Polaris Inc (PII) 2012 Q1 法說會逐字稿

Good morning. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the Polaris Industries first-quarter earnings results 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)

I would now like to turn the call over to Mr. Richard Edwards, Director of Investor Relations. Mr. Edwards, you may begin your conference.

Thank you, Sarah and good morning everyone and thank you for joining us for our 2012 first quarter earnings conference call. A slide presentation is accessible at our website at www.polarisIndustries.com/IRhome, which has additional information for this morning's call. 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 projections in the forward-looking statements. Now we'll turn it over to Scott Wine, our CEO. Scott.

Thanks, Richard. Good morning and thank you for joining us. In January we summarized our leadership direction for 2012 with the theme, staying on offense. As we discuss our first quarter performance this morning we will highlight examples of exceptional performance by our teams and business units as well as encouraging signs about our end markets. Over the past few years we have demonstrated the discipline and focus to excel in difficult market conditions and now with a little wind at our backs we will continue to work hard to accelerate growth and extend our market share gains.

Sales for the first quarter increased 25% to a record $673.8 million, as retail demand for our innovative RANGER and RZR Side x Sides and Victory Motorcycles continued to fuel strong orders from dealers and distributors around the world. We were not immune to the impact of limited snowfall and the unseasonably warm winter but I was proud of the way our Snow team battled to keep retail sales flat for the season by delivering industry-leading market share gains. International sales also started the year strong, up 20% over the first quarter of 2011. Both demand and internal execution improved throughout the quarter with March representing one of the single best months in the history of Polaris.

First quarter net income increased 27% to $60.1 million, yielding record earnings per share of $0.85, also a 27% improvement over the prior-year period. Gross profit margins expanded 60 basis points to 28.9%, as our manufacturing realignment savings and overall game plan for sustainable margin growth yielded positive results. We continue to make major investments in growth in research and development and many new exciting market opportunities. But as shown by our 32% improvement in operating profit, our focus on profitable growth is steadfast. Between our record earnings performance and our accelerating momentum in the first quarter, we are confident that we will surpass our previous full-year 2012 sales and earnings guidance.

Although we continue to see the potential for an economic slowdown in the latter part of this year, we expect to leverage our industry leading combination of innovation and execution to drive solid growth in the second and third quarters. We have modestly increased our estimates for the annual industry growth rates and coupling that with our predicted market share gains we are comfortable increasing our full-year sales guidance to up 10% to up 13% over 2011. With higher sales and expanding margins, full year earnings per share are now projected to be $3.85 to $4.00 per share, an increase of 20% to 25% over 2011.

Our history of consistent quarterly performance proves this Polaris team can set ambitious targets, build solid plans, and achieve great results by executing with discipline and speed. We work equally hard to ensure that our tactical actions are aligned with the achievement of our long-term strategic objectives. Ultimately our aim is to become a more diversified, highly profitable, $5 billion-plus global enterprise and we are firmly committed to achieving that goal as we strengthen our position as the world leader in power sports. Through the recent realignment of our leadership team, we have enhanced our focus on strategic execution and reaped the added benefit of bringing new energy and ideas to each of our business units. This is a game of teamwork and talent and I could not be more pleased with the strength and depth of our Polaris organization.

In order to be the best in Powersports PLUS we must sustain and build on our lead in Off-Road Vehicles. Dave Longren and his ORV team are aggressively driving growth and extending our Side X Side armada in the face of ever increasing competition. Steve Menneto and his team are expanding our motorcycle lineup and doggedly throttling up profitable growth in our Victory business, while also devoting significant time, energy and resources to the monumental relaunch of Indian motorcycles. Mike Jonikas and the snowmobile team delivered strong performance in the mountains to overcome dismal snow conditions in much of the country. And in an important move that indirectly but meaningful affects each of these business units, we hired Steve Eastman in February to spur faster growth in our highest margin division, Parts, Garments and Accessories.

The continued success of our power sports business enables us to accelerate growth through adjacencies and our corresponding investments, using both organic and targeted M&A activity. Scott Swenson has developed a deep understanding of the $4 billion-plus global small vehicle market and we are excited to generate our initial growth in this space with the strong GEM and Goupil brands. Our military business is winning the short-term competitive battle and by strengthening the team and fortifying our technology and product portfolio, we are solidifying our plans to make this a much larger part of Polaris. We are also making excellent progress with our Bobcat strategic alliance and expect it to contribute meaningfully to growth in the years ahead.

Our global market leadership initiative offers perhaps the best example of how we align leadership and strategy to drive growth. Mike Dougherty has built an incredibly strong team in his Asia-Pacific/Latin America business and we are counting on them to capitalize on our early successes to create a major long-term growth platform for Polaris. While his EMEA business has a difficult economy in Western Europe, Matt Homan is leading an aggressive effort to double that business over the next several years. Suresh Krishna and his operations team are spear heading our operational excellence and LEAN initiatives while working diligently to build global capability to support our growth.

