Polaris Inc (PII) 2011 Q4 法說會逐字稿

Good morning. My name is Steve and I will be your conference operator today. At this time, I would like to welcome everyone to the Polaris fourth quarter and full-year 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I will now turn the call over to Richard Edwards. Please go ahead.

Thank you Steve, and good morning and thank you for joining us for our 2011 fourth quarter and full year earnings conference call. A slide presentation is accessible at our website at www.polarisindustries.com/irhome, which has additional information for this morning's call. The speakers today are -- Scott Wine, our Chief Executive Officer, Bennett Morgan, our President and Chief Operating Officer; and Mike Malone, our Chief Financial Officer. During the call, today we will be discussing certain topics, including product demand and shipments, sales and margin trends, income and profitability levels and other matters, including more specific guidance on our expectations for 2012, 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 projected in the forward-looking statements. Now I'll turn to over to Scott Wine. Scott?

Good morning. Thank you for joining us. Following a long standing Polaris tradition, we begin each year with a two-day meeting of our extended leadership team where we review our results and progress from the past year, discuss our goals and align around plans for the year ahead. With football as a backdrop for this year's meeting, we chose stay on offense as our theme. Coming off two straight years of exceptional performance, this team remains humble and determined to continue our winning streak and keep advancing the ball. In both football and business, momentum is vital and it is clear that our strong fourth quarter finish, coupled with heavy investment in our future, positions us to once again prove in 2012 that we have the best team in power sports and increasingly, other businesses as well.

With much discussion of increased competitive pressure and the presence of a sturdy 31% sales growth comparable from the fourth quarter of 2010, no one at Polaris expected to coast through the end of the year. Across the business, the team maintained their growth focus, driving a 26% increase in sales to a record $782 million. We projected margin pressure in the quarter and commodities, currencies and dismal snow conditions did combine to reduce fourth quarter gross profit margins by 160 basis points. Despite this decrease, earnings growth was solid and net income increased 17% to $63.9 million, supporting earnings per share of $0.90, up 15%. These sales and earnings results demonstrate the fundamental strength of the business as we head into 2012.

Our fourth quarter results contributed a full-year 2011 sales and earnings growth rates that rapidly accelerated past the [sporty] results Polaris delivered in 2010. While the global economy and the power sports industry each fell in line with our predictions, big market share gains, coupled with strong international adjacency growth, enabled us to once again outperform the competition. Full-year North American retail sales were up 14%, driving total Company sales to a record $2.66 billion, up 33% from 2010. This is the first year that Polaris revenue has exceeded $2 billion, and with that significant milestone behind us, we now have our sights clearly set on surpassing the $3 billion mark.

Organic growth remained broad-based, as sales grew in every product line and in every part of the world. Thanks to industry-leading innovative new products, our Side x Sides business extended their market share leadership while contributing significantly to our sales growth. With Victory hitting its stride in most every respect and the Indian brand now part of Polaris, our motorcycle business is once again a key contributor to our revenue growth. Despite this winter's lack of snow, last season's success and our great line-up of new sleds contributed to a very strong 2011 for our Snow business. In a true testament to the caliber of our international team, they drove 37% growth in Europe in 2011, supporting 39% overall growth. As we expanded our international business, we also benefited from the late year contributions from our small electric vehicle business.

Full-year earnings clearly reflect the success of our ongoing margin expansion efforts as the team exceeded expectations by delivering a 120 basis point increase in net income margin to a record 8.6%. The combination of rapid sales growth and expanding margins drove net income up 55%, to $227.6 million, with earnings per share increasing 50% to a record $3.20. During the fourth quarter, we increased our rate of share repurchases, which will support our efforts to reduce or eliminate earnings per share dilution in 2012.

As you will hear throughout the call today, Polaris accomplished much more than posting record top line numbers in 2011. Across the business and around the globe, each of our 4,400 employees helped deliver solid improvements in our operating and financial metrics. From sales through cash flow, our financial metrics illustrate the consistency and quality of our earnings, which we feel is a key component of our ability to increase shareholder value. While the 46% shareholder return in 2011 ranks among the top 4% of all companies listed on the New York stock exchange, it is the 330% return for Polaris' shareholders over the past three years that more accurately summarizes the market's reaction to our performance.

One of the most encouraging aspects of leading Polaris is this team's ability to achieve short-term results without sacrificing long-term strategic investments. We often emphasize and over or, and the significant progress made during the 2011 year to advance our strategic objectives demonstrates how alignment and focus enable us to execute both tactically and strategically with exceptional precision. Our effort to diversify into new products and new markets notwithstanding, Polaris's primary objective is to be the best in power sports plus. The strongest testimony to this commitment comes from our results. Bennett will summarize our outstanding business unit performance, but the most dramatic developments in our power sports businesses may well be the exciting innovations and product pipeline enhancements that we will not discuss today. We are staying on offense and have no plan to relinquish our lead.

Growth through adjacency moved meaningfully from concept to reality in 2011 as we completed three acquisitions, made small investments in two cutting-edge technology companies, and greatly expanded our military and Bobcat businesses. With GEM and Goupil both holding strong positions in the growing $4 billion small electric vehicle industry, we are excited to have Scott Swenson spearheading our efforts to build on that solid foundation. Our integration and development of Indian motorcycles is proceeding exceptionally well and I am encouraged by the energy and excitement, although perhaps not the spending, that Steve Menneto is bringing to the resurrection of this storied brand. Given the potential of these initiatives, and our continuing measured pursuit of other complementary opportunities, we are confident that by 2014, our adjacency effort will deliver sales at the upper end of our projected $200 million to $500 million range.

