Polaris Inc (PII) 2010 Q3 法說會逐字稿

Good morning, my name is Felicia and I will be your conference operator today. At this time I would like to welcome everyone to the Polaris third-quarter earnings results conference call. (Operator Instructions). Mr. Edwards, you may begin your conference.

Thank you, Felicia, and good morning and thank you for joining us for our 2010 third-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.

As always, 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 and our initial qualitative view of 2011, 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 and 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 will turn it over to Scott.

Good morning. Thank you for joining us. This is a good day at Polaris. During the third quarter we once again delivered on our commitment to make growth happen, and I am proud of the way this team continues to win the competitive battle.

We are leveraging innovation and strong execution across the enterprise to overcome the still sluggish economies in our core markets. Based on our strong share gains and overall performance we are again raising our full-year guidance for both sales and net income.

Earnings-per-share are now projected to exceed $4 for the first time ever, and we fully intend to finish 2010 with positive momentum.

It was certainly accelerating momentum that drove our third-quarter results. Net income was up 51% from the prior-year period to $47.2 million, yielding earnings-per-share of a $1.37, up 46% from the third quarter of 2009, and the highest quarterly result in the history of Polaris.

Growth and productivity are key objectives, and both contributed to our strong earnings in the quarter. Gross margins expanded 190 basis points to 26%, pushing operating income up 120 basis points to 11.7%.

While the numbers are solid, I'm equally pleased that our margin performance includes continued investments in new products and margin expansion activities that will support growth well into the future.

Third-quarter sales of $580 million were up 33% from the prior-year period. We checked, and that 33% increase was the highest percent gain in any period since the second quarter of 1995, a mere 15 years ago.

The acceleration of sales growth in the third quarter was also impressive, as the sequential increase from 25% growth in the second quarter comes on the back of strong dealer and consumer demand for our innovative and value oriented products. Volume was up nearly 30% as we gained marketshare in every product line in North America and in our international markets.

Currency and mix were slightly favorable, but it is primarily broad-based demand for our products that is fueling the growth.

North American retail sales were up 21% in the third quarter, significantly above the prior-year period, which low due to the recession, and also up sequentially from the 13% increase posted in the second quarter.

Side-by-side retail sales remained strong throughout the quarter as that team and business continue to execute at an extremely high level. Victory actually had the highest percentage retail sales increase, up more than 50% in the quarter.

ATV retail was also positive, and September marked the fourth month in 2010 that Polaris has been number one in North American ATV marketshare. Overall ORV retail was up about 20%, which goes a long way in explaining the large $128 million ORV revenue increase in the quarter. Victory and PG&A sales also contributed to our topline growth, while snow was down slightly due to shipment timing.

The relationship between revenue increase of 33%, while North American unit growth was up only 21%, is worth commenting on. I want to emphasize that we continue to have a laser focus on accelerating retail performance with the leanest possible dealer inventory, which was down 25% year-over-year again in the quarter, as Bennett will show in a few minutes.

We are, however, very close to equilibrium in our ORV business, and no longer have the headwind of significantly under-shipping into the channel, as we have done consistently for the past four years. That under-shipment had the effect of creating lower sales and easier comparisons than last year's third-quarter, and therefore yielded a higher revenue growth rate this year as we shipped closer to real demand.

Revenue also includes international shipments, PG&A, mix and currency impacts that are not part of the North American retail number. The key takeaway is that Polaris revenue was up more than North American retail sales, but not, nor will it be, at the expense of our dealers. We have worked too hard to get this -- to get to this near steady-state, and MVP will allow us to sustainably maintain the appropriate balance for our dealers and Polaris.

While the third quarter was largely focused on executing another successful dealer show in Orlando and ramping up production of our model year '11 products, we also spent considerable time looking forward as we updated and refined our strategic plan.

We like the progress we are making to position Polaris for sustainable, profitable growth. And I will provide a brief overview to highlight the balance we are maintaining between short-term execution and delivering on our long-term strategic initiatives.

As our year-to-date results highlight, we are committed to winning in core power sports. The new RANGER Diesel and mid-sized Crew side-by-sides that were recently launched are examples of how we are working to extend our lead and grow share in that important and competitive side-by-side market.

Our strong growth and significantly improved dealer inventory position in Victory has our motorcycle business in a very healthy position. With MVP now rolled out to our entire North American ORV dealer network, we fully expect to make that process a further competitive advantage. Leveraging product and process, we will make sure that our best team in power sports continues to lead the best business in power sports, plus a whole lot more.

Our military business and Bobcat relationship are both examples of how we will grow organically through the adjacencies, and we see bright futures for both of those initiatives. Military orders have come in later than anticipated this year, which will limit shipments and sales in 2010, but the product development and relationship and program in-roads made this year are extremely important to our long-term success.

We have demonstrated that we will be disciplined as we add acquisitions to our growth strategy, and our acquisition funnel is healthy and active. I like how we are positioned to leverage M&A activity to support our strategy and enhance value for shareholders.

