Polaris Inc (PII) 2011 Q2 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 second-quarter earnings results conference call. (Operator Instructions).

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 second-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.

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 the remainder of 2011, which should be considered forward-looking for the purposes of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections 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 we will turn it over to Scott. Scott?

Good morning. Thank you for joining us and for your interest in Polaris. We have been talking for some time now about our commitment to make growth happen, and as we post our third straight quarter of record results for sales and net income, it should be clear that the Polaris team is dedicated to meeting that growth challenge.

This morning we will review how strong momentum in our Off-Road Vehicles business is being augmented by accelerating growth from Victory, our international markets and our adjacency initiatives. As the strength of our earnings indicates, we remain laser-focused on margin expansion as a key aspect of our long-term plan for profitable growth.

Despite weak economic conditions and heightened competition, we were encouraged by the strong retail demand for Polaris products during the important spring selling season. Throughout the quarter, we saw continued share gains in our Side X Side business as the performance of the new RZR 900 XP solidified its place among the market-leading RANGER portfolio. ATVs and motorcycles also increased market share, driving strong overall daily demand for Polaris products. With our factories and supply chain operating with improving efficiency and our Monterrey expansion coming on line with additional capacity, we again outpaced our aggressive growth targets. Sales for the second quarter increased 41% to a record $607.9 million, marking only the second time in our history were quarterly sales surpassed $600 million.

Polaris delivered net income of $48.7 million and earnings per share of $1.37 in the second quarter, representing increases of 90% and 83% respectively from the prior year period. Both numbers are record second-quarter results for the Company and demonstrate the earnings power we have when industry-leading innovation matches the 10% productivity gains we delivered in the quarter. Gross margins expanded 300 basis points to 29.2% as the team successfully offset rising commodity costs and ongoing investments in our manufacturing realignment.

It is worth noting that we expect the recently completed second quarter to be the last period where we experienced gross margin dilution from our investments in Monterrey. While there will continue to be expenses associated with the realignment, savings should exceed costs going forward.

Based on the strength, quality and breadth of our first-half sales and income growth, we are making another upward revision to our full-year 2011 guidance. We expect the exciting array of new products that we will unveil next week in Nashville to bolster demand and now project full-year sales to approach or exceed $2.5 billion, up 25% to 28%.

We are also raising our full-year 2011 earnings-per-share guidance to $5.93 to $6.05 per share supported by net income growth of 45% to 47%. While these upward revisions in our outlook signify confidence in our ability to execute and overcome most economic and competitive threats, we believe the environment is ripe for unexpected challenges and have planned accordingly.

There is no single metric we can use to highlight the progress we're making on our strategic initiatives, but I am confident that our efforts and significant investments will show up clearly in our future earnings growth. We are in the midst of our annual strategic planning period, and it is inspiring to witness the ability of this Polaris team to consistently deliver industry-leading short-term financial returns while working diligently to diversify, expand and improve the Company for the long term.

Bennett will cover the highlights of our progress in Best in Powersports PLUS, but the marketshare gains, low dealer inventories and strong fundamentals across each product line show our relentless commitment to winning in our core market. The second quarter was certainly the most active ever for our adjacency growth initiatives as we closed two acquisitions and accelerated the growth of our military and Bobcat businesses.

Customer and market reaction to our Indian acquisition is exceptionally strong, and the success of our national integration activities has matched that strength. We have assembled a world class team to execute the hard work involved in continuing the resurrection of this storied Indian brand to performance and market prominence. Whether it is related to design, engineering, assembly or distribution, this is work we understand and perform well. Combined the relaunch of Indian with Victory's resurgence gives us confidence that Polaris is on the way to creating the best heavyweight motorcycle portfolio in the industry.

We are excited about our late June acquisition of Global Electric Motorcars or GEM. This is a strong brand in the electric low-speed vehicle space, and Polaris is well-positioned to expand the sales and profitability of this small but strategically important business.

GEM vehicles are predominantly sold to municipalities, universities, hotels and commercial customers, but some of our Polaris and Breeze dealers will certainly provide inroads to new consumers. We announced our decision to relocate GEM operations into our Spirit Lake, Iowa factory, and a number of talented GEM employees are relocating to the Minneapolis area alongside the commercial aspects of the business. We expect GEM to be accretive in 2012 and are excited about the opportunity to grow in the electric vehicle space with a well-known market leader.

Our organic adjacencies also gained traction in the quarter as our partnership with Bobcat continued to expand. Building upon strong retail demand from their North American consumer and commercial customers, Bobcat is beginning to market their Polaris-produced utility vehicles internationally. We continue to see good long-term growth opportunities in this relationship.

Polaris Defense delivered significant growth in the second quarter and included the first half of 2011 with outstanding financials and perhaps even better strategic progress. We are offering innovative solutions to the war fighter, and the Polaris suite of products is generating an increased interest from numerous DOD customers.

