Polaris Inc (PII) 2012 Q3 法說會逐字稿

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Polaris third 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. Please go ahead, sir.

Thank you, Michelle. And good morning, and thank you for joining us for our 2012 third quarter earnings conference call. A slide presentation is accessible at our website at www.Polaris.com/IRhome which has additional information for this morning's call. The speakers today are Scott Wine, our chief executive officer; Bennett Morgan, our president and chief operating officer; and Mike Malone, our Chief Financial Officer. As before, during the call today, we will be discussing certain topics, including product demand and shipments, sales and margin trends, income and profitability levels, and other matters, including more specific guidance on our expectations for the balance of 2012, and some qualitative comments for 2013, 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, I will turn it over to Scott Wine. Scott?

Thanks, Richard. Good morning, and thank you for joining us. It has now been four years since I led my first earnings call at Polaris. Then, like now, we had record results to report, but I clearly recall that morning in October of 2008 when we had the additional task of discussing our plans to navigate the pitfalls of a pending recession. We made the best of that downturn and are now a significantly larger, more profitable, and more global company. But our current outlook for the US and world economy is not great, and an abundant range of opportunities and challenges face this Polaris team every day. As we review our third quarter results this morning, there should be no doubt that we will continue to aggressively pursue our strategy.

Sales for the third quarter climbed 21% to a record $879.9 million, primarily driven by strong consumer and dealer demand for our expansive and innovative lineup of off-road vehicles and motorcycles. This healthy demand also propelled higher PG&A sales, helping to offset a slower 3% sales increase in our international business. As anticipated, our EMEA business saw a notable slowdown in demand during the quarter, resulting in flat year over year revenue. While our Asia-Pacific Latin America business delivered another solid double-digit growth quarter. Our military, small vehicle and Bobcat national account adjacencies each contributed marginally to growth in the quarter, but the best days are still in the future for these strategically important investments.

Third quarter net income rose 39% to $94.3 million, representing net income margin of 10.7% and yielding record earnings per share of $1.33, a 40% improvement over the prior year period. After a challenging second quarter for gross profit margin expansion, we were pleased with the 120 basis point improvement the team drove in the quarter. We strive to manage the business tightly and therefore, were encouraged by a corresponding 28%, 100 basis point improvement in operating profit. Our profitability focus provides room for us to fund future growth projects, and we maintained a heavy level of strategic investments throughout the third quarter.

With three solid quarters in the books and strong momentum heading into the final months of 2012, we are making another upward adjustment to our full-year sales and earnings guidance. We are increasing full-year sales guidance to up 19% to 20% over 2011, which projects continued strong sales growth throughout the fourth quarter. Coupling this progression with healthy contributions from product cost reductions, productivity, and pricing improvements, we anticipate full-year earnings per share to increase 35% to 37% over 2011 to a range of $4.32 to $4.37. While we have seen increased competitive activity and declining economic indicators in many of our end markets, our consistent market share gains, combined with well-received and highly acclaimed new product introduction, give us confidence that we will finish the year on a positive note, especially here in North America. Our outlook for Europe remains muted, although demand from Russia and most of Scandinavia has held up nicely. For the full year, we anticipate modest growth from EMEA, supported by record growth from Indian Motorcycle, Victory Motorcycles and the additional revenue from our [glupeal] acquisition.

As our results demonstrate, we maintain an intense focus on our quarterly and annual financial results. Our leadership team also spent a great deal of time, energy and resources to ensure that we constantly advance each of our strategic objectives. We made meaningful strategic progress during the past quarter, which included our annual review of our long-term plans. We are confident that we are on the right path and fully expect to get a healthy return on the hundreds of millions of dollars we have invested over the past three years to further our strategy.

One of our largest and most important investments is in research and development, where we routinely spend about 4% of revenues to maintain and expand our product leadership position. This is the foundation of our commitment to be the best in PowersportsPlus, which during 2012 has led to the introduction of 22 new vehicles and over 250 new PG&A accessories. Dave Longren and his team are implementing a robust plan to enhance the availability of these new off-road vehicle products across the dealer network, and Bennett will highlight how Steve Menetto is leading the transformation of our motorcycle value chain through retail flow management. This is the first true implementation of lean product line and we will model -- will be the model that we use as we launch our new Indian motorcycles next year. This will be one of the many innovations that accompany the launch of our new Indian bikes, and it is part of an exciting array of activity and energy that we see in every aspect of the Indian business plan.

Utilizing our innovative culture to identify and enter new markets is also an important priority, which we continue to pursue through our growth through adjacencies objectives. Our small vehicle business has enormous potential, but we have not yet hit our stride to aggressively capture more of this $4 billion market opportunity. Scott Swenson has an active list of organic initiatives and M&A targets to accelerate our profitable growth in this segment, and we expect 2013 to be an important year for the small vehicle business. Polaris Defense is quickly becoming a leader in offering low-cost, high-value technology innovations to our war fighters, including autonomous vehicles, light armor, and an exciting new concept for non-pneumatic tires. We have been slower than we would have liked to obtain major contract awards for these products, and that is a primary focus of our military team, as we strive to expand this strategic important platform.

I devote much of my attention towards positioning Polaris for global market leadership, and while Matt Homan and Mike Dougherty have made tremendous progress in both our EMEA and Asian-Pacific Latin American business, we have barely moved the needle towards our long-term goal of having more than a third of our sales outside of North America. I was in Europe a few weeks ago and witnessed firsthand the stark contrast between the energy and talent of our team and the weakness in some of our end markets. Matt is driving a plan to double our EMEA business over the next three to five years, and I am confident the steps he has outlined will lead us to that goal, starting with the establishment of a European manufacturing plant in the next couple of years. Mike and Bennett were just in India to meet with the Eicher joint venture partners, and we will soon be collaborating to establish our first factory there. Our business in China and Brazil continue to grow, and we expect to invest more in these countries in the years ahead.

We truly believe that in order to achieve our overall strategy, we must make operations a competitive advantage. Suresh Krishna's team is continuing their masterful job of ramping up production of new products, while supporting the high levels of demand for our vehicles. The performance and additional production output from Monterrey facility has been a key contributor to our recent success, and we will rely on each of our plants to improve productivity and capacity to meet our expected demand in 2013. We have demonstrated over the past four years that strong financial performance can yield benefits not only for shareholders, but also for our employees, dealers, supply chain partners, and other stake holders. While we do not project a perfect future of flawless financial performance, we do expect to continue delivering on our commitment to long-term sustainable profitable growth. With that, I will turn it over to our chief operating officer, Bennett Morgan, who will provide additional insight into our operations and business unit performance.

