Polaris Inc (PII) 2011 Q1 法說會逐字稿

Good morning. My name is Melissa, and I will be your conference operator today. At this time I would like to welcome everyone to the Polaris first-quarter earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session.

(Operator Instructions)

As a reminder, this call is being recorded today, Wednesday, April 20, 2011. Thank you.

Mr. Richard Edwards, Director of Investor Relations, you may begin your conference.

Thank you, Melissa, and good morning; and thank you for joining us for our first-quarter 2011 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 before, 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 2011, and our plans for the recently announced acquisition 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' 2010 annual report and Form 10-K, which are on file with the SEC.

Now, I will turn it over to Scott. Scott?

Thanks, Richard.

Good morning. Thank you for joining us. This is a momentous day for Polaris stakeholders. A year ago, we were building momentum as we emerged from the recession and delivered the highest first-quarter earnings in Polaris history. In the first quarter of 2011, we more than doubled our earnings from last year's strong comparable. Our plans for this year remain aggressively focused on making growth happen, yet the first-quarter performance of the Polaris team surpassed even our highest expectations. As we will discuss this morning, the strategic execution of the team, including the disciplined implementation of our acquisition strategy, inspires confidence that we can stay on the gas and maintain this record setting momentum.

Innovation, quality, and value continue to drive consumer and dealer demand for Polaris products around the world. Sales for the first quarter 2011 increased 49% to $537 million as every product line in each geographic region once again contributed to the highest first-quarter revenue in our history. Our off-road vehicle business continues to exceed expectations as the RANGER and RZR products remain in high demand. Victory revenue was up significantly in the quarter, as that team continues to execute extremely well; and while it was a seasonally slow quarter for snowmobile shipments, that business concluded a season of significant progress, gaining exceptionally strong market share and introducing an impressive new line-up of the sleds for 2012.

Polaris delivered net income of $47.3 million and earnings per share of $1.34. Both numbers represent record first quarter results for the Company. These significant increases, 139% and 127% respectively, demonstrate the earnings power of this Company as gross margins rose 210 basis points to 28.3%. Our operations team managed the volume increase well and delivered strong 7% productivity gains, while continuing to effectively execute our on-going manufacturing realignment. We continue to benefit from our engineers' ability to design costs out of our products, and the impact of rising commodity costs and Japanese supply chain issues were effectively managed by our operations team. The strong results are underpinned by solid fundamentals in most every aspect of our business, and we are working hard to maintain that positive momentum.

We are confident in the sustainability of our organic growth engine, which results in the best team in power sports staying laser focused on innovation and execution. However, we have also been clear that we will augment our organic growth with a similarly disciplined approach to acquisitions. Yesterday, Polaris closed on the acquisition of the Indian Motorcycle Company, one of the most storied brands in heavyweight motorcycles. By uniting the Indian brand with the capabilities Polaris has developed during our 13 years with Victory, we are confident that we will, over time, accelerate the growth and profitability of both brands and our overall motorcycle business.

A brief history of Indian -- a brief review of history will show that Indian built the first American motorcycle in 1901 and the world's first V-twin engine in 1907, and went on to become one of the great motorcycle companies in America during the first half of the twentieth century. We have no intention of living in the past and fully recognize that the brand has had many ups and downs in the past 60 years; but the heritage and style that Indian brings to Polaris significantly expands our target customer base. As we look at the break down of motorcycle consumers, Victory has established a strong brand position with the performance- enthusiast segment where customers are typically most interested in the modern styling, performance, quality, and value of their bikes. With the Indian brand in our stable, we will gain access to what we call the die-hard segment, where riders look for classic styling and iconic brands. This acquisition more than doubles the scope of our target market.

That said, there is a distinct difference between having access to, and actually penetrating, any segment of the highly competitive heavyweight motorcycle market. We made this investment because Polaris has the capabilities, including a world-class engineering team, and the demonstrated ability to execute new product introductions that are strongly correlated to what the Indian brand needs for success. Polaris can provide the short-term support to improve and maintain production of their current product line. Concurrently, we will leverage our talented engineering, sourcing, and design teams to create an Indian line-up that is true to the rich heritage of the brand with the performance and quality that people expect of a premium motorcycle.

Another key benefit that we bring to the Indian motorcycle company is Polaris' strong network of dealers and suppliers. While we will ensure the actual bikes remain distinctly different, the compatibility of the Indian and Victory brands is telling, and we will offer a much stronger motorcycle line-up to benefit of our current dealers, and drive much-needed dealer expansion in the nation's most desirable motorcycle markets. Indian Motorcycle sales were approximately $11 million in 2010, and we project shipments will decline slightly before they accelerate with the re-launch of the new Heritage bikes we will develop. The business will be dilutive to Polaris as we make these necessary but manageable investments, but we are confident that, in time, this investment will yield quite strong returns. We have a detailed plan and a strong team to accomplish the hard work ahead to make Indian Motorcycles a top contender worthy of its legacy.

I will quickly provide an update on the areas of our strategy where we continue to make meaningful progress towards a stronger, more globally diversified Polaris. The key to our overall strategy is to continue to win in power sports. As Bennett will outline in a few minutes, we are winning the competitive battles in our core markets and making investments to build on our lead. Our effort to grow and diversify into adjacent markets is a long-term objective, but there was significant tangible progress made in the first quarter. In addition to the Indian Motorcycle acquisition, our M&A activity increased throughout the quarter, and we were encouraged by the opportunity to make subsequent strategic investments throughout the year. We also moved the needle on the organic side of adjacent market growth as retail demand from Bobcat consumers ramped up nicely.

