Polaris Inc (PII) 2012 Q4 法說會逐字稿

Good morning, everyone. My name is Sarah, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Polaris fourth 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)

Thank you. I'd now like to turn the call over to our host, Mr. Richard Edwards. Sir, you may begin your conference.

Thank you, Sarah, and good morning, everyone, and thank you for joining us for our 2012 fourth quarter and full year 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.

During the call today, as always, 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 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, we'll turn it over to Scott.

Thanks, Richard. Good morning. Thank you for joining us. January is typically one of the busiest months of the year at Polaris, but our pace this month has seemed even more aggressive than in years past. I see it in every business unit and each functional area and the energy and excitement about the year ahead is encouraging. Certainly part of our activity is devoted to preparing for the challenges and risks that we expect to face, but what is notably absent is any reflection on the tremendous performance the team delivered in 2012. We will take some time to review those results this morning but trust that the rest of Polaris is hard at work to make 2013 another record year.

From the introduction of a Jagged X RZR, our highest performing vehicle ever and the announcement of the Klim acquisition to strong double digit retail growth, we drove hard through the final three months of 2012 with strong demand for our industry leading ORV lineup and also for our On-Road and PG&A businesses, fourth quarter sales increased 15% to a record $900 million. Increased competitive activity kept us on top of our game and our 210 basis point improvement in gross profit margin in the quarter indicates we are continuing to win with innovation and execution, not overly costly discounts.

Fourth quarter net income and earnings per share both increased 38% to $88.1 million and $1.24 per share respectively. This strong end-of-the-year performance was the capstone to a third straight record year for Polaris and provides important momentum to begin our quest for a fourth in 2013.

Full year 2012 sales increased 21% to a record $3.2 billion, marking the first time Polaris has exceeded the $3 billion mark just one year after passing the $2 billion milestone. On the back of industry-leading innovation, a few strategic acquisitions, and tremendous execution by the employees of Polaris and our dealer network, we have now doubled our revenue in the past three years. Much more importantly, net income more than tripled over the same period reflecting the benefits of our laser focus on net income margin.

For 2012, net income increased 37% to $312.3 million yielding record net margins of 9.7% and earnings per share of $4.40, up 38%. The quality of our earnings remains strong as reflected by our operating cash flow of $416 million which was 133% of net income. Our consistent execution was again rewarded by the market providing shareholders with a 53% annual return on top of the 46% return in 2011.

Perhaps more significant than any number on this chart are the hundreds of millions of dollars that we have invested over the past several years to position the Company for future growth. From Indian Motorcycles to our joint venture in India with Eicher, and from new Rangers and RZRs to the GEM and Goupil electric vehicles and of course our recent X-game winning snowmobiles, we are constantly seeking avenues for profitable growth.

With strong momentum, a great team across the globe, and aggressive disciplined plans in place, we are again projecting double digit sales in earnings growth at the upper range of our guidance. We remain very cautious of debt-related economic and political risks in both US and Europe and are prepared more for downside pressure than economic tail winds in the year ahead. We are planning for US GDP to grow about 2% and Europe to come in flat to slightly down but look for better results from the economies of Asia and Latin America.

The overall North American power sports industry should grow but at a slower rate, so we expect to primarily drive growth from share gains and global market expansion. Assessing what we know and anticipate, we project overall revenue of 7% to 10%. Net income and earnings per share are both projected to increase in the range of 10% to 15% over 2012 which would equate to record earnings per share of $4.85 to $5.05. This guidance includes a modest amount of second half sales of Indian Motorcycles coupled with another full year of heavy investment in the business we are building around this iconic brand.

We will also continue to invest in our international expansion, including construction of a new manufacturing facility in Europe. As many of you know, we have been evaluating options to establish assembly capacity in Europe for the past several years. Our strategy calls for us to serve markets locally when volume justifies it and as the European market share leader in Off-Road vehicles, we now see an opportunity to better support our MEA dealers and customers.

After our very successful Monterey factory start up, we are very confident that we can execute this plan to reduce logistics cost and increase capacity. Our final decision on location is imminent and we expect to break ground in the first half of this year. The overall cost of this Greenfield facility is expected to be approximately $50 million which includes both capital investments and operating expenses. Of that, we have planned for $8 million to $10 million to hit the P&L in 2013.

Polaris is now in the fifth year of executing a strategy that has served us well through both the last recession and the slow global recovery. Our team and our culture provide a foundation that enables Polaris to consistently outperform and I am thrilled with the energy, ingenuity, and drive they bring to our business every day. We have made significant progress towards many of our goals yet we still have quite a journey ahead of us to pursue overall objective to be a highly profitable, more diversified global enterprise with over $5 billion in revenue.

Achieving that goal requires us to be the best in power sports plus which not only means extending our number one market share position but also increasing the size of the addressable market. From designing new and better products to building stronger brands, we are providing a broad and constantly growing range of customers with more reasons to buy Polaris. The project to double the size of our R&D facility in Wyoming, Minnesota, is well under way and while this physical expansion is important, our investments in talent, technology, and process improvements play an even larger role in super charging our industry leading product pipeline. This is a fast-paced, competitive industry and we will take nothing for granted as we pursue another year of power sports leadership.

While our core business fuels most of our current profits, the prospects for long-term profitable growth are enhanced by our growth to adjacency initiatives. We are excited to have Justin Summers, the Founder and CEO of Klim, and his strong brand in business as part of Polaris. We like their growth potential even more than we like their riding gear. We are also confident in the direction of our small vehicle business as Matt Homan adds this growth platform to his MEA leadership responsibility. Jim and Goupil are now fully integrated into Polaris and poised for growth in the years ahead.

We are working aggressively to expand our presence in this $4 billion global market for small vehicles, and the more we see and learn, the better we feel about our opportunities to win. New products will drive our adjacency growth in the year ahead as we debut exciting vehicles in both our military and commercial lines. Polaris must prove that we can drive profitable growth outside of power sports and this year I expect us to do just that.

Global market leadership is the mandate for both our core and adjacent businesses and during the past four years we've added over $150 million in new sales in the international markets and more than doubled the size of that team. We have growing businesses in Brazil, India, and China, and EMEA headquarters in Switzerland, and will we building plants in Europe and India in the year ahead. We are excited about the potential for our joint venture with Eicher both from the relationship and product development aspects of our partnership. Despite this progress, we remain far from but firmly committed to our goal of having one-third of our sales outside of North America by 2018. We do not expect a fast economic recovery in EMEA, but we do see an opportunity for long-term growth there and will invest accordingly.