Global market leadership is perhaps the largest and most promising growth initiative in the Company and we fully expect our international business to generate at least 25% of our sales within the next few years. In 2011, we took an important step and asked two of our most senior and experienced leaders to drive our international growth. Matt Homan brings a wealth of experience to the significant opportunities and challenges in the EMEA region and Mike Dougherty has already demonstrated his proficiency in building teams and accelerating growth in the important Asia-Pacific and Latin American markets. While these regions are quite different, we will consistently pursue our proven strategy of creating organic growth through new product introductions and dealer expansion, while intensifying our M&A activity to augment in-region capability.

Supporting quality growth and ensuring customer satisfaction, our key objectives are operational excellence in lean initiatives and in 2011, Suresh Krishna and our operations team accomplished these and much more. They executed the challenging and complex Monterrey Plant start-up on time and within budget, providing much needed capacity to meet rising demand. Additionally, the team integrated three acquisitions, increased vehicle production by 26%, and delivered 7% productivity for the second year in a row. Thanks to their Herculean efforts, our manufacturing arm is strong as ever.

Strong financial performance is a critical barometer of our progress. Not just because it is expected by shareholders, but also because it results from the successful execution of our other strategic priorities. Following two years of exceptional performance, we have raised our 2014 net income target by 150 basis points, to now exceed 9.5%, and now project revenue target for that year to be above $3 billion. With strong momentum and aggressive, thoughtful plans in place, we expect 2012 to be a third straight year of profitable sales growth. Once more, we do not expect help from the US economy which will likely struggle to deliver GDP growth above 2.5%. The overall North American power sports industry will remain sluggish, so our growth will again come from share gains and global market expansion.

We anticipate overall revenue growth of 5% to 8%, which outpaces our industries and the economies of most of our markets. Net income is projected to increase in the range of 14% to 19% over 2011, which would equate to earnings per share of $3.65 to $3.80, also up 14% to 19%. This guidance includes continuous investments in our Indian Motorcycle and international businesses, both of which offer solid returns and excellent long-term potential. 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 and good morning. North American fourth quarter retail sales were up 11% off record comparables and for the year, finished up 14%. MVP remains a competitive advantage and we are pleased with the execution and improvement by our dealers. As we continue to refine MVP, our top operational priority for 2012 is to improve product delivery response while providing our dealers with better order visibility. While dealer inventory saw a slight 4% rise to support the 14% retail volume velocity, it remains near optimal levels. And finally, we are seeing encouraging signs from the North American power sports industry. In the fourth quarter, the overall power sports industry grew mid-single digits and for 2011, it actually grew slightly for the first time since 2005.

Moving on to business unit performance, we'll start with Off-Road Vehicles. The Polaris ORV business continues to perform at a high level. Fourth quarter sales were up 18%, driven by growth in all areas, including Side x Sides, ATVs, international, military and Bobcat. For the full year, sales increased by 32%. Polaris ATV retail increased upper single digits in the fourth quarter and for the first time since 2004, Polaris' annual core ATV retail grew year-over-year. In comparison, the core ATV industry declined mid-single digits in the fourth quarter and for the year, was down low double digits. Polaris Side x Side retail sales continued to outpace the industry in the fourth quarter with sales up around 20% in an industry that appears to be growing in the low double digits. We continue to gain significant amounts of market share, both for the quarter and 2011, in both ATVs and Side x Sides and we are the undisputed leader in the Off-Road Vehicle market.

Late in the quarter, we announced our latest Side x Side, the RZR XP4 900. The first four passenger vehicle in the extreme performance Side x Side segment that Polaris pioneered earlier in 2011. The RZR XP4 900 has already begun shipping to our dealers and has successfully completed its first race, the Parker 250. This innovative product should be largely incremental to our industry-leading full line of RZR products and, in addition, the new 50-inch RZR 570 shipments in retail are ramping up nicely, providing a solid momentum as we head into 2012. For 2012, we expect that the North American ORV industry will be essentially flat year-over-year versus 2010, while we again anticipate that Polaris will outperform the industry and gain market share.

Bobcat sales continued to trend up in the fourth quarter, and for 2011, sales increased by over 60%. Bobcat retail sales increases are flattening within the Bobcat channel, so we expect more moderate growth in 2012 until our Phase II project is launched. Our defense business grew over 30% in the fourth quarter, and full-year sales more than doubled our 2010 numbers. Though the $54 million Afghan Military order we won in 2011 was protested by a competitor, the US General Accounting Office recently denied the protest and we completed our first shipment of over 700 units earlier this month. The team is making fantastic progress in business development, new product technology and order commitments. Our 2011 year-end backlog was at an all-time high and we are well-positioned for significant defense growth again in 2012.

Snowmobiles. Fourth-quarter snowmobile wholesale sales were up 63%, driven by shipment [timing] from a good snow riding season last winter, low dealer inventories and great new products. For calendar year 2011, Polaris snowmobile revenue was up 48% and constituted about 11% of total Polaris sales. Concerns exist about the lack of snowfall in many snowbelt areas the past month and there is no question that some snow on the ground would be helpful for our snow dealers and our snow team. However, the season-to-date results put these concerns in a bit better context. North American fourth quarter industry retail sales actually grew low-single digits despite a very weak December and season-to-date through December are up mid-single digits. Polaris was up similar to the industry in the fourth quarter and season-to-date, we are up high single digits, so we are growing and picking up some additional market share. Our new model year '12 products have been well received, In particular the new Switchback models, while the new RMK PRO-R mountain sled is the number one selling product in the industry season-to-date. Dealer inventories are in solid shape, up single digits year-over-year, and we will monitor this closely through the balance of the remaining selling season with our dealers before finalizing our 2012-2013 seasonal build plan.

