Polaris Inc (PII) 2010 Q4 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 fourth quarter and full-year earnings results conference call. (Operator Instructions) Thank you, Mr. Edwards, you may begin your conference.

Thank you, Felicia, and good morning and thank you for joining us for our 2010 fourth quarter and full-year earnings conference call. A slide presentation is access able at our website at www.polarisindustries.com/irhome, which has additional information for this morning's call. 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 shipment, sales and margin trends, income and profitability levels, and other matters, including more specific guidance on our expectations for 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 in the forward-looking statements. Additional information concerning these factors can be found in Polaris's 2009 annual report, and form 10-K on file with the SEC. Now, we'll turn it to Scott. Scott?

Thanks, Richard. Good morning and thank you for joining us. The history of Polaris is filled with stories of how our culture of innovation, competitiveness, and passion of performance has fueled the Company's growth. A year ago, we challenged the team to make growth happen, and felt confident that we could rebound from the recession and deliver moderate year-over-year improvement. Throughout the year, each performed at a high level, and revenue and earnings growth surpassed even our highest-stretched goals. The 2010 results we will review this morning offer the strongest validation yet that Polaris has the best team in power sports.

Polaris had momentum into the fourth quarter and the record results for sales and earnings demonstrate the fundamental strength of the business as we head into 2011. Fourth quarter sales were up 31% to $618.4 million. Once again, our broad portfolio of all pro vehicles led the way, with strong demand in North America and each of our international markets. For the fourth quarter, Polaris delivered record earnings per share of $1.55, up 18% over the previous record set in the fourth quarter of 2009. Net income also reached record highs up 24% to $54.5 million.

The strong fourth quarter propelled the Company to full-year 2010 results that were almost unthinkable a year ago. While we were close on our predictions for the overall economy in the power sports industry, we significantly underestimated the market share gains in corresponding retail sales increase that was the primary source of our out performance. Polaris full-year North American retail sales were up 15%, helping to drive total Company sales to a record $1.99 billion up 27% from 2009, and $43 million above our previous record set In 2008.

As Bennett will detail in a few minutes, we saw sales growth in every product line, and in every part of the world. The dramatic success of our side by side business drove the majority of our sales growth. But it's also important to note how well our Victory business performed in the face of a weak heavyweight motorcycle industry, and how effectively our European team worked to overcome the severe economic situation in many of their markets. The full-year earnings story is equally, if not more, impressive.

Net income for 2010 was a record $147.1 million, up 46% from 2009, on the back of meaningful success with our margin expansion efforts. This yielded record earnings per share of $4.28, up 40% from the prior year. Our strong earnings performance contributed to a record year-end cash balance, and we're pleased to be in a position to fund a wide variety of growth initiatives and capital investments in the year ahead. In addition, we will likely reinstitute moderate open market share repurchases in 2011, to mitigate at least a portion of the EPS solution that has, as predicted, become a headwind to earnings per shares growth.

While we are pleased with the top line sales and income numbers, our margin expansion and cash flow results demonstrate that the quality of our earnings was also high. Gross profit increased 150 basis points to 26.6%, and importantly, that progress largely flowed through to the operating and net income lines. We improved operating profit by 60 basis points and net income by 90 basis points. It's encouraging that embedded in these results are significant investments in our business, and admittedly, less than flawless execution throughout the year.

We have the potential and the expectation to do better in 2011 and beyond. Part of doing better will come from making wide use of our cash, provide new growth and margin improvement opportunities, and with a 54% year-over-year increase in cash flow, we have the capability and capacity to do so. As we control the controllables and improve our fundamentals, the market reacted favorably. With total 2010 shareholder return of 82.5% which comes on the heels of a 58% return in prior-year. Driven by consistent and broad market share growth, fourth quarter Polaris North American unit sales were up 18% from the prior-year period. Demand for our RANGER and RZR products remain strong throughout the quarter, and the new lineup of snowmobiles propelled that business to 40% retail growth in the quarter.

The new Victory team had their first task against the tougher comps they posted a year ago, and performed quite well, up 15% in the fourth quarter. Overall, Polaris revenue grew 31% in the quarter, outpacing retail due to the combination of international shipments, PG&A sales, mix and pricing, all of which are not reflected in the North American unit retail numbers. We had the added benefit of shipments largely equaling retail in the quarter, as overall dealer inventory was finally reached near optimum levels. Polaris is entering 2011 with retail momentum, and we will work to ensure that continues throughout the year.

I recently told the Polaris leadership team that I thought our most important accomplishment in 2010 was that we successfully executed our strategy. The record results are now history, but our strategic progress will create value into the future. Our number one objective is to be the best in Powersports Plus, as it fuels our passion and funds our growth and diversification.

The results speak louder than words, so I will only add here that I am extremely proud of the performance and execution of the team. Growth through adjacencies is critical to our diversification efforts, and will enable us to accelerate growth in new markets. We had mixed results with our organic adjacencies. Our Bobcat relationship met our 2010 objectives and expectations, and continues to grow. Our neighborhood electric vehicle business fell short of expectations, but expanded their product offering and distribution points.

The military business has great potential, and made major strides with product development and key customer relationships, but fell short of our aggressive 2010 sales objectives. We anticipate a good year for all of our organic adjacencies in 2011. Our non-organic acquisition activity remains high and on track, and we're encouraged by the potential to create shareholder value with acquisitions in the years ahead.