The successful ramp-up of our Monterrey facility remains on track, adding not only cost savings but much needed assembly capacity for our Side X Side business. We expect to build on the experience from our manufacturing realignment to capture additional strategic saving opportunities in both logistics and operations in the years ahead. We work hard to integrate operational excellence into every aspect of our business which is essential to our ability to drive consistent, strong financial performance. Our balanced but purposeful plan is designed to provide positive results for all stakeholders who should benefit as we strive to deliver sustainable, profitable growth. With that I'll 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. The excellent start to 2012 was broadly reflected in our fundamental indicators and importantly, that included a healthy 17% increase in first quarter Polaris North American retail sales and the North American Power Sports Industry is growing again, up double digits, representing the best quarterly expansion we have seen in several years and should be a further catalyst to our business. Overall dealer inventory of Polaris products was up 9%, reflecting a planned effort to supplement inventory for Side X Side and Victory and an understandable increase in Snow. Our delivery and shipment performance improved in the quarter but due to even higher than projected demand there is still some tightness in supply on select Victory and Side x Side models.

Moving on to business unit performance. Off-Road Vehicles. The Polaris ORV business continues to thrive with first quarter revenue up 30%, driven by strong wholesale growth in Side X Sides, ATVs, international, and military. Once again, we gained market share in both ATVs and Side X Sides. Polaris North American ATV retail increased double digits in the first quarter, aided by an improving North American ATV industry which grew mid-single digits. Polaris Side X Side retail driven by strong RZR and Ranger sales across all product segments and including a great start for the new RZR XP4 900 grew robustly at over 30%. And we're estimating that the North American Side X Side industry remained very healthy in the first quarter with retail up low teens percent.

All North American sales regions experienced ORV retail sales growth, an encouraging sign of consistency as we evaluate the impact of an early spring in the snowbelt. The industry promotion environment is up versus a year ago but within our expectations and we have not had to make any adjustments to our spending plans. Sales to Bobcat decreased slightly in the first quarter due to shipment timing. Bobcat has reported dealer retail sales increases of upper single digits in the first quarter, driven by network growth and improved dealer execution. Our co-development project remains on track and the Polaris national account business, while still small, is gaining traction as both customer orders and deliveries were up significantly.

First-quarter Polaris defense sales grew by about 60%, which represents an all-time record shipment quarter for Polaris. We executed the first shipments of the $54 million multi-year TACOM contract award for the Afghan Military that we won in 2011 and our business development momentum in this sector remains very strong. We were recently awarded a $5 million contract by special operations forces for MV 850 militarized ATVs. We have won a number of confidential initial development orders with customers and we ended the quarter with our backlog up over 50% versus 2011.

Snowmobiles. Snowmobile wholesale revenue is historically extremely low in the first quarter as the end of the selling season approaches and the vast, vast majority of product is already positioned in dealerships. First quarter revenue was $5 million, down 48% versus the first quarter 2011. The North American snowmobile industry retail sales declined about 20% in the first quarter, as uncharacteristically warm and dry conditions persisted for most of the flatland riding areas in the Midwest and northeastern parts of the United States throughout the winter. For the entire season, North American snow industry sales declined less than 5%.

Polaris retail sales outperformed the industry with first quarter retail down just upper teens percent, and for the season, Polaris managed retail to be flat. Polaris outgained the competition in market share for the season and remained the clear number two ending the season with our highest market share percentage since 2004. We are the leader in the mountains and our RMK-PRO is the best-selling snowmobile model in the industry. Dealer inventory is up in the Midwest and northeastern US versus last season's record low ending inventory levels due to the weak snow conditions but remain manageable in aggregate.

The recent snow dealer sales meeting was our best attended in over seven years and featured the introduction of 10 new model year '13 models led by our all new RMK-PRO, at 417 pounds, the lightest, best handling production snowmobile ever in the mountains and the all new Indy 600. The model year '13 sleds were well received and North American dealer orders are tracking to meet our expectations. International snowmobile sell-through was excellent and international orders look very good at this point. So overall despite some difficult weather conditions, our snowmobile business is in solid shape.

On-Road Vehicles and Victory Motorcycles. Our On-Road division continues to grow rapidly with first quarter revenue up 44% with about 50% of that growth coming from our 2011 acquisitions of Indian Motorcycles and our electric vehicle brands, GEM and Goupil, and the other 50% from Victory. Both GEM and Goupil had solid first quarter starts with unit sales increases in each business. Product costs are coming down and distribution sales and product development are on track in both businesses.

The North American heavyweight motorcycle industry segment continued its resurgence with first quarter sales up mid teens percent. Over the same period, Victory's North American retail sales increased around 40%, and we gained market share in both cruises and touring, led by the new High Ball and Cross Country tour models. Our newest Victories, the Judge and the Hard-Ball, began shipping to dealers during the first quarter and should fuel additional retail growth as the season progresses. Additionally, Indian Motorcycle shipments retail and financials are right on plan as we passionately develop the product, distribution, and brand elements for future generations of this storied American motorcycle brand.

Parts, Garments and Accessories. PG&A first-quarter sales were up 5% as double-digit ORV and On-Road increases more than offset weak snowmobile PG&A results. We continue to innovate. In March we introduced over 180 new PG&A snow products which were well received by our dealer network. International. International revenue was up 20% in the first quarter with all product lines in all regions providing positive year over year growth, and this includes for accounting purposes, our new Goupil business unit.

