainty and weakness of our traditional North American and western European markets, our commitment to global market leadership remains very high. We took most of the Polaris Executive Team to China in June and were able evaluate that market opportunity firsthand. We visited the first Polaris ORV showroom and dealership in Beijing and hosted an off-road riding event in the Gobi Desert with the Chinese media. This is a long-term market opportunity, but we are pleased to be starting down the trail. We believe that China, Brazil, India and the other developing countries of the world, are going to grow faster than the US well into the future, and we plan to be there to invest and grow in these markets.

While our prospects for growth are exciting, we remain firmly committed to ensuring that we deliver profitable growth. Our operational excellence tools and initiatives are improving both quality and margins, and we will increasingly leverage our lean efforts to improve speed and delivery. Strong performance over the long-term is our focus and that requires not only having, but importantly, executing the right strategy. With very strong top and bottom-line execution in the second quarter, we are making progress towards that goal in 2010. As previously mentioned, based on the strength of our second quarter and the improved outlook for retail sales, we are once again raising our full year 2010 guidance. With strong market share gains, low dealer inventories and an impressive model year '11 lineup about to be released, we now expect full year 2010 sales to be up 17% to 20% over 2009. We are also raising our 2010 earnings per share guidance to $3.80 to $3.90 per share, which represents a 25% to 28% increase over 2009, and a new full year EPS record for Polaris.

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. Let's start with Off-Road vehicles. Our ORV business, which represents 65% of our Polaris business, continues to perform above our expectations with second quarter sales up 31%. Year-to-date ORV sales have increased by 24%. We believe the ORV industry improved in the second quarter driven by modest single-digit growth in Side-by-Sides. The North American ATV industry remained weak, with retail sales down about 20%, very similar to what we saw in the first quarter.

For the second quarter, Polaris ORV retail sales improved mid double-digits, with ATVs down high single-digits and Side-by-Sides up significantly. Side-by-Side retail sales continue to be strong in all parts of North America, with strength in both RZR and RANGER categories across multiple models, which is extremely encouraging. Despite our significant second quarter production increases, dealer supply still remains tight on some key models. Polaris continues to gain considerable market share, in both ATVs and Side-by-Sides in North America, thanks to a couple of key factors. Consistent investments in innovative new product development, which has resulted in Polaris having the broadest, most current and innovative product line-up in ATVs and Side-by-Sides, healthier inventories, our mix of current sales is up significantly and aggressive marketing. ORV dealer inventories continue to decline, down 37% versus second quarter of 2009. ATV inventories are down 42% and are now very close to the optimal levels in aggregate. MVP dealer orders in the second quarter and retail share gain performance continue to exceed our expectations.

Our model year '11 dealer meeting is next week, and we will again deliver strong model year '11 new product news, which should continue to drive retail sales and share growth in the upcoming months. Our partnership with Bobcat achieved an exciting milestone as we began the first shipments to Bobcat in the second quarter and began to recognize revenue. While it is still early, the new product has been well received by the Bobcat channel and the outlook is positive. The military business continues to gain traction with key customers. We introduced five new vehicles, expanding our offerings with cost effective logistic support and tactical vehicles. Requests for quote activity, which we believe is a leading indicator to future sales, is on the rise substantially thanks to new products, sales and marketing efforts, and growing customer awareness. Based on the continued strength and the momentum of all elements of our Polaris ORV business, we are increasing our sales guidance significantly, up 22% to 24%, for the full year 2010.

Snowmobiles. Due to the time of the year, there's not much to report about snowmobiles and not a lot has changed from 90 days ago. Second quarter sales were down 73%, but all of that decrease is attributable to timing of shipments to better match customer requirements. Our guidance remains unchanged for the full year 2010 at approximately flat with last year.

On-Road vehicles and Victory motorcycles. On-Road second quarter sales, driven primarily by Victory, increased by 48% off a weak second quarter '09 comparable. North American heavyweight motorcycle industry retail sales continue to be sluggish, but did improve sequentially to down about 10% for the second quarter. Victory retail sales momentum, and market share gains, continued with retail sales up more than 10% driven by continued strength of our new Cross Country and Crossroads Touring bikes. We have already begun to ship some model year '11 cross product early to meet consumer and dealer demand. Victory dealer inventory continues to decline nicely, down 32% from the second quarter of 2009. As we head into our dealer meeting next week, we are encouraged with the progress of our and retail and market share expansion, our dealer inventory declines, and the exciting new product and marketing initiatives that we will announce.

The LEV Electrical vehicle business introduced two new products in the second quarter, a Breeze two-seat value model and a Breeze SL 25 mile-per-hour vehicle. The strategic focus for this business remains, establishing a beach-head position for Polaris with the brand and learning with aging retiring boomers. We continue to add new dealers, and see growth, but it will continue to remain a very small part of our business for the foreseeable future.