Polaris International sales were up 28% in the first half of 2011 as our European team continued to defy the debt-driven economic concerns in much of that region. There are different but notable challenges in Brazil, India and China, but given the caliber of our leaders and their teams and the early interest in Polaris products, we are confident in our growth prospects in these important markets.

Our lean journey accelerated in the second quarter as we progressed from mostly tactical improvements to building lean solutions into major business initiatives. As we continue to enhance flow and reduce waste across our enterprise, we are more confident than ever that operations will remain a competitive advantage for Polaris.

The combination of high quality growth and sharp operational execution is the foundation of our commitment to deliver strong financial performance, which is what we strive for every day always.

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.

Polaris operational momentum accelerated in the second quarter, and we are hitting on all cylinders. North American retail sales were up 19% on rising consumer demand for Polaris products across all Polaris businesses. Dealer inventory remained essentially flat year over year with Side X Side inventory up to meet increased demand, offset by declines in snow and ATV. Both Polaris and our dealers continue to improve on execution and add capability to our MVP go-to-market business model.

Furthermore, we are seeing increasing acceleration in our businesses not measured by North American retail -- PG&A, International and our emerging adjacencies Bobcat and military.

Moving on to business unit performance, let's start with Off-Road Vehicles. The Polaris ORV business had another outstanding quarter and continued to exceed our expectations. Second-quarter sales were up 41%, driven by across the board sales increases in Side X Sides, ATVs, International, Bobcat and military. Year-to-date Off-Road Vehicles sales were up 47%.

Polaris retail sales again significantly outperformed the industry with the North American second-quarter ATV retail sales up mid-single digits and Side X Side sales up well over 20%.

In comparison, second-quarter North American core ATV industry sales remained sluggish, down midteens percent, while the Side X Side industry sales appeared to grow nicely around 10%.

We continue to gain a significant amount of marketshare in both ATVs and Side X Sides, driven by strength across the entire Polaris product lineup, in particular led by strong RZR, RANGER and Sportsman sales. In its first six months, the new RZR XP 900 is turning faster than any previous ORV product in our history. To support these sales trends, ORV inventory is up slightly and while nearly optimal remains a bit too tight on a few key products. We are looking forward to our upcoming dealer show in Nashville next week where we will unveil our latest innovations and new products to build on our momentum.

Our adjacency efforts and results are gaining serious traction. Second-quarter wholesale sales to Bobcat and our Defense business each more than doubled 2010 second-quarter results. Bobcat continues to report increasing vehicle retail momentum and has again increased its forecast for the full year 2011, while our defense team continues to cultivate and land both core and new technology business.

Snowmobiles, while the second quarter is a seasonally slow period for snowmobiles, second-quarter sales increased to $6.8 million versus $2 million last year. Model year 2012 worldwide orders in Snow Check sales have been finalized, ending above our expectations, and we are looking forward to the upcoming season to build further on our growth and competitive momentum.

On-Road Vehicles and Victory motorcycles. On-Road second-quarter revenue was up 99%, driven by Victory's continued improvement. North American 1400 CC heavyweight motorcycle industry segment has begun to grow again with sales up mid-single digits in the second quarter and positive year-to-date. Victory had the strongest retail quarter in its history with sales up about 40% in the second quarter and over 20% year-to-date driven by strong cross-country and cruiser sales. We continued to gain market share, and year-to-date we have risen to the number two player in our segment.

Internationally sales remained very strong, outpacing North American retail growth year-to-date. Dealer inventory is in good shape, about equal to last year, and we continue to add strong new dealers to our worldwide dealer network.

The second quarter saw important milestones in our On-Road business with the acquisitions of both Indian Motorcycles and Global Electric Motorcars. We are currently investigating integrating both Indian and GEM into Polaris focused on realizing the synergies that we have identified.

Parts, Garments and Accessories, our PG&A business momentum accelerated with second-quarter sales up 23%, driven by growth across the entire product portfolio, but particularly by strong accessories sales, which were up over 35%. Year-to-date PG&A sales are up 21%. Our strong track record of PG&A innovation continues, and next week we will launch over 200 new products at our dealer show in Nashville.

International, our International business continues to grow rapidly with second-quarter sales up 35%. All regions, Asia-Pacific, Latin America and EMEA grew sales significantly. Likewise, all product lines grew in the second quarter with Side X Side leading the way with Q2 revenue up over 50%. Polaris remains number one in European ORV though the industry slowed a bit, and it was down single digits in the second quarter. The European and Australian motorcycle industry grew single digits with Victory gaining market share thanks to sales again significantly outperforming the industry. The Russian powersports market has rebounded nicely, and we are seeing strong year-over-year growth in Russia. Our China subsidiary is already achieving breakeven profit status as we grow and build this key long-term market, while our India subsidiary is operational now and preparing for our Off-Road Vehicles launch in the third quarter. We continue to invest aggressively in our global team and markets, and we are seeing momentum increase.