Our European team continues to deliver growth in a tough economy with revenue up 15% in the first quarter. We increased our market share lead with a strong start in ORV, Polaris retail sales were up double digits in a European industry that was down upper single digits. First quarter European snow industry retail was very good, up double digits, and Polaris actually lost a bit of share due primarily to very low inventory levels which kept us from meeting all late season demand. Polaris' Russian sales are up significantly in both ORV and Snow as we continue to gain momentum in this substantial emerging market opportunity. Asia-Pacific grew by 59%, led by strong growth in Australia, China, and India. We are actually now operational in Brazil and as our first direct dealer distribution comes online we expect Latin America growth to escalate nicely from the 6% rate posted in the first quarter.

Operational excellence. Our ongoing margin expansion initiatives continue to thrive. Net income margin improved to 8.9%, a first quarter record high for Polaris. Our operations, engineering, and global supply chain partners continue to make excellent strides in reducing product costs while improving our productivity and quality. The commodity cost environment is moderating but remains elevated from a year ago, and we will continue to monitor it carefully as we move forward. Factory inventory was up 28% year over year as we invested to better meet increased customer demand, accommodated newly acquired businesses and subsidiaries, and realized higher PG&A inventory due in part to lower than expected first quarter snow PG&A sales.

Polaris' commitment to speed and innovation is leading the market share gains and in certain instances higher selling prices. For 2012, well over 70% of Polaris' revenue will come from new products introduced within the last three years. In the first quarter alone we introduced two new Victory models, our newest RZR XP4 900, and 10 new snowmobiles. Monterrey financials and projected savings remain on track and the plant continues to achieve significant milestones. We are now over 1,000 employees strong. The exhaust transition is 100% complete.

RANGER and RZR line rates continue to increase. We recently added another shift in assembly. And we are in the final installation stages of our second engine assembly line. Additionally, we are in the process of a Spirit Lake expansion to accommodate projected On-Road growth. The project is scheduled for completion later in the second quarter and will increase our On-Road assembly capability and through-put. With that I'll turn it over to Mike Malone, our Chief Financial Officer.

Thanks, Bennett and good morning to everyone. As both Scott and Bennett mentioned, our 2012 first quarter was an excellent start to the year. Both sales and earnings exceeded our expectations driven largely by continued strong retail sales growth. This gives us confidence in raising our 2012 full-year guidance. We now expect total Company sales to increase 10% to 13% for the full year, with the individual businesses contributing as follows.

Sales of Off-Road Vehicles are expected to increase in the low double digits percentage range, up from prior guidance. We expect retail sales of Side X Side and ATVs to continue to outpace the overall market, both in North America and internationally, and to gain additional ORV market share in 2012. With the majority of our dealer orders received for model year 2013 snowmobiles, we are narrowing our previously issued guidance and now expect our snowmobile sales to be down in the mid-single digits percentage range for the full year 2012. On-Road sales, comprised of Victory and Indian motorcycles as well as GEM and Goupil small electric vehicles, is expected to be up 40% to 50% in 2012, an increase from our previously issued guidance due to the strong retail sales in our Victory motorcycle business.

We expect PG&A sales growth to approximate the overall Company's growth rate which is largely unchanged from our prior guidance. We expect 2012 sales to international customers outside of North America to increase in the mid double-digit percentage range over 2011, increased from our previously issued guidance. Gross margins are expected to expand up to 100 basis points from 2011, unchanged from our previous guidance. I will provide more details in a few minutes on gross margins. We continue to expect operating expenses to decrease as a percentage of sales in 2012, compared to last year, due to leverage obtained from the higher sales volume and more normalized incentive compensation expenses in 2012. As we have in the past few years, we will continue to invest in new businesses, growth opportunities, and global expansion to fulfill our long-term strategy.

The income tax provision rate for the full year 2012 is expected to be in the range of 34% to 34.5% of pretax income, similar to the 34.3% reported in last year. Earnings per share for the full year 2012 are now expected to be in the range of $3.85 to $4, up 20% to 25% compared to the full year 2011. In the first quarter of 2012, the gross profit margin percentage was up 60 basis points. This improvement was largely in line with our expectations. We correctly anticipated pressure from higher commodity costs in the first quarter, compared to the first quarter a year ago, while the projected negative currency movements during the first quarter proved to be somewhat less punitive than previously expected. Finally, the impact of the warmest winter in over 100 years in the US and the pressure that put on our PG&A sales was more significant than initially anticipated, and negatively affected the product mix in the first quarter.

The gross profit margin percentage for the full year 2012 is expected to increase up to 100 basis points from last year, as previously guided, although it will more than likely not be a linear path throughout the year to get there. We believe the commodity cost pressures we experienced in the first quarter will continue to pressure gross margins in the second quarter, but will moderate as we move throughout the balance of the year. Based on today's rates and current hedging contracts, currencies are expected to be negative to gross margins for the second quarter and the full year 2012 and currency movements are expected to remain volatile and unpredictable.

On the positive side, we continue to expect gross margins to benefit from ongoing product cost reductions, higher selling prices, and most importantly, our manufacturing realignment savings. Our expectations from the manufacturing realignment project have not changed. The upfront spending of transition costs and capital expenditures is largely complete, with only nominal amounts remaining in the balance of 2012. For the full year 2012, we continue to expect savings from the manufacturing realignment to be in the range of $12 million to $15 million for the year, directly benefiting gross margins. We continue to anticipate the manufacturing realignment project to generate over $30 million of annualized savings when fully complete in 2013.

