Polaris Inc (PII) 2013 Q1 法說會逐字稿

Good morning, my name is Kyle. I will be your conference operator today. At this time, I would like to welcome everyone to the Polaris First-Quarter Earning Results Conference Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions)

Thank you. Mr. Edwards, you may begin your conference.

Thank you Kyle, and good morning and thank you for joining us for our First Quarter 2013 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 speaker's today are Scott Wine, our Chairman and Chief Executive Officer; Bennett Morgan, our President and Chief Operating Officer; and Michael Malone, our Chief Financial Officer.

During the call today we will be discussing certain topics, including product demand and shipments, sales and margin trends, income and profitability levels, and other matters, including more specific guidance on our expectations for 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 Wine. Scott?

Good morning, and thank you for joining us. With Minneapolis receiving more snow last night on top of the foot we had dropped last week, I'm glad Polaris is a strong snowmobile business to capitalize on this interminable winter. We did sneak out of the cold for a few days in February to test drive our soon-to-be-launched Indian motorcycles and new side-by-side offerings, which were both thrilling and inspiring. These new products will not generate revenue for a few more months, but with outstanding results from both our snow and PG&A divisions, we were able to grind out a decent start to 2013.

Our financial results for the first quarter were more solid than thrilling, but I was encouraged by the energy and effort this team put into again delivering double-digit sales and earnings growth. Sales for the first quarter increased 11% to a record $754.9 million, while North American retail sales grew 7%, which was at the low end of our expectations. Despite continued share gains, demand was more mixed than we have seen in recent quarters. We believe some of this is due to our product news being more second-half weighted this year, coupled with the weather being more conducive to ORV and motorcycle sales last February and March, and much less so this year. In addition, the payroll tax increases and corresponding economic uncertainty likely contributed to the increased cautiousness within some aspects of our consumer base. Outside of North America sales grew 5%, with a surprisingly strong 6% sales increase in Europe.

First-quarter net income increased 26% to $75.5 million, yielding another record earnings per share of $1.07, also a 26% improvement over the prior-year period. Gross profit margins grew a modest ten basis points to 29%, as currency weakness and higher promotional costs offset improvements in commodities and pricing. Net income margin expanded 120 basis points to 10.1%, on the back of an 11% increase in operating income, and a welcome reduction in our Q1 tax rate. After paying a full-year rate of 34.9% in 2012, a favorable income tax audit settlement, and the reinstatement of the R&D tax credit allowed us to release reserves, and reduce our tax burden in the quarter. With an unprecedented level of activity in spending in product development, commercial launches, and M&A, it is heartening to be able to deliver another quarter of profitable growth.

We have owned Aixam Mega for almost two weeks now, and feel very good about the business and how it fits with Polaris. With excellent leadership, strong brands, and a versatile product line, they have built a profitable leading position in the European enclosed quadricycle market. Aixam brings Matt Homan's EMEA business to over $400 million in annual revenue, and more than doubles its market share in on-road quadricycles. The addition of Mega markedly expands our range of light-duty haulers.

We are optimistic about our ability to capture sourcing and logistic synergies to create margin improvement, and we intend to extend Aixam's global reach by leveraging our extensive R&D and distribution capabilities. In return, both Goupil and GEM will benefit from Aixam's expertise in designing and assembling high-quality lightweight on-road vehicles. We do not expect any short-term tail winds from the French or European economies, but since we acquired this asset at a very reasonable sub-five-times EBITDA multiple, we are confident we can generate long-term growth and shareholder value.

With the record earnings performance and our expectations for accelerating momentum in the second half, we are raising our full-year 2013 sales and earnings guidance. While the frailty of the US and European economies remains a concern, we believe our oncoming product releases and improved brand messaging will trump the economy once again. We are slightly decreasing our overall outlook for the power sports industry, but anticipate share gains will continue to drive growth across Polaris. We are increasing our full-year sales guidance to up 12% to 15% over 2012. With higher sales and expanding margins, full-year earnings per share are now projected to be $5.05 to $5.20 per share, representing an increase of 15% to 18% over 2012.