Thanks, Scott. Third quarter business performance remained excellent. North American retail sales increased over 10%, our tenth consecutive quarter of double-digit retail growth. We gained market share in every business, and we further extended our industry-leading aggregate market share position in North American Powersports.

We are not resting on our laurels. During the third quarter, we successfully launched our retail flow management or RFM system to our Victory dealer network. This innovative new lean pull program allows dealers to order daily instead of annually, creates segment stocking profiles for each dealer, and is designed to ensure customer order fulfillment in 18 days or less. We expect that this will significantly reduce forecast errors, unproductive inventory, and retail stock outs, while accelerating retail sales and ultimately improving customer satisfaction. Early execution and dealer reaction to the RFM system has been very positive. We've also improved our industry-loading ORV/MVP program through a number of executional enhancements focused on delivering visibility, accuracy and responsiveness.

Overall North American dealer inventory rose 23% in the third quarter versus a year ago, but by nearly every metric we track, the quality of our dealer inventory is excellent and improving. For example, dealer inventory productivity as a function of sales revenue generated has more than doubled since 2008, is up 50% versus September of 2010, and is 2% better than 2011. ORV inventory increased 18%, as we delivered on our commitment to improve service levels and response times. The additional ORV unit inventory is in all the right places, and ORV dealer inventory days of supply rose only slightly. Side X Side inventory has been thoughtfully increased versus 2011's very low levels to support the increased retail sales velocity and additional stock to support four new incremental Side X Side market segments created over the past year. In addition, we have improved on-time dealer order fill rates to 99% and reduced average order lead time by 71% versus a year ago, which has reduced dealer stock outs by 10%.

ATV inventory is actually down slightly year over year. Motorcycle inventory is up 37%, but the majority of the increase comes from supplying the 60 net new dealers that we've added, while the balance has gone to fill open stock profiles. Dealer stock outs have already been reduced in motorcycles by about 30%, and our non current inventory percent of total inventory is down significantly. Snowmobile dealer inventory is currently 39% higher than 2011 due to the modestly higher season-ending inventory levels and an accelerated bill schedule that impacted shipment timing. We expect snow dealer inventory to moderate notably, as we move through the upcoming snow season. Our dealers, our internal metrics and our financial results continue to confirm that dealer inventory quality and levels are in excellent shape, and with the introduction of RFM and the enhancements to MVP, we expect our inventory quality and velocity to further improve in the future.

Let's move on now to business unit performance. Off-road vehicles, the Polaris ORV business had another record quarter with third quarter revenue up 18%, driven primarily by Side X Side growth. Year to date revenue is up 22%. Polaris continues to make growth happen in ORVs. Third quarter North American ATV retail sales for Polaris increased mid single digits, while the industry decreased slightly. This marked the 16th consecutive quarter that Polaris has gained market share in ATVs, and we achieved an all-time high quarterly market share percentage.

North American Polaris Side X Side retail continues to roll. For the third quarter, retail sales increased more than 15% over last third quarter's record retail, in an industry we estimate grew low double digits. Third quarter became our largest Side X Side retail quarter ever, driven by strength in both RZRs and RANGERs. While still too new to materially contribute to the third quarter retail, our newest model year '13 products have been extremely well received by both dealers and consumers. RANGER 900 XP, RANGER 800 EFI midsize and Scrambler 850s all are currently over sold to dealers, while the early RANGER 900 XP shipments are retailing to customers as quickly as any product that we've ever launched. So we are encouraged that our expansive product line and new innovative ORP products will keep driving future retail and share growth.

Bobcat retail increased over 20% in the third quarter, and their key commercial account activity improved, but wholesale sales to Bobcat were down slightly. Bobcat dealer inventory is in balance, and Polaris national account activity to key commercial customers increased and more than offset our lower Bobcat wholesale sales in the quarter. We continue to make progress on the co-developed project with Bobcat that we expect to launch in calendar year '13. While our military business saw Q3 revenue rise slightly, it was a challenging quarter, as we missed our internal expectations. Many defense and government customers deferred spending and behaved very cautiously with potential defense budget reductions looming.

Year-to-date sales are up versus 2011. However, we now expect our 2012 annual defense sales to come in below our plan. Despite this lumpiness, we are bullish about our progress and our future prospects in defense. Next week at the Army Industry Show, we will be introducing our exclusive advanced light weight vehicle armor technology and we continue to expand our unmanned vehicle business, leveraging our light weight, low cost off-road vehicle capabilities.

Snowmobiles. Polaris's third quarter snowmobile revenue was up 21%, while year to date revenue increased to 16%. As I indicated earlier in the inventory section, the year-to-date sales increase is strictly timing-driven by an accelerated build schedule, and I want you to trust that we've matched our build to dealer orders and expected consumer demand for the upcoming season. Early season-to-date industry retail sales decreased about 20% versus 2011 due to the poor snow last season, which resulted in lower preseason or snow check retail sales as we had expected. Polaris has outperformed the industry and gained market share season to date with retail sales down just 10% and our non-snow check retail sales right on plan. Only about 10% of the season's retail has occurred, so as always, the next 120 days will be critical for Polaris and the industry. Our product lineup is strong. In fact, our new PRO RMK 800 recently was named 2013 Snowmobile of the Year by SnowGoer magazine, the early snowmobile consumer events have been well attended, and we are prepared and excited for the riding season to begin in earnest.

On-road vehicles and Victory motorcycles. Our on-road business in the third quarter revenue increased 78% driven by strong year over year growth in motorcycles and our GEM and [glupeal] units. Year to date on-road revenue is up 73%. North American third quarter Victory retail sales accelerated, climbing over 25%, driven by growth in all segments, cruisers, baggers, and touring. Year-to-date Victory retail is now up over 20%, and we continue to earn additional market share. The North American heavy weight 1400 CC industry slowed in the third quarter with retail sales down single digits, which we attribute more to competitive timing than industry weakness, as year-to-date, the heavy weight industry has grown low single digits. With international Victory sales growth outpacing our excellent North American results and the advent of our new RFM program, we are confidently building on our number two position in heavy weight motorcycles.

Third quarter and year-to-date 2012 Indian motorcycle retail and business performance is right on plan. More importantly, we are making outstanding progress on the product, brand, and launch plan for Indian's future. 2013 is going to be a ground-breaking year for our motorcycle business. GEM and glupeal revenue increased well over 100% versus a year ago and contributed about 20% of the 78% sales growth for on-road that we saw in the third quarter. Glupeal is battling a tough French and European economy, but still predicts strong double-digit percent growth for the year. We are making great strides on the product, cost down and manufacturing efficiencies. Our third quarter GEM unit performance was a bit more mixed. Orders were up 35%, as new dealers impacted sales velocity, but we saw weakness in the GSA and international channels.