Moving now to our balance sheet and liquidity profile. Net cash used for operating activities was less than $1 million for the first quarter of 2012, down slightly from last year, primarily due to the payment of compensation-related liabilities during the first quarter, offset somewhat by increased accounts payables. We continue to expect cash flow provided by operating activities for the full year 2012 to increase over last year. At the end of the first quarter, our cash balance was about $286 million, a decrease of $60 million from a year ago, primarily due to the payment of the accrued variable compensation earned last year.

We maintain our $350 million of borrowing capacity under the unsecured revolving credit facility that we entered into during the third quarter of last year. For the first quarter of 2012, our investments in capital expenditures and new product development tooling totaled $21 million, an increase of $2 million from the first quarter last year. For the full year 2012, we expect capital expenditures to be similar to last year, with increased investments in product development tooling for new products, including the Indian motorcycle relaunch. Depreciation for the first quarter was about $17 million, and we continue to expect depreciation for the full year to be similar to last year.

The Polaris acceptance receivables from US dealers were $603 million at the end of March, up 22% from a year ago, reflecting the mix change of higher value Side X Sides and motorcycles and the increased unit inventories and PG&A at dealers. The retail credit approval rates and penetration rates continue to be stable and at acceptable levels. In conclusion, we are very pleased with our financial performance in the first quarter and remain confident 2012 will be another record year for Polaris. With that, I will turn the call back over to Scott for further thoughts on 2012 and concluding comments.

Thanks, Mike. We are encouraged by the early strength of the industries we serve and will continue to drive growth to support their climb throughout the year. While there is much speculation about the weather's impact on first quarter demand, we believe market-specific fundamentals are indicative of the industry's best performance in years. The biggest risk to our industry and our business is clearly a third straight year where US GDP growth starts well and stagnates in the second half. From the risk of higher fuel costs and increased regulatory burdens to the significant tax increase set to hit the beginning of 2013, I worry the US economy could be negatively impacted.

We will keep a close eye on these developments but as we have demonstrated both in North America and currently in Europe, we do not need a strong economy to make growth happen. Our ability to invest and grow relies on a strong balance sheet. As Mike pointed out, we have the security that allows us to finance innovative products and technologies that stimulate customer demand and generate pricing advantages. Our M&A activity remains high and our team continues to identify opportunities to augment long-term profitable growth in each of our strategic growth initiatives. We continue to actively navigate the volatile currency and commodity markets but remain confident in our ability to drive margin expansion throughout the year.

Monterey will be a major contributor but we have a diverse arsenal available to attack margins in other areas as well. Our first quarter results were strong. Our foundation remains rock solid. And our momentum continues to provide confidence that our best days are still ahead. We are determined to stay on offense and deliver continued strong results in the second quarter and beyond. With that, I will turn it over to Sarah to open up the line for questions.

(Operator Instructions).

Tim Conder, Wells Fargo Securities.

Thank you, gentlemen. Just again given the strong first quarter here that you had and given the 8.9% net margin that you had here in the quarter, it seems like your 14 objectives of greater than 9.5% net margin are well within reach. Scott or whoever wants to take this comment, if you could comment on that within the context of, for example, the Monterrey savings. Scott, you've said before that not all that is going to flow to the bottom line. Has anything changed in your outlook that would say, okay some of those savings are going to fall -- you're going to redeploy more of those savings or let a little bit more flow to the bottom line given that business is a little bit stronger. Just some color around those.

Tim, we are obviously very pleased with our margin expansion results at the net income line over the last couple of years. If you look across our industry sector or actually just the S&P 500, 10% net income for other than technology companies is really strong. As we look at our opportunities to capture long-term profitable growth opportunities in new markets, and both those are new international markets and new product markets, sometimes those are going to start out at lower margins than what our current business is at. So I think if it was a steady-state business and we were going to be happy being a $3 billion power sports company, then yes, we would probably be able to raise that guidance above 10%. But as I stated, our objective is to be a $5 billion-plus, highly profitable global enterprise and as we take steps to reach those goals, we're probably going to get into businesses that for the first couple of years don't meet our current margin expectations. We won't get into them if we don't think they can over the long term, but the current outlook is just recognition that the steps we'll take to get there won't be straight.

Okay. Okay. And then the one additional one I wanted to ask is Bennett on Bobcat, I think you said the new products are going to come here out of the co-developed products here for model year '13. Can you kind of give us a little color as to the ramp of those products, will it hit that much in the back half of '12 or will it ramp late into calendar '12 and more into calendar '13?

Yes, Tim, actually I didn't say that those were going to be model year '13 products. What I said was that -- maybe you feel like we've been teasing you. We've been talking about it's right on track. These things take a little time for the cake to bake. But we're right on track and in the upcoming months we should have a launch of that product that I think frankly will hit both channels and you should expect a fairly similar ramp I think to what you've seen on lots of our other products where there will be a little bit of pipeline fill and then retail should ramp. We're expecting very nice things out of this project. This should be a significant capability change from products we've offered traditionally.

Thank you, gentlemen.

Greg Badishkanian, Citigroup.

Great. Thanks. And great quarter, guys. Good job there.

Thanks Greg.