While some aspects of our strategic execution are readily visible, such as the new Brutus launch, the Aixam acquisition, and manufacturing footprint expansion in Poland, most of the energy and effort that drives our long-term performance is hidden from public view. I get to witness this innovative and passionate work every day, and it is the primary reason I am bullish on the future of Polaris. Our objective is simple -- to become a more diversified, highly profitable, $5-billion or more global enterprise. We will achieve that goal only if we can strengthen our position as the world leader in power sports. We call this being the best in power sports plus, because we will not only win in our current markets; we constantly seek to expand the market and create new categories. While competitors are aggressive, our team, our products, our plans, and even our reserves are ready for the challenge.

The armada of vehicles that makes up our off-road vehicle business is certainly a key element of our market leadership position. But the significant performance and value advantage that many of our ATVs and side-by-sides enjoy is definitely a more important driver of our success. This was evident in the first quarter, as consumer demand for the Ranger 900XP out-paced all other ORVs in the industry. It is safe to assume Dave Longren and his ORV team are far from complacent with their vehicles or their market position.

While our motorcycle business is more of a challenger than a market leader, I am encouraged by the way Steve Menneto and his team have positioned our Victory and Indian brands for long-term growth. While the weather was not perfect for motorcycle retail in the quarter, we made significant progress preparing for the resurgence of the Indian brand in the months and years ahead. Our new motorcycle sales teams in staffed and ready to sell. Our consumer product testing has been extremely positive, and our work from here on out is largely execution, a core strength of Polaris. From supplier and manufacturing readiness to dealer development and brand management, the team is working diligently to give Indian the launch it deserves, and customers expect.

Mike Jonakis and the snowmobile team had a great quarter and season, building on their second-place industry position; and our PG&A business is on a roll, with the KLIM acquisition being only one of many growth opportunities in Steve Eastman's PG&A business. Much of our diversification will come through our growth through adjacencies efforts, which will leverage our organic competencies, as well as our balance sheet and M&A capabilities. The successful introduction of Brutus and the acquisition of Aixam demonstrate how we will use organic and inorganic means to grow outside of power sports. Expect more of both throughout the year ahead.

Our global market leadership initiative continues to be one of my top personal priorities, and I like how both Mike Doherty and Matt Homan are managing their respective APLA and EMEA businesses for profitable growth in the future. With factories going up in Poland and India, we are clearly committed to serving our global customers locally, which is a key element our international growth strategy. Building these plants is only one of the many responsibilities that Suresh Krishna has in driving his operational excellence for Polaris. He and his team do a tremendous job of supporting our industry-leading innovation machine, and are increasingly deploying lean and using Kaizen to eliminate waste, while improving quality and productivity. Our lead times are decreasing, and we expect to reduce inventories throughout the business, although probably not as quickly as I would like.

We are committed to driving both growth and productivity to achieve strong financial performance. While we have had a decent run over the past several years, we are still far from our long-term goal of $500 million of net income. We will get closer to that goal throughout this year, and Bennett Morgan, our Chief Operating Officer, will now explain how.

Thanks Scott, and good morning everyone. Polaris again gained significant market share in each of our businesses. North American first-quarter retail sales for Polaris increased 7% in a power sports industry that declined slightly, primarily due to a slow start to the spring selling season for ORVs and motorcycles. Dealer inventory is up 23% versus 2012, reflecting our planned efforts to improve product availability, and the impact of a slow start to the spring riding season. ORV inventory is up 26%, motorcycles are up 30%, and snowmobiles are actually down 4%.

Segment stock-outs are down dramatically in both motorcycles and ORVs, and dealers and Polaris feel we are in a healthy position to support retail with a key spring selling season. We do expect dealer inventories sequentially, and the percentage increase year over year to both decline by the end of the second quarter as spring seasonality kicks in, and we clean the channel for our compelling model-year '14 introductions.