Parts, Garments and Accessories. PG&A second quarter sales increased 8%. We saw strong increases in Accessories, which were up 25%, driven by the strength in the ORV and Victory demand. Our commitment to innovation in PG&A continues and we will announce almost 200 new Accessory products for model year '11 at our dealer meeting next week. Our large parts business runs on a much longer product cycle and is driven more by the size of our install base, the usage patterns of our customers, and the cost of ownership and will traditionally be less likely to see spikes, up or down, based on short term retail sales activity and trends.

International. Second quarter international sales grew by 32%. Year-to-date international sales are up 36%, versus a year ago at this time, driven by excellent growth in EMEA, Latin America, and Asia Pacific regions of the world. Our growth initiatives in the key strategic markets of the EMEA, China and Brazil continue to progress nicely. Despite the broader economic challenges in Europe, we continue to generate nice growth there due to strength in both ORV and Victory and continued market share gains. Year-to-date we have widened our lead as the number one ORV. manufacturer in Europe.

International Victory sales more than doubled in the second quarter, and year-to-date, and now account for 25% of Victory global sales. EMEA ORV industry sales declines appear to be easing in the second quarter, and are down upper single-digits versus a year ago. We have improved the European Distributor channel inventory position in the first half and international dealer and distributor inventory levels are in good shape. Even with all this positive momentum, we are taking a conservative approach in our guidance and we are now softening expectations slightly for international sales to be up, in the range of 15% to 20%, due to the economic uncertainty in Europe and a weaker euro currency.

Operational excellence. The strategic manufacturing realignment we announced in the second quarter, focusing our operations on the three centers of excellence in the areas of paint, weld and assembly is on track. Roseau and Spirit Lake plants are currently in planning for the new processes in investment and Osceola continues to deliver excellent productivity, despite its eventual sale or closure.

We have selected a site location in Monterrey, the industrial capital of Mexico, and expect to break ground in early August. Production is expected to begin in the first half of 2011 beginning with Side-by-Side products. Cost to complete the project remain in-line with the forecast we outlined earlier, as well as, the forecasted annual savings. For calendar year '10, we expect to spend in the range of $8 million to $10 million in transition costs.

North American dealer inventory continues to improve, down 32% from the second quarter 2009, and down 13% from the first quarter 2010. In certain instances, inventory has declined, perhaps a bit too far, based on our improving retail sales trends. And as a result, we have increased production aggressively to meet demand and have added hundreds of additional temporary manufacturing jobs, including new second shifts on three assembly lines, beginning in the third quarter. Factory inventory is up 1%, versus second quarter 2009, and is increasing sequentially as we ramp up to meet demand. We expect for the balance of calendar year '10, that factory inventory will be up modestly, versus year ago comparables, as we invest to meet increasing retail sales trends and improve delivery to an expanding MVP dealer base.

The MVP business model is delivering results. Market share for MVP dealers continue to grow. Dealer turns are up and retail sales are growing. Currently 50% of North America ORV volume is on the program. Based on the success, it's our intention to expand the MVP program to cover the vast majority of our ORV dealer volume, effective this fall. MVP still has areas for improvement. Polaris must improve our ability to deliver to dealers scheduled orders, in a rapidly growing retail environment, and dealers must learn to manage the retail aspects of this new program. Despite these learning curves, clearly the program is working and is a superior approach to what preceded it. Dealer health, while still challenging industry wide, seems to be improving modestly for Polaris dealers. Repossession activity is stable-to-declining and the Polaris North American dealer count is actually up slightly driven by strategic Victory and Side-by-Side additions.

Gross margins expanded 210 basis points in the second quarter, versus the second quarter of 2009, and year-to-date have expanded by 190 basis points. The margin expansion is coming from all aspects, innovative product, value engineering initiatives, and efficiencies from the increase in our manufacturing volume. Operational excellence is alive and well at Polaris. We expect to continue the benefit from all of these positive margin drivers throughout the balance of 2010 and beyond. And with that, I'll turn it over to Mike Malone, our Chief Financial Officer.

Thanks, Bennett, and good morning to everyone. As sales and earnings continue to exceed our expectations, on the strength of improved retail sales and the outlook for the remainder of the year remains promising, we are again increasing our previously issued full year guidance. Guidance for the full year 2010 details are as follows. Total Company sales are now expected to increase 17% to 20%, for the full year 2010, with the individual businesses contributing as follows. Off-Road vehicles are up 22% to 24%, a significant increase from prior guidance of up 9% to 12% as a result of retail sales in Side-by-Sides and ATVs out pacing the overall market in both North America and the international market. Our guidance for snowmobiles remains unchanged at approximately flat with last year. On-Road vehicles, up over 50%, is no change from our previous guidance as we continue to see solid demand for Victory motorcycles. In PG&A, our guidance remains unchanged. We expect PG&A sales to increase, in the mid single-digit range, from the levels achieved last year.