Operational excellence, in just one year, our North American manufacturing realignment has made amazing progress. Without impacting production, we have transformed our largest plant, Roseau, consolidating our ATV lines, investing in the high volume, more advanced Side X Side line to meet growth, and adding laser and tube bending operations. Spirit Lake is in the midst of integrating production lines for Indian and GEM later this year, and the Monterrey plant is now producing and shipping off-road vehicle products to our dealer network with outstanding quality results. And now we have begun engine production.

We now have over 600 employees in Monterrey, and the project financials and timing milestones for our realignment project are right on schedule. Operational excellence initiatives continue to drive gross margin improvement up 300 basis points year over year in the second quarter, and year-to-date gross margins are up 260 basis points.

Most notably, the improvements are holding to the net income line with second quarter at 8.0%, up 210 basis points versus the second quarter of 2010. Commodity cost pressures are rising, and looking forward we will continue to add year-over-year pressure for the balance of 2011. However, we are confident that our collective operational excellence initiatives, manufacturing realignment and Monterrey, warranty cost reduction due to improved quality, MVP and value engineering and strategic sourcing cost down efforts, and our lean activities, we will be able to override external pressures, and we will continue to expand margins.

With that, I will turn it over to Mike.

Thanks, Bennett, and good morning to everyone. I will begin with a more detailed discussion of our increased full-year guidance for 2011 and some summary comments about the anticipated results for the second half of the year. Total Company sales are now expected to increase 25% to 28% for the full-year 2011, up from prior guidance of up 17% to 20% with the individual businesses contributing as follows.

Sales of Off-Road Vehicles are now expected to increase in the mid-20% range with retail sales of Side X Side vehicles and ATVs continuing to outpace the overall market, particularly in North America. Snowmobile sales are now expected to increase about 40% over last year as we have finalized our dealer and Snow Check orders for model year 2012.

For On-Road Vehicles, we now expect sales to be up 60% to 65% in 2011 due to the reasons Bennett discussed earlier. Additionally the GEM company sales will be reported with our On-Road business for the remainder of the year. We now expect PG&A sales to increase in the midteens percent range from the level we achieved last year. International sales are expected to increase 20% to 25% on the strength of each of our product lines in each global region.

For operating expenses, we expect a slight decrease in the operating expenses as a percentage of sales for the full-year 2011 as we begin to achieve some leverage from the sales increase this year.

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. We also anticipate incremental integration costs related to the Indian and GEM acquisitions and increased incentive compensation plan expenses due to the higher expected profitability and the current higher stock price. The income tax provision rate for the full-year 2011 is expected to be in the range of 34% to 34.5% of pretax income, which is unchanged from our previous guidance.

As Scott stated earlier, our earnings-per-share for 2011 is now expected to be up 39% to 41% to $5.93 to $6.05 range. Net income for full year of 2011 is expected to increase at a higher percentage rate than the EPS, up 45% to 47%. As I have mentioned before, this difference is due to an anticipated increase in the number of diluted shares outstanding throughout 2011.

The gross profit margin percentage generated during the second quarter was 29.2%, a 300 basis point improvement over the 2010 period. Our gross profit margin percentage continues to benefit from volume increases, ongoing cost reduction efforts, higher selling prices, lower warranty costs and favorable currency impacts. These positives for the second quarter were somewhat offset by the higher commodity cost environment Bennett spoke of and an unfavorable product mix.

As a result of the improvement in the gross profit margin in the first half of the year, we now expect our gross profit margin percentage for the full-year 2011 to increase up to 220 basis points over the full-year gross profit margin percentage of 26.6% last year, driven largely by the same factors that influence the second-quarter improvement.

The manufacturing realignment project we announced about a year ago now remains on schedule and on budget as Bennett indicated. We continue to expect the transition costs charge to the P&L to be in a range of $12 million to $14 million for the full-year 2011, partially offset by the savings the project will start to generate in the second half of this year.

Moving now to our balance sheet and liquidity profile, at quarter-end our cash balance was $262 million, an improvement of $96 million from the second quarter of last year. A private placement debt offering of $100 million was funded in May and together with cash on hand was used to pay off our outstanding $200 million term loan. The average blended interest rate for the new long-term $100 million debt is fixed at about 4.4%. We are in the process of renegotiating the replacement for the $250 million revolving credit facility, which expires in December of this year.

Factory inventories at the end of June were $286 million, a 29% increase from last year. Inventories were higher in support of stronger ORV consumer demand, the new acquisitions and to assist in the ramp-up of our Monterrey facility. By year-end 2011, we expect factory inventory levels to be at similar levels to last year, which will yield an improvement in inventory turns.

For the first half of 2011, year-to-date our investments in capital expenditures and new product development tooling totaled $41 million, nearly double last year, largely due to an incremental $14 million spent year-to-date in capital expenditures for the manufacturing realignment project.