Our military business saw significant year-over-year sales improvement, and we added experienced talent to our already strong Players defense team. Players international sales were up 21% in the quarter, as we continued to build capability and momentum in our global market leadership initiative. In March, we held the grand opening of our European headquarters in Switzerland, which will support our growth across Europe, the Middle East, and Africa. Our strong business leaders in China, India, and Brazil continue to make progress, and we remain confident in the long-term growth opportunities in those important regions.

During the first quarter, our operations and engineering teams clearly demonstrated that operations is a competitive advantage for Polaris. These teams were key contributors to our record results and strong gross margin expansion, as they led a very efficient start of production in January while also bringing our Monterrey production facility online slightly ahead of schedule. We are still very early in our lien journey, but the results and opportunities are extremely promising. While we have multiple elements to our growth strategy, driving shareholder value through consistent, strong financial performance remains our top priority. With remarkably strong top- and bottom-line growth in the first quarter, we are on a path to deliver sustainable profitable growth for the balance of 2011.

Based on the strength and breadth of our first quarter sales and income growth, and strong fundamentals across the business, we are making a notable upward revision to our previous full-year 2011 guidance. Inspired by our strong current and future product line-ups and our teams' exceptional performance, we are increasing our full-year sales guidance to be up 17% to 20%. We are also raising our full-year 2011 earning per share guidance to $5.53 to $5.68 per share, supported by net income growth of 35% to 39%.

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

Thanks, Scott.

Operationally, 2011 is off to a strong start. First-quarter North American retail sales grew a healthy 13%, significantly outperforming a stabilized, but still relatively weak power sports industry. Revenue was up 49%, driven by strength across all reporting retail businesses in North America, as well as nice improvements in international, PG&A, Bobcat, and military, which do not roll into the unit retail numbers we report. North American dealer inventory remains near optimal, down 7% year over year, though up slightly versus year-end to meet increasing consumer demand.

Moving on to business unit performance, off-road vehicles, Polaris ORV business had outstanding first quarter with revenue up 55% driven by across-the-board wholesale sales increases in side-by-sides, ATVs, international, Bobcat, and military. In Q1, core North American ATV industry sales were sluggish, down upper-teens% , while we believe side-by-side industry sales remain positive, up in the neighborhood of 10%. Polaris continues to significantly outperform the industry, with ATV retail sales down slightly, and side-by-side retail remaining very robust, up higher 20%s; so, we continue to pick up a sizable amount of market share. RZR sales are especially strong, driven by outstanding response to our new RZR XP900 and continued great performance by our RZR S and RZR4 products. RANGER retail growth continues to shine as well, driven by XPs and our growing mid-sized product line-up offerings. Dealer inventory levels are very healthy, with ATVs down 18% year over year and side-by-sides up year over year. Overall, our ORV inventory is down slightly year over year, and up sequentially from year-end 2010, with an improved mix in the dealers to better meet rising consumer demand as we enter the key spring selling season.

Sales to Bobcat increased nicely during the first quarter. More importantly, Bobcat has reported growing retail demand from consumers and its dealers. Both Polaris and Bobcat continue to make investments and progress on our future co-developed projects. Our defense business got off to a strong start to the year, with revenue more than doubling first-quarter 2010 results. More importantly, we are experiencing some very nice wins, including a recent $5 million order to provide vehicles for the Afghan national security forces that will ship in the second quarter and another recent order from the Air National Guard. We have invested in some significant talent and experience to broaden our defense capability and reach, and we have high expectations for 2011 and beyond.

Snowmobiles; Polaris snowmobile business completed a very strong year. First-quarter revenue was up 61% in what constitutes off-season for snowmobile shipments. First-quarter North American industry sales grew by low single digits, and for the just-completed season increased by 7%, thanks to solid snowfall across the snowbelt. Polaris retail sales outperformed and were up 25% in the first quarter, and over 30% for the entire season. Strong response to our new products and improved quality led to Polaris becoming the only OEM to gain market share, re-establishing us as the clear number two player in the industry.

Polaris dealer inventory levels are at a 16- year low and are in excellent shape heading into the next season. During the quarter, we introduced 9 new model year '12 snowmobiles, including an all-new switchback series with our industry's first progressive rate rear suspensions and an all-new RMK600, so we believe we are very well-positioned for continued share gains for the upcoming season. While not yet finalized, global dealer orders have exceeded our expectations, as have pre-season consumer snow check orders.

On-road vehicles and Victory motorcycles; on-road first-quarter revenue was up 77%, driven by continued improvement in our Victory business. The North American heavyweight motorcycle industry segment continues to show signs of recovery, with sales down only low single digits. Victory retail sales increased, with sales down low single digits in North America, but up significantly internationally. With the recent launch of Victory in France, and continued growth in Germany, Europe will continue to be a growth market for our motorcycle business. Our recently introduced Victory High-Ball Cruiser began shipping in the second quarter and will nicely complement our line-up of heavyweight cruisers and touring bikes. Momentum within the dealer channel remains solid, with a net of 10 new dealers, and dealer inventory remaining flat year over year and at acceptable levels.

Parts, garments, and accessories; PG&A first-quarter sales remain very solid with sales up 19%, driven primarily by strong side-by-side and snow demand. International; our international business continued to grow rapidly in the first quarter with sales up 21% as we again experienced growth in every region throughout the world. Strong side-by-side Victory and PG&A product sales were the key product drivers of the growth. European markets returned to growth in the first quarter, with encouraging single digit industry increases in both snow and ORV. Our Victory international revenue is up 59%, and we continue to pick up a lot of market share; and, finally, we had a strong season of retail in snowmobiles and are well positioned for a significant increase in international snow orders for the upcoming season.