Global market leadership might be the most improved award for 2010, as the international team carefully balanced strong execution of the current business, with key investments to position Polaris in China, India and Brazil. We could not have ramped up production volume as quickly as we did in 2010, without an operations team that embraced operational excellence.

As we bring up our factory in Monterey and continue to drive waste out of all areas of our business, we have the opportunities to make Polaris better with Lean and other Operational Excellence tools in the year ahead. Our goal of strong financial performance and sustainable profitable growth represents aggressive yet achievable targets for Polaris. We're on the way to hitting our 8% net income objective, which is the halfway point to our long-term objective of 10%.

We entered 2011 with optimism, and have more optimism than we've had in recent years. Although we don't expect some retail sales for the overall Powersports Industry to be positive for the year, nor do we anticipate more than 3% growth in the economy. We worked hard to create the benefit of both momentum and strong fundamentals, and expect to once again gain market share and drive growth in each Polaris business. We anticipate overall revenue growth of 8% to 11%, which, again, outpaces our industries and the economies of most of our markets.

Net income is projected increase in the range of 14% to 20%, which would equate to earnings per share of $4.65 to $4.85, up 9% to 13% over 2010. This guidance includes significant transition costs related to our manufacture realignment, as well as continued investments in our global expansion. With that, I will turn it over to Bennett for more details on our operational performance.

And thanks, Scott, good morning. Let's start with Off-Road Vehicles. Polaris ORV business continues to perform at a very high level. Whole level sales were up 40% for the fourth quarter, driven primarily by side by side growth, but also by solid demand for core ATVs and Bobcat.

For the full-year, sales increased by 35%. The core North American ATV industry showed nice directional improvement in the fourth quarter, with retail sales down upper single digits. For the full-year 2010, the ATV industry was down upper teens percent. While we don't have clear monthly industry data on side by sides, we believe the side by side industry grew around 10% for both the fourth quarter and the full-year 2010.

Polaris's North American ORV retail sales continue to grow at a healthy rate with sales up low double digits against much tougher '09 comparables. ATV retail sales were about flat in the fourth quarter, while side by side sales remain very robust with growth and excess of 20%. Polaris market share is growing at a rapid rate in both ATVs and side by sides, and we have significantly extended our number one share leadership position in ORVs in North America. As we emphasize in the last quarter call, Polaris has no intension of resting on its laurels.

On new year's eve, we introduced the all new Polaris RZR XP 900. With a state-of-the-art trailing arm suspension, industry-leading 14 inches of travel, and an all-new Polaris built and design Pro Star engine, that delivers an unmatched 88 horsepower, the new RZR XP 900 defines extreme razor-sharp performance. Retailing at $15,999, the early consumer buzz has been overwhelming. Initial dealer orders are far greater than anticipated, and the RZR XP will be on allocation the first half of 2011until we can better calibrate the ongoing rate of consumer demand. We're confident that the RZR XP will expand our lead in the fast-growing recreation in side by side segment, and add to our industry-leading lineup. We now have the only trail-capable side by side with the 50-inch RZR 800, we have the only true sport performance side by side with the popular RZR S, which is now a strong value at $12,699, we have the only four-seat sport side by side with the RZR 4, and now the only extreme performance side by side with the RZR XP 900.

ORV dealer inventories are very healthy. ATVs are down 33% year-over-year, and while supply remains tight on a few products due to continued strong demand, we entered 2011 in aggregate, right where we planned. For 2011, we expect overall North America ORV industries to decline at a much more modest rate, with sales down low- to mid-single digits, versus 2010. We expect Polaris to continue to outperform and gain market share with low- to mid-single digit retail sales gains.

Shipments to Bobcat normalized in the fourth quarter and remain slightly ahead of our expectations. We're encouraged about the opportunities and momentum for continued growth with Bobcat in 2011. We continue to work closely and effectively with the Bobcat team, and remain excited about the future potential of this strategic alliance.

The military business concluded 2010 with mixed results. Fourth quarter and 2010 shipments were below expectations due to delays in orders from key customers. However, we did secure the $67 million contract from the National Guard, and received orders for immediate shipment. We continue to invest in military research and development, and have made significant progress on a number of these initiatives for new and existing military customers. We begin 2011 with our order backlog at its highest level ever, and we've made investments to increase the capability of the Polaris defense team. So we're excited about 2011, and expect to grow our military business significantly.

Snowmobiles. Polaris in the snowmobile industry had a very good fourth quarter, with wholesale sales for Polaris up 28%, driven by shipment timing, and strong retail sales. For the full-year 2010, wholesale sales increased by 5%. The North American industry strengthened considerably in the fourth quarter, driven by solid early snow, and good riding conditions across most of the snow belt. For the fourth quarter, industry retail sales were up low double digits. Season-to-date, they're now at about 10%.

Polaris is significantly outperforming the market season date with retail sales up over 30%, driven by strong new products, particularly the RUSH 800s, and the new RMKs. In fact, we have regained the number one market share position season-to-date in the critical mountain segment. The dealer inventories are in very good shape, and we're looking forward to finishing the selling season strong.