Full-year 2011 expectations for capital expenditures and depreciation are unchanged from prior guidance. Net cash provided by operating activities was $62 million for the first half of 2011, up 8% from last year due to the increased net income, mostly offset by higher Accounts Receivables. We now expect cash flow provided by operating activities for the full-year 2011 to increase at a double-digit percentage pace over last year.

The retail credit programs with Sheffield, GE and HSBC continued to perform at acceptable and stabilized levels. For the first half of this year, the retail credit approval rate was 58% and the retail credit penetration rate was 35%, both of which are up modestly from last year.

In closing, I would like to point out that for each of the third and the fourth quarters in the second half of 2011, we expect to once again set records for sales, net income and earnings per share. However, the year-over-year percentage growth rate in sales and profits is expected to be less than the percentage growth rates we have experienced in the first half of this year. This is due to the comparisons in the back half of the year being more difficult than it was in the first half of the year. As we have stated in previous conference calls, we were still significantly undershipping retail sales in the first half of 2010 so the comparables were quite a bit easier in the first half of 2011 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 discussed this morning, the Polaris team and businesses delivered a stellar first-half performance. However, we are not a group to rest on our laurels, so the hard work ahead in the second half and beyond is now our sole focus.

Coming off a very strong second-quarter retail demand and correspondingly low dealer inventories, we are confident that our positive momentum will continue throughout the second half. We take nothing for granted and will continue to work hard to gain market share and grow. Look for Victory to push especially hard for growth in the second half.

Maintaining our momentum requires that we ramp up assembly operations to meet increasing demand, and to this end I cannot speak highly enough of the broad Polaris team that worked with discipline and speed to create a new manufacturing facility in Monterrey in less than 12 months.

We are in production for certain RANGER and RZR models and will continue to add products and capability in the months ahead.

One of the long-term benefits of being in Monterrey is that we will be able to transition certain sourcing activities from overseas to Mexico. As currencies fluctuate and commodity prices rise more quickly than expected, we must maintain flexible and diligent to limit the impact. We believe that through sourcing, hedging and pricing actions and additional countermeasures as necessary, we will effectively deal with commodity price pressures.

I spoke earlier about our adjacency progress and am confident that both organically and through acquisitions we are building important new growth opportunities for Polaris. International expansion is another key growth initiative, and our investments outside of North America will continue.

There is certainly no assurance that we will be able to navigate Polaris away from all stormy seas in the second half of 2011, and we are prepared to lower our shoulders and push through the challenges that come our way. We expect to win the competitive battle and will strive to deliver winning performance in the third quarter and beyond.

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

(Operator Instructions). Scott Stember, Sidoti & Co.

Could you maybe talk about the military opportunity again? It says there in your presentation about the contract you just got with Israeli Defense, just talk about some of the international opportunities you have with the military and just how big this eventually could be?

Internationally we have got -- actually where most of our sales ultimately end up into Afghanistan and Iraq. So if you think about international markets in general, that is where most of the products are currently going. But we see opportunities in Australia. NATO presents a good opportunity for us. And as we expand our product portfolio both with technology and new vehicles, we think long term this is a $200 million to $300 million business for us. I think we have got the team in place now to get us there.

Where are sales running on an annualized basis now in military?

They are growing.

Got you. And can you just talk about Bobcat? You talked about how they are starting to sell your product internationally. Can you talk about some of the markets and just some of the opportunities there as well?

We are very pleased with how the retail rate has increased within the Bobcat dealerships. Obviously we don't deal directly with the Bobcat dealerships. It is their relationship, but they continue to increase their forecast year over year, and they continue to have record sales months.

So they are building momentum, and as we have alluded now, they are starting to penetrate international markets, which is new this year. Both companies continue to work on these codeveloped projects, and we continue to get closer to bringing that to market. So we are very excited about the success that we are having in market and the future for Bobcat.

And just moving over to Monterrey, just how much -- obviously this facility is just up and running right now, but I imagine with the growth rates that you foresee filling that up pretty quickly. Where would your capacity utilization be, let's say, once you are up fully running down in Monterrey?

You know, Scott, I think it is important to recognize our whole focus in this initiative has been around quality and schedule discipline. So we are nowhere near capacity, and in fact, we have not planned on running more than a single shift for quite some time. So there is tons of capacity in Monterrey, but our focus with that factory is going to maintain on quality and scheduled fidelity and not really to chase more cost upside. We have been very successful with that philosophy so far, and we're going to stick to that in the months and years ahead.

Scott Hamann, KeyBanc Capital Markets.

Just talk about some of the sequential weakness that you saw in the Off-Road segment internationally? I mean what segments was that in, what regions, and was it really more of a macro thing, or was it competitively driven?