Moving on to business unit performance -- off-road vehicles. Polaris first-quarter ORV revenue increased 7%, driven by side-by-side sales. For the 15th consecutive quarter in North America, we gained market share in both ATVs and side-by-sides. Polaris ORV retail sales were up double digits through February, but a cold wintry March, in contrast to the unseasonably early and warm start to spring in the first quarter of '12, provided tough comparables for both Polaris and industry retail sales.

Polaris' first-quarter core ATV retail declined low single digits in an industry that declined low double digits. Polaris side-by-side retail, driven by strength in Ranger, and particularly our new Ranger XP900s, grew mid-single digits in an industry we estimate grew low single digits. The new RZR XP 900 Jagged X has been a hit with consumers, and our sell-through is excellent. But to put it into context, it's retail impact is not nearly as broad as last year's big introductions of the 900XP, 900XP4, and RZR 570.

Sales to Bobcat declined in the first quarter, but were effectively offset by expansion in Polaris' national account business. The big news in the quarter was the official launch and the commencement of shipments of our all-new family of co-developed commercial vehicles and attachments for both Bobcat and Polaris. Polaris' Brutus family consists of three all-new commercial vehicles -- the Brutus, the Brutus Power Take Off, and the Brutus HD Power Take Off. The high-performance Brutus PTO and HD PTO models accept six new commercial-grade work attachments.

We will distribute Brutus through a dedicated new Polaris commercial channel of dealers that is already 400 strong, and likely to grow over time. This channel has been selected based on their ability to reach and serve the targeted commercial customer. To ensure success with the new channel, we have established new commercial channel standards, and are providing dealers with commercial account training. Initial orders have been excellent for the Polaris Brutus, and we couldn't be more excited to make this important step into the lucrative commercial space.

First-quarter defense sales declined off of last year's record first-quarter shipments that fulfilled our Tacom contract for ATVs for the Afghan military, but are ahead of our Polaris internal first-quarter plan. And there are reasons for optimism. The Department of Defense finally has an approved budget as of April 1, and we are already seeing positive movement out of many of our customers. Our new non-pneumatic tires and lightweight armor solutions are progressing and receiving positive customer feedback, and we continue to win new contracts and expand our customer base, thanks to our leading products and new technology solutions. Our outlook for the year is unchanged.

Snowmobiles -- first-quarter snowmobile sales to dealers are historically low as we approach the end of the selling season, and the vast majority of product is already positioned in dealerships. First-quarter revenue was $15 million, about triple the first quarter of 2012, driven primarily by sales to dealers by our Scandinavian subsidiaries. Solid snowfall propelled first-quarter North American snowmobile industry retail sales to increase by over 20%, and finish the season up modestly. Polaris grew market share in the quarter and for the season, with retail sales up over 40% in the first quarter, and high single digits for the season. We are a definitive number two, and our market share is at its highest point since 2004, as we continue to meaningfully separate ourselves from the competition.

We remain number one in the mountains. Our RMK Pro is again the best-selling snowmobile in the industry, and our new model year '14 products, led by seven new Indy models, have been well received and will significantly improve our presence in key market segments. Dealer inventory and our sell-through improved verses a year ago with both metrics -- notably better than the industry averages. More importantly, inventory is much better balanced across North American dealers. Dealer orders are still being finalized, but are tracking to be a bit stronger than our original expectation in North America, and on plan internationally. Overall, we are pleased with both our snowmobile season and how Polaris and our dealers are positioned for next season. If anyone's listening up there, it's okay if it stops snowing at this point.

On-road vehicles and Victory motorcycles -- first-quarter on-road division sales declined 3%. Our small vehicle business consisting of GEM and Goupil grew double digits, offsetting a modest decline in motorcycles, due primarily to normalized Victory shipments in the first quarter under our new retail flow management business model, verses our former annual order and ship process. We expect to see some variability throughout 2013 as the baseline is adjusted for the new RFM model.

Victory grew market share for the 14th consecutive quarter in the first quarter, and remains number two in heavyweight motorcycles. However, due to tough industry and Victory retail comparables from last year's early warm spring, and compounded by a late stubborn winter this year, the North American heavyweight industry declined about 10% in the first quarter, while Victory decline high single digits. To put it in perspective, last year the industry was up mid-teens, and Victory retail was up well over 40%.