On-road vehicles and Victory motorcycles. On-road fourth quarter sales were up 8%, driven by continued improvement in Victory retail sales to consumers and improved fundamentals. For full-year 2010, on-road sales grew by 55%. In an encouraging sign, North American Heavyweight Motorcycle Industry Segment retail sales declined only low single digits in the fourth quarter, versus fourth quarter of '09. And for the full-year 2010, the Heavyweight industry segment declined low double digits. Victory retail sales momentum remained strong in the fourth quarter as Scott mentioned, and for the year, Victory retail increased in excess of 20%.

We continue to gain share driven by modest gains in cruisers, and strong gains in touring with our new cross bikes. Last week at the New York International Motorcycle show, we unveiled our latest new product, the Victory High Ball, a Bobber-style cruiser designed to appeal to new and younger riders who want the lowest seat hike, most torque, and lightest weight in the category. Early consumer and dealer reaction to the High Ball has been encouraging.

It's our first new cruiser model offering in over four years. Victory North American dealer inventory is down 30% versus a year ago, as is our aged inventory. Victory dealer count is growing at a nice controlled rate as the brand fundamentals and products continue to improve. For the seventh year in a row, an independent third party determined the Victory's customer ownership satisfaction again led the industry. For 2011, we believe the North American Heavyweight Industry will decline modestly with Victory again outperforming the industry, and in growing retail sales at double digits.

Our low-emission vehicle or Breeze business continues to grow at a nice clip, over 50% for 2010, and at a rate below our aggressive expectations due to a slow economic comeback of the master plan community market. We continue to grow dealer count, market penetration, and market share, and are looking for additional opportunities to grow in this strategically interesting space and technology. But the Breeze product line will likely remain a small part of our portfolio for the forseeable future, without a catalyst.

Parts, Garments and Accessories. PG&A sales momentum continued with fourth quarter sales up 12%, off a tougher fourth quarter '09 comparable, driven by strength and accessory sales across all of our product lines. For the full year 2010, PG&A sales increased 10% versus 2009.

International. International sales improved in the fourth quarter sequentially, with sales up 13%, driven by growth in snowmobile, side by side, and PG&A. For the full-year 2010, international sales grew by 21% with positive contributions from all of our product lines and across all regions. Asia-Pacific, Latin America, and EMEA.

Victory and side by side products continue to be extremely strong, with sales growth in excess of 50% for 2010. In the EMEA, overall industry's improved in the fourth quarter. ORV industry sales moved toward low-single digit declines versus the fourth quarter of '09, and the snowmobile industry grew strong double digits. For the full year 2010, EMEA markets in aggregate were estimated to be down upper-single digits. Polaris's international snow business is off to a strong start with retail and wholesale sales up significantly season-to-date, and Polaris gaining a lot of share.

Polaris ORV retail sales are up slightly in EMEA, and we continue to gain market share and extend our lead as the number one ORV player in the EMEA . And finally, Victory retail sales are up in excess of 50%, and we gain market share in every market we competed in for 2010. Investments in our global business continue. We have formed subsidiaries in both Brazil and India over the past quarter. For the 2011, we continue to expect solid international sales growth of upper-single digits percent, comprised by strong growth in emerging markets, and slightly slower growth in the EMEA region due to less favorable economic conditions.

Operational excellence. Operational excellence initiatives continue to drive outstanding Polaris business and financial results in the fourth quarter and for the full-year 2010. Our integrated value engineering and strategic sourcing initiatives and lean plant productivity initiatives generated significant product cost reductions in 2010.

It's important to know that we delivered the margin expansion while making significant investments for our future in global market development, manufacturing realignment, people capability, and new products. The Strategic Manufacturing Realignment Initiative continues to make tremendous progress. We now have over 50 salaried employees on board in Monterey, and have begun to hire our hourly workforce. The factory is well on its way to completion, and we received beneficial occupancy of about 50% of the building in early January. We remain on schedule for initial production by the end of the second quarter of this year. The investments in the Roseau plant are also on schedule.

We completed our outsourcing selections for both seats and stampings in the fourth quarter, including preserving 50 stamping jobs in Osceola through our supply agreement with our new supplier, Capco. Executing this manufacturing realignment project well remains our top priority for 2011. Polaris continues to improve our speed to market. For 2010, improved product development efficiencies and increased inventory turns fueled our availability to more rapidly responding to the changing market and customer.

Total North American inventory is in very good shape, down 20% versus a year ago at this time, with all product lines in very solid positions. Factory inventory performance was moderately disappointing. Our terms improved by 25% throughout the year, but year-end factory inventory dollar levels are up 32%. This is a number we expect we can and will do better during 2011.

Our MVP business model continues to deliver. The transition of the last half of the ORV dealer network has been very smooth, and we continue to introduce improved tools and capabilities on retail planning and execution. Dealer health and Polaris momentum within our channel continues to strengthen, and dealer counts are stable in snow and ATVs, and growing side by sides and Victory.

As I've said many times before, MVP is a journey for Polaris and our dealers, and we'll improve and innovate to take Polaris and our dealers to the next level of performance and customer satisfaction. As you've heard this morning, innovation remains alive and well within Polaris as demonstrated by the launching of two key new models already in 2011. New products drove over two thirds of Polaris's 2010 revenue. Our Operational Excellence progress has Polaris stronger and healthier than ever before. Arguably, our fundamentals and competitive position have never been better. It is enhancing our product innovation, and remains the fuel behind much of our success. With that, I will turn it over to

Thanks, Bennett, and good morning to everyone. I wanted to update you on a change in the level of guidance we will providing beginning this year. As you know, we have historically given very specific guidance detail on the current full-year expectations, while providing summary data, specifically just sales and EPS guidance for the upcoming quarter. We will continue to provide full-year guidance at historical levels, but starting here in 2011, we will no longer give guidance for the upcoming quarter. In this case, our 2011 first quarter.