I think what you are referring to as sequential weakness is maybe some weakness in the industry that we saw in the second quarter for Europe. Frankly, we did not see any slowdown from our business at all. In all honesty, Europe has kind of outperformed our expectations year to date based on what we have seen from the economy there. So we are not overly concerned with low single-digit quarter-over-quarter increases in ORV. It is, frankly, a little bit better than we expected, and we continue to be number one, and the broader EMEA team is feeling quite positive about their outlook for the balance of the year. So this is not something that we are overly concerned about.

Europe is reasonably tough sledding, and we continue to be able to push through and grow year over year from a Polaris standpoint and continue to be a leader in market share. So we are okay there.

Okay. That is fair enough. I wanted to take a kind of high-level question on the On-Road business. This is one that has clearly gone from a turnaround story to a growth story in my opinion. I'm just curious about you have added some net dealers in Victory over the last several quarters. I'm curious about your plan for Victory dealerships, where you are now and what the plan is. And then just wrapping up these two acquisitions with Victory, I mean where do you see this business over the next couple of years in terms of sales? And then it seems like profitability is close to breakeven now. Where do you think you could be taking this out several years?

We are obviously excited about the great work the team has done with Victory in getting that turned around. I mean the fundamentals with dealer inventory low, lots of potential there. And being able to add Indian to the portfolio, we are real excited about what that gives us for additional market share opportunities.

We are very -- to the dealership perspective, we are still very underrepresented in the key MSAs. And so I think what you will see as we move forward, it will be a very focused effort to add dealerships in the top motorcycle markets in the country rather than just add any dealer that we can get. Longer-term this is a 300, 500, maybe more, very big business for us, and we like the potential both here in North America and internationally. And, as you know, we are pretty good at innovations. So I would not think that we are done with the products that are coming out of the motorcycle portfolio any time soon.

And then the electric vehicle, small electric vehicle space, it's a $1.6 billion overall market. GEM is a market leader, and we think we can really add our Polaris capability of innovation and engineering and costs out and distribution and really help that business expand. So really good growth opportunity. I mean the On-Road business is real and has big potential for us.

Is it fair to say that this year you are going to still be running pretty close to that breakeven level in that segment?

We said Victory was going to be profitable, and they will be. There is some work to do as we integrate the new business and take the restructuring costs and whatnot, but overall our guidance includes whatever impact that has. So there is not much there.

Greg Badishkanian, Citigroup.

Another great job in execution this quarter. Just staying with the industry being a little bit sluggish, what led to acceleration in your business and the outsized growth versus the industry? Are there one or two big factors that are leading to that outperformance?

I think it is very similar to story what you have heard from us the last several quarters. I mean our success is not really based on one product or one model. We have built I think competitive advantage and innovation across really the entire Armada, as Scott likes to call it, of our products. We are seeing strength in RANGER. We are seeing strength across our RZR lineup. Certainly the RZR XP 900 has helped, but it is really just one small part of it. And, frankly, Sportsman sales have been strong as well. So that, along with a really great dealer network that has really been bolstered by our innovations with MVP over the last couple of years, our ability to remain aggressive around marketing and advertising, we just have a tremendous amount of momentum right now. And people keep looking for it to slow down, but frankly we have not seen any signs of that at this point, and that feels pretty darn good.

Yes. And in terms of your competition, what are you seeing from particularly maybe the bigger Japanese competitors in terms of their promotions, availability of supply and inventory at the retail. What are you seeing from those guys?

From a Japanese standpoint, obviously with the whole tsunami and the issue there with the quake and so forth, within powersports particularly, we have not, even as we have tried to monitor it, seen any kind of significant supply shortages.

That said, I'm sure that some of their factories and their supply base was impacted in powersports. But, again, we have not seen it necessarily with dealers being out of product. Frankly, the promotional environment in the short term has been a little bit less than we expected, which has been a nice positive turnaround for us. We are not necessarily counting on that going forward, but the last few months it has been a little bit more muted, and maybe that is a reaction from the Japanese on some of the supply chain challenges that they had.

But from a competitive standpoint, they seem to be engaged. They are certainly working at it, and we are seeing, I would say, increased competitive focused as we signaled in Side X Sides over the last couple of years, and we are continuing to watch that space, very, very carefully. But, again, we remain very confident in what we have done from our product innovation and our lead there and expect to build on that lead as we head into Nashville next week.

So last year was a great lineup, and it has been a great lineup the last few years. And I think that is obviously part of the reason why you have gained share. Should we expect that same level of innovation to really drive sales at this show, or is this going to be more -- a little bit more lackluster just because it is hard to keep up that level of innovation every year?

Well, we never use the word lackluster. (multiple speakers) It will be another good year. Again, it does get to be a challenge sometimes with the level of innovation we have had to constantly keep topping yourself. But we will have a very good solid lineup that we will introduce here in the next week, and again looking forward to the product pipeline as we go forward out over the next five years continues to look rich and robust. So we are feeling good from a product innovation standpoint.