The Indian launch sequence accelerated in the first quarter, with the introduction of Indian's all-new Thunderstroke 111 at Daytona Bike Week. The Thunderstroke engine, a 49-degree V-twin, features 111-cubic-inch displacement, and delivers more than 115 foot-pounds of torque. It marks the first clean-sheet Indian motorcycle engine design in seven decades. Though the engine is cutting edge, with its parallel push-rod tubes, spinned heads, down fire and exhaust, and left side air intake, the proportions and layout will be familiar to Indian motorcycle fans around the world.

The response has been outstanding, as consumers and industry are beginning to comprehend the magnitude of our commitment to re-establishing Indian brand, power train, and product, and the potential impact that Indian soon will have, as we bring choice to the American heavyweight motorcycle consumer. At this time, the team and our initiatives remain right on track for a second-half 2013 launch.

With the recent acquisition of Aixam Mega that Scott discussed, our small vehicle business continues to grow and take shape. With Aixam and Mega we've added two more leading brands in the Polaris stable, solidifying our presence within the $4-billion small electric vehicle industry. GEM and Goupil both had good quarters, as GEM retail more than doubled in its best first quarter since 2008, while Goupil retail orders were up about 20%, significantly out-performing the European economy. Shipment of Goupil's new G5 hybrid have begun, and we are encouraged with both brands' start and momentum.

Parts, Garments and Accessories -- PG&A had an excellent first quarter, with sales up 27% driven by strength in snow-related products, though all categories and business units contributed to the robust PG&A growth. Apparel sales were up over 200%, driven in large part by our new KLIM technical riding gear acquisition. We keep innovating. In the first quarter, we introduced over 60 new snow and Brutus accessories, and over 200 new apparel items between our Polaris and KLIM brands. We also are making significant investments in our service and distribution capability, with the purchase of a 409,000-square-foot facility in Wilmington, Ohio. This new distribution center will provide much-needed capacity and improve service response times to many of our North American dealers in the east while improving great cost efficiencies over time.

International -- International revenue increased 5% in the first quarter, driven by strength in snowmobiles and PG&A. Regionally, our European team continues to over-deliver in a difficult economic environment, with sales up 6%. Latin America grew 40%, driven by rapidly increasing traction in Brazil offsetting a 15% decline in Asia-Pacific, due entirely to market weakness in Australia. European ORV and motorcycle industries remain weak, with sales in each market down double digits. Polaris ORV retail declined at similar levels to the industry, while in motorcycles we increased retail sales, and again expanded market share. Snowmobiles were a bright spot for Europe, with first-quarter industry retail sales up mid-single digits, and Polaris up over 30%, leading to significant gains in our market share season to date.

We introduced Victory into the Japanese market in March, the largest heavyweight motorcycle market outside North America in the world, and initial response was encouraging. Our India joint venture with Eicher Motors made nice product. [Girish Verma] was hired as the CEO of the enterprise, and most of the critical leadership positions have now been filled; and the product and plant projects are tracking to schedule.

Operational excellence -- Gross margins expanded 10 basis points, and net income margins expanded120 basis points to 10.1% in the first quarter, largely as a result of a non-recurring tax benefits. Our team and supply chain partners continue to implement measures through these product costs; our lean efforts are helping drive plant productivity, which improved again by over 5%; and commodity costs have stabilized for now. Monterrey has achieved cumulative production milestones of 100,000 vehicles and 150,000 engines, produced with outstanding quality performance. Factory inventory is up 18%, driven primarily by mix, acquisitions, and PG&A.

Our unprecedented investments in capacity capability and global market expansion are right on track. We expect to break ground in Opole Poland on our EMEA manufacturing plant in the second quarter, with much of the leadership team already in place. Meanwhile, the new Milford facility in Spirit Lake is producing and shipping Brutus; our Indian engine and assembly lines are in and being prepped; and our Monterrey injection molding and Spirit Lake liquid paint expansion projects are progressing as expected. So we are busy in operations in a good way, as we pave the way to support a $5-billion manufacturing enterprise. With that, I'll turn it over to Mike.