Bennett highlighted the impact of the manufacturing realignment we announced a couple months ago. We recorded a combined total of $2.0 million of start up and exit costs in the year-to-date 2010 period, recorded in cost of sales related to this realignment and the guidance given for our third quarter and full year 2010, include the costs anticipated related to the manufacturing realignment. Gross margins for the full year 2010 are expected to expand up to 130 basis points, an improvement over our previously issued guidance. I will give additional clarity on the reason for our continued confidence in expanding the gross margins shortly.

Operating expenses are expected to increase in dollar terms, and as a percentage of sales, for the full year 2010, which is unchanged from the previously issued guidance. The increase is due to the incremental investments being made in our growth opportunities internationally, as well as, adjacent markets and business development. In addition, we are incurring increased competitive -- increased incentive compensation expenses in 2010, resulting from the reinstatement of certain planned contributions that were reduced or eliminated in 2009, the higher stock price in 2010, and higher expected profitability this year. 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 the income tax provision for the full year last year and unchanged from our previously issued guidance.

Earnings per share for the full year 2010 are now expected to be in the range of $3.80 to $3.90 per diluted share. Which is an increase of 25% to 28% compared to the $3.05 per share earned for the full year last year. We are very pleased with our progress in growing the bottom-line. If achieved, it will represent a record for EPS for the Company. As Bennett mentioned, the gross profit percentage generated for the second quarter 2010 was 26.2%, compared to 24.1% in the second quarter of last year, a 210 basis point improvement. The primary drivers of the improvement in gross margins was an absorption benefit from the increase in production volume, as we ramped up our facilities to meet the increasing product demand, our ongoing focused attention on taking costs out of our products from an engineering perspective, and favorable currency movements particularly in Canada. Offset, somewhat, by an increase in sales promotion costs and the initial manufacturing realignment expenses. For the full year 2010, we expect the improvement in gross margins to accelerate slightly from previously issued guidance, due to the increased sales volume and associated absorption benefit. We are increasing our 2010 guidance, and now expect gross margins to increase up to 130 basis points, given the first half actual results, the production and sales volume increases and the success we have experienced in taking costs out of our model year 2011 products.

Income from financial services for the second quarter 2010 grew 7%. Primarily due to an increase in retail credit fee income resulting from the growth in retail sales to consumers. During the second quarter 2010, we financed about 33% of Polaris products sold to consumers in the United States, through our retail credit programs, HSBC, GE, and Sheffield combined, which penetration rate has held stable now for a number of quarters. The approval rate in the second quarter was 57%, the highest approval rate we have experienced since the third quarter of 2008. We believe 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 second quarter 2010, the wholesale portfolio related to the floor plan financing of dealers in the United States, was approximately $425 million, a decrease of 26% from the end of the second quarter last year, reflecting the decline in the dollar amount of the dealer inventories. Units outstanding in the portfolio decreased 31% for the second quarter. Credit losses in the dealer wholesale portfolio remain very reasonable, averaging well less than 1% of the portfolio. 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 slightly lower than last year, primarily due to the lower dealer inventory levels financed by Polaris Acceptance, driven in part by the success of the MVP program.

Moving now to our balance sheet and liquidity profile for 2010, our net debt position has improved significantly from a year ago, with debt at $200 million at the end of June and cash balances at $166 million. We continue to have ample borrowing capacity, under our attractively priced $450 million banking arrangement, which expires in December of 2011. Factory inventories at the end of June were $222.6 million, a 1% increase from a year ago. We now expect factory inventory levels to be higher than 2009 by year end to support improved delivery to dealers. For the year-to-date 2010 period, our investments in capital expenditures and new product development tooling was $20.9 million, slightly less than a year ago. For the full year 2010, we expect Capital Expenditure spending to be in the range of $65 million to $70 million, up from guidance issued at the end of the first quarter, due to the capital required for the manufacturing realignment project as we announced in May. We continue to expect depreciation for the full year 2010 to be in the range of $65 million to $70 million.

Operating cash flow, provided by operating activities, was $57 million in the year-to-date 2010 period, a significant improvement from last year as a result of the improved profitability and reduced working capital requirements this year. We expect cash flow provided by operating activities to increase double-digit percent for the full year 2010 compared to last year. Our expectations for the third quarter 2010 are as follows. Total Company sales are expected to increase in the range of up 17% to 20% from the $436 million experienced last year. Earnings are expected to be in the range of $1.10 to $1.15 per diluted share for the third quarter, an increase of 17% to 22% over the third quarter last year EPS of $0.94 per share.

In conclusion, we are very pleased with our second quarter, and first half results, and feel confident we can maintain the momentum in the second half of the year. At this time, I'll turn it back over to Scott for some concluding comments.