Our North American business is performing at a very high level. We know that we must move to become better represented in many of the faster growing regions of the world. There are long-term economic headwinds in the US that make a return to strong GDP growth unlikely. So with tailwinds in much of the developing world, we are striving to balance our investments appropriately. We strengthened our teams in China and Brazil in the third quarter, and continue to invest more time and resources in developing products for our international customers.

Our margin expansion progress and acceleration of MVP provide real examples of how we are using operational excellence tools to make our business stronger. Despite progress, we are still very early in our lean journey and we expect to improve quality and delivery, as well as margins, in the years ahead.

Strong financial performance over the long term is our focus. And we judge our strategic success by how well and how consistently we deliver on our profitable growth objectives. With very strong top and bottom line execution in the first three quarters of 2010 we are making good progress toward that goal.

With that, I will turn it over to our Chief Operating Officer, Bennett Morgan, who will provide additional insight into our operations and business unit performance.

Thanks, Scott, and good morning. Let's start with off-road vehicles. Our off-road vehicle business continued to pick up significant momentum with third-quarter sales up 49%, driven by growth in ATVs, side-by-sides and our new Bobcat supply relationship. Year-to-date sales are now up 33%.

The North American ATV industry remained sluggish in the third quarter with sales down about 20%, similar to what we have seen through the first half of the year.

While we do not receive monthly side-by-side industry data, we believe the side-by-side industry grew in the third quarter by low double digits and year-to-date is now up about 10% versus last year.

Polaris North American ORV retail sales grew by about 20% in the third quarter, marking our strongest retail performance yet this year, and making it the fourth consecutive quarter of stronger retail. ATV retail sales were positive, up mid single digits for the first time since 2005. Year-to-date Polaris ATV retail sales are now down just low single digits.

Side-by-side sales remained extremely robust, with sales up well over 30% for the quarter. Polaris marketshare momentum continues to accelerate significantly in the third quarter and year-to-date in both ATVs and side-by-sides.

We have seen a couple of new competitive entries into the side-by-side category in recent months. As is usually the case, these new products appear to be stronger competition and we are monitoring their impact. But to date these products have not slowed our growth or our share expansion.

Competition is good and it makes us all better. But we believe Polaris' lead in the growing, lucrative side-by-side market will continue to accelerate for a number of sound reasons.

We have superior product innovation with industry-leading platforms in both RANGER for utility and RZR for recreation. These platforms now each have a series of models that effectively meet a diverse group of customer needs better than anyone in the industry. And it is a broad range of customer solutions and models, not just one hot product. We have a better business model with less waste with MVP, strong brands and a distribution channel we continue to invest in.

Finally, we have a superior quality, cost and speed to market through our operational excellence initiative. You have seen our track record of new product innovation, and we are confident about our future product plans' ability to continue to drive profitable growth for Polaris and our dealers in side-by-sides.

ORV dealer inventories are down 30% versus a year ago, with ATVs about where we want and side-by-side inventory a bit too low. Due to the continued strength of our retail sales and the new model year '11 product demand from dealers, product supply remain tight on some models in the third quarter, most notably in our RANGER line.

As we mentioned last quarter, we significantly ramped up production in the third quarter, increasing production by over 50% for ORV products. The ramp up has created over 700 US jobs, but was not without some short-term pain as we struggled with staffing and material flow early. Those operational issues are now largely behind us, and we are pleased our team could so rapidly flex up to meet strengthening consumer demand.

Shipments to Bobcat accelerated in the third quarter, and the Bobcat channel has begun to retail the differentiated utility vehicle to consumers.

Scott has already commented on the timing of our military sales year-to-date, but we have a number of positive developments. Third-quarter highlights include quote and order activity for new vehicles were up significantly. We also won a competitive bid for a five-year Army National Guard contract valued at up to $67 million for the supply of RANGER XPs and RANGER 6-by-6 vehicles. And we were also awarded a key development contract with the U.S. Army to explore and develop new power generation and vehicle range extension technologies for vehicles in our space.

As a result of the continued performance above expectations and improving retail strength, we are significantly increasing full-year 2010 sales expectations for ORVs to up 32% to 33%.

Snowmobiles. Third-quarter wholesale sales decreased 6%. And full-year 2010 expectations continue to be about flat with calendar year 2009 sales. Polaris and the industry are off to a better start early in the season versus a year ago. North American third-quarter industry retail sales declined by mid single digits, while Polaris retail sales increased upper teens percent, driven by continued interest and demand in our new model year '11 RMK and RUSH snowmobiles.

Polaris marketshare is up. And we believe while it is very early, we will continue to gain share thanks to our strong new products. In Europe retail sales and marketshare are up as well.

Less than 10% of the season's retail has occurred, so the next 120 days, as they do every year, will be the critical retail months for the industry and Polaris. Dealer inventory levels are in solid shape, and based on all of these factors we remain cautiously optimistic about the upcoming snowmobile season.