On-Road Vehicles and Victory Motorcycles. Our On-Road business delivered fourth quarter sales up 69%, led by strong Victory Motorcycle growth and sales from GEM, Goupil and the Indian acquisitions. For full-year 2011, our On-Road revenue increased 79%. The North American 1400-plus cc heavyweight motorcycles industry segment continues to strengthen with retail sales up low-double digits in the fourth quarter and mid-single digit growth for 2011. Victory grew market share again in both the fourth quarter in 2011 with retail sales up around 20% for both periods, driven by growth in both our Cruiser and Touring categories. Victory is now number two in market share in the 1400cc segment in North America. Dealer inventory is in excellent shape, up about 5% year-over-year and the Victory Dealer network has increased by about 15% in 2011, and is now just over 400 strong.

Victory has been busy on the new product front as well. In December, we introduced the Victory Hard Ball, a touring/bagger with attitude featuring ape-hanger handle bars, and just this last weekend at the New York International Motorcycle Show, we introduced the all new Victory Judge Custom Cruiser. Both new products will begin shipping in Q1 and we'll provide the strong Victory line-up with two more incremental retail drivers for calendar year 2012. For 2012, we expect continued growth from the North American heavyweight industry segment, up low single digits, and the Victory Brand and dealer network is clearly on an upward trajectory, and we again expect to outperform by growing market share.

In the fourth quarter, our first Indian Motorcycle shipments were delivered to dealers and Indian retail met our expectations. Our primary focus for Indian in 2012, however, is developing and executing the brand, distribution and product strategies that will restore the first American motorcycle brand to its rightful place in the global motorcycle industry.

Our Small Electric Vehicle business continued to take shape with the acquisition of Goupil in November. Goupil is the market leader in the fast growing European electric commercial light work vehicle segment and complements our GEM brand and business which is the market leader in the North American electric people-mover segment. Fourth quarter GEM retail and revenue met our expectations and late in the fourth quarter, we successfully began production in Spirit Lake, while moving the balance of our GEM headquarters down to the Twin Cities from Fargo. In order to better focus on GEM and Goupil, we have ceased production of the Breeze product and shifted our energy toward integration activity, driving our value tracks, taking out waste and creating profitable growth in 2012 and beyond.

Parts, Garments and Accessories. PG&A fourth quarter sales increased 13%, driven by strong double-digit growth in all global regions and strong accessory sales that were somewhat offset by slower snow parts sales. For the full-year 2011, we concluded a record sales year up 19% versus 2010, again driven by strong accessory sales.

International. International sales continue to outpace our rapid North American growth, with fourth quarter sales up 43%, thanks to strong growth from all product lines in all global regions. ORVs, On-Road and snowmobiles all grew in excess of 40%. 2011 was a record sales year for our international business, with sales up 39% for the year. Despite fears of a slowing European economy, our EMEA team continues to deliver with fourth quarter and 2011 sales that exceeded 35%, including (inaudible-technical difficulty). The European ORV industry was down mid-single digits for both the fourth quarter and the full year, with Polaris ORV retail trends following a similar track while retaining our market share leadership. Unlike North America, Scandinavia has decent snow cover and industry sales season-to-date are up low-single digits. Polaris is gaining some share with season-to-date retail sales up mid-single digits.

Likewise, the European heavyweight motorcycle industry was up single digits in the fourth quarter, and for 2011, increased low double digits. Victory retail momentum and market share continues to build with sales up over 50% for the quarter and the year. And finally, our Russian sales are up over 100% in 2011, driven by outstanding growth in both ORVs and snowmobiles. As we head into 2012, we are monitoring the European economy carefully, and will accordingly be cautious in our expectations. However, we are encouraged by our team and our dealers' ability to grow in a tough and uncertain 2011 environment and believe we will grow again in 2012.

Asia-Pacific and Latin America grew about 30% in total in the fourth quarter, and for 2011, were our fastest growing global regions, and our long-term prospects for these areas are extremely encouraging. Our new local subsidiary teams in Brazil, India and China are talented and experienced and are executing their market development plans rapidly and effectively. In the Asia-Pacific region, Australia just concluded another record year for ORV and Victory sales while China and India both continue to add high-quality dealers that will drive strong growth and develop a Polaris brand experience in these key markets. For 2012, we again expect that Asia-Pacific and Latin America will be our fastest growing global regions.

Operational excellence. We continue to see tangible results from our operational excellence initiatives focused on quality, cost and speed. For 2011, gross margins increased 130 basis points to a record level. Even more impressively, net margins improved 120 basis points to a record 8.6% for 2011. However, fourth-quarter gross margins did decline 160 basis points off of the record comparables due to currency fluctuations and significant commodity pressures, notably rare earth and steel. While we expect to face continued commodity and currency headwinds, particularly in the first half of 2012, we are confident in our ability to improve both gross and net margins, thanks to our speed to market, relentless global sourcing efforts and value engineering and lean plant productivity initiatives.

The Polaris manufacturing realignment projects continues to make significant progress; Monterrey met or exceeded all financial and project timing targets during 2011. More importantly, it outperformed our expectations on quality, and provided much needed capacity for our rapidly growing global consumer demand. As we move into 2012, Monterrey will grow in importance as we expand to our planned third assembly line, migrate some more of our supply chain down to Mexico and produced at higher volume line rates throughout the year. Our quality continues to improve as reported by our customers, net promoter scores increased by 4% and we are the industry leaders again in Side x Sides and Motorcycles.