The developing economies will continue to outperform our western markets, and we expect our Asia Pacific-Latin America enterprise to lead the growth of our international business in 2013. Our rapid growth could not be possible without the talent and dedication of our operations and supply chain team. As we expand our global footprint and strive to make significant improvements in quality, delivery, cost and inventory, we will further embrace the tools and principles of lean and work to insure that operations is a competitive advantage. As we move operations closer to the customers we serve while simultaneously making those plants and processes more efficient and productive, we are strengthening our foundation for growth and margin expansion.

We focus relentlessly on executing our strategy with a clear recognition that strong financial performance is both the result of and a major force behind our ability to aggressively drive our strategic objectives. Due to our significant increases in revenue and profitability, we have been able to invest more money back into our businesses to create new opportunities for growth. History suggests some of these growth prospects will start with slightly lower margins which is why we are not currently projecting net income margins to substantially exceed 10%. We will, nonetheless, maintain our maniacal focus on profitable growth to generate the earnings required to continue to fuel our strategy.

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, everyone. Fourth quarter operational performance was excellent and Polaris remains on the gas. North American retail sales increased 13%, the 11th consecutive quarter of double digit retail growth and for the year we were up a robust 14% identical to 2011's stellar retail growth rate. We built further on our number one market share position in North American power sports and for the third consecutive year we gained share in every business we competed in. Our operations in global supply teams continued to deliver production upside to meet increasing customer demand and we have initiated new investments that will expand our global manufacturing footprint into Europe and India.

As we projected on our third quarter call, North American dealer inventory finished 2012 up 25% versus a year ago as we continue to better match product availability to retail demand. Our dealers and our internal metrics continue to confirm inventory levels and quality are in excellent shape while our new capabilities in the retail flow management and MVP will enable us to reduce dealer stock while optimizing point of sale availability. ORV inventory was up 26% to support incremental side by side and ATV new market segments and our increased retail velocity. Motorcycle inventory was up 43% driven by new dealer adds and RFM implementation. RFM has already reduced order to delivery time by over 75% and reduced stock outs by 35%. In 2013, we anticipate Victory customer order fulfillment in less than 18 days.

Snowmobile inventory was up 16% due to higher beginning the season inventory levels. So, all-in all, as we enter 2013, we feel good about our dealer inventory levels and, more importantly, our increased capabilities to meet dealer and consumer demand moving forward. For 2013, we do not expect dealer inventory levels to increase or decrease significantly.

Moving on to business unit performance. Off-Road vehicles. Our ORV business is rolling. Fourth quarter revenues increased by 22% driven by North American core ATV and side by side sales strength which more than offset some weakness in international and military markets. For the full year, ORV again achieved record sales and grew by 22%. Polaris continues to build on our undisputed leadership in ORV market share and retail momentum remains very good. For the full year 2012, North American ATV industry retail sales increased slightly, the first increase in ATV industry sales in eight years, although the industry did decline marginally in the fourth quarter.

Despite the weaker industry, Polaris' fourth quarter and calendar year 2012 ATV retail sales had healthy growth of upper single digits. On the strength of this performance, for the first time ever we achieved number one in North American ATV industry retail market share. It's simply a tremendous accomplishment by our team and our dealer network.

Polaris' North American side by side retail was similarly outstanding, up over 20% in both the fourth quarter and for the full year 2012 and in industry we estimated continued to grow about low teens percent. Our new ORV model year '13 products, including the new Ranger 900 XP, the Ranger 800 EFI mid size, and the Scrambler 850 are all selling very briskly, and we recently introduced the RZR 900 XP Jagged X edition at our Camp RZR in California in front of tens of thousands of side by side enthusiasts. This is our most deluxe production RZR ever built. It has a new high output 94-horsepower 900 engine, custom bucket seats, and factory installed doors.

Orders sold out in less than 24 hours and product has already begun shipping to dealers in January. For 2013 we expect the ORV industry to continue to grow but at a slower rate to 2012 and Polaris to again outperform in both ATVs and side by sides and gain market share as we continue to face high year-over-year sales growth comparables.

Fourth quarter wholesale sales to Bobcat declined with Bobcat retail reported down slightly. For the full year 2012, Bobcat total retail increased upper single digits despite declines in its national account orders. Dealer inventory positions at Bobcat are lean and well positioned for 2013. Both partners are working hard preparing for the arrival of our co-developed product which will launch in the first half of 2013. This commercial targeted vehicle should provide meaningful growth to both Bobcat and Polaris in 2013 and beyond.

Military sales declined in the fourth quarter as the challenges and uncertainty of defense budgets caused customers to continue to behave cautiously and defer spending. For the full year 2012, Polaris military revenue was approximately flat. This short-term sales disappointment notwithstanding, we continue to make meaningful progress in defense. Our new resilient tire and M9 high performance lightweight armor technologies will enable us to penetrate new product categories in 2013 and beyond, and we've secured a number of multi-year, multi-million dollar contracts with TACOM, the National Guard, and special operations command that will drive future revenue. We have quickly become the preferred platform of choice in the growing unmanned tracked and wheeled vehicle space and expect continued rapid growth in this strategic growth segment. Despite an ongoing tough external environment, we expect Polaris defense sales to bounce back and grow significantly in 2013.

Snowmobiles. As we communicated in the third quarter call, fourth quarter wholesale sales predictably declined 9% due to revised build timing. For the calendar year 2012, snowmobile revenue increased 1% comprising 9% of total Company sales. The North American snow conditions were unfavorable in the early season, they improved in mid December and industry retail sales accelerated nicely. For the fourth quarter, the industry declined slightly while Polaris continued to grow share as our retail sales were flat. Season to date, the industry is down less than 5% with Polaris down even less. Our model year '13 products have been well received. We remain a clear number one in the critical mountain segment with our industry leading RMKs and the return of an all new Indy has been a boost to the flatlands. Dealer inventory is in descent shape and we are cautiously optimistic about the better snow conditions generating improved year-over-year first quarter retail before we finalize our 2013/14 build plan in the spring.

On-Road vehicles and Victory motorcycles. Polaris On-Road revenue increased 36% with strength in Victory and nice contributions from both GEM and Goupil. For calendar year 2012, On-Road revenue jumped up 64%. Victory gained market share again in the fourth quarter with retail sales up modestly in a North American 1400 CC heavyweight motorcycle industry that grew slightly in the fourth quarter and for the full year 2012.

We built on our position as the number two heavyweight OEM with 2012 Victory retail sales growing better than 10 times the industry growth rate resulting in share gains across all segments, cruisers, baggers, and touring. The strength and breadth of the Victory dealer network continues to improve with the North American dealer network now over 450 strong and retail sales per store up nicely. To celebrate Victory's 15th anniversary, we recently introduced a new limited edition Cross Country Tour model loaded with chrome, Billet wheels, and tons of electronics in Teres red to match the inaugural 1999 V92 C that rolled off the Spirit Lake line.