Just wondering maybe, little bit of color kind of as the quarter progressed in April or any geographic regions, just to maybe give a little bit more confidence that the strong sales was at least partially underlying fundamentals, not necessarily just weather.

Greg, I think Bennett had it in his comments, across every region of North America we saw strong growth. While the weather certainly helped in some areas, it wasn't perfect across all of the US and Canada. The strength of our end markets, the fundamentals are really good. Not just in motorcycles but in our Side X Side business, they continue to be good. There is certainly not as much optimism about Europe. They're still fighting hard, gaining share to make that work. But we don't feel like the results would have been much different if we had had the weather of last winter than what we delivered.

Good. Good to hear. And just also, obviously you're gaining share. Talking to dealers, we see that. It's pretty obvious in your results. Can you talk a little bit about maybe which competitors -- well, to an extent maybe broadly where you're seeing the most pressure or any specific competitors or broadly if it's a group of competitors like more Japanese manufacturers that you're seeing more or less competition.

Greg, this is Bennett. We're probably not going to spend a bunch of time commenting on our specific competition. I think, suffice it to say, that retail frankly in all of our businesses was extremely strong, arguably exceeded our expectations. The Side X Side strength was really, as I mentioned in our comments, was really across all products and all product segments. Frankly, ATVs were strong, again across most product segments and most regions of the country.

And from a competitive standpoint, what I would tell you is I think the Japanese are engaging a little more and that tends to be a little bit more promotional and advertising, financing related, and our North American competitors are tending to try to compete a little bit more the way Polaris does with more product innovation. And again, I think that as you hear from those companies, some of them are having success but frankly even with the additional competition which we generally say is good, it hasn't slowed us down one iota. So we're feeling pretty good.

Great. Congrats again.

Scott Hamann, KeyBanc Capital Markets.

Hey, good morning, guys. Just looking for a little bit more color on your end markets and specifically where you're seeing kind of heightened levels of demand. Is it more on the recreation side or is it more commercial and the different product segments, core ATV, Side X Side.

Scott, this is Bennett. I don't know if this is going to be exactly what you're looking for. I think, frankly, we're seeing strength, again, across most customer segments. We have -- obviously in Side X Sides and ATVs, one of our greatest strengths is it's really a pretty diverse customer base between hunting, ranching, farming, recreation. The commercial aspect of our business is smaller and that's an area that we're trying to grow and we're certainly seeing strength in that area. But it's small. And I would tell you we're seeing strength again against all of our customer segments.

Scott, just to add to that, as I talked to you guys before, the breadth of our product offering, especially in the Side X Side range, but increasingly true in Victory motorcycles as well, we're reaching a lot more customers than we've ever been able to reach before and we're pleased with the strength of almost every single product category.

And just to give Mike a chance to talk, just wanted to ask about financial services income and the pickup there and what we should kind of look for throughout the balance of the year.

Certainly. Thanks, Scott, for letting me talk. I appreciate that. We did have a very good quarter for financial services in the first quarter, up 36% from last year. That was fueled primarily from our benefit that we're getting from our retail credit volume and the partnerships that we have with our three banks, Sheffield, GE, and HSBC. We would expect that -- as I said in my comments, that retail credit is more or less stabilized year over year. As our volume of our sales increases, we're getting more volume in retail credit and we benefit from that. So growing with or perhaps a little bit better than our overall sales is to be expected. The other part of our financial services income is our joint venture with GE on the wholesale credit and that continues to operate very effectively and profitably.

Mike, just in terms of your guidance around market share, what's your underlying assumption for the balance of the year with respect to market share gains versus simply industry growth?

Yes, Scott, this is Bennett. We don't want to let Mike talk too much. Essentially what we -- the assumptions that we had coming into the year and I think what we would say at this point after one quarter is we're continuing to model additional market share gains, essentially in each and every business we have, but in ORVs, not to the same level you saw the past couple of years. So significant market share gains but maybe not epic market share gains.

Perfect. Thanks.

Jaime Katz, Morningstar.

Good morning. Nice quarter. I have two questions. The first is it looks like Off-Road Vehicles were, [arrin] has stated to be up only low double digits after having a really strong first quarter and I think that kind of surprised me with the dealer show coming up in the summer. Is there something that we should be thinking about outside of just some sort of economic slowdown that would make those sales decelerate that quickly?

I think, Jaime, you're right, we are confident in the product that's we have and the products that we'll be bringing out. I think what you're probably modeling out is simply a recognition that we're not going to grow to the moon and our comparables, not our competition, but our comparables continue to get tougher and tougher. So we had a phenomenal -- actually, two phenomenal years of market share gains and sales growth in Off-Road Vehicles and specifically Side X Side. We expect to still continue to deliver strong growth but at some point it's going to moderate and thus far we've been wrong about when and the level at which it moderates and we're not hoping we're going to be right this time but we're trying to be realistic and plan for what we think the market will bear. We'll certainly continue to strive to do better than that.

Understood. And then can you guys add any additional color on GEM and Goupil, if there's anything out there that's changed, new opportunities with them that you guys have seen or anything like that?