On-road vehicles and Victory motorcycles. On-road third-quarter sales were very strong, up 116%, driven by stronger demand and sell-through of Victory motorcycles across the globe. North American heavyweight motorcycle industry retail sales remain sluggish, with sales down low double digits in the third quarter, very similar to what we have seen all year.

Victory retail sales momentum continued to accelerate with retail sales up over 50% in the third quarter in North America, driven by strong share gains across the lineup, but particularly in touring, where our Cross bikes continue to sell very well.

We continue to make good progress on dealer inventory, which is down 32% year-over-year. And we have done a nice job of reducing noncurrent cruiser inventory.

Dealer fundamentals and momentum has improved, and as a result we have been more aggressive and successful in targeted dealer count expansions. Year-to-date our North American Victory dealer count is up 15%.

As encouraging as the North American progress is, it pales to our success rolling out and selling Victory globally. Year-to-date wholesale and retail sales have just about doubled, and we are gaining marketshare in virtually every market we have entered throughout the world.

Comparables do get tougher in the fourth quarter, but we are encouraged by the improved retail velocity and the improvement in the dealer business model over the past year with the new team and more aggressive approach. Clearly we will enter 2011 in a much stronger competitive and business position in Victory.

Parts, Garments and Accessories. PG&A had its strongest quarter this year in the third quarter with sales up 12%. Year-to-date PG&A sales improved to plus 9. Sales growth in the third quarter was again driven primarily by strong increases in accessories, up 33%, driven primarily by side-by-sides. We also successfully introduced nearly 300 new products for model year '11, and PG&A business momentum is trending upwards.

International. Third-quarter international sales grew 4%, about as we expected. Year-to-date international sales are now up 25% versus a year ago, driven by increased growth in every region throughout the world -- EMEA, Latin America and Asia Pacific. The European ORV industry declined by upper single digits in the third quarter, similar to the year-to-date 2010 performance.

Polaris third-quarter retail sales continued to outperform the industry, and we widened our lead as the number one marketshare performer.

International growth drivers remain numerous for Polaris. International market trends appear to be mirroring North America's shift towards more side-by-side products. Year-to-date international side-by-side sales are up well over 50%, but still remain only 6% of total Polaris side-by-side sales, our smallest international to total Polaris sales production product penetration. Based on the trends, we have plenty of room to grow side-by-sides internationally.

Victory is growing rapidly and expanding to new markets. China and Brazil subsidiaries are on track and growing. Russia has begun to bounce back to growth. The EMEA had continues to grow through sustainable share gains and product mix improvements. For the full-year 2010 we now expect international sales to grow by about 20%.

Operational excellence. We made significant progress on our strategic manufacturing realignment project. We broke ground in Monterrey and construction is on schedule. We have added over 30 new salaried hires for the plant. And we have been thrilled with talent and experience of the new Monterrey hires. Investment into Roseau and Spirit Lake plants are in schedule as well, as we continue our manufacturing transition.

The cost and benefits of the project remain as we have outlined previously. Though we are investing more up front in 2010, we now expect to spend between $11 million and $12 million during 2010 in transition costs, which include additional investments for security. This will put us in a better overall position to mitigate risk and deliver on a flawless launch in 2011.

North American dealer inventory continues to improve, down 25% from third-quarter 2009 and up 11% sequentially from the second quarter, due primarily to snowmobile shipments in advance of the upcoming season.

Core ATVs are down 37% versus a year ago. And as I said earlier, supply on certain models still remain tight, particularly on certain side-by-side models, even with our aggressive production increases. We expect that this will improve as we move throughout the fourth quarter.

Factory inventory has increased 27% versus third-quarter 2009 and is up 26% sequentially from the second quarter as we have increased our inventory position in response to our significant retail sales increases to better respond to growing customer demand.

We expanded and made our MVP go-to-market model available to 100% of our North American ORV channel in the third quarter. Smaller dealers have now been included, but will operate on a slightly less frequent order cycle to better fit their size and velocity profiles. Retail sales, dealer orders, marketshare and dealer turns continue to improve. We are enthused about the ongoing improvements in growth we can drive together in MVP as we move forward with our dealers.

Our momentum within the dealer channel continues to strengthen. Dealer attrition is down about 50% versus 2009, and dealer count is up in side-by-sides and Victory.

Innovation remains alive and well at Polaris. Earlier this quarter we again introduced several new products at our dealer meeting in Orlando, including a new diesel RANGER, two new value mid-sized RANGER 500s in a standard and Crew configuration, new value Sportsman 400s and 500s, and a new core custom series, further building out our Victory motorcycle touring line.

Receptions to the new products has been excellent, and many have already began shipping and retailing. Our ability to get relevant products to markets faster and more efficiently than competitors continues to fuel our growth.

Gross margins expanded 190 basis points in the third quarter and year-to-date versus 2009 comparables. Expansion continues to come from innovative, superior new products, value engineering and sourcing initiatives and leverage from increased volumes.

While we are pleased with our results and progress to date, we continue to see many further opportunities on our journey to improve customer satisfaction and profitability through operational excellence at Polaris.