Indian business performance remains right on our plan. In December, at the Long Beach International Motorcycle Show we launched the 2013 Indian Chief Final Edition, the last model from the previous Kings Mountain Indian Chief platform and we began the launch sequence with the groundbreaking Polaris design model year '14 Indian Motorcycles that will be revealed later this year. We teased our all new model year '14 engine through a unique customer sound booth experience that pounds out the distinctive growl of the new Power Plant and earlier this month at the New York International Motorcycle Show we introduced an all new Indian rides App for Apple and Android users that replicates the engine sound with a twist of the wrist. And in March at the Daytona Bike Week we will officially unveil the all new Polaris built from the ground up Indian Motorcycle engine that will power the model year '14 Indians into the future.

2013 is the year of Indian and we are thrilled to restore the first American motorcycle brand to its rightful place in the global motorcycle industry. For 2013, we expect the North American heavyweight industry to continue to grow low single digits with both Victory and Indian driving significant Polaris retail and market share growth.

Our small electric vehicle business, while still in its infancy and under 2% of Company sales saw revenues increase over 50% in the fourth quarter. GEM had a solid fourth quarter with revenue up double digits percent and dealer orders up even more significantly. This was GEM's best quarterly order performance since the fourth quarter of '09 when large government incentives contributed significantly to the upsearch.

Goupil continues to battle a difficult European economy but we've made nice progress on costs and operations and with our new G5 hybrid product launching in 2013, Goupil is poised for growth. We continue to improve capability and get valuable cycles of learning in the strategically attractive electric vehicle market, and we are looking forward to 2013 growth from both GEM and Goupil.

Parts, garments and accessories PG&A fourth quarter sales increased 17% driven by double digit growth in all global regions and across all categories. ORV, PG&A sales were particularly robust, up 24% on strong side by side related revenue and offsetting modest weakness in snowmobiles. The new side by side cab system and related accessories are driving big dollar per unit acceleration and sales penetration. For the full year 2012, we completed another record revenue year in our highest margin business with sales increasing 13% with strength across each of our PG&A product categories.

In the fourth quarter we acquired Klim, the market leader in the design, development and distribution of technical riding gear for snowmobiles, Off-road and adventure touring motorcycles. The 2012 sales approaching $30 million and a five-year compounded annual growth rate over 20%, Klim will further accelerate our growth and our highly profitable PG&A business and turbo charge our apparel portfolio. The Klim and Polaris brands will remain distinct, although Klim's Rigby, Idaho, facility will become Polaris' center of excellence for apparel, design, and development in the future. For 2013 we expect PG&A sales to outperform overall Polaris Company sales.

International. International revenue increased 6% in the fourth quarter driven by Asia Pacific at plus 18% and Latin America at plus 21% and a small amount of growth from EMEA. For the full year 2012, international sales rose 9% with Asia Pacific, Latin America regions up 21% and the EMEA region up 5%. Victory, PG&A, and snowmobiles were the primary drivers of the fourth quarter 2012 international growth offsetting modest declines in ORVs.

European markets remained weak with both ORV and motorcycles down low double digits for the fourth quarter and for the full year 2012. Polaris continued to win the competitive battle in the fourth quarter and for 2012 gaining almost two points of share and increasing our number one position in ORVs. In motorcycles, we grew European retail over 20% in a market that declined double digits and we continue to expand our presence in share in Australia.

The European snow market is growing with season to date industry sales up mid single digits and Polaris up almost 10% and gaining market share. We are investing to win globally. Scott mentioned the new European facility we will soon begin building and our new Eicher joint venture in India is off and running. We are hiring the team, product development is on track, and we'll break ground on a new plant in 2013.

Our key emerging market subsidiaries in Brazil, India, and China grew over 50% in 2012 as we developed the power sports market and channels in these economies, and Russia is very strong with sales up over 50%. For 2013, we expect international industry markets to improve moderately. We anticipate continued growth and expansion in the Asia Pacific, Latin America regions, though we believe ORV and motorcycle industries will remain down in Europe due to economic weakness.

Operational excellence. Lean operational excellence initiatives focused on quality cost and speed are delivering margin expansion as fourth quarter gross margins expanded 210 basis points. Higher volume, product cost reductions, pricing and manufacturing realignment savings also contributed more than offsetting reserves for a more aggressive promotion environment and product mix effects. Further, commodity and currency pressures have stabilized. Our plants continue to hum for the full year 2012 productivity improved 6% and for 2013 we are investing in the incremental $100 million in new and existing plants across the globe to enhance our foundation for long-term growth.

Factory inventory is up 16% primarily in support of higher retail demand. Inventory turns are flat year-over-year as we continue to invest in customer order fulfillment initiatives that are improving dealer and consumer order response but, with that said, factory inventory is an opportunity with our 2013 lean initiatives that we will attack with gusto. We can and will do better and, 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, we're very pleased with our record 2012 results as the execution of our long-term strategy continues to deliver outstanding results for the Company. For the full year 2013, we expect to report another record year; however, we will need to overcome a continued weak European economy and uncertainty around policies that may be enacted by the US Government in the area of spending, taxes, and the debt ceiling.

Taking into consideration these impediments, our 2013 full year guidance is as follows. Total Company sales are expected to increase 7% to 10% for the full year with the individual businesses contributing as follows. Sales of Off-road vehicles are expected to increase in the high single digits percent range with retail sales of side by side vehicles and ATVs continuing to outpace the overall market both in North America and the internationally. We expect to gain additional ORV market share in 2013, although at a more moderate rate than the last three years. We do expect our sales volumes of ORVs in the EMEA market to be down in 2013.

At this time of year it's always difficult to predict the outcome of the snowmobile selling season, but with the current level of higher dealer inventories and below average snowfall we currently expect our snowmobile sales to be down in the single digit percent range during calendar year 2013. As usual, we will know much more as the winter selling season winds down and we begin taking dealer orders in March.

On-Road vehicle sales comprised of Victory and Indian as well as the Company's small electric vehicles, GEM and Goupil, are expected to be up in the range of 25% to 35% in 2013. Victory is driving solid retail sales demand and additional market share gains in all markets and Indian Motorcycles will begin shipping all new bikes in the second half of 2013 while we also expect double digit percent growth from our small vehicles. We expect PG&A sales to increase about 20% with faster growth in Polaris branded PG&A and the addition of the Klim acquisition completed in December of 2012. We expect sales in 2013 to customers outside of North America to grow slightly over 2012 as the impact of Europe's weak economies on our EMEA business is offset by growth in our Asia Pacific, Latin American business; however, we expect to continue to gain market share in Europe and we are making investments to make our European business even stronger when the economy rebounds.