Thanks Bennett, and good morning to everyone. As both Scott and Bennett mentioned, our first-quarter results were gratifying, given the tough comparisons with the prior year's first quarter. Based on our performance in the first quarter, our projections for the remainder of the calendar year and reflecting the acquisition of Aixam Mega completed during the -- earlier this month, we are increasing our 2013 full-year sales and earnings guidance as follows.

Sales of off-road vehicles are expected to increase in the 8% to 10% range, with retail sales of side-by-side vehicles and ATVs outpacing the overall market in North America and international. We expect to increase ORV market share in 2013, although as we have previously stated, at a more moderate rate than the past three years. This full-year 2013 ORV sales guidance is slightly better than issued earlier, in spite of a weaker than planned North American industry in the first quarter, in part due to the enthusiasm we have over our new model year 2014 ORV products to be introduced at the upcoming summer dealer meeting.

Our snowmobile business finished the season very strong, with retail sales up and dealer inventories down. With the majority of our North American deal orders received for model year 2014, we are pleased to be able to improve on our previously issued guidance, and now expect our snowmobile sales to be about flat for the full year 2013.

On-road vehicle sales, comprised of Victory and Indian motorcycles, as well as the Company's small vehicle businesses, are expected to be up in the range of 50% to 60% in 2013. Victory's solid retail sales demand is expected to continue, driving additional share gains in all markets in 2013. The Indian motorcycles will begin shipping all new model year 2014 bikes in the second half of this year. We also expect growth from GEM and Goupil for the full year; and now beginning in April we'll be consolidating the sales from the recently acquired Aixam Mega business. Aixam Mega had annualized sales of approximately $110 million last year for the full-year 2012. We expect Aixam sales for the eight-plus months of ownership in 2013 to be somewhat lower than that period in 2012, given the weak markets and economy in southern Europe, where a majority of the existing sales are generated.

We now expect PG&A sales to increase in the 22% to 25% range, which is better than previous guidance, given their excellent start to the year. We expect sales in 2013 to customers outside of North America to increase about 20% over 2012, as the guidance now takes into account the additional sales from the Aixam acquisition in Europe. We do expect to gain market share in each product line in both EMEA and the emerging markets for the full year.

Rolling up the above modified product line sales expectations equates to a total Company sales increase in the range of 12% to 15% for the full year, up from our initial sales guidance issued. I would like to elaborate on our total Company sales growth projections for the remainder of the year. First, our guidance contemplates stronger percentage sales growth in the back half of 2013, given the expected strength of our new model 2014 products that we will introduce later, including the new Indian motorcycles, Brutus and Bobcat commercial vehicles, and a number of exciting ORV products.

Additionally, Aixam Mega historically exhibits seasonality in both sales and profitability, more heavily weighted to the second half of the calendar year. As Bennett noted, we are planning to reduce North American dealer inventories here in the second quarter. The combination of the above factors means that we expect overall Company sales growth in the second quarter to be at a lower percentage rate than any other quarter this year, and lower than our overall full-year sales guidance of 12% to 15% growth.

Operating expenses are expected to be about flat as a percentage of sales for the full year 2013 compared to last year, despite as we have previously noted, an unprecedented level of investment in sales, marketing, and distribution related to the Indian re-launch; and continued global investment for future growth opportunities.

Similar to the first quarter, we expect operating expenses as a percentage of sales to provide some pressure to net margins in the second quarter of 2013, given our preparation for the Indian re-launch, the addition of the Aixam acquisition and transaction costs, and preparation for the launch of our new model year 2014 products. In addition, as we have stated earlier, we continue to expect to record a modest loss in calendar 2013 related to our 50% share of the joint start-up cost of our Eicher joint venture in India. This loss is being recorded as a component of non-operating expense on the income statement.