Operational excellence; the manufacturing realignment project is making tremendous strides. Monterrey plant construction is essentially complete and we now have 400 employees in Monterrey. Initial ORV production began earlier this month, and after we successfully complete our validation testing, we expect to begin dealer shipments sometime in the second quarter. The relocation of machining operations to Roseau is right on schedule; and, additionally, our Osceola transition continues to go quite well, and the sale of our stamping operations and concurrent outsourcing of seats to our supply base are preceding as planned. Based on our strong growth over the past year, and the Osceola team's continued outstanding performance, we've decided to maintain snowmobile and motorcycle engine assembly in Osceola; this decision will also provide duel plant engine production support of our ORV business. Finally, we will transition production for our newest acquisition, Indian Motorcycle, into our Motorcycle Center of Excellence plant, Spirit Lake, over the next several months.

Our sourcing team and supply chain have done an outstanding job of working through the impact and risk arising from the terrible tragedy in Japan. Under 10% of our cost of sales originates from Japanese suppliers, including our largest supplier, Fuji Heavy Industries. All our Tier 1 suppliers, including Fuji, are producing and shipping to our orders, and we have suffered no production interruptions, nor do we expect any based on our current knowledge today. We have, however, incurred some additional expedited freight expense over the past 30 days to ensure we maintained our scheduled production.

Operational excellence initiatives continue to drive margin expansion and business improvement. First-quarter gross margins expanded 210 basis points to 28.3%. Strong product innovation such as the RZR XP900, value engineering, strategic sourcing investments, significantly improved quality, our MVP go-to-market strategy, and increased lien events, are driving our expansion. We have done a nice job in deferring and mitigating the increasing commodity pressures through hedging, forward supply contracts, and continued value engineering. With that said, we do anticipate we will incur modest additional cost pressures in the balance of 2011, primarily in the areas of steel, aluminum, plastic, and diesel fuel, which is in our revised full-year guidance. Our focus on quality, cost, and speed continues to make our businesses more competitive and strengthen our financial performance.

And with that, I will turn it over to Mike Malone, our

Thanks, Bennett, and good morning to everyone.

As both Scott and Bennett have stated, we were very pleased with our first-quarter results. All of our businesses are performing at a high level, and we expect this momentum to continue through the balance of the year. Let me begin with more detailed full-year guidance for 2011 and some summary comments about the first-quarter actual results. Total company sales are expected to increase 17% to 20% for the full-year 2011, up from our previous guidance of up 8% to 11%, with the individual businesses contributing as follows. Sales of off-road vehicles are now expected to increase in the upper-teens percent range, with retail sales of side-by-side vehicles and ATVs continuing to outpace the overall market in both North America and internationally. The strength of our sales increase is a direct result of consumer acceptance of our innovative product offerings, improved dealer inventory position, and the success of the MVP go-to-market strategy, which gives us confidence in this increased sales guidance range for ORVs.

Snowmobile sales are now expected to increase about 30% over 2010. We are currently in the process of finalizing our dealer and snow check orders for model year 2012, and are confident in our expectation for strong growth, given the extremely low dealer inventory levels at season end, improved quality, and model year 2012 product innovations. For on-road vehicles, we continue to expect to be up over 50% again in 2011, due to our improved dealer inventory position, solid retail sales demand, and additional global market share gains for Victory motorcycles. Our on-road vehicle sales guidance includes the impact of the Indian Motorcycle acquisition for the balance of 2011. We expect PG&E sales to increase in the low-teens% range from the levels achieved last year, and we now expect international sales to increase 15% to 20% on the strength of each of our product lines in each global region.

Our guidance for operating expenses remains unchanged. We continue to project decreased operating expenses as a percent of sales in 2011 as we begin to achieve some leverage from the expected sales increase. In dollar terms, we expect operating expenses to increase, primarily due to the continued infrastructure investments being made in international and adjacent markets as we continue to invest prudently in future growth opportunities, as well as incremental integration costs related to the Indian Motorcycle acquisition. The income tax provision rate for the full-year 2011 is now expected to be in the range of 34% to 34.5% of pre-tax income, up from 32.7% in the full-year last year. Given the strong first-quarter results and our increased confidence in our ability to drive growth and mitigate risks through the balance of the year, our earnings per share for 2011 is now expected to be up 29% to 33% to $5.53 to $5.68, compared to the full-year last year.

Net income for the full-year 2011 is expected to increase at a higher percentage rate than EPS, up 35% to 39%. As I've mentioned before, this difference is due to an anticipated increase in the number of diluted shares outstanding throughout 2011, resulting from no open-market share repurchases last year and a higher anticipated stock price. However, in the first quarter, we did repurchase a total of 400,000 shares for $31 million.

The gross profit margin percentage generated during the first quarter of 2011 was 28.3%, a 210 basis point improvement over the 2010 period. This was considerably better than our original expectations, and was achieved, in part, due to our ability to avoid or defer increasing commodity cost pressure in the first quarter. In addition, the first quarter benefited from ongoing cost reduction efforts, lower warranty costs, and improved currency impacts. These positives for the quarter were somewhat offset by incremental manufacturing realignment costs and sales mix impacts. For the full-year 2011, we now expect our gross profit margin percentage to increase up to 90 basis points over the full-year 2010 percentage of 26.6%.