With that, I will turn it over to Mike Malone, our CFO.

Thanks, Bennett, and good morning to everyone. It is very gratifying to again report sales and earnings growth that exceeds our expectations, and the outlook for the remainder of the year remains promising. We are again increasing our previously issued full-year guidance to reflect these positive trends, especially related to ORV retail sales.

Total Company sales are now expected to increase 24% to 25% for the full-year 2010, which will approach an all-time record year for sales. Diluted earnings per share guidance has been increased to $4.17 to $4.20 per share, an increase of 37% to 38% over last year's reported $3.05 EPS.

The specifics of our full-year 2010 guidance are as follows. Off-road vehicles are expected to be up 32% to 33%, another significant increase from prior guidance of up 22% to 24%. This is primarily a result of retail sales of both side-by-sides and ATVs outpacing the overall market and our expectations.

Our guidance for snowmobiles remains unchanged at approximately flat with the full-year last year, which results in an expected double-digit percentage increase in the fourth quarter due to timing of shipments to our dealers this year.

On-road vehicles, expected to be up over 50%, has not changed from our previous guidance, as we continue to see solid demand for model year 2011 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 in May, which saw plant construction in Monterrey begin during the quarter. We have recorded a combined total of $5.8 million of startup and exit costs related to the realignment in the year-to-date 2010 period, principally in cost of sales.

We have narrowed and increased slightly our guidance range for costs related to the realignment for the full-year 2010 to $11 million to $12 million. As a result, the upper end of our gross profit margin percentage guidance has moderated a bit. We now expect for the full-year 2010 gross margins to increase up to 110 basis points over the 2009 levels. I will speak in more detail about 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, both internationally as well as for adjacent markets and business development.

In addition, we are incurring increased incentive compensation expenses in 2010 resulting from the reinstatement of certain plan contributions that were reduced or eliminated last year, the higher stock price in 2010, and the higher expected profitability this year.

The income tax provision for the full-year 2010 is expected to be in the range of 32.5% to 33% of pretax income, which has improved slightly from our previously issued guidance.

Net income for the full-year 2010 is now expected to increase in the range of 42% to 43% compared to the full-year last year. We are very pleased with our progress in growing the bottom line. If our guidance is achieved, 2010 will represent a record year for net income and EPS for the Company.

The gross profit percentage generated for the third quarter 2010 was 26.0% compared to 24.1% in the third quarter of last year, a 190 basis point improvement. The primary drivers of the increase in the gross profit margin percentage are continued product cost reduction efforts, production volume increases and favorable pricing and foreign currency movements compared to the third quarter of last year. This was offset somewhat by the manufacturing realignment costs and increases in commodity costs and higher sales promotion costs in the third quarter compared to last year.

In addition, as Bennett mentioned, during the third quarter we did experience some manufacturing costs inefficiencies as we increased production levels of ORV products significantly. Although we do expect full-year 2010 gross margins to increase up to 110 basis points, the increasing level of manufacturing realignment costs as we ramp up the new Monterrey production facility is expected to cause the gross margin percentage in the fourth quarter to decline compared to the record 27.3% in the fourth quarter of a year ago, but still is expected to be up sequentially from the 26.0% generated in the third quarter of this year.

Income from financial services for the third quarter grew 5%, primarily due to an increase in retail credit fee income resulting from the growth in retail sales to consumers. During the third quarter we financed about 33% of Polaris products sold to consumers in the United States through our retail credit programs, HSBC, GE and Sheffield combined.

This penetration rate has held stable now for a number of quarters. The approval rate in the third quarter was 60%, the highest approval rate we have experienced since the third quarter of '08. And year-to-date the approval rate is running at 57%. Additionally, the dollar volume of retail sales -- retail credit to US consumers has increased 12% year-to-date over last year.

We believe the retail credit market for power sports products have stabilized, and retail credit availability to our dealers and consumers remains at acceptable levels. In fact, we just signed a multi-year extension of our retail installment credit arrangement with Sheffield.

For the third quarter 2010 the wholesale portfolio related to floor plan financing of dealers in the United States through Polaris Acceptance was approximately $503 million, a decrease of 11% from the end of the third quarter last year, reflecting the decline in the dollar amount of the dealer inventories.

Units outstanding in the portfolio decreased 20% in the third quarter. Credit losses in the dealer wholesale portfolio remain very reasonable, averaging well less than 1%.

For the full-year 2010 we expect total income from financial services, including 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 our MVP program.

Moving now to our balance sheet and liquidity profile for 2010, our cash position has improved significantly from a year ago, and is currently at $264.5 million. Our debt level remains at $200 million at the end of September. 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 September were $279.8 million, a 27% increase from a year ago. We expect factory inventory levels to be higher than last year through year-end to support increased retail sales and improve delivery to dealers, as Bennett mentioned.

For the full-year 2010 period our investments in capital expenditures and new product development -- I'm sorry, for the year-to-date period in 2010 our investments in capital expenditures and new product development tooling were $35 million, about the same as a year ago.