The income tax provision rate for the full year 2013 is now expected to be in the range of 33% to 33.5% of pre-tax income, a decrease from the 34.9% reported last year, and improved a bit from our previously issued guidance. As expected, and as we told investors about last quarter, during the first quarter of 2013 recorded the full-year retroactive benefit of the 2012 R&D tax credit. Also during the first quarter, the IRS completed their federal income tax audit for a number of open tax years, which proved favorable to the Company, allowing us to release certain income tax reserves. The total non-recurring benefit to the Company of these events was $8.2 million, which resulted in a 26.4% effective tax rate for the first quarter of 2013, which was largely contemplated in our previously issued tax rate guidance.

Earnings per share for the full year 2013 is now expected to be in the range of $5.05 to $5.20, up 15% to 18% compared to the full year 2012. Net income for the full year is also expected to increase 15% to 18%. These bottom-line projections compute to a net income margin of about 10% for the full year 2013, a record for the Company and equal to our longer-term goal. However, in light of my previous comments related to the operating expenses and the recording of the acquisition of Aixam Mega, we anticipate that our net income margin for the 2013 second quarter will be about flat with the second quarter a year ago.

During the first quarter 2013 we repurchased approximately 300,000 of the Company's shares, at a cost of about $26 million, leaving 1.7 million shares on the existing share repurchase authorization. For the full year 2013, the number of diluted shares outstanding is expected to be approximately flat with last year, as we again plan to target share repurchases that approximate the dilutive impact of shares issued under the employee plans.

In the 2013 first quarter, the gross profit margin percentage increased by 10 basis points. The gross profit margin percentage for the full year 2013 is expected to increase up to 40 basis points from 2012, unchanged from previously issued guidance. We anticipate continued benefits from production volume increases, higher selling prices, and product cost reductions, as we have experienced over the past several years.

For the full year 2013, we continue to expect commodity costs and currency rates to be about flat with 2012, although for the first quarter commodity costs were somewhat favorable, while currency rates were somewhat unfavorable. We will monitor those closely, and utilize hedging strategies to minimize a risk. And we continue to expect the competitive sales promotion environment will remain aggressive and provide some pressure to gross margins for the full year, as it did during the first quarter compared to a year ago.

Moving now to our balance sheet and liquidity profile. Net cash provided by operating activities was $48 million for the first quarter of 2013, an improvement from last year, primarily as a result of the increase in net income and improved working capital. Continue to expect cash flow provided by operating activities for the full year 2013 to increase modestly over last year. At the end of the first quarter, our cash balance was about $381 million, an increase of 33% from a year ago. We utilized a portion of this cash to fund the acquisition of Aixam Mega in early April. We maintain $350 million of borrowing capacity under the unsecured revolving credit facility. We continue to have only $106 million of debt outstanding, which leaves us plenty of debt capacity to fund additional acquisitions and growth initiatives.

For the first quarter, our investments in capital expenditures and new product development tooling totaled $40 million, nearly double that from the first quarter of last year. For the full year 2013, we continue to expect capital expenditures to double to about $200 million. These investments include the Poland manufacturing plant, the completion of the Wyoming Minnesota R&D center expansion, our second North American PG&A distribution warehouse in Ohio, and capacity expansions at each of our North American production facilities, as well as increased investments in tooling for all the new products under development for model year 2014 and beyond.

We expect depreciation and amortization for the full year 2013 to an increase from last year's levels, due to the increased capital spending. Polaris acceptance receivables from dealers in the US were $786 million at the end of March, an increase of 30% from a year ago. This increase reflects the mix change of higher-value side-by-sides and motorcycles, and the higher-unit inventories at dealers.

The retail credit environment continues to remain stable, with approval and penetration rates near historical levels for the first quarter. The income from financial services for the first quarter of 2013, which reflects both our share of the Polaris acceptance wholesale credit joint venture profitability, and the fee income from the retail credit providers, was up 40% from the first quarter a year ago.