Thanks, Mike. Obviously, overall we are pleased with our performance in the first half and are ready to continue the trend in the balance of 2010. While Polaris business performance and outlook has improved, we remain concerned and skeptical about this economic recovery. With high unemployment and continued uncertainty from Washington on the policy front, especially as it pertains to higher taxes and increased regulation, the risk of minimal GDP growth is quite real. We are maintaining our conservative outlook for the Power Sports industry and predict continued industry retail sales declines in North America and Europe. While we are projecting growth for Polaris, our revised guidance anticipates a very weak economic recovery for the remainder of this year and into 2011.

As we have done in the first two quarters, we will not look for excuses but rather continue to find ways to make growth happen. A primary short term objective is to efficiently ramp up production to meet retail demand. Using the same operational excellence tools that Bennett has discussed, we will accelerate the roll-out of MVP and work to improve the benefits for our dealers and Polaris. We have some heavy lifting to do on our manufacturing realignment in the second half and we will devote the necessary resources to properly execute this important strategic initiative. Finally, for those that harbor doubts about the sustainability of Polaris' growth trend, I invite you to talk to Richard about joining us in Orlando next week for our analyst meeting and dealer show. There is only one thing more confidence inspiring than seeing and riding our new products, and that is meeting the Polaris Team Members that drive our innovation and execution every day. Whether we see you in Florida or catch up with you on our October call, expect us to work hard to deliver continued strong results in the third quarter and beyond. With that, I will turn it over to Kayla to open up the line for questions.

(Operator Instructions) We'll pause for just a moment to compile the Q-and-A roster.

Okay, Kayla. We're ready to go.

Your First question is from Ed Aaron with RBC Capital Markets.

Thanks. Good morning, everybody and great quarter.

Thanks, Ed.

I wanted to just talk about the sales guidance for a minute. So, up 17% to 20% for the year? It seems a bit stronger on a percentage basis than where retail sales are kind of tracking on a full year basis. And I'm wondering if there is any read-through to that into how Bobcat might be going, because I know that's kind of a newer growth initiative for you, and you started shipping in the second quarter? So, maybe you can kind of help me connect the dots and all that. Thanks.

I wouldn't read too much, Ed, into the Bobcat. It's a great future opportunity. Bennett can add a little bit more color. He spent a lot of time with that team recently. But, that's not a major portion of it. Don't forget, we've a strong business outside of North America. So, the retail sales numbers we talk about are really just the US and Canadian markets. So, with military, the international business, Bobcat coming on strong. Don't forget, we're behind a little bit right now in dealer inventories. So, we're working to catch up. We get a little bit of a benefit from that in the second half as well. Bennett, do you just want to talk a little bit about Bobcat?

Yes. Bobcat is going well. We started early shipments to that channel late in the second quarter. So, the product is really just starting to arrive in dealerships. Everything looks good. The dealers seem to be excited about the new product. Looks good. It's a significant upgrade from what they've had previously and right now Bobcat orders are on, or slightly ahead, of what are expectations for the year. So, it will be a nice little chunk of our business. But, again, in the big scheme of things, Ed, it's still a relatively pretty small part of our overall portfolio, but certainly, additive for us.

Okay, thank you. Just one follow up on international if I could? You took the guidance down there just a little bit and I'm wondering if that's just sort of anticipating things might flow in the back half versus maybe already seeing some consumer trend behavior and I was hoping you could quickly elaborate on that? Thanks.

You know, Ed, actually the trends in Europe have been better than we expected. We had to twist the team's arm to bring down that guidance a little bit, just simply, because we are concerned. The currency dropping, the Euro is back up a little bit this week. But it dropped quite a bit and that put some pressure on there. But we're just being prudently cautious, not concerned at all about what's going on in Europe. Our Team there continues to execute extremely well.

Thank you.

Next question is from Scott Stember with Sidoti & Company.

Good morning.

Good morning.

Just touching on the Europe topic here. Could you just, or international, could you just talk about some of the areas which have shown particular strength for you?

The Scandinavian countries are actually where were strongest in Europe. They've done well. Then, overall, with the launch of Victory really starting to spread out, that's done well for us really across Europe. As you can imagine, some of the southern European countries have been a little bit weaker. But, I think, what we've seen out of Sweden and Norway, and even in Germany we are starting to see significant year-over-year increases in sales. So, by and large we are very pleased with what our team is doing.

Just to add a little color on that, Scott, EMEA continues to be our growth driver, and that's up year-to-date about what our earnings are, about 35%, and we are seeing really nice growth in the other regions. Latin America is up greater than that. It's a small part of our business, but the percentage growth is better than what we are seeing in the EMEA. Asia Pacific is trending very similar to what our rates are. We are really seeing it across the globe, which is encouraging.

This is Mike. One other thing to add is, as we said before, our Side-by-Side penetration outside North America is somewhat lower than it is here in North America and that's accelerating rapidly in the EMEA market in the year-to-date period.

Could you give additional color on China, now that you have a full quarter under your belt?