The reasons for this change are simple. There is a growing trend in the market to focus less on short-term trends and instead, devote more focus and attention on longer-term strategy. Based on that review, fewer and fewer companies continue to provide quarterly sales and EPS guidance, especially in our space. In addition, our business model is becoming more complex, with more global entities and a faster value chain.

I suspect the timing and implications of announcement like our manufacturing realignments last year, or potential acquisitions, or other projects going forward, could prove challenging to the accuracy of the short-term projections. So we feel the time is right to make the change now. However, toward the end of my comments this morning, I will give some qualitative comments about the quarterly trends that we expect to see throughout the year to help you understand the seasonality impacts.

With that, let me begin with the full-year guidance for 2011, and some summary comments about 2010. Total Company sales are expected to increase 8% to 11% for the full-year 2011, with the individual business contributing as follows. Sales of Off-road vehicles are expected to increase about 10%, with retail sales of side by side vehicles and ATVs continuing to outpace the overall market in both North America and internationally. We again expect to gain ORV market share in 2011, although not at the pace we accomplished in 2010.

Snowmobile sales are expected to increase modestly relative to 2010, however, we will know much more as the winter selling season winds down and we take our dealer orders starting in March. On-road vehicles are expected to increase over 50% again in 2011, due to our improved dealer inventory position and solid retail sales demand, and additional market share gains for Victory motorcycles globally. We expect PG&A sales to increase in the upper-single digit percent range from the levels achieved in 2010.

Operating expenses are expected to decrease as a percent of sales in 2011, as we achieve leverage from the sales increase expected in 2011. And in dollar terms, operating expenses are expected to increase primarily due to the continued infrastructure investments being made in international and adjacent markets. The income tax provision rate for the full-year 2011 is expected to increase to a more normalized range of 33.5% to 34% of pre-tax income, up from 32.7% in 2010. Earnings per share for the full-year 2011 are expected to increase 9% to 13% compared to the full-year 2010.

The net income the full year 2011 is expected to increase at a higher percentage rate than EPS, up 14% to 20% compared to the full-year last year. That's happened in 2010, this disparity is due to an anticipated increase in the number of diluted shares outstanding throughout 2011, and resulting from no open share market purchases in 2010, and a higher stock price.

The gross profit margin percentage generated during the fourth quarter of 2010 was 27.7%, a 40 basis point improvement over a tough comparable of 27.3% in the 2009 period. This was somewhat better than our most recent guidance, driven by higher production volume, and less harmful currency impacts than anticipated in the fourth quarter. The gross profit margin for the full-year 2010 of 26.6%, represents an expansion of 150 basis points from last year. The primary drivers of this improvement were production volume increases, our value engineering and sourcing strategy, product cost reduction efforts, higher selling prices, and favorable currency movements.

These positives for the full-year 2010 were offset somewhat by incremental manufacturing realignment costs and higher sales promotion costs. For the full-year 2011, we expect our gross profit margin percentage to increase up to an additional 40 basis points. We expect improvement in '11 from higher production volume, our product cost production efforts, higher selling prices, and lower warranty costs. These gross profit margin benefits are expected to be somewhat offset by higher commodity costs, higher sales promotion costs, and unfavorable currency movements.

We expect the Manufacturing Realignment Project to be neutral to the gross profit margin percentage for the full-year 2011, compared to 2010. During the full-year 2010, we recorded a total of $10.9 million for startup and exit costs related to the Manufacturing Realignment Project. For the full-year 2011, transition costs related to the realignment are expected to be in the range of $12 million to $14 million, offset somewhat by the savings the project will start to generate in the second half of 2011.

Income from financial services for the fourth quarter of 2010 declined by 12%, while the full-year 2010 financial services income of $16.9 million was about flat with last year. During the fourth quarter, we financed about 33% of Polaris products sold to consumers in the United States through our retail credit programs with HSBC, GE and Sheffield, an increase from 31% during the fourth quarter of last year.

This penetration rate has held stable now for a number of quarters at about a third of our unit volume. The approval rate in the fourth quarter was 62%, up sharply from 54% last fourth quarter, and averaged 58% for the full-year 2010. We believe the retail credit market for Powersports products has stabilized, and is starting to improve modestly, and retail credit availability to our dealers and consumers remains at acceptable levels

For the fourth quarter 2010, the wholesale portfolio related to floor plan financing and dealers in the United States was approximately $498 million. This was a decrease of 10% from the end of the fourth quarter last year, reflecting the reduced dollar amount of dealer inventory. Units outstanding in the portfolio decreased 17% in the fourth quarter. Credit losses remain very reasonable, averaging well less than 1% of the wholesale portfolio. For the full-year 2011, we expect total income from financial services, including Polaris acceptance wholesale credit, retail credit, and other financial services activities to increase at about the same percentage rate as overall sales, primarily due to higher retail credit income in 2011.