Thanks. Nice job on the quarter.

Ed Aaron, RBC Capital Markets.

Mike, I wanted to ask you about the incentive comp accrual. It is a really big number this quarter, and obviously you're having a great year. I am just trying to get my head around the magnitude of that change and whether that number is likely to ultimately come down meaningfully as your growth rates normalize?

Well, there is a number of factors going on in those accruals. It is largely related to the stock price. There is a fair amount of the variable compensation incentives that our employees have, our Board of Directors, our management. There is a lot dependent on the movement in the stock price. And, as we all know, the price has escalated significantly, and we need to recognize that in our accruals. So that is the major driver.

The other driver is as our profitability increases and we exceed our expectations, then the accruals increase from that as well.

Okay. Thanks. On the recent acquisition, the GEM deal, you have not talked about it much in specifics, and maybe this is something we can get into next week. But having had a chance to go in there and take a look at things now, just at a high level wondering if you have seen any surprises relative to what you expected to see?

No. I think we pretty much knew what we were getting into. I mean Chrysler has owned the business for about a decade or so, and it was not a core business for them. So we expected to see an opportunity to add some value on the commercial side around not only sales and marketing but around distribution, and that is what we found. Naturally Polaris brings a capability around design and innovation and engineering and sourcing, and those were opportunities we expected to see, and they are playing out largely like we expected them to be.

Okay. And then one last one, if I could, maybe for Bennett. You talked about dealer inventory being with the exception of a couple of products where you may be like close to optimal. I noticed that that was very similar language to what you used around this time last year. Yet your inventories are kind of flat year over year, while your retail sales are up almost 20%. I guess I'm trying to square that against why you don't need to build some more inventory than what you are right now?

I think that is a fair question. Obviously as you do your surveys and the guys do your surveys particularly when we are in a growth mode like this, our view of what optimal inventory may be slightly different than what our dealers view of optimal inventory. We have a pretty sophisticated system around shipping to retail, and we don't believe we are losing, even with the lower inventory levels, losing anything material from a retail sales standpoint. That said, I think that as you talk to our dealers there are certainly pressure points on certain models where they would look for more.

As a company, we are generally going to err a little bit on the short side versus a little bit on the long side. That is just how we want to run the railroad. And we also believe with the improvements and the lean initiatives that we are doing within our facility on leadtimes and delivery that the opportunity is that inventory can continue to get a little bit better over time even as we reach towards optimal levels. So I think that is why you see us continuing to stay even with the growth that we can continue to manage inventory levels.

With that said, I mean I think as your guys' surveys have pointed out, we can still do a better job on delivery, and most of that mess is not really related to MVP, but, frankly, as more in relation to that, we continue to significantly outpace our expectations and our dealers' expectations on retail sales based on how much we are outperforming the industry at Polaris.

So, again, it is an opportunity for improvement, but we feel pretty good about where we are.

Great. Well, well done on the quarter.

Tim Conder, Wells Fargo Securities.

Let me also offer congratulations on the reasons driving the higher incentive comp. Again, congratulations, gentlemen.

A couple of things here. The MVP program, Bennett, you were just touching on it a little bit there, but basically you said at the last dealer meeting a year ago that you were rolling out the last tranche of that domestically. And then you mentioned that that is continuing -- you are continuing to see benefits of that. When do you feel you get the large amount of the full benefits of the MVP program? Will that continue on through the first half of 2012, all of 2012, I guess?

And then also Harley mentioned as it relates to motorcycles and granted the Japanese really are not impacting Victory and they are not really impacting Harley, but they cited the statistics that in the second quarter 70% of all Japanese retail sales in the US were non-current models. What is your updated view on where the Japanese stand with what is in their inventory as far as getting that cleared out on motorcycles and maybe on the ORV side?

Okay. Let me take the second quarter first. From a Japanese standpoint on the Off-Road Vehicle products kind of ATVs and Side X Sides, what Harley is reporting is probably a little different than what we see in those categories. I think their mix is more current than it has been in several years. I think their here inventories are in control or maybe low, and I think again when you talk about the promotion environment, I think that is why you see a pretty healthy industry right now. So I would characterize the Japanese in good shape there.

On motorcycles I mean again I'm not going to argue with what Harley is telling you. They probably do have more noncurrent pressure, and that is a little bit higher than perhaps what we would have saw from our numbers. But our sense is they are healthier on ATVs and Side X Sides than they have been in several quarters or years, frankly, and that shapes up pretty well.

In relation to the MVP question, that was a fairly complex question you asked. But our view is when we release something like an MVP, this is very much like a product plan. There are levels of innovation and improvements that we continue to make to the program over a period of years, and we continue to do that with MVP, even as we have launched this over the last couple of years. Our view is we are kind of in the early to middle innings on the improvements that we can do and our dealers can do with this MVP go-to-market business model.