Yes. China is really a long-term growth play. Kind of what we try to apply, a lot of the lessons we learned, in Europe as we've kind of grown fairly aggressively to become number one in the market there. We started off with an extremely talented and strong team on the ground in China. We had a great week there with the Executive Team. We've got our first showroom opened up in Beijing and a real fully functioning Off-Road vehicle dealership there. Sales are going to be, probably give or take, 100 units this year. Very, very small market for us. But we expect it to ramp up quite well as we expand distribution and certainly we value our strategic partners that we have there and any opportunities they provide to enter that market effectively.

Moving back over to Bobcat. Could you talk about the next stage, the co-develop product? What was the time line for that?

I'm not going to get too specific about that. But, Bobcat and Polaris continue to work on, what we call phase II, which is that co-developed product. That product is right on schedule and the timing of that would still be a year-to-two years out, essentially would be the time frame you should expect that next, that next phase of the Bobcat expansion.

Okay. And last question on the military side. You've added a bunch of new products there recently. Could you talk about what your annualized run-rate is of military sales right now?

Yes. Right now, military is down slightly from where we were a year ago at this time. But, again, all of our key indicators are pretty positive from a standpoint of things that we have either in backlog or things that we are chasing. So, we remain bullish and really haven't changed our full year forecast on military for the year. We still think that's going to roughly be for us right in the range of about a $50 million business for us at the end of calendar year '10.

I think the exciting thing about military is for the first time we are really developing purpose built products that are not -- the military values our commercial off the shelf options, but we are really starting to think about how we can add significant value with products specifically designed for that customer, So, we are very, very excited about the long-term future there.

Great. That's all I have right now. Thank you.

Your next question is from Scott Hamann with KeyBanc Capital Markets.

Hi. Good morning. Just in terms of the retail trends that you saw throughout the quarter, can you give us a sense of how they trended month-to-month?

We're not going to generally get into too much comment within the quarters and within the months. But, it was pretty consistent for the most part. We've seen remarkably consistent strength, as you can see, from our numbers in Side-by-Sides all year long. The ATV market has been a little choppier based on what's going on in the industry. But, our sales have been pretty darn consistent. You wanted to add something, Mike?

I think, generally, the thought is that retail globally weakened a bit in June from what was experienced earlier in the quarter. We saw a little bit of that. If you look at our total of 13% for the quarter June was a little bit less than that, but not dramatic.

Okay. Then Mike, on some of the financing that you talked about, the higher approval rates. Do you get the sense that lenders are changing their underwriting standards or what's driving that higher approval rate?

Well, I think for one, consumers are being more careful and more educated. The consumers that know they're not going to get credit don't necessarily apply for the credit. So, I think there's -- there is more of a concerted effort by consumers to look at that. I don't know that when we look at the average FICO scores and underwriting criteria, there is not significant loosening going on in the retail credit market. So, I think it's just a matter of returning to more normalcy more than anything else.

Just my final questions on what you are seeing in terms of the promotional environment and especially as relates to competitive products. I know you guys are doing well, I'm concerned about what you're seeing out in the channel, outside of your products? Thanks.

This is Bennett. Promotional activity, I would characterize, as it's up slightly but exactly what our expectations were. I do think competitors are getting a little bit more aggressive as they continue to see in general market weakness. And obviously, we're gaining a tremendous amount of market share. So, they're trying to find new ways, without new product innovation, to see if they can get some market share. But it's completely within our expectations and really throughout the second quarter was largely stable. So I'd say it's up slightly, but that's kind of how we modeled the year.

Next question?

Your next question is from Greg Badishkanian with Citibank.

Great, thanks and great performance this quarter, Guys. I just have two or three questions. First, as a follow up to the last question. Have you noticed any, in terms of new products, any new innovation coming out, particularly on the Side-by-Side, from some of your competitors or when do they typically come out with new products?

Greg, this is Bennett. If you've been watching, as we kind of outlined at the beginning of the year, and longer term, we expected where we would see investment in power sports would be in the Side-by-Side category and that has rung true. We've seen, at least, announcement or launch of a couple of key products. Can-Am has launched a new Side-by-Side product called the Commander, which is not in the marketplace yet, and looks to be what we would call a tweener, but a fair amount of high performance characteristics. So, we will see how that does. John Deere has upgraded their Gator to be a little bit more Ranger like, I would characterize it as. So, we will see how that does. Yamaha's announced a Rhino, but at least from our appearances, it doesn't appear to be a significant change from what they've had previously.

So, we are seeing investments in new products in Side-by-Sides and, frankly, that's about the only category we are seeing investment in new products. I think the key thing I would tell you from our perspective is, in the Side-by-Side category with Operational Excellence, we really honed our speed and if we were a target that was standing still that might cause more concern for us to be worried, but we are not standing still as you'll see when you come down to the show next week. Our future product plan is aggressive and so we feel pretty good about our competitive position, even with these new entrants.

Greg, just one final comment. Not only do we feel great about the products, we feel great about the Side-by-Side portfolio, and I think though too that gets even stronger next week is the reason that we're certainly appropriately watching what the competition does, but not overly concerned.