The manufacturing realignment project we announced less than a year ago remains on schedule and on budget. For the full-year 2011, the transition costs related to the manufacturing realignment remain unchanged from our previous guidance. We continue to expect these transition costs to be in the range of $12 million to $14 million, partially offset by the savings the project will start to generate in the second half of 2011. As mentioned earlier, we have decided to continue snowmobile and motorcycle production at our Osceola facility indefinitely, given the increase in volumes we are experiencing in each of our businesses. This change does not materially impact our costs or the savings we expect from the manufacturing project.

Moving now to the balance sheet and liquidity profile; at quarter-end our cash balance was about $346 million, an improvement of more than $220 million from the first quarter of last year. We continue to have a $250 million borrowing capacity under our attractively priced $450 million banking arrangement, which is set to expire in December of this year. As a reminder, during the fourth quarter of last year, we made a commitment for a private placement debt offering of $100 million that is expected to be funded next month, and, together with cash on hand, will 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 March were $224 million, a 36% increase from the first quarter last year. Inventories were higher in support of stronger consumer demand and, as projected, to assist in the ramp-up of our Monterrey facility. For 2011, we continue to expect factory inventory levels to be lower than last year by year-end. For the quarter, our investments in capital expenditures and new product development tooling totaled $19 million, an increase of 133% from last year, and reflects an incremental $6.5 million in capital expenditures for the manufacturing and realignment project. Full-year 2011 expectations for capital expenditures and depreciation are both unchanged from prior guidance.

Net cash provided by operating activities was a positive $4.8 million for the first quarter, up slightly from last year due to the increased net income offset by higher accounts receivables. We now expect cash flow provided by operating activities for the full-year 2011 to increase slightly over last year. The retail credit programs with Sheffield, GE, and HSBC continue to perform at stabilized levels. The retail credit approval rate for the first quarter was 57%, up from 53% during the first quarter a year ago and about the same as the full-year 2010. The retail credit penetration rate for the first quarter of 2011 was 35%, a slight improvement over both first quarter and full-year last year.

I will conclude my comments with some qualitative directional comments on our quarterly expected results for the balance of 2011. As you know, we ceased giving quarterly guidance last quarter. Without any specific guidance provided, the resulting Street's sales and earnings estimates for the first quarter ended up being quite a bit lower than the Company's expectations for the first quarter coming into the year. That being said, the actual results for the first quarter were better than our original expectations, and we have raised the 2011 full-year sales and earnings guidance as a result of that outperformance. For our 2011 second quarter, we expect to again set second-quarter records for sales, net income, and earnings per share. The year-over-year percentage growth rate in sales and profit for the first half of 2011 was expected to be considerably higher than the growth rates in the second half of 2011. Remember, that we were still significantly under shipping retail sales in the first half of last year, so the comparables are quite a bit easier than they will be in the back half of 2011.

I will now turn the call back over to Scott for some concluding comments.

Thanks, Mike.

As we have detailed, Polaris had an excellent start to the year, and with our strong fundamentals we were well positioned for the balance of 2011. We are carefully navigating the dynamics of a slowly improving economy, global commodity inflation, and uncertain currency movements, but remain confident in our ability to manage the business and make growth happen. Led by outstanding execution from our off-road vehicle and snow divisions, we expect to gain share in all of our power sports business units this year. I'm extremely proud of the way the entire Polaris team has pulled together to bring our Monterrey facility online, and we will continue to execute our manufacturing realignment plans throughout the year. Our decision to leave snowmobile and motorcycle engine production in Osceola, Wisconsin, was based on unanticipated growth, but also provides improves stability and flexibility to our business.

ORV engine assembly remains on schedule to transition to Monterrey later this summer. We continue to aggressively manage rising commodity costs and potential supply chain disruptions from the tragic events in Japan. Our treasury team has a long track record of effective hedging strategies, which typically provides time for our team to find alternative means to offset rising costs. Acquisitions and other adjacency activities are beginning to add new growth opportunities for Polaris, and we will increasingly look beyond the North American and western European markets to drive expansion and diversification. Our commitment to profitable growth and margin expansion is both boundary-less and relentless. Much work remains to make 2011 a second straight year of strong sales in earnings growth. There will be many challenges to overcome, but expect this team to work hard to build on our momentum and deliver continued strong results in the second quarter and beyond.

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

(Operator Instructions)

Your first question comes from the line of James Hardiman from Longbow Research. Your line is now open.

Good morning and congratulations on another really, really impressive quarter. Couple of questions here.

Obviously, the delta between wholesale and retail continues to be quite large and you have helped us put together at least the contributors to that. I was hoping maybe you could give us an indication of order of magnitude of how some of those things have contributed between -- obviously pricing is a big one, the inventory dynamic. You talked about last year under-shipping pretty meaningfully and so -- that's obviously a pretty big dynamic. I was also hoping that maybe you could quantify the impact of Bobcat and military in the first quarter to the extent that you'd feel comfortable. Thanks.

You know, James, I understand the importance of trying to get that number exactly right, but I don't know how much more clarity we can really give you. I will tell you that you hit on the main drivers. Clearly, not under-shipping quite as much this year than last year is a big contributor. With strong retail demand, that has been a helpful dynamic for us for quite sometime.

Bobcat ramped up nicely, as we said, The military business was very strong. PG&A had a great quarter. All of those things that aren't in that retail number contribute to it, and I think the important number to look at is dealer inventory being down 7%. We stay very focused. We got this dynamic right now where we are not giving our dealers enough of some of our units and we are trying to getting them in as fast as we can. With sales being quite a bit higher than retail, as long as that dealer inventory number stays straight, I think you should feel good.

I can add a little bit more clarity, James. Of the 49% sales percent increase, volume is 44% of that. Currency is 2% and the price and mixed impact is about 3%. That's a little bit more clarity on where the 49% came from.