Operating expenses are expected to be about flat as a percentage of sales in 2013 compared to 2012 which includes an unprecedented investment in sales, marketing and distribution expenses related to the Indian relaunch, and continued global investment in future growth opportunities, so we are not expecting to get any leverage from our sales growth in operating expenses in 2013. In addition, we expect to record a modest loss in calendar year 2013 related to our 50% share of the start-up costs of the Eicher joint venture in India. This loss will be recorded as a component of non-operating expense on the income statement.

Income tax provision rate for the full year 2013 is expected to be in the range of 33.5% to 34% of pre-tax income, a decrease from the 34.9% reported in 2012. The anticipated income tax provision rate is lower in 2013 due to the renewal of the Federal Research and Development income tax credit. For Polaris, the full year benefit of the 2012 R&D credit will be recorded in the first quarter of 2013 since the renewal legislation was not passed until January.

As Scott discussed, earnings per share for the full year 2013 are expected to be in the range of $4.85 to $5.05, up 10% to 15% compared to the full year 2012. During the fourth quarter we repurchased approximately 835,000 of the Company's shares bringing the full year total repurchases to 1.6 million shares at a cost of $127 million. This leaves about 2 million shares as of year-end remaining on the existing share repurchase authorization. In the full year 2013, the number of diluted shares outstanding is expected to be approximately flat with 2012 as we again plan to target share repurchases that approximate the dilutive impact of shares issued under the employee plans during 2013.

In the 2012 fourth quarter, the gross profit margin percentage increased by 210 basis points, as Bennett described, and grew 90 basis points for the full year 2012. The gross profit margin percentage for 2013 is expected to increase up to 40 basis points from 2012. We anticipate continued benefits from production volume increases, higher selling prices, and product cost reductions as we have experienced over the past several years. Also, as projected, we should realize incremental savings from the Monterey manufacturing realignment project in 2013 which will bring the total annual savings to about $30 million as we estimated in 2010 at the project's inception. However, these incremental 2013 savings when compared to 2012 will be largely offset by the planned start-up costs for the European manufacturing facility which are expected to have an $8 million to $10 million income statement impact in 2013.

For 2013, we expect commodity costs and currency rates to be about flat with 2012 but as you know currencies and commodities can be very volatile so we will continue to monitor those closely and utilize hedging strategies where we can to minimize our risk. As it has throughout 2012, given our significant market share gains, we expect the competitive sales promotions environment to remain heavy in 2013.

Moving now to our balance sheet and liquidity profile. Net cash provided by operating activities was $416 million for the full year 2012, up 38% from last year due primarily to the increase in net income and improved working capital. We expect cash flow provided by operating activities for the full year 2013 to increase modestly over 2012. At year-end, our cash balance was $417 million, an increase of $92 million from 2011. We maintained $350 million of borrowing capacity under the unsecured revolving credit facility. We continue to have only $107 million of debt outstanding which leaves us plenty of debt capacity to fund potential acquisitions.

For the full year 2012 our investment in capital expenditures and new product development tooling totaled $103 million, an increase of 22% from last year, which includes capital to begin the expansion of our Wyoming, Minnesota, R&D facility. For the full year 2013 we expect capital expenditures to double to about $200 million, an unprecedented level of investment by Polaris and production capacity and capability. These investments include the European manufacturing plant, the completion of the Wyoming R&D expansion, a new PG&A distribution warehouse, and capacity expansions at each of our North American production facilities as well as increased investments in tooling for all of the new products under development for model year in 2014 and beyond.

Depreciation and amortization for 2012 was about $71 million. We expect depreciation for the full year 2013 to increase due to the increased capital spending levels. Our return on invested capital is at an industry leading 44% for 2012 and is expected to decrease only slightly in 2013 with the additional capacity investments planned.

Polaris acceptance receivables from dealers in the US were $767 million at the end of December, an increase of 35% from a year ago. This increase reflects the mixed change of higher value side by side in motorcycles and the higher unit inventories at dealers to support consumer demand. The retail credit environment continues to remain stable with full year 2012 approval and penetration rates similar to last year.

In conclusion, 2012 was another exciting and successful year for Polaris. There are likely to be challenges both economically and from the increased competition, but we remain confident that we will deliver another record year in 2013. With that, I'll now turn the call back over to Scott for further thoughts on 2013 and concluding comments.

To wrap up, I will offer some additional insight into how we see 2013 now that we have a perspective four weeks into it. Here in the United States, we have a more stable political scene than we did a year ago, but the potential economic risks of Washington's actions or inactions with respect to our national debt, taxes, and regulatory policy is still a very big concern. As such, we expect muted GDP growth here and for Europe to be flat or perhaps even contract. In North America, we project the power sports market will once again outpace the economy but will grow less quickly than last year. We anticipate new entrants and better products in the side by side market but believe our strong growing stable of Rangers and RZRs will again win the competitive battle.

I'm extremely proud of the work the Victory team has done to accelerate the growth and profitability of their business and believe their 15th anniversary year could be an inflection point for long-term global growth for what is now our younger motorcycle brand. Indian Motorcycles is clearly the older brother or more accurately the great-great grandfather to Victory with a birthday some 97 years earlier. We will learn a great deal building the Victory business and we will apply that knowledge to ensure we give Indian the best possible introduction to the market later this year. I have ridden the bikes, seen the drawings, and know the business plans, and feel confident that we will finally bring choice back to the market for great American motorcycles.

Indian apparel and accessories will certainly be a growth driver for our PG&A business and along with Klim and many new product innovations, we expect to see strong growth from our highest profit margin business. We have invested quite a bit into our adjacency businesses and I'm excited about their prospects in 2013. We will work to accelerate growth in small vehicles, military, and our commercial businesses as each have the benefit of reasonably low comparables and strong products and plans for the year ahead.

We expect to gain market share in EMEA again in 2013 but do not believe that will be enough to achieve top-line growth. Economic expansion is expected to remain strong in our Asia Pacific and Latin America markets, although the rate of growth in China and India may slow slightly. Our teams in Brazil, India, and China are continuing to build momentum. Along with support from our Australia business, we will lead our low single digit overall international growth. Monterey volume will increase as will savings which should reach our goal of more than $30 million annually by the end of 2013 and we are eager to begin building our factory in Europe and more excited obviously to complete the construction and begin to capture the savings in late 2014.

Few initiatives possess the scope to benefit as many stakeholders as lean and we will accelerate those efforts across the business to further reduce costs, inventory, and lead times in 2013. We have a balanced plan and fully expect to maintain momentum and drive profitable growth. I look forward to sharing our progress with you throughout the year. With that, I'll turn it over to Sarah to open the line for questions.