Jaime, the things that we liked about those businesses is we felt like we could help them with distribution, we could help take product costs out, and we could help them with product innovation and those three elements that we liked when we bought them are still the three main reasons that we like the businesses. I think what as I mentioned in my remarks -- Scott Swenson since he stepped into this role has really spent time understanding the global Small Electric Vehicle market and what it takes to win. We like the growth rates that it offers. And we like the fact that we're going to build from these two market leading in their spaces product lines. So we're very encouraged about the space and very encouraged about the companies.

Thank you.

Ed Aaron, RBC Capital Markets.

Thanks for taking the question. Scott, you mentioned I think in your prepared remarks that you saw, I think you characterized it as better internal execution as you moved through the quarter. That comment seemed like a comment that was independent of just strong demand commentary. I was just curious to maybe get your thoughts on what you saw just internally that was different at the end of the quarter than earlier in the quarter.

I think it's just recognition that we're not perfect and as we continue to strive to get better every single week and every single month and every single quarter, we actually saw some of that improvement take hold throughout the quarter and I was proud of the way the team -- this is not just the operations side of the business. The front end of the business on the dealer side executed well and as I mentioned, March was a very solid execution month and I just wanted to point that out.

Okay. Great. And then Mike, just a follow-up for you. The operating expense leverage progression through the year, just hoping you could speak to that a little bit. Q1 is probably the strongest top line quarter that you're expecting to have. But you didn't get the leverage that you were looking for in the first quarter. Is that -- how much of that is timing of the incentive comp accruals and some kind of one-off factors like that?

I think you're right. There will be a little bit of timing impact. As I said, our guidance is still that we're going to get leverage on operating expenses for the year and we would expect to do that. You mentioned incentive comp. That did have frankly a little bit more of an impact on Q1 than we had anticipated. Most of that's due to the 29% increase in the stock price since the end of December.

So that will have about a $6 million or so increase in our variable incentive comp. It will show up in the 10-Q footnotes when those get filed. So that was some of the increase. But the other thing I'd like to point out is that we are investing very heavily in R&D and new products and as we buy these acquisitions and these new companies, we're investing heavily in those new products and those new businesses to grow over the long term to achieve our strategy. So we will continue to invest in operating expenses, but as I said, we will get some leverage this year.

Okay. Thank you.

Thanks, Ed.

Scott Stember, Sidoti & Company.

With the successful implementation of the facility down in Mexico, can you maybe just touch again on what the next step could be towards international expansion from a manufacturing standpoint, maybe in Europe?

You know, Scott, I think you probably heard from Suresh when we were down in Monterey, we have been looking at that one for quite some time. Actually, we've been looking at putting something in Europe before we thought about putting something in Mexico. That's still on our list. We learned a lot as we set up the Monterrey facility about the resources it takes and the time and the money it takes and what it takes to pull it off successfully and I think we're a lot smarter and we'll continue to evaluate that as well as look at opportunity long term, we're going to need a footprint in Asia to support growth there. We can't continue to get the growth that we want out of those regions by shipping from North America. So we've got a very good process for evaluating that and we'll share more when the time's right.

Okay. And just lastly on the military, you talked about how the backlog was up 50% I believe at the end of the quarter. Could you talk about how much of that or just quantitatively is coming from demand from military agencies outside of North America or the US?

Yes, Scott, this is Bennett. Again, the backlog is extremely healthy. Frankly, we're getting it from a number of different sources. It's always interesting with the TACOM order which is our largest contract order and is part of our backlog, it's a US agency but for an international customer with the Afghans and the mix is -- it's really a good blend. It's a good blend of both domestic and international customer bases and so we're feeling really good. We've made a lot of investments in our business development capability with our team over the last couple years and there's a fairly long fuse, a lot of times on those development and that team continues to gain traction and we're getting more and more orders in broader and broader customer bases. So it's a good diversity of orders.

Excellent. That's all I have. Thank you so much.

Jimmy Baker, B. Riley & Company.

Good morning, guys. Great quarter. My first question regarding the breadth of ORV SKUs just kind of stems from my conversations with dealers. Not sure if it's still the case, but I believe you have more Side X Side models on the market than all of your other competitors combined. I'm just hoping you could speak about using the breadth of your lineup as a competitive advantage, why you see it's worthwhile given the incremental challenges that that presents for inventory management and if you think it's becoming confusing at all to dealers or consumers.

Jimmy, Bennett and I can both speak to that one. It's a definite advantage for us. As you know, our team and especially our engineers are avid riders and we understand what customers use these vehicles for and, unlike our competition, we try to make sure that customers have a product to address their specific desires and needs across our categories. One of the opportunities we have for ourselves and our profitability and our quality and for our dealers is to make sure that we limit the complexity within those models as much as we can.

As we talked about before, our value engineering effort to try to commonize the back end, the powertrains and many other components of those products, that's a very aggressive effort for us. But we certainly are not going to stop driving innovation in support of it. As far as the inventory levels and complexity, we have a very, very focused initiative to reduce our lead times and make sure that we can respond to dealers and customer orders much faster than we have been able to previously. So we recognize the challenge but we think that certainly that is a strength and a card we expect to continue to play.

I think that was a perfect answer, Scott. I think the other thing that you could build on that, Jimmy, is you look at our dealer inventory levels in Side X Side there, they're really frankly extremely lean. You look at our retail rates, frankly well outstripping the industry. This is a consumer-driven innovation of model expansions which is growing not only Polaris' business but the entire industry. So we feel pretty good about it. We are very, very cautious and cognizant about model proliferation for the sake of model proliferation in wholesale. Maybe we did that several years ago; we're not doing that now. This is consumer-driven innovation and model expansion.