Parts, garments and accessories. Our PG&A business delivered record sales in the third quarter and continues to accelerate, up 14% for the quarter and 11% year to date. We achieved growth in every geographic region, business unit, and product category. We have had outstanding dealer response to the new apparel and integrated cab innovations for the RANGER 900 XP introduced at the dealer meeting, and our momentum is excellent across the entire PG&A business.

International, Scott's already covered the top line international numbers, so I'll just covered market specifics. ORV and motorcycle industry retail markets remain weak in Europe, both down about 10% for the third quarter and the year. Polaris again gained significant market share with our B retail sales down just slightly and motorcycle retail up over 50%. Russian sales growth was big for both ORV and snowmobiles, while India and Brazil delivered nice year over year growth, as we build our network, brand and capability within these key growth markets. We are making very solid progress with Eicher on our new joint venture in India. Right now, the focus is on product development, securing the factory location, and hiring the leadership team. Despite the challenging short-term global environment, we continue to strategically invest in our international infrastructure, better positioning Polaris for long-term global growth.

Operational excellence. Gross margins expanded 120 basis points, driven primarily by manufacturing productivity, realignment savings, and cost and pricing improvements, which more than offset reserves for a more aggressive promotion environment and product mix. Productivity improved by a healthy 11% in the third quarter and is now over 7% year to date, and our plants and people are humming, including Monterrey, where we recently began production on our third vehicle assembly line. We leased an additional 380,000 square-foot facility in the Spirit Lake area to allow us to better meet rising demand and implement new manufacturing initiatives and opportunities. Production capacity is stretched, and as a result, we are strategically outsourcing to suppliers additional component manufacturing at a short-term price premium.

Inventory turns measured on a rolling 12-month perspective, are flat. However, factory inventory is up 21% versus a year ago to support our increased global sales velocity, new plants and businesses, and commitment to support our customers with enhanced delivery. We do anticipate improvement in upcoming quarters, as our lean projects on delivery transformation initiatives progress. Innovation remains the fuel for Polaris's growth engine. Our new product vitality index, which measures our percentage of sales derived from new products over the trailing three-year period is over 80% and rising.

Third quarter investment in R&D increased 26%, as we aggressively pursue product development opportunities that will drive future growth at Polaris. In light of our dramatic growth in engineers and projects, we recently broke ground on 144,000 square-foot expansion to our worldwide Wyoming product development center, more than doubling the capacity of our existing footprint and greatly enabling the breadth, scale and capability of future innovation at Polaris. The expansion is expected to accommodate over 300 additional engineers during the next few years and is slated for completion in the third quarter of 2013. With that good news, I'll turn it over to our CFO, Mike Malone.

Thanks, Bennett, and good morning to everyone. We are pleased with the continued strength of our business, which, as Scott mentioned earlier, is allowing us to raise our full-year guidance for 2012. I'll begin with a review of our revised guidance. We now expect total company sales to increase 19% to 20% for the full year 2012, with individual businesses contributing as follows. Our off-road vehicle sales to dealers are expected to climb about 20%, up from our prior guidance, with retail sales of Side X Side vehicles and ATVs continuing to outpace the overall market, both in North America and internationally. We expect to continue to gain ORV market share in the balance of 2012.

On-road vehicle sales comprised of Victory and Indian brand motorcycles, as well as the Company's GEM and glupeal small electric vehicles are expected to increase 60% to 65% in 2012, up from our previously issued guidance, primarily due to the strong worldwide retail sales in our Victory business. Snowmobile sales are now expected to be about flat, with the strong results posted last year, a slight improvement from our prior guidance. All dealer and international distributor orders are in, and we will wrap up shipping those orders in the fourth quarter. We expect PG&A sales to grow in the mid teens percent range with growth coming from ORVs and our international division, which is a slight increase from prior guidance. We now expect 2012 sales to customers outside of North America to increase about 10% over last year. This is a slight reduction from prior guidance, as European economies remain very sluggish.

Gross margins are now expected to expand, in the range of 70 basis points to 90 basis points from last year, a slight improvement over the guidance last quarter. I will provide more details on gross margins in a few minutes. We continue to anticipate operating expenses will decrease as a percentage of sales for the full year 2012 as a result of leverage obtained from higher sales volume and more normalized incentive compensation expenses. But make no mistake, we are using our strength to remain aggressive in committing resources and investments to new businesses, growth opportunities, and global expansion in order 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, which is unchanged from our previous guidance, and similar to the 34.3% reported last year. Earnings per share for the full year 2012 are now expected to be in the range of $4.32 to $4.37, up 35% to 37% compared to the full-year in 2011, an increase from prior guidance. In 2012, the number of diluted shares outstanding throughout the year has been essentially flat with 2011, as targeted share repurchases have offset the dilutive impact of shares issued under employee plans. During the third quarter, we repurchased about 125,000 shares for $10.3 million, leaving 2.8 million shares remaining on our repurchase authorization.

In the 2012 third quarter, the gross profit margin percentage was up 120 basis points to 29.5%. The increase in gross margin for the third quarter was due to product cost reduction efforts, production efficiencies on the increased volumes, higher selling prices, and ongoing cost savings from the manufacturing realignment project, partially offset by higher promotional costs and negative product mix. The volatility of both commodity costs and currency movements moderated during the third quarter of 2012 compared to the significant fluctuations in the third quarter a year ago. Both commodities and currencies had an approximate neutral impact on the gross margin percentage in the third quarter of 2012, which we expect will continue for the balance of the year. Sequentially, the Canadian dollar exchange rate has improved for us about 2% during the third quarter of 2012 from the second quarter, which was better than our expectations. We do have financial hedges for about two-thirds of the Canadian dollar cash flow exposure for the remainder of 2012, and for over 50% of the cash flow exposure for some of the other currencies.

We anticipate the factors driving our gross profit margin improvement in the third quarter to remain in play for the balance of the year. As a result, the gross profit margin percentage for the full year 2012 is now expected to increase 70 basis points to 90 basis points from last year. Our expectations from the manufacturing realignment project that we began a couple of years ago remain unchanged. For the full year 2012, savings from the manufacturing realignment will be in the previously issued range of $12 million to $15 million, all of which will positively impact gross margins. We expect savings from the manufacturing realignment project slated for completion in 2013, when targeted production levels are reached at Monterrey and all changes are made at our three US facilities to be in the $30 million annually range.