(Operator Instructions)

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

James, are you there? Let's go to the next one, Sarah.

James Hardiman, your line is open.

Can you hear me?

There we go, yes, we can hear you James.

Great, sorry about that. Thanks for taking my call and congrats on another stellar year. I guess a couple questions on the ORV segment. Let's start out with just the industry growth assumption, the assumption that it's going to be slower in 2013 than 2012. Is that just generally being conservative or are there some specific events that happened in 2012 that may not ultimately be repeatable in 2013?

From an industry standpoint, James we were really pleased to see the ATV industry grow for the first time in eight years, but while we believe it stabilized, that's not an industry we're modeling yet for long-term growth as we go forward and obviously we've seen a tremendous amount of growth out of side by sides over the last several years and the way we've been modeling that again is that it will continue to grow nicely but at a slightly decelerating rate, and then obviously you've got the backdrop of a lot of uncertainty around the economy with the higher taxes for most of our customers, and so I think that's a balanced approach as we head into '13 the way we're looking at the industries.

Very helpful. And then just on the inventory front. I think the dealer inventory increases are pretty straightforward in terms of both motorcycles and snowmobiles. I was hoping you could help us deconstruct the 26% growth in ORVs at retail. You talked about some of that being to support new products, new segments. I guess if you were to strip that away, how much would still be remaining, if any, and was this just more a function of exceedingly low inventories last year and sort of building up over those?

I think James you're right. You're really right on it. It's really three factors. Obviously retail velocities up significantly and so by nature we're going to need some higher level inventories to support it. We do have five newer segments that we created over the last year in both side by sides and ATV, so a significant portion, more than half of that inventory increase is for essentially new retail segments and so those are the two primary drivers.

And, James, just remember throughout the year we talked about the commitment we made to our dealers to improve availability of products. Despite the progress we've made with MVP, we were not meeting our dealers' demand to have the right products for all of their customers and so part of this increase was reacting to the dealers' demand and fulfilling our commitment to make sure they had products to win the competitive battle and we think we made tremendous progress towards that in 2012.

Great. I'll hop back into queue. Thanks, guys.

Next question.

Your next question comes from Scott Hamann of KeyBanc capital.

Good morning, everyone. Just on the Indian business, can you kind of give us an update as to where you are with some of the dealer openings? I think the launch timing is later summer, but then just kind of what's incorporated in guidance as we kind of move '13 into '14, if you could help us out a little bit with that?

This is probably going to be one of those non-answers, Scott. We talked about this. Obviously, we've put a lot of energy and effort and money into the Indian business. We feel very good about where we are. The dealer development activity is really moving along exactly as planned. Our target is to have between 120 and 140 Indian dealers by the end of the year. Some of our best Victory dealers will fulfil that, but mostly these are going to be new distribution points really focused on the top motorcycle MSAs in the country.

We are not giving specific guidance. I think you can expect that sales in 2013 are not going to exceed $100 million so you got the range between zero and 100 depending on when we actually get the bikes launched and how retail demand flows, but obviously, based on what we've seen by consumer reaction and interest in these products, and what I know about what the guys are doing with the bikes and building out distribution, we feel very good about bringing choice back to the heavyweight motorcycle industry.

Okay. And then just on the European facility, timing of the investment on the P&L this year, have you started to break ground there? And then is that a gross margin adverse impact this year and when can we expect the savings to really start to hit the P&L in '14?

Sure, Scott this is Mike. We're expecting to break ground some time later in this first half, so you'll see the cost and the P&L kind of ramp up through the year. Nearly all that will be in gross margin, so the $8 million to $10 million of costs that we guided to this year is embedded into the up to 40 basis points of gross margin during the year. The savings -- we obviously won't get any savings until we start production. The start of production is currently planned for the second half of '14. We'll still have obviously start up costs in 2014 so for your modeling I don't know that I'd plan on a whole lot of net upside in '14, but as we start to ramp up production in '15 and beyond, we should start to get some savings and our projection is that at maturity that this European facility can generate over $20 million of incremental benefit.

Okay, great. Thanks.

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

Can you talk about the competitive pricing environment that you guys alluded to, how its picked up, maybe side by side versus ATVs and with some of the new entrants into the market, how do you expect that will progress as 2013 goes on?

Scott, I think you got cut off on the beginning of your question. Can you just repeat that for us real quickly?

Can you hear me now?

Yes.

Yes, just talking about the competitive pricing environment. You alluded to the fact that it has heightened and it has picked up. Maybe just talk about ATV versus side by side and how you would expect that to progress throughout 2013.

Yes, this is Bennett. I think from an ATV standpoint, what we're seeing is, again, it's a competitive market, but for the most part promotions are reasonably stable and I think we haven't seen a tremendous amount of innovation in new products in ATVs, which again is not surprising to us, so I think as we go forward on that, we think that's status quo, and the side by side industry is, obviously, that's the growth market. We're seeing a number of new entrants. We're seeing more escalated promotion as people try to get their share of the pie and as we go into '13 we expect that we will see more new product offerings and we expect that the promotion environment will continue to remain competitive.

As for pricing, again you've seen how aggressive we've been on our product plan as we look to the future. We feel very confident about our product plans going forward in side by sides, and so I think we think we're well positioned to compete with the competitive threats that come forward but we do expect side by sides to become increasingly crowded and competitive in '13.

Okay. And as far as the guidance of 2013, could you talk about the amount of contribution from the new product that you're developing with Bobcat?

No, we're not going to really be specific on how much that contribution is going to be.

Yes, I think on the charts we indicated the sales increase from our Bobcat commercial business, again without any numbers, but relative increase. We said it's double digit -- I'm sorry forget that, that was small vehicle. So, on a profitability, Scott, remember this is co-developed vehicles, so on a margin perspective the incremental commercial business won't add to our margins. It will be a little bit dilutive as we distribute product through the Bobcat channel.

Okay, but just trying to basically ascertain if you're expecting any contribution from it whatsoever or would you prefer not to comment on it?

Oh, yes, I mean I can see we're being a little elusive for you here, but what you've traditionally tracked in our Bobcat relationship with this new product entrant along with what we'll be doing on the Polaris channel, this will be a meaningful increase and it will be a meaningful increase in profitability versus that small segment as we've reported it. That's as specific as I'm going to get for you but, yes, we will positively feel the difference of the new product in both the Polaris and the Bobcat channel this year.

And, Scott, this is not just a 2013 play. This relationship with Bobcat and really the entry with a significantly better offering into the commercial segment is something that we expect will be beneficial in 2013 and really a great growth platform for us over the next several years.