Okay. That's helpful. Thanks. And then can you give us an update on your On-Road dealer expansion initiatives? I think the Victory success is continuing to open some doors for you and would just be interested to hear any color on that and to what extent that's helping you with Indian. And then any additional update on GEM and Goupil distribution, how that's trending, if you feel like you need inorganic product expansion to really accelerate that distribution growth, any color there would be helpful as well. Thanks.

Yes. We're really pleased. Obviously as we offer better products and more profitable opportunities for our dealers, it's helped Victory expansion. We've got an improving set of 400 dealers across North America now and expanding in Europe. And certainly with Indian, it's a major investment for us in both energy and strategic understanding of how we're going to build that network out appropriately and I'm extremely confident in what Steve Menneto and his team are doing. So we feel like as we've entered into each of these business that's we've acquired, Indian and GEM and Goupil, distribution's a key element of it. As we've demonstrated over the last several decades, we know how to do distribution and we'll build it out here. I don't know that we need to acquire something else to get the distribution in the small vehicle space but certainly we think we're not done building out that portfolio.

Okay. Very helpful. Thanks, guys.

James Hardiman, Longbow Research.

Good morning. And congratulations on another fantastic quarter here. Most of my questions have been answered. I did want to follow up on a previous question about contrasting the guidance for the rest of the year versus the fantastic growth you saw in the first quarter. I think one of the most impressive aspects of the quarter was just the retail growth, I think, was the best quarter I've ever seen at least since you guys have been reporting that metric.

I guess my question is as you think about your internal plan, obviously you're being cautious across the board but are you expecting an equivalent deceleration at both retail and wholesale or are there some specific items on the wholesale side that make that comparison a little bit tougher in relation to retail? You called out sort of the inventory build here in the first quarter. Does that continue? Sounds like you're still low on inventories. Does that continue throughout the remainder of the year? Are there other items that I should think about when I compare the two?

Let me take a crack at that, James. This is Bennett. While it isn't our best retail quarter but it's darn close since we've been kind of communicating those numbers. We'll take 17% any day. Frankly, it's more a factor of -- again, we had awesome second half of the year last year so we have really stout comparables. I think as you continue to see our businesses grow, there will be modest inventory expansion to facilitate consumer demand. Again, I think you've seen our track record.

This is a Company that's going to watch that dealer inventory line closely and so again, the way we would really like you to think about it is ship equals retail and that's kind of how we are modeling it right now as we go forward for the most part, other than shipment timing. And maybe I'll let Mike comment a little bit more specifically on the guidance but I think that's more what's driving -- it was a good first quarter. Sometimes we were putting product in position so that we can take advantage of the key spring selling season. That becomes a little more normalized throughout the balance of the year.

I don't think there's anything -- there's definitely not anything unusual going on with the differences between wholesale and retail. As Scott mentioned in his prepared comments, I think we are somewhat cautious on the overall economic indicators and what we think might happen toward the latter half of the year, both in North America and in Europe and we're just being a little cautious on that.

Great. And then just real quickly here on the gross margin side, I was hoping you could just give us a little more color, tease out the differences here between pricing or selling prices and mix. One was up, one was down. Sounds like that's just the mix towards PG&A but I guess maybe also better prices as more Side X Sides are sold. I'm assuming that as we work our way through the year, the PG&A negativity sort of goes away and hopefully you'll get a tailwind on both fronts, both pricing and mix. How should I think about that?

I think you're looking at the mix properly here in the first quarter, certainly with our top line sales up 25% and PG&A up 5% and PG&A is obviously our highest margin business, that has an impact on the product mix and we frankly expected that to be a punitive to overall gross margins for the year and it frankly was a little more punitive in the first quarter than we expected. But we still are guiding for the full year, the mix to be somewhat harmful to our gross margin. On the pricing, we are able and have been for many quarters now and we continue to expect to be able to get pricing, given the relative strength of our products, relative to the overall market and our competitors and as we innovate and bring differentiation across all of our products, we're able to get some price for that and we haven't seen that yet get to the point where that's maturing. At some point, that might stop but at this point we're continuing to expect benefit from pricing.

Very helpful. Thanks, guys.

Gerrick Johnson, BMO Capital Markets.

Good morning, guys. International ORV sales I think you said up 15%. Kind of interested in Europe and what products are currently gaining traction for you guys in Europe with that new initiative.

Yes. Hi Gerrick. This is Bennett. We were pleased with the -- we had a great start to the ORV business in Europe in a pretty tough economy. The market was down as I said modestly, kind of single digits, and we were up essentially about low double digits really. So really good. We continue to see the conversion to more Side X Sides and we frankly saw some improvement in some of our key markets, most notably France, and we had an excellent start and from a competitive standpoint picked up a fair amount of share. So that's really what drove the ORV growth in Europe.

Now on that Side X Side growth, is that mainly on the RANGER side or is it RZR or is some other derivative that we don't have here?