For the full-year 2010 we expect capital expenditures to be in the range of $65 million to $70 million, which will ramp up in the fourth quarter due to the capital required for the manufacturing realignment project.

We continue to expect depreciation for 2010 to be in the range of $65 million to $70 million.

Cash flow provided by operating activities was $156.9 million for the year-to-date period 2010, a 53% improvement from last year, as a result of the improved profitability and reduced working capital requirements this year, which we expect will continue for the balance of the year.

Our expectations for the fourth quarter 2010 are as follows. Total Company sales are expected to increase in the range of up 22% to up 24% from the $471.8 million experienced last year.

The gross profit margin percentage is expected to decline somewhat from the record 27.3% achieved in the fourth quarter of last year due to the ramping up of the manufacturing realignment costs and the tougher commodity costs and currency comparisons.

Earnings are expected to be in the range of $1.45 to $1.48 per diluted share for the fourth quarter, an increase of 11% to 13% over the fourth quarter last year EPS of $1.31 per share.

In summary, we are very pleased with our third-quarter and year-to-date results. We are confident we can maintain the momentum during the fourth quarter and into 2011. With that said, I will now turn it back over to Scott.

Thanks, Mike. As our comments indicate, we feel good about what Polaris has done and will do that in 2010. I will wrap up with a few brief early thoughts on what to expect in 2011.

Despite continued low interest rates and the prospects for a more business-friendly and growth-focused Congress, we are not planning for 2011 to bring anything more than the tepid growth we have seen in the United States this year. Europe is likely to be in a similar slow growth mode, so we will once again focus on making growth happen in our core markets.

China, India and Brazil have much better prospects to outpace the developed economies, and we will accelerate our investments in those regions next year. We fully plan to once again expand marketshare in every part of the world. Our side-by-side lead will grow, and we will build on our Victory momentum here in the US and in Europe.

We expect to begin 2011 with record backlog for our military business, and will build on that position to achieve aggressive growth with our broad array of military customers.

As Bennett highlighted, our manufacturing alignment is on track, and we expect to have our plant in Monterrey operational by midyear. 2011 will be a year of investment in manufacturing, and we anticipate that our team will have work to do to offset commodity pressure throughout the year.

Acquisitions will start to aid our growth and market expansion efforts in 2011, and expect our diversity to be helped by international teams as they drive continued growth in the developing markets. We will move into our new European headquarters in January, and look to that strong team in Europe to beat the market again there next year.

We expect the gross and net margins will expand with much of our progress coming from operational excellence. We will drive lean initiatives more deeply in our business, which will have positive impacts across the enterprise.

Overall, I believe we are well-positioned to make 2011 another solid year of growth for Polaris, both for sales and earnings. There is a tremendous amount of work to be done, but I have great confidence in this Polaris team and their ability to continue to deliver value for our customers and returns for our shareholders.

With that, I will turn it over to Felicia to open up the line for questions.

(Operator Instructions). Ed Aaron, RBC Capital Markets.

Good morning everybody and great job on the quarter. First, I wanted to follow up on the supply constraints that affected you in Q3. Obviously, the numbers were very strong, but can you make a case that they would have been better if -- to the extent that you might have, A., left some sales on the table, and then, B., just perhaps the margins without the bottlenecks from an efficiency standpoint could get better going forward?

This is Bennett. I think you can probably make that parallel. Certainly we did leave a little bit of money on the table with some of our ramp up issues with some efficiencies. But very few companies could ramp up the way Polaris did in short order to meet that demand. And we maybe lost a few sales, but again, in the big scheme of things we would probably rather be a tad short than long. And we are doing a really good job of moving product amongst dealers.

So I think while there is still some supply constraints, we are much more effective than we were even a year ago about getting the product to where it needs to be retailed. Dealers are just getting used to essentially having much more of a just-in-time inventory, which we believe is a very, very good thing.

Thanks. And then, Scott, I have heard you talk in the recent past about trying to hit an 8% net margin target, and it looks like a slam dunk at this point. So as you assess for longer-term goals, do you have an updated and a margin goal in mind or how should we think about that?

I think margin expansion at the net and operating level is going to be a long-term goal for Polaris. It is not one year, one quarter, five years. We are going to continue to always look to expand net margins.

The 8% target does look a little bit closer than we might have expected at this point. But remember, the early years of getting after it, we found a little more low hanging fruit than we possibly -- it gets harder to go the farther you get into the margin expansion effort. So we've got a long way to go. I am very pleased with the work that the team has done, but I would just be cautious about expecting us to continue with this current rate of expansion well into the future.

That's fair. Then just a last follow-up question on the manufacturing realignment. For 2011, Mike, can you just give us a preliminary sense of what the incremental costs will be and what savings you expect to realize next year?

Well, as far as the transition costs, the bulk of the remainder of the transition costs will happen in 2011. So we said there is $11 million to $12 million that will be this year, so the balance largely will be next year. By the end of next year we should be pretty much done with that.