Factory inventory declined sequentially 12% in the fourth quarter, but was up 26% versus 2010 year-end as we accommodated significantly higher retail demand, supported growing international subsidiaries in the [BIC] countries and took on inventory from our acquired companies. Factory inventory reduction remains an opportunity for Polaris and we have key 2012 lean initiatives focused on improving both customer response and eliminating inventory waste. With that, I'll turn it over to our CFO, Mike Malone.

Thanks Bennett, and good morning to everyone. As both Scott and Bennett mentioned, 2011 was another extremely successful year for Polaris. We significantly exceeded our initial plans at the beginning of the year, through higher volume and improved margins. 2012 is expected to be another record year for the Company. Our full year guidance is as follows. Total Company sales are expected to increase 5% to 8% for the full year, with individual businesses contributing as follows. Sales of Off-Road Vehicles are expected to increase in the mid-single digits percent range, with retail sales of Side x Side vehicles and ATVs continuing to outpace the overall market in both North America and internationally. We expect to gain additional ORV market share in 2012, although at a more moderate rate than the past two years. With the lack of snowfall, we have seen in much of the snowbelt, we expect our snowmobile sales to be down in the mid-single digit percent range from a very strong 2011. As usual, we will know much more as the winter selling season winds down, and we take dealer orders starting in March.

On-Road Vehicles, which now comprise of Victory and Indian brand motorcycles, as well as the Company's small electric vehicles, GEM and Goupil, is expected to be up 30% to 40% in 2012, due to continued solid retail sales demand and additional market share gains for Victory Motorcycles globally, plus a full year of sales of GEM and Goupil electric vehicles. We expect PG&A sales to increase slightly faster than the overall Company growth rate. We expect sales in 2012 to customers outside of North America to increase in the low double digit percent range over 2011, which now includes the acquisition of Goupil in the fourth quarter.

Gross margins are expected to expand up to 100 basis points from 2011, and I'll provide a bit more detail shortly on that one. Operating expenses are expected to decrease as a percent of sales in 2012 compared to 2011, due to the leverage obtained from the higher sales volume, and more normalized incentive compensation expenses in 2012. The income tax provision rate for the full-year 2012 is expected to be in the range of 34% to 34.5% of pre-tax income, similar to the 34.3% reported in 2011. Earnings per share for the full-year 2012 are expected to be in the range of $3.65 to $3.80, up 14% to 19% compared to 2011.

During the fourth quarter of 2011, we repurchased approximately $1.2 million of the Company's shares for a total of about $70 million, bringing the full-year total repurchases to $132 million. That leaves about 3.6 million shares as of year end remaining on the existing share repurchase authorization from the Board of Directors. In 2012, the number of diluted shares outstanding throughout the year is expected to be approximately flat with 2011, as we plan to target share repurchases that approximate the dilutive impact of shares issued under the employee plans during 2012.

In the 2011 fourth quarter, the gross profit margin percentage was down 160 basis points, slightly worse than we expected when we last updated our guidance. We anticipated pressure from higher commodity costs and continued negative currency movements, and those came in about as planned. What we did not predict was the extent of the lack of snowfall, which impacted the high margin PG&A sales, resulting in a negative product mix impact on the overall gross margins. Additionally, the lack of snowfall caused an increase in snowmobile promotion accruals in the fourth quarter. The gross profit margin percentage for 2012 is expected to increase up to 100 basis points from 2011.

We believe the significant commodity cost pressures we have experienced in the second half of 2011 will continue to pressure gross margins in the first half of 2012, but will moderate as we move through 2012 and end up about neutral to gross margins for the full-year 2012. Based on today's rates, currencies are expected to be significantly negative to gross margins for the full-year 2012, and currency movements are expected to remain volatile and unpredictable. On the positive side, we expect gross margins to benefit from ongoing product cost reductions, higher selling prices, and most importantly, the manufacturing realignment savings.

As Bennett and Scott noted, the manufacturing realignment project has been a huge operational success during 2011. From a numbers perspective, not much has changed. The upfront spending of transition costs and capital expenditures is largely complete, with only small amounts remaining into 2012. As anticipated, we began generating savings from the project in the second half of 2011, totaling about $2 million. For 2012, we expect savings from the manufacturing realignment to be in the range of $12 million to $15 million for the full year, most of which will show up benefiting gross margins. We continue to anticipate the manufacturing realignment project will generate over $30 million of annualized savings when fully complete in 2013.

Moving now to our balance sheet and liquidity profile. Net cash provided by operating activities was $302.5 million for the full-year 2011, up slightly from last year due to improved profitability, mostly offset by the higher investment in working capital, particularly increased accounts receivables related to the Company's continued international expansion, higher factory inventory levels, and a short-term income tax receivable. We expect cash flow provided by operating activities for the full-year 2012 to increase over 2011 as factory inventory is expected to decrease and the short-term tax receivable is applied to the estimated 2012 tax payments, offset somewhat by higher incentive compensation payments expected in 2012. At year end, our cash balance was $325 million, a decrease of $68 million from 2010.

We maintained a $350 million borrowing capacity under our new unsecured revolving credit facility that we entered into during the third quarter. The $100 million unsecured Senior Notes issued earlier this year replaced the $200 million term loan outstanding at the end of last year. For the full-year 2011, our investments in capital expenditures and new product development tooling totaled $84.5 million, an increase of 52% from last year, which includes the capital for the realignment project. For the full-year 2012, we expect capital expenditures to be similar to 2011, with increased investments in product development tooling for new products, including the Indian Motorcycle re-launch. Depreciation for 2011 was $66 million, and we expect depreciation for 2012 to be similar to the 2011 levels.