In the early stages when you talk about inventory correction and so forth as we brought the full set of the dealers on board in our ORV business, a lot of that benefit does anniversary really almost by the end of this calendar year. But there are additional enhancements we are doing around -- on retail and going after different share in segments and some other improvements that we do as we continue to drive towards industry-leading customer satisfaction that should drive further profitability improvements for ourselves and our dealers going forward. So we are still pretty excited about the leverage MVP brings to both parties over the next number of years.

Okay. And Scott, two questions here. You touched on it in your preamble. Latin America distribution timetable, I think you mentioned last quarter that you guys have an assembly operation set up in Brazil to deal with some of the tariff issues down there that you're building out -- starting to build out your distribution in Latin America, which is already an established predominately off-road market, but you have proven very well that you can take on the Japanese. Give us an update there and then just maybe a little bit more color if you can on India, China. So that is the international distribution question.

Separately you have two acquisitions under the belt starting to integrate those. If you take a little pause here to get that done, as well as the continuing ongoing operations, or could there be some near-term appetite if the right thing came along?

All right. I will try to hit these fairly quickly. You ask about Brazil, right now our primary focus in Brazil is around building the infrastructure for the business. We hired a great leader for the country, and he is putting his team together and getting things set up, and we are preparing for a fairly aggressive launch. So we are not as aggressively -- we are not actually pushing out distribution yet while we work to build out our launch plans. We've got a great, great team and feel very comfortable that that is still a very large potential market for us.

China and India, as Bennett alluded to, we are going to be profitable this year in China. We have got a nice several hundred vehicle order from one of the provinces for RANGER, and we feel like initially selling our core Polaris products made here in the United States, that is a bigger opportunity than we originally planned.

India, as Bennett also mentioned, is going to have a launch in Q3 of their RANGER product, and they are building out distribution. We are learning all along. So what we have done in China we are starting to take lessons learned and apply it in India. And really we are building the infrastructure and expect much significantly larger things from those businesses in the years ahead. We cannot get there selling our current portfolio of products, so expect a lot more of investment and opportunities for significant growth going forward.

The acquisition stuff, I mean the team did a really nice job. I think sometimes we underestimate the talent and capability of the Polaris team. We have got Monterrey up and running. We have got a couple of acquisitions done. So by no means are we going to say, okay, gosh, we have got to stop and do these. These were small deals. A lot of the heavy lifting for integration is already completed, and Todd is busy. We see lots of opportunities for niche companies to add profitable growth to our Company. I think that may happen later this year, it may happen next year, but the first two will not cause us to take pause.

Mark Smith, Feltl and Company.

First, can you walk through a little bit of what you are seeing competitively, mainly in the sports Side X Side as others come out with new products to compete with the RZR?

Frankly, we have not had any formal announcements for model year 2012 yet on the Side X Side, so you guys have probably seen the news from Arctic Cat around their Wildcat. We don't have a timeframe on that yet. And we continue to be very aggressive around our product development, around RZRs creating new segments. And as you head into Nashville, again we feel very good about what we have got going with RZR and continuing to grow that category from a Polaris standpoint. So we expect that category to get more crowded and to get more aggressive, and our product plan reflects that, and again, as you get to Nashville, I think you will like what you see.

Good. And then second, can you just give any updates on contracts or hedging on commodities?

We are, as we have talked about before, we do hedge certain commodities with financial instruments. We also have relationships with our suppliers where we do price locks and those kinds of things that are more short term for the next quarter or so. So we have got a number of those established in the short-term through the second half of this year. Specifically we do have aluminum and diesel fuel commodity contracts at certain levels through the balance of this year.

Joe Hovorka, Raymond James.

Just a couple of quick questions. One, Mike, did you give the wholesale portfolio at the quarter-end that you usually give?

I did not, but I will. Let me look it up.

Okay. And then while you are doing that, can you confirm that both Indian and GEM close before June 30 in the 2Q?

Yes.

They did?

Yes. The wholesale portfolio is $455 million.

Okay. And then, Bennett, I think you mentioned that Victory is now number two in its segment. How did you define that segment?

That segment is in the segments we compete in, which is 1400 CC motorcycles in North America, and that obviously encompasses both cruisers and touring.

Okay. And then a last question, how many Bobcat dealers are you now selling through?

You know, we don't have that number exactly. We are not selling -- obviously we sell to Bobcat, and they have the relationship with the dealer. So their dealer network I think in the US is approaching 600 would be my estimate. That is an estimate, and I would say we are in the majority of those dealers.

And do you think the dealer footprint there has grown over the last 12 months, or is this all kind of comp growth in the same dealers that you are seeing?

I think it is primarily comp growth. Again, we launched this in second quarter of last year, started shipping last year in this quarter, and frankly, I think what we have seen over the last couple of quarters is the dealer same-store sale ramp-up is increasing. I mean we have probably penetrated a few additional Bobcat guys as they picked up on it, but I think it is more that they have had the product in there for six months to a year now, and they are starting to figure out how to sell it better, and the customers are aware of the product, and they are having more success with it.