Moving on to the balance sheet and cash flow, at the end of the third quarter, our cash balance was $412.9 million, an increase of $77 million, or 23% from a year ago, while our debt balances remain largely unchanged at a little over $100 million. For the 2012 year-to-date period, our investments in capital expenditures and new product development tooling totaled $65.8 million, slightly higher than 2011. For the full year 2012, we expect capital expenditures to be about $100 million, as we invest in product development tooling for new products, including the Indian motorcycle relaunch, and begin to address the production and engineering capacity needs that Scott and Bennett discussed. Depreciation for the nine months of 2012 was $51.5 million, and we expect depreciation for the full year to be slightly higher than 2011 levels. Net cash provided by operating activities was $254.5 million for the first nine months of 2012, up 28% from last year, primarily due to the higher net income. We expect cash flow from operating activities for the full year 2012 to be over 20% higher than last year.

The Polaris acceptance receivables from dealers in the US were $716.4 million at the end of September 2012, an increase of 34% from a year ago. This increase reflects the mix change of higher value Side X Sides and motorcycles, as well as the higher dealer inventories that Bennett previously covered. The retail credit environment continues to be stable, with year-to-date approval rates of 59% and penetration rates of 34% on a 13% volume increase. Combined, the income generated from our wholesale and retail financial services is up 38% year to date in 2012 compared to a year ago. In conclusion, we are pleased with the financial performance of our business year to date and anticipate we will maintain our momentum and close out the year with another record for sales and earnings in the fourth quarter. I will now turn it over, back to Scott, for concluding comments.

Thanks, Mike. I will conclude our comments today with some preliminary thoughts on 2013. This would be an easier task if I could postpone the discussion until after November 6, since we are facing one of the more consequential elections of our lifetime. Potential tax and regulatory changes will certainly impact Polaris and the economy we operate in. But we are prepared to deal effectively with whatever Washington throws our way. I referred earlier to how we successfully navigated the last down turn. While a 2013 recession is not our forecast, hope or preference, we will be ready, if required, to leverage our agility and speed to weather the storm, intensify our competitiveness, and position the business for long-term growth.

Irrespective of the economic outlook, we are keenly aware of, and extensively prepared for, a significant increase in competitive pressure, especially in the Side X Side sector. We begin the battle from an enviable position of strength with an unparalleled armada of RANGER and RZR products and a multi year product pipeline of new Side X Side products that we believe will be unequaled in the industry. The additional end market work that our teams are executing with our dealers is equally exciting and impactful and gives us confidence that we can deliver another year of market share gains and off-road vehicles in 2013. We are about as certain of snowfall this coming season as I am about the outcome of the elections, but Mike Jonikas and his team have introduced an excellent lineup of snowmobiles, led by, as Bennett mentioned, my personal favorite, the 2013 PRO RMK Sled of the Year. That should enable us to chase retail sales and share gains, as the season unfolds.

As our Victory business continues to roll in the third year of their dramatic turnaround, we are much smarter and more confident about what it takes to succeed in the very competitive heavy weight motorcycle industry. The quality of our bikes has always been great, and now we are building the marketing, distribution, and delivery plans to match. In the summer of 2013, we will add the iconic Indian brand to our motorcycle stable, and I expect us to deliver a thoroughbred in every respect. Indian will be more than a great bike and more than a legendary brand. It will be an exciting new growth business, with the full support of Polaris to once again restore it to its rightful place as the embodiment of the American motorcycle industry. In conjunction with and in support of our product lines, we expect Steve Eastman to continue to accelerate growth in our PG&A business; from innovative new accessories to improved riding apparel, we see many opportunities to drive global growth in our parts, garments and accessories business.

We are not expecting a rapid recovery in Europe, but do see a path to growth in EMEA, if they can avoid a sovereign debt default that could drive the region into a deeper recession. Similarly, the economic outlooks for China and India are more uncertain than in recent years, but our businesses are agile and our teams are strong, so we will be able to navigate the challenging seas and remained poised for growth. Expect us to share more details about our Eicher joint venture in the coming year, which we expect to become a key long-term growth lever for our Asia-Pacific Latin America business. With continued economic ambiguity and federal reserves around the world pulling levers that will certainly have unforeseen consequences, we anticipate another year of volatility in commodity and currency markets. We will rely on our rigorous process for managing risk to minimize any adverse impacts.

We expect increased demand on our balance sheet next year, as we pursue acquisitions and additional engineering, manufacturing, and distribution capacity support growth. We will remain disciplined, but we intend to use our cash to augment international and adjacent market growth in the year ahead. Monterrey is a stellar example of how we effectively deploy capital, and we expect to hit our $30 million plus target for realignment project by the end of 2013. I also predict much more activity and results from our lean initiatives, as we build critical mass and attack higher impact opportunities across the corporation.

We are laser focused on delivering a strong finish to 2012 and plan to carry this momentum into the new year. We expect to deliver profitable growth and market expansion in 2013, although we will not be able to determine the magnitude of our growth rates until we have more clarity around the economic and political landscape. We are mindful of the fragility of the global economy and are aware that any region of the world could deal us a more challenging hand at any time. We will once again plan for and be ready to deal with any risk that may arise, and we'll certainly respond rapidly to any downward shifts in demand. Operational flexibility and aggressive cost control are core strengths of Polaris, and we will intensify our execution of these disciplines if required. While we are cognizant of the risks and uncertainty, we cannot escape the fact that Polaris is geared for growth. We have no intentions of stepping on the brakes and slowing our momentum, and we will play to win in 2013, which is what this Polaris team does best. With that, I will turn it over to Michelle to open up the line for questions.

(Operator Instructions)

Tim Conder, Wells Fargo.

Thank you, gentlemen, and congrats on the quarter. A couple of questions here. Bennett, you alluded to the outsourcing, that you're increasing the part of components that are outsourced. Could you talk about the impact to margins that's having in this year and when you expect that to normalize? And then also, the sales and promotions incentives on your balance sheet, the accrual there, is up about 31% year-over-year. You talked about, Mike, you talked about the higher sales incentives. Can you give us a little bit more detail and what segments you're seeing that in, in particular?

Sure. First question, let me just tackle promo first. As we talked about, we're not seeing anything that's shocking to us. We had a relatively weak snow season, so competitors and us are a little bit more aggressive out of the gates in the fall here to make sure that we retail the non current sleds from last year, and I think we're all just being prudent there. We have seen a little bit more ORV activity from both an ATV and a Side X Side perspective.

As Polaris continues to gain share with innovative product, we think our competitors are trying to respond, and I think, again, it's not something that's shocking to us. We -- I think we show that we win with new product, but we always have some powder so that if the environment gets a little more competitive, we're able to compete in that game. And I think we feel pretty good about our ability on both fronts. So a little bit higher, and we're just trying to be prudent. But again, nothing that we're overly concerned about or really unexpected in this kind of choppier economic environment.

Okay.