Polaris Acceptance receivables from dealers in the US were $568 million at the end of December 2011, an increase of 14% from a year ago. This increase reflects the mix change of higher value Side x Side vehicles and Motorcycles and slightly higher unit inventories at dealers.

In conclusion, we are very pleased with our financial performance throughout 2011 and we're confident 2012 will be a continuation of our recent success. With that, I will now turn the call back over to Scott for further comments on 2012, and some concluding comments.

Thanks Mike. To wrap-up, I'll offer a little color on how we view the playing conditions for the rest of 2012. Typically, I would expect an election year to bring a bit of optimism to the US economy, but it appears we will have to wait until 2013 to see more market-friendly decisions and policies out of Washington. Our team in Europe expects to deal with a modest recession across the Eurozone but we will be ready for the possibility of a more severe debt-driven downturn; making growth happen will continue to be their mantra. Economic expansion is expected to remain strong in our Asia-Pacific and Latin American markets although the rate of growth in China and India may slow slightly. The bigger risk to our international business is currency volatility, which could be a major headwind in 2012.

Our M&A funnel is active and we see numerous opportunities to enhance shareholder value by acquiring and investing in companies that can make Polaris a stronger, more diversified global enterprise. We anticipate new entrants in the Side x Side market and look forward to demonstrating how well our strong, growing stable of Rangers and RZRs can compete. While growth will get much of the headlines, our margin expansion efforts are far from over. Monterrey volume will ramp up, as will savings, and our lean activities will accelerate across the business to further reduce costs, improve quality and delivery. We have a balanced plan and fully expect to maintain momentum and drive profitable growth again in 2012. I look forward to sharing our progress with you throughout the year. With that, I'll turn it over to Steve to open the line for questions.

(Operator Instructions) James Hardiman, Longbow Research.

Maybe I'll start with you, Mike. Could you just -- it sounds like currency was a pretty big factor in not only the gross margin performance in the fourth quarter, but also what you are guiding for next year. Could you quantify the impact of currency on the top line, the gross margins and that other income line and walk us through how all that works? Ultimately, if the assumption is you are assuming negative currency impacts in 2012, how should I think about that other income line, because it seems like that's somewhat of an offset?

Yes, currencies have been very volatile. We talked about that quite a bit actually on our third-quarter call. They were moving around quite a bit in September. We anticipated that they would have a fair amount of impact in the fourth quarter and it came to fruition about as we had called. The impact for the full year on sales of currencies is actually positive, about 1.6% for the full year. But the fourth quarter impact was negligible on the top line sales.

On margins, however, gross margins, it was a significant impact in the fourth quarter. I'm not going to quantify it, but it was a significant negative impact, some of which was hedged and to the extent that there is hedging activity, we get some of the benefit of those weaker currencies down on the other income line. As you noted, other income was positive for the quarter, and much of that related to the hedging activities on the currencies. So, the pressure up in gross margins for the fourth quarter was somewhat offset by the other income impact down below.

Looking forward into 2012, our expectation right now is that with the rates where they currently are, and just to remind -- we are heavily dependent in Canada, with the yen, the euro, Australian dollar, all those have significant impact as well as some of the Scandinavian currencies.

Right now, with the rates that the way they are, we are anticipating what I'm calling a significant negative impact in gross margins for next year. That is netted into our gross margin guidance of up to 100 basis points of expansion. So that offsets some of the benefit that we are getting from Monterrey and other areas.

I guess the question comes down to, how much of a negative impact is hedged, and should I be modeling a significant positive income in terms of your other income line?

We have some hedges for 2011 in place. I'm sorry, thank you -- 2012 in place. Our Canadian dollar is approximately 50% hedged. We also have hedges in place for some of the Australian and Scandinavian currencies, so we have some protection. It's very difficult to model or budget or guide impact on another income that is very volatile and uncertain. I'm not guiding or suggesting any benefit down below.

Okay. That's helpful. In terms of your top line guidance, it really looks like the ORV growth assumption of mid-single digits is really a linchpin in terms of your overall Company sales target. That segment grew 30% in each of the past two years, grew 18% in the fourth quarter, so obviously, you are looking at a pretty significant deceleration.

Can you talk about some of the -- obviously, that type of growth can't last forever. Can you talk about some of the reasons why that would need to come down so dramatically? A nd as I'm modeling that for 2012, how should I think about some of the quarters?

If you are thinking about a slow down, I would -- you might assume that maybe that's a more of a back half issue than a front half issue. But then I look at the comparisons last year, and the first half of the year seems like it is the much tougher comparison. So how do I think about that?

James, it is Scott. I'll take a crack at it and Bennett will probably throw his wisdom in as well. We have much tougher comparables, as you acknowledged. I think as I hope you heard us all three talk about, we did end the year and into December with quite a bit of momentum in our ORV business. So we expect the first half is likely to be good.

As I said in my comments, our optimism about a strong US economy and getting anything other than headwinds and sluggish growth in the second half is not very high. So we think we'll have a pretty decent first quarter and then the second half is where we see more risk. We'll see how that plays out. But right now, I think from a competitive standpoint, dealer inventory standpoint, Bennett, you might want to talk. You were just out in the field, so --

Yes, I'll tell you, James, I understand the question. It goes back to exactly what you were inferring. The amount of market share that Polaris has been able to garner in the ORV space over the last three years is frankly, it's historically unprecedented. I mean, not to sound high and mighty. It really, it truly is. So we have modeled the industry for the upcoming year about flat, which is that is an improvement from where we've been.