Moving now to our balance sheet and liquidity profile, at year-end, our cash balance was $393.9 million, an improvement of more than $250 million from last year. We continue to have $250 million of borrowing capacity, under our attractively-priced $450 million banking arrangement, which is set to expire in December of '11. During the fourth quarter of 2010, we made a commitment for a private placement long-term debt offering of $100 million that is expected to be funded in the second quarter of 2011. And together with cash on hand, would be used to pay off our outstanding $200 million term loan.

The average blended interest rate for the $100 million private placement is fixed at about 4.4%. Factory inventories at the end of 2010 were $235.9 million, a 32% increase from last year. For 2011, we're expecting factory inventory levels to be lower than 2010 by year-end as Bennett mentioned. For the full-year 2010, our investments in capital expenditures and new product development tooling totaled $55.7 million, an increase of 27% from last year.

For the full-year 2011, we expect capital expenditures to be in the rage of $70 million to $80 million. It should be noted that both the 2010 and 2011 year spending includes capital expenditures for the Manufacturing Realignment Project. Depreciation for 2010 was $66.5 million, and we expect depreciation for the full year of 2011 to be in the range of $65 million to $70 million. Net cash provided by operating activities was $297.6 million for the full-year 2010, a significance improvement from last year due to improved profitability and reduced working capital requirements, particularly accrued expenses.

We expect cash flow provided by operating activities for the full-year 2011 to be slightly less than 2010, as many of these accrued expenses turn around and get paid in 2011. The Company paid dividends during 2010 of $53 million. Last week, our Board Of Directors approved a 13% increase in the regular cash dividend of $0.45 per share for quarter, which represents the 16th consecutive year of Polaris increasing the dividend.

We're proud of our dividend track record, and believe paying dividends is one of the important ways we can deliver value to our shareholders. I will conclude my comments with some qualitative directional comments on our quarterly expected results during 2011. For our 2011 first quarter, we expect to once again set first quarter records for sales, net income, and earnings per share. The year-over-year percentage growth rate in sales for the first quarter and the first half of 2011 is expected to be higher than the growth rate in the second half of 2011.

Since we were still under shipping retail sales in the first half of last year, the comparables are a bit easier than they will be in the back half of 2011, hence the higher first-half percentage growth. The timing of the up-to-40 basis points improvement in the gross profit margin percentage for the full-year 2011 is backend-loaded since the Manufacturing Realignment Project transition costs are more heavily weighted toward the first half of the year, and the project savings occur in the second half of 2011. In conclusion, we're proud of our financial performance during 2010, and we are confident we can contain the momentum in 2011. That said, I will now turn it back to Scott for some concluding comments.

Thanks, Mike. To wrap up, I will offer a little color on how we view the landscape for 2011. We're finally hopeful about the US economy as the late-year tax agreement and the new, more business-friendly rhetoric out of Washington seems to have a potential to take the damper off of job and GDP growth. We have planned for the US economy to expand about 3% but are poised to capitalize if the economy, or our industry performs better than expected.

Once again, we're committed to making growth happen, and expect to gain market share wherever we compete, albeit at a slower pace than 2010. We expect acquisitions to contribute to growth as well, although we will maintain our focus on quality over quantity. We have made progress to date with our manufacturing realignment, and we will stay very focused on that throughout the year. We have a well-resourced conservative plan, but still anticipate the inevitable challenge coming with the major projects.

We will officially open our EMEA Headquarters in the first quarter, and their number one chair position in off-road vehicles, and all-around business success, will serve as a model for our continued investments in the developing economies. We expect Victory to build off of their 2010 success to deliver solid global growth with sustained profitability. Snow finished the year with significant momentum, and we anticipate continued success with their new model year lineup.

While growth will get much of the headlines, our focus on margin expansion will be relentless. We fully intend to make Polaris better and stronger in 2011, and expect to deliver another year of profitable growth. I look forward to sharing the progress with you throughout the year. With that, I will turn it over to Felicia to open the lines for questions.

(Operator Instructions) We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Ed Aaron with RBC Capital Markets.

Thank you, good morning, everybody.

Good morning.

I wanted to start by asking about the manufacturing realignment and the savings that will eventually materialize from that. The number you threw out, initially, the $30 million plus, it was in an environment that was before you really saw a lot of the surprising growth in side by side. So, if you think about that project longer-term, if side by side demanded better than you initially planned for it to be over that period, does that savings number seem likely to go up meaningfully, versus that $30 million number you talked about initially?

That is a good question. We're still in the early stages of the project and we're very comfortable with the guidance we have given. We're not going to talk about increasing that. We've got two very, very good plants in Spirit Lake and Roseau, and a lot of the volume will continue to come out of those facilities. So, I think it's fair to assume that volume helps savings, but we're not about to re-look and re-think about our projections at this time.

Okay. My second question, just relating to returning more cash to shareholders, you have a nice balance sheet. It's a little bit frustrating to see six points or so of your net income growth get clipped by share count dilutions. I know you talked about acquisitions, but we haven't really heard anything to suggest a really sizeable transaction coming. Just wondering, why not maybe return a little more cash to manage that share count down more?

I think you saw by the 13% dividend increase that we're looking for ways to return cash to shareholders. I alluded to, in my comments, that we're going to step back in to share repurchase after, essentially, a two-year layoff. But, at the end of the day, I have said it repeatedly, that is for our priority is about generating that income, and bringing cash flow to the bottom line. And ultimately, the last two years, I think that's been fairly well-rewarded by the share price. So, while EPS growth is extremely important to us, we're not maniacally focused on it. Although, certainly, your point on the 6% dilution, it's been noticed, and that is why we're stepping back in with share repurchases.