In conclusion, while the first quarter had some challenges, we were able to overcome them and report solid sales and earnings results. That ability to power through obstacles gives us confidence that 2013 will be another record year for Polaris. With that, I will turn the call back now over to Scott for concluding comments.

Thanks, Mike. While we were pleased with our start to the year, it should be clear by our words and our investments that we expect the latter half of the year to be stronger than the first two quarters. This is not how we normally project the year at this point, but with the Indian launch revving up and our off-road vehicle line up continually expanding, we cannot help but be optimistic about the future. With signs of economic and industry weakness appearing, we will re-double our focus on making growth happen.

We have a renewed emphasis on building and growing profitable brands, and our product teams will increasingly demonstrate their commercial prowess. We will grind and scrap to win the competitive battle this spring and apply a broad and aggressive game plan to the remainder of the year. Marketers always look smarter when they are promoting and selling innovative, industry-leading products, and our model year '14 lineup should make our sales and marketing teams look like geniuses.

We will continue to make investments in our future, with both CapEx and M&A outflows expected to hit record levels. We are proud of our industry-leading returns on invested capital, so trust that we will continue to work hard to ensure these investments yield strong positive returns. Currency and commodity markets are slightly less volatile than previous years, and we remain confident in our ability to drive continued market expansion. Monterrey is operating extremely well, and is a major contributor to our output and efficiency; but with our great network of plants and suppliers, we can and will attack margins in other areas, as well.

Our first-quarter results were solid. Our team and business is getting bigger and stronger every quarter, and our opportunities for growth have never been better. After an aggressive two-year effort, we will only be weeks away from launching our new Indian motorcycles when we get together for our second-quarter call in July. That will be an historic event, and is just one of the reasons we like our prospects for 2013. With that, I will turn it over to Kyle to open the line for questions.

(Operator Instructions)

We'll pause for a moment to compile the Q&A roster. Ed Aaron from RBC Capital Markets. Your line is open.

Thanks for taking the question.

Just wanted to start on the ORV guidance, which you took up a little bit. I think you said the reason for that is you are more optimistic about the new products that are launching this summer. I am trying to get a little more color for that. Presumably, you had good visibility into what those products were when you last gave guidance, so just wondering why the change?

Ed, this is Bennett.

I think we feel pretty good. We continue to gain market share like a drum in both the businesses, and as we are alluding to, we feel really good about our model year '14 news. It's in our minds quite compelling. That gives us reason for optimism.

Okay. Then just one other question from me.

On the balance sheet, the accrual for promotions -- was that about the same on a percentage basis as it was in Q4? Obviously, the snowmobiles weren't a real part of it at the end of Q1. Is the discounting environment on ORVs -- would you characterize it as accelerating? Is that how you would interpret that balance sheet accrual?

I'll speak to the environment and I'll let Mike speak to the balance sheet accounting and accrual.

From a market standpoint, as Mike said in his comments, the promotional environment is pretty much exactly as we had planned. It's active and aggressive. People are fighting for their space. But nothing that we hadn't expected, and we haven't seen any what I would call crazy levels of discounting in side-by-sides or ATVs. So we feel just fine where it is.

As far as the balance sheet is concerned, what I would say is, even though the sum of the inventories are down 4% year over year, they're still higher than they were a couple years ago. And there's an opportunity for those to go down again in the future as we look to next year's [build]. If you look sequentially at the sales promotion reserve, sequentially from December to March it only went up 2%. Last year at this time in the first quarter, sequentially from the fourth quarter to the first quarter it went up more than that. I think that should give you comfort that there is not a lot extra going into that sales promotion reserve at this point.

One more quick one if I could.

Obviously, March was a tough month across the industry. Any early read on how the early part of Q2 is shaping up would be great. And then I'll leave it there. Thanks.

Well, I'll tell you we're not selling many motorcycles in Minnesota with the snow on the ground right now. But Ed, our guidance I think gives you an indication about how we feel about the business going forward. We are not big box retailers. We are not going to start giving monthly guidance, but trust that we're okay.

Thank you.

Next question?

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

Could you maybe give a little bit more granularity about Brutus and what your expectations are as the year progresses? And maybe talk about how well it's been received so far through your dealer channel?