But we see more competition coming and we are going to be prudent about not getting too far in front of our headlights. We expect that with the product line, we have and when -- again, I was just out and about 25 dealers over the last 60 days, and I would tell you our competitive position, I would tell you has never been stronger.

Our dealers are feeling really good about the product lines and the consumer demand. But I think based on the movements we have made over the last three years, we prefer to prove it rather than get too far in front of our headlights is, really, I think the bottom line.

That is really helpful, but I just want to make sure I'm clear. Even though the comparisons in the first half are meaningfully more difficult than they are in the second half, you guys actually feel better about first-half growth than second-half at this point; is that fair?

Well James, do you want to send me your spreadsheet and I'll fill it in for you? (laughter) I think the only thing I would tell you James is, in typical Polaris fashion, we obviously have a pretty good visibility of what's going on as we head into the first half of the year and the second half is a little further, and with the economy the way it is and potential new competitive entrance, that is where it gets a little more cloudy. So you are hearing the confidence from us based on the momentum we're carrying and what we're doing right now as we head into the first half.

That is really helpful.

James, we have got to move on.

That is great. Thanks, guys.

Scott Stember, Sidoti & Co.

Could you talk about with the Phase I of Bobcat now seemingly slowing a little bit, what's the timeline for the second phase of Bobcat? Are we still looking possibly at the end of this year, early 2013?

We are right on the timeline we developed. We try not to comment too much about future product development. I would say what you've lined is a range of when you might see that Phase II product.

Okay. And last quarter, you guys talked about a potential hit from having to rebook some compensation costs in the fourth quarter. Could you talk about the impact in the quarter and what your assumptions are for 2012?

The impact for 2011 fourth quarter was about what we expected. It is comparable to last year's fourth-quarter impact, so no real big surprises as there was in the third quarter, when it was quite volatile. Looking forward into 2012, as I said in my comments, we do expect some of this incentive compensation stuff to normalize in 2012. It will be less than it was in '11 as we roll off, if you will, the initial three-year long-term incentive plan expense that was based off of an extremely low share price three years ago. So we've got that behind us and 2012 will be more normalized.

Could you update us where you are on -- as far as deploying savings from the facility realignment, whether it is putting it into new product or whether it's just showing it down to the bottom line?

I think Mike gave a pretty good estimate of what the savings looked like. We can't really script for you exactly where that money's going to go. A lot depends on what happens in the economic environment. If things continue to go well, we'll probably put more of it to the bottom line. If things don't go well, we'll just allocate based on the market circumstances. But as Bennett said, the facility is performing right on plan, and we expect to have that opportunity to make the investments where they need to go.

Tim Conder, Wells Fargo Securities.

Thank you. Gentlemen, a couple of things here. Bennett, on one of the slides you were talking about the strategic objectives. You stated that factory inventory is off plan. Could you elaborate on that statement you have in the slide deck?

When we put the budget together, that's what we are talking about when we are saying off plan for 2011. We had modeled in much lower growth than what we actually experienced in 2011. We didn't have all the acquisitions planned for and accounted for. Those two factors primarily drove factory inventory off a plan.

We are not really uncomfortable with our unit inventory positions, but we are not necessarily satisfied with the dollar level, and with all the work and the capability of this team, and the value we think we get out of driving out inventory waste, this is an area that, frankly, Wine and I continued to beat mercilessly on the teams.

We think we can do better and we think as we do that we can actually improve customer response. You'll continue to hear us beat this drum probably pretty regularly until we get it down to a number that we're satisfied with.

It was a little bit of a strange statement but, okay, that helps a lot. Mike, on the gross margin, you said that FX and commodities in the fourth quarter were as expected. You did accrue some promos on the sleds in the fourth quarter for -- it appears would be, what would be to [work] down the channel inventories a little bit in the first quarter. The other thing in the slide deck that you said was a variance and it appeared to be unexpected was warranty. Could you expand on that a little bit?

You're right. The warranty arrow is down in the fourth quarter. There is no real issues, I would say, to speak of with warranty. It was slightly negative for the quarter. But for the year, we are in fine shape, and as you look to next year, it's about as one would expect with flat impact on margins. So some timing; no real issues to speak of on warranty.

Was it any particular category, Mike, or --?

No.

Okay. Okay. And then your Military sales, helped by some contracts and timing up over 100%. Could we assume that those are roughly around $100 million in significant increase next year, I mean, directionally over 50%? Is that fair, a ballpark characterization?

No. (laughter)

No? (laughter)

You might recall we had a tough year last year in 2010 with our Military business. A lot of the heavy growth was on a fairly low comparable. We are not approaching the $100 million business yet. I'm confident over the next couple of years we'll get there, but as Bennett indicated, the backlog of actual orders that we ended 2011 with, plus the exciting array of new products, new technologies, and ultimately new customers, we are very bullish on a very strong year of growth from the Military team.

Despite the announced cutbacks and increased cutbacks they are talking about in Washington, we think with our value-oriented products in the Military, we are going to do especially well with the Special Forces, and some of our unmanned technology is doing quite well also.

Okay. And --

Tim, we have got to move on to the next question.

Jaime Katz, Morningstar.

I have two questions. I'll be short. The first one is it appears that you have moved those net income margins up to 9.5% in 2014. Should we be thinking about that as mostly through costs of goods sold and gross margin improvement then? Or is there some G&A factor that we should be thinking about coming down? And also, will you talk a little bit about the reception of the entry-level products that you put out earlier?