Okay. Thanks and one last quick question. The snowmobile guidance from modest growth, you're coming off of a year where you under shipped in that business, and a year where your retail sales are up nicely. So, why wouldn't that translate to something better than modest growth in that division?

This is Bennett. I think it's pretty consistent with how we have handled the snowmobile business. It's the middle of January, there's still ski seasonality left, we usually wait until the season ends and go into the dealer meeting, and you'll see, I'd say more definitive guidance from us in the April call. We don't want to get ahead of ourselves right now. We're really encouraged how the season started, and we feel really good about it, but we have been around the block a few times in the snowmobile business, and until we get through the season and see the dealer orders, I think it would be premature to give you anything more definitive.

Understood. Thank you.

Thanks, Ed.

The next question comes from the name of Greg Badishkanian with Citi.

This is Alvin Concepcion in for Greg. Just a couple of quick questions. You had a solid earnings season in the fourth quarter in retail sales trends, at least from our check, it continues to be pretty strong. Would you characterize your 2011 guidance as conservative, given strong momentum that we have been seeing?

I think it is fair to assume that our guidance is consistent with the way we always give guidance. And we -- I wouldn't say it's ultra-conservative, but I can say, it's numbers feel confident we can deliver.

And then, side by side, continues to have good retail sales performance in the quarter and continues to gain share. How are you seeing competitors respond in terms of, maybe, new products or pricing?

I think we're prepared for that and obviously, we have driven some tremendous growth in this category, and taken a tremendous amount of market share over the last several years, and we do expect a competitive response. We have seen some key competitors come in with new product here over the last year, Deer, Bomber, and some other folks, and we expect that we will continue to see new products from competitors and we expect that they will also be aggressive on the marketing and sales front. So we're expecting that the competitive game will be more challenging without question in 2011 in side by sides. But as you can see from our product lineups and our moves, we feel very confident we can stay a step or two ahead of the competitors.

And on that note, what are you seeing in the promotional environment, by your competitors? Particularly in the side by side or even core ATVs, and what sort of factors are in the guidance regarding promotion?

Well, we are -- maybe Mike can jump in as well on that, we expect -- the promotion environment, I would say has remained within our expectations. But people are looking to try to find ways to take share back from Polaris and grow in that declining market. People have been aggressive on promotions, and we expect that is going happen and continue in 2011, and within our guidance and within our plan, we believe that we budgeted appropriately to make sure we can appropriately respond to any kind of competitive reps they throw at us in the promotion environment. And again, we'll throw our product up against anybody.

Thank you.

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

Good morning.

Good morning.

Can you talk about the new diesel product you came out with this summer? Can you just talk about how that is doing with -- within the non-recreation space?

And I will take a shot at that. This is Bennett. We're off to what I would characterize as a good start. The dealer response when we launched the product back at the dealer show was tremendous, and orders were very, very strong. As we kind of had counseled our dealers and, to some degree, the street, it's a different product and it's a different customer for us.

So we expected that the retail ramp to be a little bit slower, and I will tell you right now, the diesel is performing exactly to our expectations, and we're going to continue to educate our dealers on how to take a nice piece of share in that market. It's a very nice incremental opportunity for Polaris, because it's a space we have never played, but it's an area that, again, is an area that is what we have to work a little harder to educate them, that Polaris has an industry-leading offering.

And as expected, there is a lot of potential for that product in Europe. And even the military sees value in it. So I think it's a little bit of a slow ramp, but certainly a great category for us to be in.

And with the new RZR XP, the initial response and orders that you're seeing, do you expect us to go to the same customer that would be buying a lower-priced RZR? Or is this a totally new type of customer you have coming in the door?

Well, it's -- we really see that there is going to be a nice incrementality to this product. You can kind of see -- I talked about it in my remarks, and how we're communicating the field. We think that it has a clear segment and a place for being as an extreme performance vehicle, but frankly will be a new emerging is segment in this category, and that there'll be a place for the XP and there will continue to be a nice place for the RZR S, which has been, perhaps, our hottest-selling model the last few years.

So, this is still -- that is what is exciting about side by sides and the recreation space. It's a new segment, and Polaris has been the lead about creating new segments. We created, essentially, four new segments over the last four years, and we think that we're go doing it again with the XP. So, we're very optimistic about the opportunities for the full overall RZR family.

And the last question on that realignment cost. Could you just give, maybe a little bit more granularity on the cadence between the first and second quarter? And again, what line items should we be looking at to be taking a hit?

The majority of the manufacturing realignment costs will land in gross profit. There is some that ends up in the engineering line and operating expenses. But the vast majority will be evident in the gross profit. As I said in my remarks, the vast majority of the anticipated ramp-up costs for the transition costs for 2011 will occur in the first half of the year as we continue to get ready for our initial production. So, I don't think that I will get more specific than the split between the first and the second half.

Got you. That is all I have. Thank you.

Your next question comes from the line of James Hardiman with Longbow Research.

Good morning and thanks for taking my call. I was hoping you could give us a little bit more color on that delta between wholesale and retail. I think you did a great job of laying out, sort of Company-wide, saying that some of the differences were international, PG&A, mix and pricing. I was hoping that we could focus a little bit on the off-road vehicle segment. A pretty big Delta there.