Thanks a lot. That's all I have, thank you.

Next question.

Your next question comes from Jaime Katz of Morningstar. Your line is now open.

Good morning. Nice finish to the year.

Hi, Jamie.

I guess I have two questions. First, obviously last year was pretty difficult for snowmobiles and this year looks not so promising either. Is there some part of the technological advances that has made the replacement rate a little bit slower than in the past and do we anticipate that to be the case going forward or is it kind of more snow driven. And then I know in the press release you guys talked about counter measures to take if economic conditions worsen. Does that include kind of financing incentives or pricing promotions or is there something else we should be thinking about?

Jaime, it's Scott. I'll start and then I'll let Bennett finish up. On the snowmobile side, obviously last year's snow especially across the planet was not very good at all, but we were extremely pleased with the way our team and our dealers executed and then I think we did reasonably well. The snow in the mountains this year is actually fairly decent and remember that's where we have most of our market share and it's actually just opposite of what you said. The technology advances that we're making with our sled is actually encouraging people to buy more frequently, so really it's a factor of snow and, as Bennett said in his prepared remarks, the relaunch of the Indi products has done well for us in the flat lands and we feel good about our snowmobile business as a profitable contributor to the Company this year and going forward. Now, obviously the growth rate depends on snow and that's not been ideal, but because of our strong market share number -- leading market share in the mountains, we tend to do reasonably well. The pricing stuff, Bennett, you want to cover that?

Yes, I think Jaime, from a Polaris perspective, obviously the snow conditions haven't been ideal last year. We did get some snow in December and that was helpful. We're not alarmed where we are in snowmobiles as we sit here in late January, so we expect that the way the first quarter is progressing we're going to end up okay, maybe a little heavier than we would like in a perfect world, maybe we won't get a lot of growth. Mike talked about being down in single digits in snowmobiles, but we think our inventory levels and our dealers and our build as we head into the spring will be okay. And from a standpoint of promotions and so forth, if we continue to see less snow than we would like, you might see promotions escalate some but, again, that's modeled in our guidance so I don't think you should expect any kind of hair-raising concerns from us in snowmobiles as we head through the rest of the season.

And I think more broadly when we mention counter measures if you followed us we figured out how to get through the 2009 recession pretty well. We have numerous and big levers to pull rather quickly in terms of reacting to any downward pressure in the market. That was the comment I think about the counter measure we referred to.

Perfect, thank you.

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

I wanted to ask about kind of your expectations for the sales cadence is going to look like over the course of the year? You have tougher comps in the early part of the year than the latter part of the year in terms of retail growth and some of the new products don't kick in presumably in full force until the second half, so should we expect that your growth rates will look stronger in the back half versus the front half?

Ed, I don't think we're going to give any more detail on the quarterly splits and the quarterly guidance. I don't think there's anything other than what you already commented on, on our normal product releases and those kinds of things, I don't think we'll comment any further.

Obviously, as Mike said, we commented on Bobcat is going to be coming out, that co-developed product later in the year, the Indian is going to be coming out later in the year. To the extent that they contribute, I think you would see it but every year we have new product entrants coming later.

Okay. And then I guess back to the promotional question. I think my perception is that your retail sales numbers are as strong as they are maybe being viewed with a little more skepticism than was previously the case because the cost of doing business in side by side is starting to go up, and looking for a little bit more clarity on how much of a change have you already seen in that marketplace versus what your expectation is for future change that's still to come?

Ed, this is Bennett. Again, certainly competitors are trying harder to get what they think would be their fair share and we've seen in side by sides the promotion rate escalates some but again remember we're dealing with a higher average selling price as well and if you look at what we're able to do in our largest business and you look at what we're doing to gross profit margins, again it is a more aggressive environment but I think from at least the Polaris standpoint, we're not alarmed at all. This isn't a surprise to us and we're feeling very good that we're still seeing margin expansion out of our largest business, so I think we're trying to be appropriately mindful as we look forward of what competitors could do to us in '13 and trying to make sure we're responsible from a P&L standpoint, making sure we put ourselves in a position that we respond to what they do, so I'm not alarmed.

One more quick one if I could. Mike, the balance sheet accrual for compensation expense was down a fair amount sequentially and that usually doesn't happen. Was there like a meaningful P&L benefit from lower compensation this quarter versus prior quarters?

Yes. If you recall a year ago in the fourth quarter we had a significant hit in the compensation -- incentive compensation area largely related to the stock price movement and the impact is about $6 million beneficial in the fourth quarter of this year compared to the fourth quarter of last year, most of which ends up in SG&A line.

Thank you.

And, Ed, I'm going to give you a little bit more clarity on your earlier question about the quarterly sales splits. What I'll tell you is that the first half would maybe lend more to the bottom end of our sales range and the second half more to the top end of the sales range that we've issued.

Thank you very much.

Next question.

Your next question comes from Gerrick Johnson. Your line is now open.

Hi. Good morning. I was just wondering how much the Klim acquisition added to PG&A in the quarter, and then if you could just go over briefly the strategy behind that one. I know you're operating it as a standalone, but eventually will this be sort of exclusive to Polaris dealers, will it be an umbrella brand for all sorts of other products, what do you plan on doing with this over time? Thanks.

Well, I'll start with the strategy piece and let Mike talk about the financials. Clearly, as you know, we love our PG&A business with tremendous profitability and we're increasingly -- obviously Indian kind of got us started with increasingly recognizing the power of really strong brands and when we looked at our apparel business we had everything but a strong brand, and with Klim we got an industry leader, we got a great team, and we have an opportunity to really help them expand their distribution and help us make a better apparel business. So, I think this is exactly in our wheel house and we get great riding gear along with it.

As far as the impact, we purchased the business in early December, so it was very modest sales in PG&A for the month of December.

Okay. And, Mike, one more for you. Your liability for sales promotions and incentives was up about 30% year-over-year. Can you talk about that a little bit?

Well, again, our inventories are up in the dealer channel so what's on the balance sheet represents the anticipated cost to move that inventory through to the consumer, so as our inventories are up in the channel then our balance sheet needs to be up to reflect that. And then as we've indicated throughout the year in our gross margin analysis that the promotional environment has been heavier in 2012 than earlier and so we're preparing through the P&L and to the extent it's in dealer inventory on the balance sheet for that heavier promotional environment.

Alright. Great. Thank you guys.

Next question.

Your next question comes from Jimmy Baker of B Riley. Your line is now open.

Good morning. Thanks for taking my questions. First, I just wanted to dive a little bit deeper into your gross margin expectation for '13. You note that product mix is going to be a headwind there again in '13 despite your expectation for PG&A out performance. Is that simply a function of on road vehicle sales picking up and maybe that dilutive shift within your ORV portfolio towards Bobcat? I'm just looking for any color there, thanks.