I'll take the first one, Jaime, and let Bennett talk about the 570. We are actually just relentless on margin expansion. There is not an element of the P&L that doesn't provide itself an opportunity for us to expand margins. We still see, as Monterrey comes online and we drive some of our LEAN initiatives, we see a lot of opportunity in the cost of goods sold line.

But as we have talked about in the past, the last couple of years have been heavy years of investment for us in some of our new products and new business areas. We certainly see an opportunity, as Mike alluded to, in the compensation line as well. So I think SG&A and both gross margins are going to be a positive contributor to that march up towards 10% over time.

Jaime, I'm assuming you are referring to the 570 RZR and if I'm not you can correct me, but that product just hit the dealerships and the marketplace essentially late in Q4, maybe the last 30 days or so. Retail is really just starting to ramp up, and the feedback from dealers and consumers has been good.

It is not the same level of euphoria that you sometimes see on your big high-end products because you are not really chasing some of those 1 percenters. But we've had the product with the press and on our way out training tour demos and reaction to the capability of the product and the value of the product is fantastic. We expect to see a very nice lift from that product based on the reception so far throughout 2012.

Ed Aaron, RBC Capital Markets.

Just had a question on mix. If you look back coming out of the downturn, Side X Sides were driving your growth and mix was real positive. Now it seems like Side X Sides are still driving your growth but mix is more of a negative. Can you just help me understand why that dynamic seems to have changed as much as it has?

Some of it is related to our significant percentage growth in On-Road Vehicles and those types of things. As that part of our business grows significantly faster, those margins aren't quite as good as Side X Sides.

And then, within ORV itself, we have been expanding significantly our product line and being more diverse within ATVs and within Side X Sides to develop things like a more value-priced product. The 570 is an example of that, that will move into 2012 and have an impact on that. Those are the things that are, more or less, impacting the product mix impact on gross margin.

I think the last comment would be, obviously PG&A is our most profitable business unit at the margin level. And with really unprecedented growth level we have seen in almost all of our home goods units, because you have that significant service business, the parts business isn't growing as fast right now as the top line. That will have a little bit longer-term effect, Ed. So I think that is the other variable to build on what Mike said. I think that, we'll get that benefit down the road.

And you'll see that especially in 2011 and more so even in the fourth quarter.

Okay. And then a follow-up if I could on snowmobiles. You gave some season-to-date metrics which I think were through December. How much of those season-to-date numbers changed if you incorporate what happened in the month of January from a sell-through perspective? And then in terms of the increase promotional costs that were in Q4, does that fully cover the promotions that you are going to do in the first quarter that clear through the inventory, which of those have been entirely accrued for?

Ed, I'll take a crack and Mike can jump in on some of the accounting stuff, if you want. You are actually trying to get me to comment on January retail sales. You know we don't do that, but let me give you a little bit of color. So yes, the end of December was weak. January, from an industry standpoint, has been weak.

We are starting to get some snow here over the last week or so, across a good part of the flats, and the mountains finally have been hit pretty hard. So I think we are getting -- I don't know if we would say we are optimistic but we are encouraged that we are finally seeing some white stuff on the ground through most of the snowbelt. We expect that we will see an improvement in the rate that we've seen over the second half of December and the first half of January.

I think it is too early to call what is going to happen in the first quarter. To give you some perspective, if this helps, about 30 -- one-third of the sales are generally, of industry sales are generally in the first quarter, that last half of the riding season. So, I guess the way I'd say is if the trajectory didn't change, you could expect that we'd be down a little bit. But it's just too early to call and I would say right now, it is inconvenient. It is certainly not a crisis level for Polaris.

And on the accrual question, yes, Ed, we accrue an estimate in the fourth quarter. Since we've shipped all the snowmobiles to the dealers, we need to make an estimate of the cost to move those units. And we make -- every year we do our best at making an estimate of the accrual of promotions that is going to ultimately take to move those things through. We look at everything we can at this point in time and with the lower snowfall level, and a little bit higher inventories, we had to bulk up those accruals a bit. But we don't expect there to be any hits in Q1 to move through the inventories.

Greg Badishkanian, Citi.

Maybe just a little bit on the international market doing well for you and how was Europe? What did you see there in the marketplace? And overall, in terms of your mix, how big do you think that could be over the next, I don't know, call it two or three years?

As I mentioned in my comments, we are incredibly encouraged by the ability of our team in Europe. We set up the headquarters in the spring of last year and that team continues to drive momentum. We were up 37% last year and had good growth throughout the year.

We are projecting a little bit softer sales in Europe this year, given the potential turmoil. But over the next couple of years, we sent Matt Homan over and it is really great to have someone of his experience and leadership background to help make us think differently about how we approach that market. Obviously, somewhat demanding more from this side of the pond, as we support it. We would expect that business, over the next couple of years, to grow quite significantly in spite of a little bit of a bumpy road here the next year or so.

And just as a clarification on Ed's question, did you say you have 30% of the selling season left over the next month or two?

Roughly the first quarter's about 30% of in-season -- of total snowmobile sales.

At the retail level?

Yes.

Jimmy Baker, B. Riley & Co.

Can you talk a little bit about the ramp in R&D spent here in the quarter? Where you are seeing opportunities for that investment? How much of that is related to some of your recently acquired On-Road business and if we should think this is the new spend rate going forward?

You are correct, Jimmy. It is a largely related to our On-Road -- the incremental increase is largely related to our On-Road business and that, specifically, is mostly related to Indian. As we said when we bought that business, we thought we were going to have to do a lot to bring those back to meet the expectations and standards of the heavyweight motorcycle market for that iconic brand. We are taking a lot of time, putting a lot of resources to make sure we get that right and that is driving some of the spike.