If history is any guidance, you guys do provide great innovation at those show's, so, looking forward to it.

One other thing, Greg, that I think people should note is we've been kind of all alone in product innovation the last several years really in this space. We think, in some ways, it could be healthy for the industry to see investment by competitors because it drives interest, and awareness, in the category which, again, may be very beneficial for what we call the market leader here.

Great. And what is, for Ranger sales in the back half of the year, what is baked into guidance at retail? Is it a continuation or a little bit of deceleration of the current trend?

Well, I am going to be careful with that answer, Greg. If you look at our guidance, I think what you would see modeled in there if you start cranking your model is we continue to see significant retail growth in Side-by-Sides. But, we think we are a taking a prudent cautious approach and it moderates somewhat mostly because we have tougher comparables in the second half of 2009 that we are going up against, versus the first half of 2009.

Okay, and then just finally, as you look at your European market, are there any kind of differences, in terms of, how the US consumer and the European consumer has behaved during the last recession? Any major differences there?

Not tremendously. One of the things we saw in Europe, you know that's a different business model for us. A lot of the products there are used on-road at least a portion of the time. But that was a market that had been significantly more penetrated with the Asian competitors than what we'd seen in the US. Throughout the recession, we saw a lot of those Asian competitors back away from the market, either because of lack of distribution or lack of demand. We've gained share through the downturn and we've seen customers migrate, as Mike talked to earlier, to our Ranger and RZR products there.

Great. Nice job in the quarter. Thanks, Guys.

Your next question is from James Hardiman with Longbow Research.

Good morning and also congrats on another strong quarter. Just to close the loop here, real quick, on the international guidance. First half up 36%, full year 15%, 20%. Was there something in the first half, in terms of maybe, timing of shipments that would, you know, not being repeated in the second half, and that would ultimately make the second half numbers not look as good? I'm just trying to figure out how that would be possible and if it's just a conservative approach, should I assume that we slowly get there and ultimately fourth quarter is worth than the third quarter, for example?.

I think, there is a different business model there. We don't have the same dealer networks that we ship into distributors. They had brought their dealer inventory or their inventory down significantly. So, there was much more of a channel fill opportunity for us in the first half that doesn't repeat in the second half. So, that's part of why there would be a natural, even without the currency and the slowdown in the economy, we would have expected the first half to a little bit stronger.

Okay, that's perfect. What was the currency benefit in the second quarter?

There -- it was helpful in Canada. But from an international business perspective, it was negligible.

I don't want to steal the thunder, obviously, from next week, in terms of making the case for the sustainability of the Side-by-Side market, but what can you tell us about who is buying these Side-by-Sides that are growing at such an impressive clip? Are you bringing new customers to the broader ORV market? How much cannibalization is going on here from the core ATV market to the extent that you can tell that? With replacement patterns in Side-by-Sides versus traditional ATVs, how do those compare and what are the implications on the broader ORV segment?

James, I'll take a crack at it. This is Bennett. Matt, next week, will spend a reasonable amount of time going through some of those consumer trends and so forth. But, what I can tell you is from what we've seen the trends of cannibalization from ATVs generally remains fairly similar. It's roughly a third. The customer is largely the same customer we've told you about for years. But, what we still have with Side-by-Sides is a relatively, at least in respect to our other categories, a relatively immature market still. We see significant expansion in recreation which is really, frankly, a fairly new phenomenon that really began with our RZR and maybe a little bit before that with the Rhino product. So, we're seeing very nice growth out of the growing recreation segment in Side-by-Sides and we think that continues to have legs.

Again, you know that the Ranger platforms and a lot of our competitors, it's frankly in lot's of ways a superior solution. It works harder. It provides a social experience that allows Side-by-Side seating for multiple passengers and it's doing a number of, what we would call, utility tasks throughout it. So, we still see decent growth in the utility work aspect in the Ranger platform. But, from a standpoint of the change in the buyers, not so much, other than we're penetrating new segments with new solutions. But, again, Mr. Holman will go through that in detail next week, when we're down there.

Is it safe to say, I mean, I think the numbers you laid out, correct me if I'm wrong, were that the industry in terms of core ATVs was down, I think you said 20%, but you guys were down sort of high single-digits? Which would suggest you guys are gaining a lot of market share. So, to the extent that Side-by-Sides are cannibalizing the core ATVs or are you basically cannibalizing the other guys core ATVs. Is that how I should think about this?

I think you should think about it that, from both categories in our Side-by-Side and ATV categories, we are clearly taking market share from our competitors and have been for some time. Again, what we attribute that to is a number of factors. Frankly, we've consistently invested in innovation in products that we have a broad current. Frankly, I think in many ways, our opinion, superior portfolio, as we've gone to MVP our mix. So, what we're selling is we're often selling current product solutions versus our competitors non-current discounted solutions. That clearly is helping us drive share. So, from a share standpoint we're taking it. And I do think, that at least in our own ATV category our Side-by-Side line-up is so strong that there is some cannibalization from our ATV business that's moving to the Side-by-Side business.