Question was on outsourcing, yes, again, that's a product of doubling the size of the business as rapidly as we have. When we came out of the recession, we were able to insource a fair amount of activity into our plants, which was very helpful from a cost standpoint and us allowing ourselves to flex as we've grown very dramatically, even with some of our capacity increases, we've had to make strategic choices to outsource to our supply base. And I think that will probably continue to happen modestly as we grow. It's a modest impact on 2012 gross margins. That's why I kind of highlighted it in the comment. And I think as we go into 2013, it will continue to be a modest impact.

Okay, okay. And then, gentlemen, the other thing is regarding Latin America, your distribution, can you update us what you've added, grown there year to date and then plans maybe looking through where you want that to be by the end of '13?

Yes, Tim, Scott. We are -- as we talked about, we got off to a slower start there as we worked through some challenging distribution arrangements. We're not prepared to talk about the number of new dealer add. I will tell you that Rodrigo, our leader down there, has a very aggressive plan that they are executing, and we certainly expect to go into 2013 with a broader distribution network that will build out significantly through the year there. But really, not a specific metric we're going to talk about.

Okay, okay. Great. Thank you, gentlemen.

Thanks, Tim. Next question?

Scott Stember, Sidoti & Company.

Good morning.

Good morning, Scott.

Could you guys talk about the timing of the rollout of the new RANGER XP 900, and when exactly that started retailing?

Yes, Scott, this is Bennett. We were really in position coming right out of the dealer show in Las Vegas, and we began shipments essentially in mid to late August, and we are starting to, we're attempting to try to fill the pipeline. The consumer response has been, as I iterated in my remarks, absolutely outstanding. We're retailing this at almost an unprecedented rate, so there's product in the field. There's product starting to retail, but I would still tell you that the impact is by full-size RANGER, as key-er models, that will be very, very modest in the third quarter and I think you'll see obviously significantly more shipments in retail in the fourth quarter and quarters beyond.

And that was my next point, was on a sequential basis, your North American retail and off-road vehicle, one would expect that would probably increase somewhat, correct?

We would expect that that would be helpful to RANGER sales in the platform. Again, the way we've positioned this and the way we feel like we've created a whole new class of rec utility vehicles with the capabilities of this vehicle and at least, again, very early from dealer and consumer responses, customers appear to agree with us.

Okay, and sticking on this model, the RANGER XP 900 and this new cab system, could you talk about from the PG&A side how the initial sales have been with regards to that and customer acceptance of that and the opportunity I guess in the fourth quarter heading into next year?

Yes. It's been awesome. It's -- we're -- Side X Side penetration standards, we are seeing unprecedented levels for RANGER penetration, and most of that success is being driven by the cab. It's been so successful frankly that our PG&A guys are struggling to meet demand here in the short-term because response has been so fantastic from dealers and consumers. So I think that will be a nice lift or accelerant for our PG&A volume as the RANGER XP continues to pick up momentum in retail and in wholesale as we go through the coming quarters.

Okay, and last question on the military, we know that the governments and local areas are certainly holding off on spending right now. But could you talk about maybe some new products that are out there that you guys will be in a good position when the orders start coming back through again, where you can start to accelerate that order bank?

Yes. Scott, we are, you know, as we've talked about, I think I had in my prepared remarks, some of the technology investments around light armor, we'll have a press release going out for the AUSA, the big army conference that starts next week, really excited about what we can do with light armor, really excited about our unmanned vehicle capabilities, the potential for the NPTs, I think you had a chance to ride them, even from a kit perspective, as we think about retrofitting some of the things, the vehicles that we have in Afghanistan and Iraq could be very exciting. So lots of -- on the vehicle side, we are working closely with the special operations command, the special forces guys. They have helped us design what we think is one of the best vehicles across our commercial that we've ever built. We don't know about the viability of that. Sometimes these decisions in the defense department take time, but while we're disappointed in the short-term, GSA orders and take-on demand, we are really excited about what the team has in store for the future, and we'll aggressively work to try to get those products sold in.

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

Thanks, Todd. Next question.

Gregory Badishkanian, Citi.

Greg Badishkanian here. Really nice quarter, obviously. And just, I just going back to Scott's comments in terms of the R&D investment, so 2000, last few years have been great in terms of the level of innovation. So when would you expect all those investments to hit? Have they been hitting already and it's going to be pretty consistent levels of innovation over the next few years? Was there any step up in terms of where you saw kind of the level of innovation really picking up and maybe where you'll flat line after that?

You know, Greg, we've kind of been communicating and the reality is, it's not a hard, fast target for us, but we've pretty consistently spend about 4% of our revenue on R&D and as Bennett just mentioned, we doubled the size of the Company, and therefore we've doubled the size of our R&D investment. A lot of that money has gone into motorcycles and specifically the Indian bikes, and you haven't seen that come out yet. But we continue to spend a tremendous amount on our core off-road vehicle business.

And I think a key indicator of that, Greg, is this vitality index. And Bennett mentioned that's over 80% now and it's been gradually rising from 60%s to 70%s and now it's 80%. I think that's evidence that we're seeing now results of some of the investments we're making and as Scott said, there's much more to come.

That's very helpful. And then just kind of moving over to Europe, obviously there's economic issues there. Are there any specific markets getting incrementally worse or better and any big changes to the competitive landscape over the last few months, or has it been pretty steady?

I just had the opportunity, actually both Bennett and I were over there with Matt and the team couple of weeks ago for the [Intermont] show, as expected, the situation in France has gotten a little bit worse throughout the year. Spain, I don't know that it can get much worse, but it's been kind of bottoming along. Some of the other markets, and we kind of paint our EMEA business with one brush, but as I mentioned in my comments, we're pleased with what's going on in Russia, some of the Scandinavian markets are really good, we do feel like that unless there is a -- one of the risk countries goes into a sovereign debt default, we think we can post growth in 2013.

Thank you very much.

Jamie Katz.

Nice quarter. The slide show shows that growth through adjacencies topic had really gone from about $200 million to $500 million, up to $1 billion to $2 billion. But it looks like the categories that were highlighted stayed pretty much the same quarter over quarter. Has there been any difference in kind of acquisition opportunities, or has it just been from better current opportunities that you have that you guys have kind of raised that number?

No. Actually, Jamie, that is nothing more than calendarization. When we set that target out, it was a three to five-year target. We're four years into it, so you almost have to go to the longer 10 year outlook that we had, and that's all we've seen. Certainly as we've put more resources and energy behind the acquisition opportunities, we see more. We have more in the funnel, but really, that was just a, the change on the slide was nothing more than the four years have passed since we started this.

Okay, and then I know there's been some talk obviously before this about the sales incentives. Has there been more -- has it actually been more promotional overseas or has it been more promotional here because of the competitive environment?