It doesn't sound like a big part of that is international, and it sounds like you're shipping about the same as what is selling out of retail. I was hoping you could give us a little bit more color on that, and maybe an indication of the timing as we move forward. Do we expect wholesale to be ahead of retail in the first quarter or the first half? By the second half? Has that played out? I was hoping for some color there.

And I will take a shot, and we can all just kind of contribute here a little bit. You have to remember that retail sales are just pure units. There is no dollars there at all. And when we report company sales, it's all in dollars, and don't discount the significance that mix and pricing and all of those things have in that disparity. The last of my comments there also stated that in aggregate, we're about where we want to be with dealer inventories, so shipment and retail is coming in line.

But side by side demand, as you know, has been so strong, we're actually behind a little bit. We're trying to catch up in terms of giving the dealers a product that they want. So, specifically on side by side, I think it could be fair to assume that shipments will be slightly ahead of retail for a little while and as we try to get it caught up. But in aggregate, we did in the fourth quarter and have throughout the year, we continue to bring dealer inventory down. It's a long-term commitment from Polaris, and I think if you wanted to get a spreadsheet and do all the math, you could probably get to it. But I think directionally, we have told you what is driving the disparity.

The thing I would add is, I think a quarter or so ago, we told you that we thought ATV dealer inventory was more or less, kind of where we wanted it. Yet, sequentially, it went down another 8% during the fourth quarter. So, we're continuing to sell that retail at a higher rate than our expectations, and we will taste that.

The simple answer, and I know it's confusing, is the side by side continues to become a bigger part of our mix of ORVs in our overall portfolio, with the price points associated with the products, particularly as we do things like RZR XPs and so forth. I think you're going to continue to see that number be really healthy ahead of retail sales and that doesn't mean that there's anything funny going on from the standpoint of loading up channel or anything like that. Nothing could be further from the truth.

And was not trying to suggest anything like that, I was curious, as I look forward, do we think that you will have caught up, or that that huge Delta will have narrowed at any point during 2010, or is that going to be the case? I'm sorry, 2011.

And you have to remember, international shipments, you might have discounted the size of it. It's a growing part of our business. Military units are not included in that number. There is a whole lot of stuff that we sell out that is not -- I would not put emphasis on trying to figure out what that Delta is going to be.

Okay. Fair enough and just real quick. I believe in one of the slides, you said your expectations for the North American industry are to be down, I'm going to say low to mid-singles, I think, was the number. Can you talk a little bit more about that?

And from what I can tell, I think the numbers you threw out there were that, fourth quarter core was down, high singles and side by side were up 10%, maybe. I guess one of the things that we don't really know is, from an industry standpoint, you know, how those things shake out as a portion of the industry. Can you talk a little bit about your industry guidance being down despite what appears to be a recovering economy?

Yes. I think what I said on ORVs, just to be clear with the rest of the folks on the thing, was that we expect the overall and aggregate industry in North America will decline, and that includes, again, side by sides and ATVs, and it will be down, what we're saying low- to mid-single digits. Which, frankly, would be about half of the rate of the decline we saw this year.

So, we do expect that with the economic recovery, that industries will get less bad. But we don't want to get ahead of the headlights, so to speak, and start prognosticating growth coming off the cycle we've been, and what we've seen out of the overall ATV industry until we see it for a period of time. We just think that would be, frankly, irresponsible, and this is a Company that's capable of chasing the upside and reacting to the changes in demand pretty quickly. The worst thing we could do, again, is to get too optimistic.

And to add a little bit of clarity, maybe. Obviously side by sides have grown to be a really big portion of what you sell. But from that industry perspective, is it still weighted towards core ATVs? Any idea, from the industry perspective, what the respective percentages of mix are for the industry in terms of side by side and the core?

I'll try to give you directional feedback on that, James. The trends out over the last three of four years continue, where side by sides continue to become a bigger percentage of the overall ORV industry. The ATV in aggregate is still quite a bit larger from a unit standpoint, but that percentage continues to get closer and closer. It's not near parody yet, but is approaching that. Obviously when you go from a dollar standpoint, and you see that again, just with your first question on the financials, these are more expensive products. And from a dollar standpoint, they're getting to be more and more equal within the industry. Obviously, side by sides is an area with that significant product and share leadership, and so our results are more skewed than what the industry would see.

Yes, absolutely. Perfect. Thanks.

Thank you.

Your next question comes from the line of Gerrick Johnson with BMO Capital Markets.

Good morning. You gave us an ATV channel inventory number of down 33%, I think it was. How about side by side? Can you give us an idea what that percent is for dealer inventories up or down on that year-over-year basis?

Hang on a second.

And while you're thinking about that, I will ask my follow-up. It's kind of similar to what James asked, but maybe a little different way. For 2011 on a unit basis, do you plan aggregate shipping to be aggregate total shipping of everything to be in line with retail sales ahead or behind?

Let me take the first one on the side -- inventory. Side by side inventory year-over-year is upslightly.

Okay.

And again, that is coming off of what we would call huge retail growth, so as Scott characterized, we're actually -- and if you talk to our dealers -- we're a little tight on side by side inventory. And that's a number that probably needs to come up a bit.

Okay.