Excellent. Appreciate it, Guys.

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

Good morning. Congratulations. Thanks for taking the question. Bennett, Scott mentioned you were a little bit behind on shipments. Which is certainly a good problem to have, but, could you expand on the comments you made earlier that you need to tighten up some of the supply chain processes and also you need to get dealers to tighten up their retail processes. What exactly do you think needs to happen here?

On a couple of fronts. From our standpoint, obviously, as we move to MVP, everything happens much quicker. The retail happens which triggers an order, which triggers us to deliver. In a business as usual as a flat or shrinking environment we didn't really see much issues with deliveries. We move to a much higher percentage of our dealers on MVP and we see, frankly, rapid retail increases in some cases are greater than our forecast; we've been challenged to keep up with delivery on some key models.

So, just like we've been doing the last couple of years, we have got to continue to get way faster with our supply chain lead times. We've got to improve our internal processes and visibility to our dealers about promise to delivery and hitting those delivery dates. So, that's a key focus inside the walls of Polaris is to continue to speed that up and hone that.

From a dealer standpoint as we move to more of an MVP environment, again, it's far more than an order and supply program. It's about repeatable retail processes that drive segment stocking, that drive retail share and customer satisfaction, and we have dealers from being very small to quite large and they are in different levels of sophistication on how they manage retail. So, we continue to keep, what we would call, agitating our dealer partners that as we move to this very powerful tool, the retail processes can't be that someone walks in the door and retail just happens to you. That's just not good enough. So, that's why you hear us making commentary about that. That's a significant focus area for us to continue to drive market share and dealer profitability down the road.

Thanks. Mike, question for you. The restructuring plan, I think we calculate an annualized benefit of approximately $0.59 once it's all said and done. How much of this would you expect to see this year? I think that number is probably zero. Then how much of it would you expect to see next year on a gross basis?

Our expectations there have not changed since our initial announcement a couple months ago. As you guessed we don't anticipate any savings in 2010 from the manufacturing realignment. Eventually, as we said, it will be $30 million when we are done at maturity and it will ramp up starting in 2011 as we start production during the first half of the year. In 2011, I don't have specific numbers for you, but in 2011, we will continue to have costs that are charged to the P&L for the manufacturing realignment. We will have some savings, but the savings will not off-set the costs in 2011. So, the net will still be dilutive and then it will turn quite positive starting in 2012.

So if I could just rephrase that any earnings growth you see, or would expect to see in 2011, would not come from this initiative. That would be more of a 2012 part of the budget?

That's correct.

Great. Great. Thanks and congratulations.

Thank you.

Your next question is from Bob Evans with Craig-Hallum Capital Group.

Good morning. I'd like to echo as well, great execution this quarter. Can you comment on, again, kind of back to the Off-Road vehicle, equilibrium as relates to MVP and the dealer channel right now. Can you give us a sense of when you expect that equilibrium to happen?

Bob, this is Bennett. I think as we are trying to signal, we are arguably essentially there. The reason why we're not saying we are quite there is when you look spread across an entire dealer network, and there are certain regions of the country that have not gone on MVP, not every dealer is at equilibrium. We have some that still have too many; we have some that have too few. In general, at least, as we sit here today, we are essentially at equilibrium.

I just want to make sure we are talking apples-to-apples. When you are saying equilibrium, are you saying in terms of your inventory levels on your Side-by-Sides? Because we talked to some dealers who are saying they can't get stock.

Yes, I'm saying both for Side-by-Sides and ATVs. I think, our view is we probably have to improve, increase our dealer inventory on Side-by-Sides slightly in aggregate and ATVs is essentially about where we want to be. Again, I can't make that comment for every dealer throughout the country but, in general, our aggregate inventory positions that would be a fair characterization.

And if there is -- would you say the biggest challenge to getting that inventory, is it just increasing your production capacity in terms of what you've done with people, and so forth, or is it more vendor lead time?

I think, in the short term obviously the solution is we've increased supply significantly. We began that in the second quarter and, as I alluded to, we've began three, second-shift operations on three assembly lines here early in the third quarter. So, we are humming from a production standpoint and we will see significant increases in build going forward here from really second quarter on. So, we think we will catch up.

Okay. Just want to clarify on the core ATV product because there's a lot of numbers put on it; I just want to clarify where you were? Polaris kind of retail sales this quarter versus the industry and where you kind of expect that to go second half?

We were down high single-digits in the second quarter and the industry was down 20%. Going forward, I think, we would like to think that the industry will improve modestly in the second half and similarly for us modest improvement continuing to outperform the market.

I think, Bob, just to add to that, looked right before I came into the call this morning at the combined Off-Road vehicles, so ATVs and Side-by-Sides are tracking very well in July. So, we are seeing good strength in that market right now.