Okay. That's certainly helpful.

And then hoping you could speak I guess a little bit more specifically about the second quarter, help us build these models, so I don't miss by $0.61 again. It looks like second quarter of last year wholesale was meaningfully ahead of retail. That is when that trend seemed to really take off, and it sound like what you are saying is you continue to under-ship pretty meaningfully in the second quarter. Certainly, when I look at your guidance for the year -- and this is ORVs I'm really speaking of, more specifically -- but when I look at your guidance for the rest of the year you are looking at maybe 10% to 12% growth out of ORVs versus the 55% we saw in the first quarter. Just trying to tie all those things together; help me understand the second quarter and then the balance of the year how that should look.

Well, James, we are not going to give a lot more clarity on the quarterly splits. We updated our full year. I tried to give you a little bit of color on how things will ramp throughout the year. Clearly the first quarter percentage moves and sales and income and EPS aren't going to be repeated, obviously, and I think as you look to the balance of the year, the percentage changes will decline as we go through the year. Other than that, we are just not going to give any more specific quarterly look.

Okay. Fair enough.

And then just real quick, how do we think -- you gave guidance the cash was going to be up 2011 versus 2010. I'm assuming that assumes, that is excluding any acquisitions you make. I'm also assuming that the Indian acquisition was not in the first quarter numbers. How should we think about the size of the cash drain from -- I know you don't want to say how much you paid for that. But ultimately, what is it to do in terms of your outlook for future acquisitions as we move forward?

Yes. James, it's Scott.

I think we got plenty of room on the balance sheet to do anything that we have the appetite to do. I would be fair to say we aren't going drain that cash balance on acquisitions in 2011, but you're going to see that number diminish.

Okay. Great. Thanks, guys.

And I would add, the Indian acquisition is a second quarter event. None of that is reflected in Q1. That actually just closed yesterday.

Great. Thanks.

Thanks, James.

Next question?

Your next question comes from the line of Ed Aaron of RBC Capital Markets. Your line is now open.

Thanks, good morning, everyone. Great quarter.

I want to ask about the full-year gross margin guidance. You came in north of 28% in Q1 and the full-year guidance number is a little bit lower than what the Q1 margin was. I was looking back over the last ten years; I think that there was only one year where the full-year gross margin wasn't better than what you did in Q1, and I understand you have some inflation hitting later in the year, but it's a little bit hard for me to understand why gross margin wouldn't come in better than perhaps where you've guided.

I think the best way to answer that is to observe the what I call the arrow charts in our filings, where we try to map out for you guys the impacts of a number of different criteria on our gross margins. If you look at that you will see directionally we see things, we're anticipating to be more pressure as we look to the balance of the year, and we talked about commodities and our ability to defer or avoid the impact largely in Q1, but that's coming. The whole world is seeing that, and we think there is going to be more pressure there that will impact us.

There is other impacts, as well, that have more of an impact later. Currency rates are uncertain. We are very favorable in Q1. Those are hard to predict and our expectation perhaps for the balance of the year aren't quite as high as it impacted us in the first quarter. And, there's others that you observe on there that -- it's more timing issues as we move throughout the year.

Okay.

And then, I wanted to ask a question on Indian. I think one of the challenges that I think you've had historically with Victory is getting the distribution right. I am just trying to think through how the dealer network of your overall motorcycle business might change over the next couple years as you integrate Indian in there. Just any high level thoughts on that would be great and then I will pass it on.

Sure, Scott -- I will take that one. You can imagine we put a lot of thought and study into how this might work, and our Victory dealer network has done a decent job of expanding over the last 18 months, but we were still very much underrepresented in what I'll call the top MSAs or the top 100 markets within the United States. We are not going to try to -- certainly not going to try to push Indian into all of our dealers, but we were going to make a concerted effort to improve -- to leverage the Indian brand and the strength of those bikes with Victory to establish better representation in the top markets for motorcycles in the United States, and I think over the next couple of years you will see that strategy play out.

Thank you.

Your next question comes from the line of Scott Hamann from Key Bank Capital Market. Your line is now open.

Good morning, guys.

Mike, just on the mix on the gross margin, saw it went from neutral to negative from last quarter. Is that a function of snowmobiles being a little higher? What's driving that?

The primary movement there is actually PG&A. Total sales were up 49%, and our highest margin business is PG&A and that was up only 19%, so that has a fair amount of impact on the mix. The other thing that we talked about for a number of quarters now is that as we introduce these mid-sized side-by-sides, we are gaining a lot share in that part of the category, but those margins are a little bit less than some of the higher priced products. So, those two things are the primary driver of the mix.

Okay.

And then, Scott, just maybe on the acquisition front, update where you think the pipeline is, where the focus is, segment-wise, geographic. Anything there, where you are stepping around it might be helpful. Thanks.

We are not -- we were not very dynamic with our acquisition strategy changing very much. It's been pretty consistent. We are looking to get into new markets that we find that likely grow faster. The international market is certainly interesting to us. We've said that fairly consistently. We are not going to give any more clarity. I think we will actually through actions rather than words demonstrate where we are going. Todd is very busy right now, and the fact that Indian was the first one announced doesn't mean it was the only one being worked on.

Okay. And then one final.

On the military business, it looks like there was a little bit of a log jam that cleared up, and it looks like you getting traction there. Can you help us size up where that opportunity could be over the next couple of years? It's a couple $100 million opportunity and how should we expect that to play out?

I think longer term. I wouldn't say in a couple of years, but we certainly expect the military defense business to be a $200 million to $300 million business for us over time. How quickly they can get there is a constant debate that we have internally.