And the 600, is that a North American number, or is that a worldwide number?

I believe that is a North American number, and it would be a little bit rude if you quoted me on that, but that is my recollection off the top of my head.

Okay. But there was a comment earlier on the call where you said that Bobcat was actually gaining some momentum internationally. Did I hear that right?

Yes, they had not taken this product line internationally, and they have started to sell that in the last quarter into a couple of key international markets. So it is very early in their international expansion, but I think that is encouraging development.

You said that started this quarter, 2Q?

That is my belief, yes.

Okay. And then one last Bobcat question, how many SKUs are you selling into Bobcat at this point?

Well, they have close to a dozen different models, which is probably a little too many.

Craig Kennison, Robert W. Baird.

Congratulations to your whole team. Scott, I wanted to give you the chance maybe to provide us with some milestones or some benchmarks by which we should judge the success of Indian and GEM, whether it is marketshare or the number of dealers. What should we look at over the next 12 to 18 months that would indicate whether you guys are executing on your strategy?

I think that is fair. To be clear, every acquisition we ever do it is going to be about operating income and cash flow as the key measures of their success. And when we can really start to tout that we have done what we thought we were going to do is when they start contributing.

As I said earlier in my prepared remarks, we expect GEM to be accretive in 2012. Indian obviously is going to take a little bit more work. And that one, I don't know that we are going to have great milestones to give you. It is really going to be a maintain and support the current product lineup with dealers. We think the bikes, they are beautiful bikes right now. In fact, I have been riding one all summer and really enjoy it. So we're going to continue to support the current lineup and current dealer network.

As I mentioned, we are going to look to expand Victory and Indian dealers into the key MSAs and metropolitan areas where they sell the most bikes where we are currently underrepresented. And that, as we start to build that out, it is probably going to be a more 12 to 24 months rather than the next six to 10. So expect that to happen over time, but that is kind of the heavy lifting we will be doing.

Over the next couple of years, we are going to relaunch a truly exceptional lineup of Indian motorcycles. I think when that happens that will be the major milestone you should look for. And from that point forward, you will see a fairly rapid ramp-up in sales and profitability. But unfortunately a lot of it is going to be behind the curtain while we are doing that redesign work for the bikes.

Thank you, and then Bennett, a question for you. We have seen some manufacturers in motorcycles in particular choose this opportunity to raise price. Do you see any opportunities in any of your products to maybe get a little more on price given supply/demand dynamic you face?

Yes, we are watching the competitive price environment closely. We have taken a little bit of price mostly to offset the pretty significant commodity pressure we are seeing year over year. And so you will see us take a little price in model year 2012, and we took a little bit earlier in the year as well. And, again, it is mostly just to again offset the higher input costs that we are seeing, more so than any kind of issue around supply and demand.

I think we have time for one more question.

[Jimmy], B. Riley.

This is [Chris Armbruster] on the call for Jimmy. Can you guys maybe in your domestic ORV business tell me if you are observing any meaningful geographic disparity in the rate of acceleration of retail demand?

As you have seen, the US economy, the Southwest area has obviously been a little slower to recover than the balance of the US. And if there is any meaningful separation there, it has to do with that. If you look at the mix of our product to that, it has traditionally been a little bit of a younger group at much more of a sport-oriented product, which I think also is contributing to the fact that that region is performing -- underperforming versus the other regions. Other than that, it is fairly similar or normalized I would say.

Okay. And just real quick on the strategy of putting cash to work, can you talk a little bit about whether or not your acquisition strategy is impacting your appetite for share repurchases? And then should we maybe be looking for a continuation of smaller deals, or are there any kind of larger opportunities in the pipeline?

I think the way to look at our capital allocation model is very consistent with what we have said previously. Our first objective is to invest in opportunities to get above GDP growth opportunity. Sometimes that will come with capital investments in our current business, and sometimes that will come through acquisitions. And we still see a healthy opportunity out there for acquisitions to add to our portfolio.

We are not looking to do a huge deal. That is not anywhere in what we are looking at. But certainly I would not look at the size of GEM and Indian and saying that is where we are always going to play. Share buybacks are going to be an important part of what we do. We are not -- we are going to try to get to the point where we are neutral on the impact of share dilution. We have got a lot of work to do to get there, but it's really investing in growth be it organic or acquisitions. It is make sure that we are a dividend paying company, so we will always have a healthy dividend policy. And then we will look to buy back shares as it makes sense.

Thanks, guys. Great quarter. Congratulations.

Okay. Thanks and that is all the time we have this morning. We appreciate everybody listening into the call, and we look forward to seeing you next week if you're coming to the analyst meeting in Nashville. Otherwise, we will talk to you next quarter. Thanks again. Goodbye.

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