The savings -- we haven't been very specific about that yet. The savings will ramp up -- they will start next year. But there frankly won't be a ton of savings as early as next year. There will be some, and then it will be higher again in '12, and eventually we will get the total of the $30 million pretax savings that we talked about.

But we are not obviously giving guidance for next year. We'll be more specific about the savings as we move forward.

Scott Stember, Sidoti & Company.

Can you guys talk about the new RANGER Diesel product and how that fits into your military business expansion plans for next year?

Sure. Obviously diesel is a new, incremental opportunity for us, and frankly as we introduced and released the product, where we see the greatest opportunity is frankly, one, international, two, military, and then thirdly probably alternative fuel source for our existing North American dealers.

The military has certainly been clamoring for a diesel solution. Again, it is a much more common fuel for them on many of the bases, and it is a much more available fuel from a supply standpoint. And early response -- and it is very, very early -- and you know that customer moves a little bit more slowly in general on procurement -- looks very, very encouraging.

And we are off to a very encouraging start as well in a lot of key markets internationally. So we are excited about the early response to the diesel in both of those key growth markets for us.

Okay, and moving on to Bobcat, could you talk about -- a little bit more depth about the retail reception of the product?

Yes, I can try. Again, this is a little different for us, obviously. We are the supplier here and that is an adjustment for us. So wholesale sales to Bobcat accelerated significantly as we kind of were starting to fill the dealer pipeline. Everything we hear is generally through our contacts at Bobcat. They are very pleased with the reception that the dealers have. It is clearly a superior vehicle to what they have had previously. They seem to be pleased with the retail rate.

But I would tell you it is still very early. We have really only been retelling the product for really less than 90 days. And so we will continue to work and monitor and assist Bobcat as we can as we go forward, because we still see this as a very nice growth opportunity for us as we go forward. But I would say early, but early news is encouraging.

Great. Last question on China. You made some comments about some increased investments in the third quarter and for 2011 as well. Could you just maybe expand upon that a little bit?

Right now we firmly believe that the competitive advantage Polaris has anywhere is in our people. And that is really where we started with our investments in China. Extremely pleased with the leadership we have with [Geoffrey Val] leading the way as our country manager in China. He is putting together a really strong team.

We've got the initial display room there and our first dealership selling product. We are just looking to build out the team. So the investment -- some marketing expense. We had over 400 Chinese customers in the Gobi Desert doing test drive and had really good media coverage, but primarily investments we are talking around is on the human resources side.

Scott Hamann, KeyBanc Capital.

Just a couple questions on the military business. Can you talk about what the current run rate is in terms of sales? I thought you had indicated it was around $50 million recently. And then just the relative profitability of that business and the expectation going forward.

Just in terms of the backlog, you said it is going to be a record backlog. This deal you just announced this morning looked like a good deal, but how big are the contracts you are bidding on overall? And would things be challenged if we were to wind down in the Afghanistan theater over the next couple of years?

Good question. Just a reminder that we don't give a lot of specificity around product line details, including military. But I will give you some general comments.

We felt like we were on a run rate for about $50 million based on the year-over-year growth. As I indicated in my prepared remarks, we are likely to fall short of that based on the timing of orders. I mean, I've got a lot of experience in military, and lumpy demand is one of the things that you have to expect, and we have seen the downside of that this year.

As I indicated, though, we have made probably the best in-roads in our history in terms of deepening relationships with the key customers that make the long-term procurement decisions. So we are actually very close to getting our first program of record. Instead of having commercial off-the-shelf product sales through GSA, we are going to start having real programs that have funding coming out of Congress.

So really this is -- that is part of what is going to drive the record backlog is winning some of those programs. So I think we are extremely pleased with the profitability. We are extremely pleased with the advancements we have made and the relationships and the future programs.

We haven't talked about the product details. We talked about -- Bennett answered the question about diesel products for the military, but we really have some exciting products that we are going to be offering to military customers. And because of those products we don't feel like that we are at any risk at all with the ramp down in Afghanistan or Iraq.

The products we offer provide a significant value to the Warfighter and also provide a much lower cost product for even the military bases around. So it is a very good market long term for us, and we don't see the slightly lower sales than we expected this year of being of any impact long term.

Okay, great, thanks. Then just a quick follow-up. Do you have a sense of where you are in terms of marketshare in core and side-by-side off-road?

Yes.

Can you share it with us?

We really don't share those kind of details, other than as we said in our prepared remarks, it is up significantly. We can tell you we are clearly a strong number two and growing rapidly in ATVs. In side-by-sides we are the clear, clear leader. We are -- we have been able to gain a tremendous amount of marketshare over the last couple of years, and perhaps with humility I will just leave it at that.

Greg Badishkanian, Citigroup.

Great quarter, guys. Just maybe on the side-by-sides a little bit, maybe if you could talk about what really you think drove that? Was that new product, innovation, just not seeing much from your competitors? And then also international, what are some things you think you could do to maybe get that penetration up some more?