Yes. I think, Jimmy, you've got the primary drivers identified. The On-Road vehicle sales growing 25% to 35% and that obviously being at lower margins have a big impact on the mix. PG&A is growing as you say so that's helpful, but also within PG&A, our best margin is in parts and accessories are good. Margins and apparel historically have been lower margins. Our mix within PG&A is moving away from parts more toward accessories and apparel and so within the PG&A category, even though PG&A is going to grow about 20%, it's not necessarily helpful to the overall mix. So, those are the primary drivers.

That's helpful, Mike. Thanks. And then in your balance sheet expectations your cash balance will be down if acquisitions are completed. I'm just kind of running through the math and I'm trying to understand if that's because you're evaluating more sizeable acquisitions or is it simply that before incorporating any acquisitions because of the elevated CapEx you'll be essentially breakeven from a cash perspective after you return your planned amount of capital to shareholders?

I think the answer is both. As you point out, we do have more cash needs to grow our business with the CapEx at $200 million and we are optimistic that we'll be able to execute some meaningful acquisitions to utilize our balance sheet.

Okay, great year guys. Thanks a lot for the time.

Thanks.

Let's go to the next question. We have a few more. We're going to try to get through most of them. I know we're at the 10 o'clock hour here, but we'll keep going here for a little while longer so next question, Sarah.

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

Yes, thank you. Good morning. A couple questions about the new European plant. First, obviously there's probably some underutilized facilities out there these days, so could you just walk through the buy versus build decision why the decision is made to construct as opposed to buying existing facility and refurbishing. And also, too, obviously you're going to save money shipping vehicles across the Atlantic ocean, but thinking about Monterey, that was very much on track with cost savings and all that. You won't quite get the same labor benefits as Mexico but could you talk about some of the intangible factors that benefits of having Monterey you alluded to in prior conference calls, superior product quality and the other cost savings, some of the lessons you've learned there that you can bring to new European facility? Thanks.

Rommel, good question. As I mentioned in my remarks, we've been looking at this for quite some time and we spent that time with the first priority to find one of those used spaces and we quickly ruled out any available buildings in what I'll call Western Europe, but parts of Spain, Italy, France where we really don't want to be because of labor issues, and then looked over in what I'll refer to as central Eastern Europe where we have lower labor cost, great engineering capability, yet still close enough from a logistics standpoint to get the savings. We feel like we found a very good location there and when we weighed all of the costs, the shell of the building for us is really not the big cost. It's the tooling investment and the equipment that we put in and it just made sense for us to go with a Greenfield that specifically meets our needs.

The other aspect is we only have one ATV line in the world and that's in our plant in Rosa, they do a phenomenal job but we, as Bennett alluded to, achieved the number one market share position in North America, we're very close to capacity there so it made sense. We needed to add capacity somewhere and this was yet another reason to put it in Europe. The other benefit as we talked about with Monterey is being closer to serving those customers in the Latin America and southern part of the United States will now be closer to serve those customers in Europe and will also be able to start designing more products specifically for those European customers.

Obviously in the UK they drive on the opposite side of the road and we'll be able to start putting more emphasis on exactly what those customers need, not adapting and adopting and [amoligating] products that we build here in the US. So, lessons out of Monterey I think we learned to get the team in place early, really focusing on product quality and validation instead of volume shipments from the beginning and we're really confident in our ability to execute this one over the next 18 to 24 months.

Great. Thank you, Scott.

Next question, Sarah.

Next question comes from Tim Conder of Wells Fargo Securities. Your line is now open.

Thank you. Just wanted to revisit the channel inventories. Bennett, remember from the third quarter call I think you alluded then that probably you kind of had things in balance because you said that the turn should be flattish and can you maybe just bridge us from there to fourth quarter. And then again, Mike, you responded I think in one of your prior -- to the one of the prior questions that you've cranked up the accruals because of the channel inventories. Are you gentlemen implying that maybe it's slightly above where you would like it in North America? I guess again one collective question there.

And then on Eicher, you indicated that you're going to be launching in calendar '14. If I recalled correctly, you previously -- I think when you did the JV you talked about '15, so is that going a little bit better than anticipated, your ramp up there?

Alright, Tim. This is Bennett. I'll try to take a couple and these guys can clean up. On the Eicher one, just since that was the last one on top of mind, basically that plan is going exactly as we had kind of outlined it and we might have alluded to maybe model year '15 type of product which is maybe a confusion and now we switched nomenclature to calendar year '14, but that is right on track. We're off to a very good start. I wouldn't say we're ahead of plan, I wouldn't say we're behind plan, and we're feeling pretty good about what we got going there.

On the dealer inventory standpoint, from the third quarter call I guess in our view and I don't think I necessarily specifically spoke to exactly where we would end the year, in my mind we ended up right where I thought we were going to end up. You have a little bit of a seasonal build in the fourth quarter as you're shipping snowmobiles and as you get into pretty strong seasonality, particularly in ORV, and so by nature your inventories rise a little bit in the fourth quarter, but I would tell you, as you could tell from my remarks, I think we're feeling pretty darn good about where our dealer inventory position is. I know the number might look a little scary to you but again when you do our surveys and when we do our surveys and look at the metrics the quality of the inventory, the segment stocking, our ability to take care of our customer is profoundly better than where it was 12 months ago and we're feeling quite secure where we are in dealer inventory positions.

If there was one area we would say we wished we were a little bit better on, we wished that our snowmobile inventory was modestly a little bit lower but frankly that's been coming down frankly as we expected through the season and we expect we should end up okay there as well.

And as it relates to the promotions that's the one area that we did beef up a little bit on the promotions was in the snowmobile area as the inventories are still a little bit higher than we would like.

Okay. And then, Mike, just a follow-up a couple of housekeeping items. You mentioned that if you could just revisit your statement on the tax impact of the R&D catch up in the first quarter, and then on Indian do you anticipate some of these ramp up startup costs to fall off in '14 and maybe give a little bit of tail wind as we look out a year from now?

Okay, on the taxes, Tim, just to refresh everybody on this, the R&D tax credit -- the federal R&D tax credit was not allowed in 2012, so our tax provision rate is higher year-over-year primarily because of that. The legislation was passed in early January, retroactive for 2012 so the actual '12 benefit of our R&D credit will show up in the first quarter of 2013 which will impact positively our provision rate in the first quarter.

Any magnitude there, Mike, you can quantify?

Yes, I figured you'd ask. What I would suggest you do is go into the footnotes and look at our tax footnote from the prior years and it maps out what our R&D tax credit is worth over the last couple years and you can guess from that.