We are making a little bit of investment in the GEM and Goupil vehicles, but not a significant spike. But as you know, innovation really is what drives this Company. So we are not looking to reduce R&D, other than by becoming more efficient with our R&D dollars. And I think throughout 2012, you are seeing us get a lot more for the dollars that we spend in R&D. And you'll see the benefits of that throughout '12 and beyond.

I think you are maybe thinking of it a little bit almost as a percent of revenue, us being a product and innovation Company. That's really how we determine how to spend our money first, is what have we got in innovation coming. That is always a top priority for us. But look at the percent of revenue, that should be a good driver.

Could you just give the ORV, ASP change in Q4 that usually shows up in the 10-Qs? As it pertains to your 2012 ORV target, could you provide a little color as to how you get there in terms of ASP and mix versus volume?

That is you, Mike.

I'm looking it up. Okay. ORV ASP increased in the quarter about 4% and about 8% for the year.

And maybe how you see that playing out versus volume in 2012?

I don't have a number on that. I would expect that the trend would continue. Our trend toward more Side X Sides and less ATVs will continue. Our Military business will increase. Those ASPs tend to be a bit higher. If I had to guess, I would guess that they would be up year-over-year, but I don't have a number.

Mark Smith, Feltl & Co.

Could you quantify for us Canadian sales in Q4?

Canadian sales in Q4 were up 8% to approximately $96 million US dollars.

Perfect and then just so that I understand product mix right, just looking at guidance, PG&A should grow a little faster than the rest. Is that just not enough to make up for the mix of On-Road vehicles and the margin differential there?

Right. That is yes. Yes. You have got it right.

Gerrick Johnson, BMO Capital Markets.

Good morning, question on GEM. If you look at that business, let's say you had owned it in fourth quarter of last year, what would the sales growth look like both wholesale and retail for that GEM business?

Good.

Good? Okay. Good. On the 570, was that delivery schedule on plan? Did you experience any delays or any constraints getting that product out to dealers?

No, that was basically as planned. We started to leak shipments out in essentially mid- to late-November and didn't have a huge amount in the ship planned for the calendar year '11. So it probably felt slow to the dealers, but it was right on our ship plan.

Okay. And related to that, do you think the dealers are constrained on any particular product? Is there a product that the dealers are saying we need more and more and more, and how come we don't have it?

I don't think, Gerrick, there is a particular product right now after being out in a number of dealerships over the last couple of months. In general, they have continued to feel a little tight on certain [LEs] or models on a few Side X Sides. A lot of times, that can be regional in perspective. In general, they feel a little tight on a few products, but we are not missing retail. They don't -- instead of having three, they have one and that makes them uncomfortable.

Joe Hovorka, Raymond James.

I think my question was asked but I was distracted and I missed the answer. Did you give the ASP increase for ORVs and for overall in the fourth quarter?

I did.

I apologize asking again but could you give that one more time? A shiny object came in, and I just -- (laughter)

ASP for ORVs in the fourth quarter increased about 4%.

Okay.

Full year is about 8%.

Do you have the overall as well for the all products?

For the full year?

For 4Q?

About 6% for the full year, and about 2% for the fourth quarter.

Okay. And presumably, you'll have another ASP increase in 2012 for ORVs or no?

Yes, I got asked that question before. I don't have a number, but I think it's going to be a bit higher.

A bit higher than 4Q or just a bit higher in general?

Bit higher than 2011.

Okay.

Not the percentage higher. The ASP increase will in 2012 over 2011.

When I look at the guidance for ORVs of up mid-single digits I think is what you've said for 2012, that would imply, I mean if we factor everything in there right with ASP increases, your international business, Bobcat, Military, that's not there, it doesn't seem like much of a unit increase in that number. Am I correct in reading it that way if I look at retail sales?

Yes, that is a fair way to read it. What we are having is continued growth in Side X Sides, but moderating. And continuing to be offset by some declines in ATVs, which has traditionally been the larger business. It is up, but it is up modestly.

And ORV, you said, I think, was flat for -- the industry was flat for 2012? Was that the comment?

That is what we are expecting, yes.

I'm sorry for 2011. My mistake, 2011 ORV.

2011 ORV was actually down low single digits.

The entire ORV or just --

Yes, the entire ORV industry.

That would imply that you are picking up maybe one point or two points or you are growing one point or two points in an area that is growing flat. Is that the way I would read the guidance?

That's it. You are close, Joe.

Craig Kennison, Robert W. Baird.

Bennett, you have provided very helpful color on North American sell-in and inventory on an ORV basis. Could you provide some color on what you are seeing internationally as well?

Just to make sure I understand the question, Craig, from a standpoint of what we are expecting?

In terms of the current, well, I'm interested in the current, your view of the current status of inventory internationally, and how that product is selling through?

Okay. Again, I apologize. I didn't -- We have a slightly different set up with our subsidiaries and our dealer network in Europe than what you have had traditionally in North America. So dealer inventories have never been an issue, in all honesty, in Europe, and they are not an issue today. Subsidiary inventories, from a whole goods standpoint, I think are stable, even with the growth. And we feel really good about our inventory positions.

They are, sometimes with the rapid growth we have had over the last year or so, we have starved the international guys a little bit on timeliness of product as well, with the better-than-expected demand. So if anything, it had been a little bit too lean on certain models.

But you would say maybe they are no longer starving for inventory today?

I would say that we're in a -- like I said, I think our inventories are near optimal levels.

Very good. Thank you so much.

Okay. That is all the questions we have and the time we have, so we want to thank everyone again for participating this morning and we look forward to talking to you again next quarter. Thanks again, and goodbye.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.