No, it's essentially RANGER or RZR and their derivatives. There are some On-Road pieces, there is an On-Road piece to that as Wine's making a face at me --

Last time I checked most of our Side x Sides were RANGERs. (laughter)

All right, let me clarify. There are some On-Road derivatives, street legal pieces, that's what I was speaking to on the derivative side. Now I've completely lost my train of thought here thanks to my illustrious comrade here. It's really based a little bit on the markets. In the northern part of Europe, it was a little bit more utility and work related. We're putting things like RANGER centers in and we're seeing really nice growth with RANGER. In the more southern markets that are a little more recreational we're seeing continued RZR expansion. So the answer is, in most cases with Polaris right now, both.

Okay. And lastly, no mention of the 570 which is a new initiative over the last six months or so. How's that performing? To your expectations out of the gate?

Yes, it is. And I think what you'll see -- we moved a fair amount of product, what I would call into the channel as we kind of filled the pipeline a little bit. Retail has certainly met our expectations and I think because of that product strengths of it being obviously a 50-inch in a trail-based market, what we're seeing is acceleration as we move into the spring months because it's a little bit more of a trail-oriented market versus a dune type of product. We expect that the retail contribution of that product will actually accelerate as we move forward. So we're pretty encouraged. I'll try to make sure I get it in the remarks next time.

Okay. Appreciate it, thanks.

XP is good, though. (laughter)

Rommel Dionisio, Wedbush Securities.

Good morning, thank you. I wonder if you guys can just give us a little perspective on the secular trends in snowmobiles, if you could somehow strip weather out. It's been crazy the last few years. And the industry had been declining the last decade. Do you get the sense that going forward that may stabilize, maybe even improve? You're obviously still investing in the category. We're hearing great things about your next year model lineup from dealers. Could you give us your perspective on that, the secular trends in Snow?

Yes, Rommel. This is Bennett. I'll take a shot at it. Certainly weather has been feast or famine a little bit here. It seems like the last several years and maybe a little bit more famine than feast, and so that has created some wobble. The way Polaris looks at this is this is a pretty nice little business. There's four competitors. The competitors are, I think, building consistently innovative product. We've got a really loyal, passionate consumer base.

And when you look at usage patterns and installed base of the products, it's growing and so we're not going to build our $5 billion vision at Polaris based on gigantic snowmobile growth but we're very confident essentially in the industry and our ability to essentially to have a stable to a modestly growing business as you take weather out of this and do it quite profitably. We're pretty bullish on the snowmobile business. I don't think you're going to go back to the heydays of maybe the '90s but I think you're going to see this normalize and I think you're going to see most competitors in this space, including Polaris particularly, do quite well in snowmobiles.

Okay. That's helpful. Thanks and congratulations guys.

Thanks.

Craig Kennison from Robert W. Baird.

Good morning. You've addressed most of my questions. I'm going to go off the board a little bit.

Great. (laughter)

One of the things that's been difficult, you've had such a strong product cycle that it's been difficult for analysts to isolate the cyclical pressure that you've been under. Have you done any work to try to get at how much pressure you have been under from a cyclical standpoint and how things might change if we get an economic recovery?

When we went into the downturn, we spent a tremendous amount of time trying to understand where our business correlated. And I have to tell you, Craig, as we came out of the downturn in 2010 we were just as bad as you were at trying to model this thing out of where it was going. What we have done is we never feel like that things are going to continue to be great for us. So as we commented on our remarks, there's a very helpful little bit of tailwind in the first quarter. We're not sure how long it's going to last.

But we don't really change what we do. If things turn south, we're going to work like hell to take cost out really, really fast and you know our model allows us to do that. But what I think, and you saw it in us raising our guidance, if the markets are a little more helpful, we are going to continue to play the game that we've been playing and gain market share and certainly benefit as that happens. But we've not been able to find anything that says the correlation between oil or housing starts or anything else is going to be a better indicator of what's going to happen to our business.

Great. Thank you.

Mark Smith, Feltl and Company.

Hi, guys. Just real quick. Can you give us any idea on your increase in R&D expense, how much of that maybe went to Indian and then is this a good run rate through the rest of the year, this $30 million plus?

I just was talking to the guys about that this morning. We are incredibly consistent at a 4% give or take a very few basis points over the long term. So I thinks as you're looking at this, Mark, don't expect us to go dramatically over that or don't expect us to go dramatically under that and we've been fairly open I think that we're spending a good bit of money bringing this Indian bike back. We're really excited and encouraged about it. But that's on top of what's historically and continues to be a high level of R&D spend. I think on average, if you look at it, we're embedding this new investment in R&D for Indian and continuing to keep all the rest of the product portfolio up, so I guess it's very helpful that sales continue to be up a lot and our percentage stays the same. That gives us a lot of money to feed back into the business.

One quick follow-up just on Indian. Are you at the point where you're looking at adding dealers for Indian or are we still early on on kind of setting up the dealer network there?

I think the answer is both. We are looking and it's too early. So it's a long-term thing. But this is -- we've got a little bit of time. We've learned our lesson about rushing in to this. We're going to get it right and as I said earlier, I'm really pleased and confident in the plan that Steve Menneto and his team have put together on how we roll this out. So more to come. But we're in good shape right now.

Perfect. Thanks, guys.

All right. Thank you.

Okay. Thanks. I want to thank everyone for participating. We appreciate your interest and we'll be talking to you next quarter. Thanks again. Good-bye.

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