You know, usually what drives our promotional reserves would be much more North America, and so that's generally the biggest part of our business and it's generally been in the more promotional market, so that's the big mover. We have seen a little bit more promotion in Europe, but I mean, from a standpoint of a P&L impact, very, very modest. So most of what you're seeing there is really North American driven.

Okay, and lastly, snowmobiles seem to do really well in the Scandinavian Russian markets, is what you said. Has anything changed in the distribution channel there, or have you had just better access this year, or is anything different year-over-year that we need to think about?

Not really. A couple of factors. The Scandinavians and the Russians did get snow. That's obviously very helpful. The North Americans didn't. I think that's one noticeable change. We had a very strong distribution channel in Scandinavia, but frankly, Russia is a wonderful growth market opportunity for snowmobiles and frankly even ORVs, and the distribution and our brand continues to make really nice progress in Russia. And I think that's a very important driver as well.

Okay. Thank you, guys.

Thanks, Jamie.

James Hardiman, Longbow Research.

Hi, good morning. Congrats on another good quarter. First question I had was on ORV guidance from the fourth quarter. If I'm doing the math right, looks like maybe low to mid teens growth for that segment in 4Q, which is a little bit of a deceleration from 3Q. How should I think about that? If we break that down between sort of how you're thinking about the market, how you're thinking about your market share, and how you're thinking about sort of that inventory delta, what's the best way to think about that?

I'm going to let Mike handle that one.

Well, I think your math is showing we're guiding near, about 20% for the year, right?

Right.

What is your math showing for what's in Q4?

Basically, I don't know, somewhere between 12% and 15% for ORVs. Is that not right? Basically you've been ahead of that 20% this year.

That's -- I don't know what to comment. It's -- I think our guidance speaks for itself. That's a very strong double-digit wholesale shipment, and we expect the market share gains that we've been getting in the market for the last number of quarters to continue in the fourth quarter.

As you've heard from my lengthy comments, we feel really good about where our inventory levels are. We feel really good about our market share momentum. We expect we'll continue to grow share, and the Powersports market is still growing, and I think as we had head in the fourth quarter, we feel pretty good about our ORV volume. That's been fairly consistent with Mike's guidance most of the year. I don't think we should be sending any red flags yet.

Oh, no, that wasn't what I was getting at. I was just curious, obviously from an industry perspective, things have slowed a bit this year. Have things bottomed at this point from an industry perspective or should we expect another leg down here in the fourth quarter I guess is what I'm getting at?

From an industry standpoint, we went through four or five years where the industries didn't grow at all. And for really most of the last 12 months now, we've seen industry growth not just in Side X Sides, but also in the balance of Powersports, it was a tad slower than it had been year to date in the third quarter, but still growing. So again, we feel pretty good about it. The industry is growing. We feel good. And we'll take the low single-digit growth in the industry. That's good.

Okay. That's fair. And then on the snowmobile side, I think previously you guys were guiding to down mid singles, and now that's flat. Obviously it's real early in the season, so what's ultimately changed? Is that entirely a function of some of the international stuff that you guys were talking about? And then with the down 20% for the industry to date, obviously the early part of the season is the most challenged, given how we finished last year. Was that about what you expected for at this point in the year and then things get better, or how should I think about that?

I think, James, the key thing that's moving us there really is two things. One, we did very well internationally. As the season ended with both Russian and Scandinavian orders, we have some international strength in snow and the Canadian dollar's done a little bit of appreciation. The rest of this thing from the standpoint of how our build went, how our orders came in, how our retail is doing so far is essentially right within our expectations.

So what's the, what's the delta then versus the previous guidance?

It's, it's rounding. I mean, down mid single digits to about flat is rounding. A little bit of Canadian dollar and a little bit of better orders out of Europe.

Okay, great. Thanks, guys.

Next question?

Gerrick Johnson, BMO Capital Markets.

Good morning. I was hoping we could talk about the Side X Side business, and particularly in retail in the third quarter, utility versus recreation and how that performed and are you seeing any differences there from recent history?

No, not really, Gerrick. I think both of those categories, both grew nice strong double digits. We've been on a, for frankly a number of years, even the last 12 months, we've been on a really nice RZR run, with all of the innovation and all the new segments created, whereas, as you would expect, because it's a little bit of a more older, more stabilized segment in rec utility, RANGER sales continue to grow very nicely versus the aggressive spike. But like you said, we're optimistic with the advent of the new 800 EFI midsize RANGER and now this new RANGER XP 900 that we might see some nice acceleration in RANGER retail off some pretty good numbers as we go forward.

Okay. So getting to the question I always ask, any impact from the drought? Any sort of deferral by the farm community for utility vehicles to later in year, when insurance check comes in or anything like that?

Gerrick, I don't know what to say really on that, other than we're just not hearing that.

Yes.

I know that you guys pick it up and I'm not saying it's not real and there aren't people suffering. But I think that's a product of our success. Sales are good for our dealers. Sales are good for us. And I think a lot of times you might pick that up from other areas where sales aren't good in other competitive brands, and I don't want to say it's an excuse. It's probably a reality. But we've been able to motor through it. I'm sure there's some impact, but we're not feeling it.

Okay. Lastly, on snowmobiles, what's different this year than prior years that you, that led to earlier shipments? I mean, the retail demand always starts pretty much the same time of year. So why this year are we shipping a little earlier?

The fundamental change that drove the accelerated build schedule is we are obviously a little bit capacity constrained. And we have made some adjustments to make sure that we could ship all the ORVs that we could, and so we eliminated a second shift in snow mobiles that we've traditionally done right around the third quarter and kind of lengthened that build out and started a little earlier. So that's really what's driving it, is it's about enabling ORV capacity and meeting retail demand there.

All right. Got you. Thanks very much.

Thanks, Gerrick. Next question?

Craig Kennison from Robert W. Baird.

Good morning. Thanks for taking my questions. Wanted to ask about Indian motorcycle and your distribution network. How many dealers have you signed up at the July dealer meetings? And what's your overall target in terms of the number of North American dealers?

We are not disclosing the progress towards our dealer growth there. I mean, obviously there was a -- we were extremely pleased with the turnout in Vegas and the follow-on interest in dealers. We've put a very strong team together to pursue establishment of dealerships in each of the key MSAs. As I talked about, we're taking a more -- we learned a lot of lessons from the Victory early days. And we're very, very focused on hitting the top 100 MSAs to start with, and that's where we'll spend a great deal of our time, ensuring we have the proper distribution. I would not expect us in the first year to have anything close to the 400 dealers we have in Victory, where that's not our strategy. We're going to take this slow and thoughtful and have strong, profitable dealers in each of the markets, and Craig, I would love to give you more details, but really what Steve and the team are working on there, is not something we're ready to report on, on a number basis right now.