I will tell you that the team that we've got in place now -- we had a very strong team to begin with and we've added some great resources to that. I think we will find our way there certainly over time. We feel confident in where that's going. They have good momentum to start the year and we expect that to build throughout 2011.

Next question.

Your next question comes from the line of Tim Conder from Wells Fargo. Your line is now open.

Thank you.

That was one of my questions, a little bit of military color, so thanks, Scott, on that. Maybe touched on before, but wanted to circle back on the Bobcat side. Similar question to the military that was just asked, Bennett. And then on Fuji and any other Japanese tertiary suppliers, Bennett, you alluded that there were some costs. Were there any costs in the first quarter, and then any quantification that you can put around those costs in the quarter or for the year that you guys are looking at this point?

Yes, first on Bobcat, very similar to what Scott talked about on military. Obviously, in this case we're a supplier to Bobcat, so we get our information second hand, but we are really encouraged, as is Bobcat, with what they are seeing directionally from their dealer channel and consumer response. They are also starting to penetrate rental markets, which is very encouraging, and we are seeing a nice trend line right now of growth as we go forward. So, while it's not the law of big numbers yet, it continues to pick up nice momentum as we head into 2011 and I think that 1should continue for the foreseeable future.

In regard to the supply chain in Japan, Tim. Our team has done an outstanding job. We have what we call 14 tier 1 suppliers in Japan. We have been in constant contact with them over the last 30 days. We've reached down into our tier 2 and tier 3, and again, as we said in the remarks, there is at least as of what we know today and our schedules are locked and loaded through the end of May, we feel surprisingly okay.

The costs I talked about -- while we did incur a nominal amount of freight expediting expense in the first quarter, we will probably have a nominal amount in second quarter. I wouldn't consider them, in the scheme of what we are reporting, anything material at all. Just trying to communicate to you guys, so you knew that we did have some modest issues and we are just working through them.

Okay.

And then on the Bobcat, your commentary -- so we could assume that we should put that in -- that $200 million to $300 million opportunity over the next couple of years.

No, I don't think -- I think as we move towards co-developed projects that we continue to allude to, the opportunity can become much larger than what we would call our Phase 1 where we are just essentially utility vehicle supplier for their private label efforts. I don't think I want to quantify $200 million to $300 million. I do think it's an opportunity that if it goes well for both Bobcat and us, it could certainly be well north of $100 million, but I want to avoid any things of $200 million to $300 million at this point.

Okay.

Then Scott, any additional color on the metrics related to Indian price paid, timing when you anticipate turning accretive, and timing in overall acquisition or -- obviously, looks very, very good and strategic focus here, but any additional color on that?

Then, any thoughts about resetting your net income margin goal? I know it was just the first quarter and you exceeded the 8%, but any thoughts there?

First on Indian, Tim. We are going to be fairly consistent; unless required to we will never disclose what we paid for an acquisition, so that's -- just get used to that one. But, it's fair to say that we got a history of being frugal in most things that we do and I think it's fair to assume that with acquisitions as well. As far -- there was -- if you go back to the chart that we filed on the Indian acquisition, we tried to put a little line in there to signify how sales are going to ramp up, and we're not going to give you any -- it was somewhat nondescript on purpose. It takes a couple of years in general for us to bring a new bike to market and that's probably what it's going to take to get these bikes that we think we can bring out. And, it's hard for us to make money in a motorcycle business until we're shipping any significant volumes, so you put those two together and look at that chart and you can figure that out.

As far as the net margin numbers, we took a big step this quarter and actually put a greater than sign in front of the 8% on the charts. We've all -- and I have tried to signify that the long, long term objectives for Polaris is to get to 10%, and it's going well right now and things can happen in the future, but I think we're shooting for north of 8% now as an objective.

Okay. Great. And again, congrats on a great quarter, gentlemen.

Thanks.

Next question.

Your next question comes from the line of Greg Badishkanian from Citigroup. Your line is now open.

Hi, guys. Just really two questions here.

First, with respect to the disruptions in Japan. What are you seeing from your competitors and some of your Japanese competitors? Do they produce in the US or is it all in Japan right now?

Okay. This is Bennett, Greg. What we've seen so far, and we are monitoring it closely from our competitive set, is so far there is no real news or interruptions that we have seen. I would expect -- we have less than 10% of our supply chain really originates out of Japan. Clearly, even when they produce in the US they are much more concentrated in Japan. So, they clearly have some probably more risk in concentration there, but what we have seen through dealer channel and competitive information is that there really has been no behavior chain or any supply interruptions that we have seen so far. Now that could change, but so far no news.

Has their inventory levels been higher in general?

No, I would characterize in general versus what we used to talk about 12 to 24 months ago. I think in general, industry inventory levels are very solid in most categories. I think what you would talk about from competitors, frustrations would probably be retail velocity frustrations rather than inventory pressures. It's not like they got tons and tons of supply to handle it. Again, these guys are diversified global manufacturers and they are quite good at what they do. We will see how they do, but my sense is they will figure out how to maneuver their way through this.

And just on your dealer inventory levels, obviously they are pretty lean and I think a lot of dealers, at least that we talked to, like that, it helps their margin and creates a little bit of scarcity. When do you think those will be -- as you build it up a little bit, when do you think those will be more normalized?

I would tell you -- from our perspective, we were pretty close to normalized now. We are always -- we like a little bit of a scarcity mentality. I think that's healthy for our dealers and it's healthy for the business model, and obviously, we also, as a manufacturer, want to make sure we are getting the right product, right place at the right time, so we make sure we are meeting consumer demand; and it's been well documented over the last year, particularly in certain side-by-side products, we have been a little tighter than we like.