Okay.

You want to do the Indian?

As far as Indian relates to what's going to happen in '14, obviously -- just a reminder, these are ground up bikes. We didn't borrow parts from Victory. We started over and both the engineering and product development spend, the manufacturing spend, and the marketing spend are big startup expenses and obviously a lot of those happened last year and a lot of those are happening this year. Next year should see a turnaround from a cost to a benefit and we're looking forward to that.

Okay. Great. Thank you gentlemen and congrats again on a great '12.

Thanks. Next question.

Your next question comes from Mark Smith of Feltl and Company.

Great. Thanks guys. First, can you talk a little bit about gross profit margins? You talked about mix kind of hurting with On-Road. Is there an opportunity with Indian, maybe not initially but down the road, to improve those gross profit margins?

Certainly, Mark. Obviously one of the reasons -- don't forget we still love the Victory business and the profitability improvements we see there are encouraging, but when you add a great iconic brand to what we know are going to be great bikes, that is a recipe for much higher gross profit margins and that's certainly something we expect to see from Indian probably '14 and beyond.

Okay, great. And then second just to revisit the Klim acquisition quickly and kind of the opportunity there. I think, Bennett, you talked a little bit about Indian apparel and an opportunity. Is that something that you guys can now shift that kind of towards Klim in that total apparel business and, second, is there an opportunity in side by sides and even more so on ATV to convince people if you're going to spend close to $20,000 on a side by side and accessories that you may as well get a $300 coat while you're at it?

Yes, well clearly we think this is going to turbo charge our apparel. These guys are awesome at what they do and their particular strength is obviously snowmobile apparel. They've done a nice job in the recent years really building out their kind of performance motorcycle and Off-Road apparel. Nobody has really done a great job frankly in Off-Road side by side apparel. We continue to have passion for that. We've not succeeded on a couple of previous tries over our career, but we do believe with the power of our team along with the Klim capabilities that that's something we can take a crack at as we go down the road. I don't expect that to be huge numbers but, again, we're pretty excited strategically how this is going to improve both our sales and frankly our capability in apparel long term.

Okay. And lastly just looking outside of Europe. Any other markets that you see that you're nervous about that you see any weakness in and then also on the upside, Russia, maybe any other places where there's maybe opportunity going forward?

As we commented on the call, Mark, we feel pretty good about the Asia Pacific, Latin America markets. We're building a power sports business in there, so it's not exactly a smooth upward trend but from an end market perspective we continue to expect those economies to do better than the US and Europe.

Great, thank you.

Thanks, Mark. Next question.

Your next question comes from Michael Swartz of SunTrust. Your line is now open.

Good morning, everyone. Thanks for taking the question. I guess my question just concerns maybe the broader M&A environment and understanding of your hands full with a bunch of investments in 2013. Has your thought process changed with regards to different product lines or geographies that you may be interested in?

Not really. We have learned and gotten smarter and very importantly we've gotten more capable. Our leadership team is stronger. We've added a couple thousand employees, so we feel like we're well prepared to take on more but we don't feel like we have a gun to our head at all to go to pull the trigger on anything. That being said, we see a lot of opportunities for global market expansion to help our small vehicle business, the military. Lots of our adjacency businesses offer us opportunities for growth, so I think we've been disciplined so far but part of being disciplined is continuing to find more and better opportunities and I think what Mike alluded to as we go into '13 we see more and better opportunities.

Great, thank you.

Okay. Sarah, we're going to take Joe and Craig -- Craig and Joe and then we'll be done. Go ahead with Craig.

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

Thanks for taking my question as well. Wanted to dig into Bobcat quickly. What have you done, Bennett, to prepare the Polaris dealers to sell Bobcat and then what are your plans internationally for that product line?

Craig, I'll try to answer that the best I can. We have not formally launched the vehicle, so I'm going to be somewhat allusive with you on this but, again, this is -- again, what we said is this is a commercially targeted product and so one of the opportunities for Polaris particularly is to improve our share with that customer segment. That's not a customer that we've traditionally done as well as many of the other customer segments, so we see this as a big opportunity.

We have a number of dealers in our broad dealer network that have quite a bit of capability on this, but we've never really provided them a product solution or a product family that really allows them to go after that with them, so we have a pretty comprehensive plan as we go to market as both from a marketing standpoint as well as from a dealer development and a training standpoint to make sure that we do more than the traditional Polaris MO which is rollout great product and let them go sell it. We're going to need to do more and we're prepared to do more as we put that into parts of our channel.

From a Bobcat standpoint, this is in their wheel house and we expect them to do quite well because it shapes up very well with frankly the customers that they're targeting today and I think internationally, I think you'll see a slow ramp with it frankly. It will be -- you'll see it going to our developed channel over time but I think that frankly the international benefit will be more material as we go forward in outer years, Craig.

Great, thank you.

Our last question, Sarah, from Joe.

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

Thank you. Just a quick question on the capacity. So, between Europe and the I think you said your increasing capacity on all existing plants as well, how much is capacity going up, first question?

A little bit.

A little bit?

Well, obviously, Joe, we are -- and I think Mike talked about it in his comments. Our focus on continuing to maintain extremely high returns on invested capital and in order to do that we have to make sure we're careful with our capital investments. What we're doing now -- we're probably late to add this in Europe just given the opportunity to take cost out and better serve those customers. And we saw ourselves based on projected growth rates at limits for capacity in our Off-Road vehicle business in the next couple of years, so this is just really making sure we're getting ahead of the game but it's not like we're adding more than 15% or 20% capacity.

It's a little complicated because frankly a number of our investments are in things we have to outsource on componentry or capability, whether it's paint, injection molding, additional line in a product line, it's hard to quantify that. That's why you heard us pausing. It's a material number but, again, we're not doubling the size of our capacity by any means.

We are, however, adding a great deal of capacity to our motorcycle business.

Okay. So the spend, the ramp from $100 million to $200 million and I guess $50 million of which is Europe, but all of Europe is [gone] in '13, does the other capacity flow into '14 as well or does it go kind of 100, 200, 150 or something like that from a capital spend standpoint?

The answer is, and I'll let Mike try to clean that up, the answer is it depends on the investment, some of it's very much focused in '13, some of it, like Europe, flows into '14.

But the capacity additions at the existing plants is not going to flow into '14 or it is?

No, some will.

Some will. Okay. That's all I had.

It's probably a high watermark.

I would say that the $200 million is spike.

It's a high watermark.

It will come down.

Okay.

Anything else, Joe?

That's it, thanks.

Okay. That's all of the time we have, guys. I appreciate everyone hanging on and participating this morning and we look forward to talking to you again next quarter. Thanks and goodbye.

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