Thanks. And then with respect to your parts and accessories business, it's been a good business, but it has declined as a percentage of sales in recent quarters. I'm just looking at this tremendous fleet of Side X Side and other units you have out there. And to what extent will that fleet drive incremental PG&A sales down the road? Is there an attachment rate you can see related to the fleet you have outstanding?

Yes, Craig, this is Bennett. I think you're right that, that is certainly going to be helpful. The way you should think about our PG&A business, we've got generally as we show you the mix, 45% of our business roughly is a parts business that's really run on a life of ownership and an install base. And so what you'll generally see is when we're going through a rapid growth period like we had the last couple of years on whole goods, often PG&A might lag a little bit. When we go into tougher periods, PG&A generally out-performs. I would tell you our teams have done a great job over the last decade frankly of increasing dollars per unit penetration and install rates. And again, what you're seeing now with Side X Sides that have a much higher penetration rate per unit and with the level of innovation, like you're seeing on the new RANGER XP 900, we're very bullish about additional opportunity and growth that we're going to see out of PG&A going forward, with exactly what you alluded to.

Okay, thanks.

Next question?

Eric Hollowaty, Stephens.

Nice job on the quarter. Just following up quickly on the PG&A, you talked at your investor day about the substantial opportunity that you see in adding generators to the product assortment. And I'm just wondering if you could update us on where you are with that.

Yes, I think that's a long-term opportunity, but we, we made kind of what I would call a soft launch to our dealers in Vegas, where we talked we would come in 2013 with an introductory line of generators. That's still the plan, and we're on track to do that in 2013. I don't think it's going to be a gigantic number that you should expect that's going to drive even the PG&A P&L in the short-term. It's a business that we see some nice long-term opportunity and it's clearly a nice adjacency, and we're excited about getting into it, but it's not going to be the law of big numbers early.

Okay. Great. Thanks.

Thank you.

Jimmy Baker, B. Riley & Company.

Take it off mute, Jimmy.

Can you hear me now?

Yes, yes. There we go.

All right. Sorry, guys. Good morning. Great quarter.

Thank you.

So as you added a third line in Monterrey, I would think that would provide some upside to your prior expectations there in terms of savings. Have you elected not to raise those expectations out of conservatism, or had you kind of always baked in a third line going into your prior forecast?

Jimmy, we've always thought that we would maximize the capability of our Monterrey facility. Certainly it's going to give us a little bit higher output. I mean, we've been really encouraged by what the team's done there, but we never committed that we would pass on additional savings in that facility, and at this point, we're just extremely pleased with the output, both in terms of volume and quality we're getting from Monterrey, and we expect that to be helpful for us. But maybe down the road we'll talk about a higher number, but we're nowhere near ready to commit to that at this point.

Okay, and then in terms of expanding into Europe with a manufacturing or assembling facility, is the timing of that primarily a function of you finding the right location, the right asset, kind ironing out all the planning on your end? Or are you waiting to see something there in terms of end market demand or other opportunities that would dictate the timing of that move?

No. You hit it right, hit the nail right on the head. We are probably late to this. And the volumes that we have currently make this a very, very quick return on our investment, as we've talked about. So it's just a matter of Suresh and Matt and their teams finding the right location and going through the process. I mean, it is a very significant focus for those guys right now, and I think as soon as we -- as you know, we do things thoughtfully. We work hard as hell, but we don't take these kind of decisions lightly. So teams work as fast as they can. We'll announce as soon as we know.

Okay, great. Last question for me, ending the quarter with a pretty sizable cash balance here, I guess I'm somewhat surprised you weren't a little bit more aggressive or opportunistic with the buyback in the quarter. Are you evaluating some more sizable M&A targets, or how should we think about capital allocation in the cash balance going forward?

Really no changes there. We -- as I mentioned earlier, I think it was Jamie's question, we have a long list of acquisition candidates we feel really good about. Those will fall in place when they fall in place. As Mike, as I think all three of us talked about, there is a healthy demand on the balance sheet next year as we try to meet this capacity constraint that we've gotten. Whether it's adding something in Europe or getting ready for the Indian launch, I mean, there's a lot of capital demands on our business as well. So we actually prefer not to have $400 million some of cash on hand, but I'm not at all concerned that that's going to stay there very long.

Okay, thanks. Great quarter.

And as far as the buybacks go, we've really kind of come to terms with we're going to buy enough shares to keep the share count flat, you know. And I think you can just pretty much count on that. We'll maybe buy a little bit more, maybe buy a little bit less depending on what's going on, but generally speaking, expect it will maintain flat share count through our buyback strategy.

All right. Got it, Scott. Fair enough. Thanks a lot.

Next question?

Joe Hovorka, Raymond James.

Thanks, guys. Couple questions here. First, the days inventory and ORV you said is up versus last year. Are you comfortable where it's at now? Do you think the days of inventory need to go up more so you don't have as many stock outs, or when do we get the equilibrium there?

Yes, I'm going to try to be more careful how I answer that, Joe, because a lot of times when we said we were near optimum levels, people tend to draw that at a physical level and frankly, there's a lot of variables that affect inventory, size, segments, and a number of factors. We feel pretty good about the quality of our inventory right now. Days are up a little bit. Frankly, they were too low in Side X Sides last year. They are still, in your surveys, you may still pick up a spot or two where we're still a little tight in a few products in a few regions, but that's gotten much better and our stock outs are better.

The other factor that's driving is we continue to innovate, and we continue to frankly find new customer segments to appeal to and market to and the dealers need to stock those products and they are driving incremental retail for us. So that's the other factor that frankly has been a pretty significant driver of the Side X Side inventory increase. So I think that's a long answer. I would tell you we feel pretty good about where we are structurally. I don't think you're going to see big sea changes of the inventory going down in Side X Sides, and I don't think you're going to see it rise dramatically unless we add a lot more segments or we grow another 50%. I think we are feeling pretty good about where we are.

But the growth of 50% would be growth in units, but not necessarily growth in day supply.

Correct. I think you should expect our velocity to be pretty close to where we are. Again, you'll put it in the note that it's equilibrium, so I want to be careful with that, but, yes, I think we're pretty close to where we want to be.

Okay. And then the, the disconnect between the 20% retail sales growth at Bobcat and the down wholesale shipments, what's driving that and does that come back to more closely matching to those numbers shortly?