We some made nice progress as I alluded to in the remarks in the first quarter, getting our side-by-side inventory bolstered to meet the spring selling demand. So, I think we are close. There are still areas, particularly in side-by-sides, where we are little tighter than we'd like, but we're close and obviously with Monterrey coming up and having additional capacity over the upcoming quarters, we think we were in good shape.

Thank you.

Next question.

Your next question comes from the line of Scott Stember from Sidoti. Your line is now open.

Thank you, gentlemen.

Could you talk about the new diesel product that you guys had released late last year, how that's doing internationally, and if any -- how it's helping with the military business?

Yes. It's still a little bit early, but we got off to what I call a nice start with the diesel and we are continuing to plug along. We always have high expectations for our products and it's a nice incremental category for us. So, it's an area that because it hasn't been in the center of the bulls eye of where our dealers and our brand has played, we are going to have to work at it a little harder to make sure we continue to drive consumer awareness in those new categories, but we like our start.

It is starting to have some impact on military. They have a little longer buying cycle than consumers, and so I think this is one of those ones that should have a slow burn and should increase nicely as we continue to develop skill and capability and awareness around this product category.

And Scott, I was in Europe last month and there is a lot of talk about momentum building for that diesel product, especially in the UK where they think it's going to be a nice hit.

And on the military side, one of the things we are finding is not only the diesel, but we have other -- with our electric products and things we are working on multiple power train technologies that we can offer, that I think will be a key driver for our long term military strategy.

How about this product towards the farming and agricultural community?

I think absolutely from a farm standpoint it's single source fuel for farmers as well as in construction application. So again, that is what encourages us with our existing channels. It is certainly something we can continue to build momentum off of.

And the last question, could you touch base on what some of the Japanese competitors are doing here in the US over the course of the last couple of quarters. We've heard before that some of them are actually pulling back their efforts here and focusing more internationally. Can you talk about how that's benefiting you and if -- what you think?

I think I have covered on the supply chain, but from a competitive standpoint, that's not exactly with a we are seeing. I would tell you in general I think that was your characterization that they weren't paying as much attention to North America was true through the recession. I think over the last six to 12 months I think we have seen increased competitive activity from all of our competitors from a standpoint of what they are doing from a marketing and focus standpoint. So, I think they are engaged and they are trying to grow the North American market, but again with the product innovation lead that we've had and our speed to market advantages and innovation lead, we feel really, really good that even with what they've got and got coming, we are well positioned now and into the future.

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

Thank you.

Next question.

Your next question comes from the line of Joe Hovorka from Raymond James. Your line is now open.

A couple questions. First, Mike can you give the wholesale portfolio that you usually give on the call?

No, I didn't.

Could you?

Yes. Let me -- go on to the next question; I'll find it.

And then the next one is your gross margin slide where you've got your pluses and minuses. Your sales promotion cost go from a benefit in the fourth quarter to basically a push for the latter part of the year or for rest of the year, which implies that they are going to get worse. Given the retail strength that we have and the level of inventories in the dealer channel, why would promotional cost goes up? Am I missing something there? Or is that just not that big of a number and shouldn't worry about it anyways? Or -- ?

Well, I think our expectation going into the year was that the promotional costs would be punitive year over year. We were fortunate in the first quarter to experience actually a benefit from the promotional cost. Part of that is due to the significant volume increase and the impact on our gross margin percent of 44% more volume.

So, at quarter end, we are feeling a little bit better about the promotional pressure, but clearly there is, as Bennett said just a second ago, there is re-engaged competitive activity of both product and promotion and as we map out the balance of the year, we think that there is a potential there for some pressure.

On the wholesale portfolio in the US, the ending receivables were just under $500 million, which is very similar to where it was a year ago.

And then on Indian, what are you buying? Are you buying just the IP? Are you buying the plant that they had in North Carolina? What assets come with the acquisition?

We're buying the Indian Motorcycle Company, and they are in Kings Mountain, Georgia. And they've got engineers and assembly guys, and we are buying the entire business.

Kings Mountain, North Carolina, not Georgia, right?

Yes, right. So, yes. We are buying the entire business. Again, it's very small at this point, so essentially what we are getting is primarily a very strong brand, but it's an operating business today with sales and dealers, and we will have to work from there.

So, I think you made the comment that you will move it to Spirit Lake. Is that implying you are not going to use the plant in North Carolina or no?

There's just not scale there right now. We got very good assembly capability and capacity in Spirit Lake, but it's worth noting, just again, buying this iconic brand, we will be very, very disciplined to make sure that there is a very distinct difference between any Indian bike that we develop and any Victory bike that comes out of Spirit Lake.

Thanks. That's all I had.

Thanks, Joe.

Next question?

Your next question comes from the line of Gerrick Johnson from BMO Capital Markets. Your line is now open.

I was wondering, of your international sales what were they in -- what was the growth in local currency and then related to that, you talked about your Swiss office. What other offices do you currently have out there supporting international business and what are your plans going forward there? Thank you.

Okay, Gerrick. Of the 21% growth in sales in the first quarter for international, about 4% of that 21% was related to currency movements.

Okay.

And regarding to the international offices, what we alluded to there was our new European, Middle East, and Africa headquarters as we put a little bit more of a fully loaded P&L structure in place there to capitalize on future growth. We have a number of facilities throughout Europe, a number of subsidiaries in Europe that are almost too numerous to mention. We have a new facility in India. We have an organization on the ground in China. We have an organization in San Paolo, Brazil, so again as we -- as Scott has talked about with the strategy of getting much more global, we were starting to get more boots and world class capability on the ground so we can start to successfully sell into those emerging commercial markets across the globe.