And that is up slightly.

Thank you.

And that second question?

Yes, just on the unit base, for 2011. Do you think that is going to be in line with retail unit sales ahead or behind?

Side by side inventory?

And just everything in general. Before we were mixing apples and oranges with sales and unit sales. I was wondering, your 8% to 10% sales guidance is based on a certain number of units, and I was wondering if that unit number is ahead or behind retail that you plan for 2011?

Right. So our dollar sales guidance for the year is up 8% to 11%, and our expected retail sales embedded in that guidance is that our retail sales will be up year-over-year, but up at a lower rate than that 8% to 11% dollar growth.

Okay, that is good enough. Appreciate it. Thank you.

Your next question comes from the line of Joe Hovorka with Raymond James.

Thanks. Just a couple of quick questions. Your Bobcat relationship, when do you plan on introducing a product that you're jointly developing something with them?

We don't like to talk too specifically about future product development. That is a key part of the strategic alliance. That project is progressing from both party's standpoint quite well, and it will come out at a future date. That is as far as I'm going go.

Fair enough. And usually you display your AFP increases for ORVs and your Qs and your Ks. Can you give that for the quarter and the year?

Yes. The ASP for ORV is an increase of 4% for the fourth quarter, and 5% for the year-to-date.

And just one final thing and in that quarter, your R&D was up big. I think it's the largest quarterly spend you ever had in R&D. Is that a number they will continue that dollar level? Or is that -- and that is great to see it, no question about that. But, just to gauge where you're thinking on that spend there for 2011?

And I think it is a clear signal that as our business continues to grow and strengthen, we're aggressively investing in our future, and you will continue to see nice increases in aggregate dollars spend on our R&D. I think as a percentage of sales, we continue to try to be prudent and responsible about how we manage that, but there is no question that we're aggressively investing in ourselves.

And Joe, two points. Mike pointed out about where the costs for the realignment go, there are a portion of that that fall into the R&D bucket, and the validation of those products as we move them around from which facility they come is very, very important to us, so we're making sure we're there. I think it's important as you look at the increase in dollar spend, as you know, what Longren has done with that group, there is also a tremendous amount of productivity and engineering as well. So we're getting a lot of bank for our buck in what we're spending with R&D.

And as you know, a significant portion of our sales come from new products that were not around a couple of year ago, and what you're seeing is, there is no lack of ideas for innovative new products that are under development for future pipeline of products.

Right. Okay, that is all I had. Thanks.

Thanks, Joe.

The next question is from Mark Smith from Feltl.

Hi, looking at your international growth guidance. Up high single digits. Some of the momentum we have seen this year and adding new geographies. Is there a reason maybe not being aggressive on that?

Yes, it really comes down to that we're making significant investments, and we love the growth we're seeing, primarily out of Latin America and Asia-Pacific, particularly in the new emerging economies. But there are still new initiatives in it. We don't have a large base there. EMEA is the region that, frankly, is our most significant piece of international sales, and as you look at the economy for 2011, I think we're trying to be very grounded.

That team continues to perform at a high level. We're gaining share, we've actually been able to grow, but we still see economic headwinds in the EMEA, and we're trying to be prudent about how we manage guidance on that. Until we see the storm clouds pass in the EMEA region economically.

Last question, just housekeeping. How much is left on your current authorization for share repurchases?

About 3 million shares.

3 million shares. Perfect. Thank you.

Felicia, we have time for one more question.

The last question comes from the line of Tim Conder with Wells Fargo.

Hi, Michael Walsh filling in for Tim. I'm looking at your gross margin slide for '11, forecasting a 40 basis point increase to the gross margin. You list out the items. Is there one or two items there that would impact that more so than the others? And what are you thinking and seeing right now on the commodity side?

Well, we put a chart in the materials that show what is positive, what's negative and what's neutral. And as far as additional quantification of how helpful or how harmful, we're not going to go into that level of detail today. You mentioned commodities and like pretty much everyone else in the world, we're struggling right now with increased commodity costs and we're seeing that in some of our raw materials, and that is not unusual in our marketplace. We've done a very nice job of deferring and pushing those out and working with our suppliers and doing hedging and those kinds of things to minimize and mitigate those pressures. But that clearly is something that we're facing as we go into 2011, and it frankly, is probably why we're not giving more than up 40 basis points. But there is plenty of things that are tail winds for us. Our pricing continues to improve, and it has for a number of periods; and we're aggressively going after product cost reductions. We've been doing that for a number of periods and our team is aggressively going after that to offset some of those pressures. So, all end, we're very optimistic that we can once again grow our gross margins in 2011.

Got you. And then, last question. I realize the military's piece is a small percentage of your business, but you mentioned that being up significantly in '11, probably off a smaller base. Are you willing to give what 2010 ended up on the military business for revenue, and what you're thinking there for '11?

I think you got what you're going to get here. We don't break out our product line revenue at that level. I would tell you that the large order from the National Guard is indicative of the progress we made in generating customer relationships and excitement about the products. Some of the work that we're doing with new technologies and that space. We feel very optimistic about what the military business is going do in 2011.

Right. Thanks.

Thank you.

Okay. That is all the time we have this morning. I want to thank everyone for participating in the call again this morning and we'll speak to you again next quarter. Thanks again. Goodbye.

Thank you, this concludes today's conference call, you may now disconnect.