Yes, it's -- I think there is a couple of factors, in all honesty. They -- I think they had generally under-performed at least Polaris Side X Side performance in those previous retail quarters, and as their dealers get a little bit better at this, as you would expect, they're getting better at retail, so they are coming off weaker comps and we have still frankly the law of relatively small numbers at least by our Side X Side business, and I think the other thing you can assume, I'm probably being kind when I say inventory's in balance. Their inventory is probably a tad light, which I think positions us well as we head into 2013.

So the implication would be, you wouldn't be under-shipping again going into 2013 in Bobcat?

I don't think that would be the case. Again, remember, we are a supplier to Bobcat and they make those supply calls and we're one step removed on that, but I would expect that you should see that retail and shipments should be in equilibrium or, you know--

Actually, probably not true, because we're going to launch the new jointly developed product, so there will be a little bit of channel fill next year.

On that product for sure, yes.

Right. Okay, and the Bobcat dealers, they are not in your promo line, are they?

No, no, that's theirs.

Okay. And the -- just housekeeping question, the average sales price increase for ORV in the quarter, what was that?

We're checking. I'll get it. Go on to the next.

Okay. That's all I had.

James Hardiman, Longbow Research.

Thanks for taking a follow-up. Quick question for Bennett. I think you made a comment that the motorcycle industry deceleration here in the third quarter, I think you said something about competitive timing. What exactly were you getting at there? Was it just more that again, you had really nice weather early in the year and we're still hurting now from that pull-forward or was there something else to that?

What I meant there, obviously we don't mention competitors generally by name in these calls, but we have a very big competitor just to our east that is a significant piece of the 1400 segment. And you guys covered them like a blanket and I think you guys have covered it. Again, I don't think they are seeing weakness and I don't think we're seeing weakness. This has to do more with their situation of supply within the dealership. We're not -- I think that's really what drove the industry because they are such a significant part of the industry.

Got it. And then just wanted to get your comment. Obviously you had this new competitive announcement here in the high-end rec Side X Sides, the new maverick. Wanted to get your comments on that vehicle. Obviously a lot of people talking about that. Can you give us an idea generally, I mean, that's a pretty relatively small piece of your total ORVs. How should I think about even sizing that high-end segment of the market?

Well, I think it's -- I think that's, as you can see competitors enter that segment with our success in the high performance rec segment, it's a very nice and it's a very fast-growing segment. And obviously when you see that kind of attraction and our kind of unbelievable success there, it's going bring competition. And as we've said before, I know people get worked up about it. We view competition as a good thing. And BRP is a very good competitor and I'm sure the Maverick, we haven't put it through its pace, but I'm sure it's going to be a high quality product. But frankly, what we've seen on our retail through the third quarter and when the other guys came with a product, it hasn't slowed us down at all. And we feel really, really good about our product plan and I think you should look at that segment as being a material segment as we go forward. But from our standpoint, we feel fine.

Got it.

I'm going to interject here. Joe, to answer your question about the ORB/ASP increase, it was about 2% in the third quarter and that makes it about 2% for the year to date period as well.

James, we've got to move to the next question here.

Okay. Ed Aaron, RBC Capital Markets.

Hi, great. Most of my questions have been answered. I just wanted to follow up on the earlier PG&A discussion. I was a little bit surprised to see you got up to mid teens growth running 11% year to date, and Mike, maybe your answer to this is the same as your answer to the kind of, the snowmobile guidance change being more of a rounding issue. But it would seem to imply a pretty big step up in the fourth quarter and I'm wondering if that is really tied to your expectations for the XP 900 getting a pretty fast lift here in Q4.

No. I think, Ed, it's more a product of, as you guys saw, we had a slow start to the year, and frankly, that was primarily snow-driven for both the snowmobile business and snow-related accessories for ORV. And as we've moved past that and the guys have innovated, we've been picking up steam throughout the year. And we expect that we will continue our momentum in the fourth quarter. So I think that's really what you're seeing. And what we've got planned in there is kind of what we would call normal snow conditions. It's always a variable, whether you get the early snow. And that can be a reasonable number for the fourth quarter PG&A sales, but we feel pretty good that that business is accelerating right now.

And then just one other quick one, if I could, just on the subject of dealer inventory turns, you had a big improvement for a couple years, it's kind of flattened out, you seemed pretty happy with where things are, but I've also heard you talk about wanting to reduce your lead times even further and getting eve closer to built-to-order models. I'm wondering why doing that, making progress toward that next year might not cause you to under ship retail in 2013. Am I thinking about that the right way?

I don't think so.

Ed, our commitment to get to built-to-order and the next level of MVP, what we're doing is retail flow management, as you know, to do those right, it takes a long time, and we've been working now on MVP for four or five years. We are continuing to mature it. We're not going to get to a pull system and shipping to demand next year in our business. We'll get very close with motorcycles, and that's going to be kind of the model that we try to replicate from. But what we found is, we had -- we thought two high levels of inventory for sometime and we did a very consistent job of bringing that down. We realized, as we did that and our demand increased rapidly, that we were not able to fulfill our dealers the stocking level that they want to maximize retail. As Bennett indicated, we feel like we're making good progress with that, but there's really nothing more to the ability to drive a step function change again in dealer inventory for -- I think for several years from now, we may talk differently about that, but as of now, I think we're, we're running this about the way we want to.

Thank you.

Okay. Last question, Michelle.

Mark Smith, Feltl and Company.

Good morning, guys. Just a quick question on snowmobiles. How much of the timing impact was really from Russia and Scandinavian snowmobile shipments being up 20%?

Again, as I stated a little bit before, that is an impact because we had very strong orders, and obviously we had to get that product overseas. We tend to mobilize that product earlier in the third quarter versus the fourth quarter, and then the second factor really is last year, we had to prioritize the second shift based on the increases in snowmobiles, which was taken away from ORV demand and so we'd gone away from the second shipment snowmobiles, so we had to lengthen our snowmobile builds, which had us starting earlier, and that's really a legitimate timing issue about how we're running our factories.

Okay. That makes sense. And then can you guys give us anything new on Eicher?

Yes, I was just over there, I don't know kind of seems maybe two weeks ago, and was meeting with the Eicher guys, and our teams were making really nice progress, it's still very early in the joint venture. The product development is progressing very nicely. We are kind of in, I don't want to say the final throes of really selecting a plant location and trying to get that plant built, because that's what this will require, and then we are actively hiring the leadership team right now. We've already filled a few slots and we've got a few more key slots to go. But we're going to be really busy on all three of those fronts I would say over the next couple of quarters. And that's really going to drive all of the focus between the partners and the new JV leadership team.

Okay. Great. Thanks.

Thanks, Mark. That's all the time we have this morning. Want to thank everyone for participating. Thank you for your support and interest, and we look forward to talking to you next quarter. Thanks again. Good-bye.

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