This is Bennett. I think as we have tried to cover in our prepared remarks, I don't think it is just one thing in side-by-sides. Certainly it is the most lucrative market in power sports right now, so the growth trends, as you know, are positive, and I think the long-term outlook is encouraging. So we feel really good about that.

But this has really been a combination of a tremendous amount of focus and work over the Polaris team over several years in really developing some unbelievable product innovation on multiple platforms with both -- in utility and recreation that meets customer needs, and building outdoes product lines. Improving the business model with MVP with our dealer network, and we have a great dealer network.

And then, again, I would tell you that with the toughness of the North American economy, I do think competitors maybe paused or took a step back or focused elsewhere. And that has certainly been to our competitive advantage here over the last couple of years. Again, I think the lead we have, we have a tremendous amount of momentum and legs to build on that as we go forward.

Internationally, I think we feel really pleased with the trends we are seeing. If you look at what has happened in ATVs over the last decade, the international market, particularly in the EMEA, clearly followed North American sales trends with ATVs. They got to be a much bigger deal about a decade later, and we have been trying to crack the code and increase our sales in side-by-sides internationally with all our success in North America. And really just over the last two years we have really started to see significant momentum in most markets there.

We are really encouraged that trend will continue and our competitive advantage is sound. And we think we've got a lot of legs to really drive international growth through the side-by-side product category as we go forward. So we feel really good.

Great. I am assuming based on guidance and color today that sales in the last month or two really -- they probably haven't slowed down any, right?

We're going to be careful with that. Obviously, the third quarter was our best quarter yet from a retail trend standpoint, and so as we said in our remarks, we feel like we are building retail momentum clearly. The one thing I will tell you is that comps do get tougher as we go forward, but we feel like we are -- we are feeling really good. I will leave it at that.

Yes, great. Thanks. And great job in the quarter again.

James Hardiman, Longbow Research.

Good morning, thanks for taking my call and congrats on another great quarter. As we look out to the fourth quarter, that delta between wholesale and retail obviously pretty significant, and not only the third quarter, but the second quarter.

I am assuming we can continue to expect wholesale to outpace retail, but can you give us any color as to the magnitude of that delta? Should it be a similar magnitude or is that going to contract?

Then, longer term, how long would we expect wholesale sales to outpace retail sales? I guess it comes down to how long it was this year before you started going to one-for-one wholesale to retail. Thanks.

I tried to address that in my prepared remarks, and I'll see if I can't summarize again here. Last year's third-quarter was a very low quarter for retail sales because of the recession, and then we under-shipped into that. So we had a significantly low comparable for us to ship back into.

We are very close on the ORV side of things. We still have inventory we want to take out of the channel in Victory, but we are very close to retail equilibrium in our ORV business.

As I tried to say, we will never be at equilibrium because retail -- North American retail sales is in units. And when we report revenue growth it is dollars, so you have mixed benefit. You're going to have currency benefit. You are going to have all of the international shipments that aren't included in the retail number.

They are both very important and interesting numbers, but when you compare them it is truly apples and oranges, and we are going to try to give you more color on what is driving that. But I wouldn't be -- I can't -- we haven't modeled out exactly what the delta is going to be. It is likely to narrow going forward as the variances from the prior-year become less. But overall I think having those numbers be disparate and more leaning towards revenue than retail should be expected, but as I said, it is going to decrease going forward.

That makes a lot of sense. Drilling down there a little bit further though, I think you mentioned that you actually added a few dealerships, at least in the side-by-side space, here in the quarter. Did that have a material impact on that delta in the quarter? And do you expect to continue to add more dealerships in terms of side-by-sides?

This is Bennett. We have been frankly modestly growing the side-by-side count really over the last several quarters. Generally speaking, when a new dealer comes on, the ramp up is generally rather slow, so they don't have a material impact generally of any significance in the calendar year. It generally takes at least a full-year for a dealer to ramp up. But clearly as you make those additions there should be some incrementality along their midterm as we make those additions. So it is a good thing, but it is low.

Great, and then just in terms of pricing, we obviously talked about the 20% is in units, the 33% is in dollars, and wholesale, a whole bunch of differences there. But what is -- obviously for a long time you've got a pretty significant boost from prices, certainly as you shifted away from core and into side-by-sides. Now that the core is coming back a little bit and the mix within the side-by-sides might be a little bit negative because some of what you're selling is value priced side-by-sides, should that mix benefit subside? Is that how I should think about that or how should I think about that?

This is Mike. I think you're right on that. As we showed here in the third quarter, our mix and price benefit to sales was 3%. We have seen higher numbers than that in the past. We still are getting some benefit from price. As Bennett mentioned, we have very strong product in our categories. And to the extent we have strong share and strong product, we can price for that where we have product differentiation.

But as far as the mix is concerned, you're right. There is more of a balanced mix going forward as we introduce more value priced products that are at a lower price point, and more and midsized side-by-side products that we up until a year ago or a little more than a year ago, we didn't even have mid-sized side-by-sides. So those are all impacting somewhat the ASPs and the mix impact. So generally I think you've got it pegged about right.