Okay. Okay. Thank you. And last question. Acquisitions. Are you, I know you've got a larger pipeline, if things have not gotten done yet, is it price or cultural fit, or just can you give us a little bit of color as to what you are seeing?

I'm only going to say, Bob, is we are very busy right now. That's all I'll say.

Fair enough. Thank you.

Next question?

Your next question is from Joe Hovorka with Raymond James.

Hi, Guys. Actually just two quick ones. Just to confirm, Bobcat is not in the retail sales numbers you are talking about for ORV, right?

That's correct.

Secondly, can you give the ASP increase for ORVs shipped in the second quarter?

Mike is getting that for you.

Hold on.

Not going to be a big number. The Ranger 400 is doing really well for us. As you know, that's at the lower price point. Also on a positive side by the RZR 4.

How much of that Ranger 400 accounting for as a percentage of retail sales at this point?

Well, it's a significant portion now. It's moved into our top five of Side-by-Side sales. So, it's a growing part of our portfolio. We think from a market share standpoint, while we don't have great numbers, we think that that product may have moved to industry leadership in the mid-sized category which is pretty outstanding for a product that's been in the market less than a year.

Right.

Joe, the answer is 5% increase in ASP for ORV in the second quarter.

Okay. Great. Thanks, guys.

We have time for one more question. Kayla?

Your last question is from Tim Conder with Wells Fargo.

Thank you. Let me give kudos to Scott and Bennett for calling the 400 a year ago at the dealer meeting. Dead on there, guys. Just a couple of things as it relates to the ATV secular decline in the Side-by-Sides and some of the previous questions with the switch between those. Bennett or Scott, where do you kind of see the ATV secular sort of, maybe leveling off and, obviously, it is the Side-by-Side growth is more than just the swap of those markets. But can you kind of talk about those dynamics there?

I'm going to have to be fairly vague. But I think the trends, as we see it, obviously the ATV market core market is a little more mature in North America and we too are wondering when we will see the bottom of what we would call stabilization. We think we are not far from that point right now. It's been very difficult with the economy. So, we think we are nearing kind of what the erosion and the fallout of what we've seen in that market. In Side-by-Sides because, again, it's a superior solution. It's fairly new. We will have new competitors coming into that space. We still see plenty of what we would call longer term opportunities to provide new products that meet new solutions for customers that are superior to what's out in the market today. So, we see, continued industry growth in Side-by-Sides. It's, I think, it's rather impressive in this market environment that we've seen Side-by-Side growth here industry-wide here over the last six-to-nine months when all our other categories are down.

Clearly. Okay. Okay. And then as far as, does the gain in the incremental sales guidance, that you've given in the back half of the year, any quantification or color as to how much of that is basically getting caught up on where you need to be with in particular the Side-by-Side inventory in the channel?

Frankly, and I'll let the other guys jump in, as I said on an earlier question, in aggregate we are fairly close to equilibrium. We think we will increase Side-by-Side inventory positions in the dealer network slightly to modestly, but ATVs is about where we are. We still would like to take Victory down a skosh. So, net net, I think you shouldn't consider a significant add to our second quarter, second half sales being what I call pipeline fill.

Don't understand estimate our commitment to maintaining dealer inventories as lean as we possibly can. I wouldn't weigh too heavily on that one.

Okay. Okay. Then just a little more color, if you gentlemen may, on when do you anticipate the competitive inventory largely being cleaned up? You commented that maybe they are trying to be a little more promotional as they don't have the products and you guys do? Really the only new things that they're bringing are Side-by-sides. But all of the non-current stuff, should that pretty well be done this selling season or by calendar year end or what's your view there? Obviously, it's not having that much of an impact on Polaris.

I think the way you should think about that, Tim, is very versus the environment you are in a year or two ago, the competitive boxes that we sitting in inventory are down significantly. What I think our competitors are challenged with is what happens a lot of times in declining markets they've taken their inventory boxes down, but the mix isn't great so they have a lot of non-current versus current and so, you don't necessarily have the right mix of current product versus non-current product in inventory in the dealership. So, I think we are going to continue to see them be relatively aggressive on promotion, though their overall box count and velocity in inventory isn't where they want it to be. I see that going for, into the future here. I don't think there's a quick easy fix on that. But, I would not characterize the issue from an inventory standpoint of our competitors. It's much better than it was a year, year and a half ago.

Okay. And then, Mike, finally as a follow on the restructuring. Just wanted to double check, 13 is when you will get basically -- you won't have any additional charges and you will get the full benefit of that restructuring in the P&L?

Tim, that's correct.

Okay. Okay. Thanks, Gentlemen. We will see you next week.

Okay. Thanks. That's all the time we have this morning. I want to thank everyone for participating, and for those of you who are coming to our analyst meeting next week, we look forward to seeing you there down in Orlando. Thanks, again, and we will talk to you next quarter. Goodbye.

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