Okay. Great.

And maybe if I could sneak in -- I don't know how much of your ORV shipments were side-by-side versus ATV.

No you're not going to be able to sneak that one in. (Laughter) I would tell you that, frankly, side-by-sides continue to be very, very strong. And ATVs, again, as we've gotten the market corrected and we continue to see market share gains our of that, that business has been quite healthy from a shipment standpoint as well.

All right, how about this way? The market for side-by-sides, that information is hard to come by right now, how big do you think that market is? How much has it grown in the last couple of years, how much room do you think it has to run and maybe what you think your market share there is?

Okay, well, you aren't going to get all of that either, but I will try to give you a little bit there. We still think a long term and medium term and short term side-by-side is the best growth opportunity in power sports. We are extremely well positioned and have very, very clear market share leadership. That's as much as you're going to get from us there, and we are growing share rapidly, still.

I would tell you right now, though, that coming through the recession though, that the side-by-side market is probably down a little bit from its peak, and so we still are very, very encouraged that there is a number of -- quite a good opportunity for additional side-by-side growth in the industry both in North America and then as we go forward, an increasing percentage in international. We are pretty bullish on side-by-sides.

All righty. Thank you very much.

We have time for one more question, Melissa. Or, two more questions.

Your next question comes from the line of Craig Kennison from Robert W. Baird. Your line is now open.

Congratulations as well. Many of my questions were addressed.

Maybe you could just give us a feel for the US consumer today. Consumer confidence has dropped. Gas prices are a concern. I know you have got innovative products and that's driving the boat here., but what's your view on the consumer today versus 3 months ago?

If I read the newspaper I would have a different look at things rather than look at our own retail reports. As you know, Craig, we have somewhat defied gravity on the industry results and even last year when US economy wasn't growing very fast we were, and I think that continues to be the case. We talked about it quite a bit in preparation for the call. What happens if gas prices spike. We aren't going to be immune from an economic downturn. We know that, but right now, we are seeing consumers continuing to show strong demand for the value and innovation that we are bringing and that's not changing.

Thanks, that's helpful.

And, one quick follow-up, Scott. What's your appetite for the stock here relative to some other priorities you may have for cash? Thanks.

As Mike said, we got back in the market in the first quarter a little bit, and I think you can expect us to periodically being investing in the stock. Our long term objective is to try to offset the delusion that we get -- and get net income and earnings per share to be unbalanced. We are kind of a ways from that ,so we will have to continue to work that effort, but -- like we were in the first quarter, we feel there is long-term value in stock.

Thanks and congratulations to the whole team.

Thanks.

Next question, Melissa.

Your next question comes from the line of Rommel Dionisio from Wedbush Securities. Your line is now open.

Yes. Good morning. Thanks.

I certainly don't mean to ask for too much detail about sales by loan number, but within the side-by-side business, you guys have launched a variety of new products over the years, the last couple of years from the lower end to the higher end. How should we think about directionally the mixed shift or ASP within that business?

We certainly have done a great job of developing a portfolio of products that are meeting new and emerging customer segments, Rommel, and I would tell you, we are hitting them high and we're hitting them low. The ASP, I don't think is dramatically changing. I don't have that number in front of me; maybe Mike can grab it as I'm rambling.

But, obviously, as we bring the XP900 -- that's a high MSRP product, that counterbalances the increased efforts that we've done around the value mid-sized lines, and really our success has been driven off more as developing compelling new innovations that meet new and emerging customer needs at both the low and the high and the mid end. And, it's not one product. It's a series of products throughout side-by-sides that is the driving tremendous success we are seeing.

Okay, here but you're not seeing a significant ASP shift or mix shift, it sounds like?

No.

Perfect. Thanks a lot and congratulations on the quarter.

Thanks, Rom.

Time for one more question, Melissa.

Your last question comes from the line of Mark Smith from Feltl and Company. Your line is now open.

Thanks, guys. Just real quick, looking at the RZR XP900. How do you feel on the supply and getting that product out in the consumer's hands.

We feel really good about it. I product has received outstanding response. We don't want to set expectations, but the sell through rate on this has been as good as any product we've ever launched including the original RZR, so. So far, 3 months into it we are thrilled. I think the team has done a fantastic job of getting the product out and allocating.

Over 90% of our dealers have received a product already. The product is still short in the marketplace as we expected and with the strength of consumer demand, we might be tight for a few more months, but we have capacity to take the shipment plan up and that's what we are working to as we go forward. I think we feel good about where we are and our ability to meet consumer demand over the upcoming months, and we are thrilled with the start.

One more quick question. Just looking at international opportunities in trend -- seems like a great thing here. Can you talk at all in the quarter or what is you are seeing currently as far as a mix between Victory and side-by-sides internationally?

Well, internationally I think what we are really encouraged about is, just as we saw in North America, the evolution from an ATV dominated marketplace to a side-by-side primary marketplace, Europe is trending that way right now and obviously with our innovations and share position we are extremely well positioned for that trend. And, we, certainly, over the last several quarters have really started to see that movement in earnest across the globe, but particularly in Europe and again as you see from our Victory numbers the last several quarters. As good as the momentum has been with Victory in North America, it is way, way stronger globally, so those are the two primary drivers of our international growth.

Thank you.

I want to thank everyone. That's all the time we have this morning. We appreciate your being on the call and we look forward to talking to you again next quarter.

Thanks again. Good-bye.

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