Craig Kennison, Robert W. Baird.

Bennett, you sell products to a broad group of customers, work and play. Can you tell us anything about the behavior of various groups within your customer base that would give us an idea of which consumers are spending and which are not?

I can try a little bit. It is a little bit difficult. Clearly we still see the more affluent customer is clearly the stronger, more aggressive customer. If you look at the side-by-side sales in both RZR and RANGER, frankly, that is generally our highest income customer and that has been generally the strongest.

The entry level stuff, particularly in ATVs and in low-end motorcycles it still remains pretty tough with financing and the likes. But all-in our value plays are being extremely well received. And so the middle seems to be coming back a bit. And some of this consumers' balance sheets and kind of our base customers' seems to be improving a little bit. So that is not too much color, but it gives you a little bit of a feel.

Thank you. Then, Scott, the military win is a nice sign. Can you just give us an idea of how that sales cycle works, how long is it? And come again, just getting at the size of that opportunity, when might we see a buildup in that backlog?

The guys are actually on the road constantly right now, and it is hard to say. It depends on the size of the program and the type of program it is. Our largest sales to date have just been getting allocations from in-budget year monies. Those can come fairly quickly, just depending on the need of the deployed forces.

The longer-term stuff, which is actually what we find more exciting, is new products that we can really specifically design for the military. And those take a little bit longer typically, probably in the 18 month timeframe. If you figure we have been working on them for about a year, it could give you an idea of where we are in some of those things.

But the National Guard, for example, is a big win spread over five years. And those type of contract wins can come in a matter of months. So we run the gamut. Traditionally we have been more focused on the short-term awards and more of a sales oriented stuff. And right now we are shifting to more of a program win and product development activity. That is likely to raise the upside limit on that business for us.

Great, thanks and congratulations.

Tim Conder, Wells Fargo.

Most of the questions have been answered, but a few here. Bennett or Scott, just the commentary back on the side-by-side and then the ATV market, did you say you were basically still short on where you want to be broadly on side-by-sides? That is what I thought you said. But ATVs are pretty well where you want to be as far as wholesale equaling retail?

Yes, I would say in ATVs we are about at equilibrium. There can still be tightness on a few specific models, and that is the case, but in aggregate we are about where we want to be.

In side-by-sides I think with the rapid sales growth we have seen, I think clearly we are a bit low, and we are tight on certain products there -- that is a little bit more prevalent. So that number probably has to come up a bit in the upcoming months.

Side-by-sides there, Bennett, do you think by year-end, early part of next year do you see the world at this point in time as far as reaching -- getting closer to equilibrium?

I think that is -- it is difficult to answer. If you looked at -- tracked how we have answered that over the last couple of quarters, we continue to outperform even our expectations. So we think we will get closer to equilibrium by the fourth quarter, but if we continue to out-retail our expectations we may be a little tight.

Again, I think you understand our bias. We have worked our butts off to get this business model in equilibrium, and our bias is to be, if anything, a tad short versus too long. So that gives you a little bit of mindset about how we are trying to run the railroad on that.

It is a much appreciated, consistent message from you guys. Mike, on the -- just to revisit your maximum leverage, whether in terms of debt to EBITDA or coverage that the Company would be comfortable considering that you guys are continuing to look at acquisitions, and it appears like you feel fairly confident something may occur here over the next 12 months.

Well, I don't know that I'm going to be very specific about what our future capital structure plans might look like. We've got an ample amount of cash that we have been building up, obviously, over the last couple of years. We do have a credit arrangement that, as you know, expires at the end of next year that we will need to do something with over the next 12 months.

We have -- I guess the way I would say it is we are in a great position. We've got a lot of flexibility. There is -- as Scott mentioned, there is acquisition activities in the funnel that we can deal with from a financing perspective in any number of ways. So we've got a lot of flexibility. We've got a strong financial position and a strong outlook and we've got a lot of choices.

Okay, and then just a couple more -- more housekeeping. Any detail you can give us on FX benefits (inaudible) sales, EBIT and net income in the quarter. And then anything that you can say or want to say as far as some of the big capital items, D&A and CapEx looking into '11?

The currency impact, we have disclosed what we want to disclose. The currency was 1% beneficial to topline sales during the quarter. As the arrow chart shows that we showed currency is favorable to gross margins during the third quarter.

We do expect that to taper off here in the fourth quarter with the current exchange rates and where they were at an elevated level a year ago in the fourth quarter -- we do expect that currency benefit on margins to turn around in the fourth quarter.

As far as 2011 guidance, we have given what we are planning on giving at this point in time, and we will have more specifics on cash flow and the P&L attributes of guidance 90 days from now.

That is fine. Thank you, gentlemen.

Thanks, Tim. I might just want to let you know how much we appreciate your support and ratings for us. We seem to have done quite well as you looked at us, Tim.

No problem there, Scott. We always like to keep a little dry powder.

I think we are out of time, so I want to thank everyone for participating on the call this morning. And we will look forward to talking to you next quarter. Thanks again. Goodbye.

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