Yes, Scott, this is Bennett. I'll start. Maybe the guys can finish.

Again, we are very pleased with the launch that we had from a Polaris standpoint in March -- well-attended event, the product has been extremely well received from both the press and the dealers. We are over 400 strong now on the dealer network, which is slightly ahead of our expectations. The orders have been -- initial orders for both the products and the attachment have been better than expected. But I think, as we would say, we are in the first inning of this game. We just in the last week have begun shipping the product.

This is a big step for us into the commercial market. Our dealers in Polaris -- we still have to prove that we can compete effectively against some of the bigger brands there. But again, we think we have without question industry-leading product solutions that are unique to the market, and that's pretty much how our dealers and at least the customers we have interacted with have been playing back to us. So we are very encouraged.

From a guidance standpoint -- again, I think that factors in to where you see the ORV. We've knotted it up a little bit, and some of that's a little bit more bullish on Brutus.

On our end over here we have heard some reports that April ORV sales have improved somewhat from what we saw in March. I know you don't want to comment too much on a month-by-month basis, but could that be playing into your relative comfort level going out to raise your guidance?

Scott, we have our outlook plan long before April starts on things. As I told Ed, we are giving you about as much color as you are going to get on Q2 retail.

Okay, got you.

Could you just again -- just give -- you mentioned when you'd be breaking ground on the new facility in Poland? And when that will start ramping up again?

Yes. We'll break ground in Q2, and construction will really continue through most of the rest of the calendar year. Again, we expect to be in essentially in the second half of 2014. So we're really getting down to starting to be the very heavy lifting, but we've got a really strong team already assembled there, both local and expats, and we are feeling really good our ability to execute this project. Obviously Monterrey has helped pave this way as we get those cycles and learn it. So we are feeling really good about Opole and where we are on that project.

Great. Last question -- could you just talk about -- I know the new products, obviously you sound very bullish on it going forward for 2014. Maybe just talk about the amount of R&D that you've spent over the last year versus the previous year, just to talk about how that's supporting your efforts?

Scott, we've very consistently been at about 4% of total revenue. And as I have said a number of times now, our revenue has doubled over the last four years, and our R&D spend has more than doubled over that period of time. It's a very heavy period. Mike and I have both alluded to the spending levels. To bring the new Indian bikes out, to bring the new lineup of ORVs out, we are deep in the spend right now on product development and product launch. We should feel good about it. I mean, if we were not optimistic, considering the amount of money and energy we are spending, I think you should be disappointed; but that's not the case. We like where we are.

Great. Thanks a lot, guys.

Next question.

Your next question comes from the line of Jimmy Baker from B. Riley & Company. Your line is open.

Good morning, thanks.

First just a follow-up on the co-developed commercial side-by-side product. You're looking for very strong growth there this year. Can you give us a sense for what portion of that growth is coming from Brutus and Polaris dealers, versus incremental sales in the Bobcat channel?

Yes, I'm going to be careful with that, Jimmy. This is Bennett.

At least right now, our outlook would say that both will contribute meaningful into the Brutus thing, but right now our outlook would say that might be more predominantly Polaris-Brutus than Bobcat.

Okay, that's helpful.

Mike, your comment on Q2 being the slowest sales growth quarter of the year. First, did I hear that correctly? And would you say that's true for both ORV and consolidated sales?

Yes, you heard it correctly; and yes.

Okay. All right, thanks.

Just lastly, Scott -- I think in your prepared remarks you indicated you'd expect to continue to expand organically and inorganically outside the core power sports category. Could I get you to maybe elaborate on that at all? And would at least the organic component of that be included in your current guide?

Yes, I think part of the excitement you hear us talk about the model year '14 launch includes that type of stuff. Inorganically, we have been building over the last several years our M&A capability. Hopefully, you've seen we are diligent buyers. We're not trigger-happy on anything. We continue to see lots of opportunities to add to long-term profitable growth outside of power sports, and we'll continue to pursue those.

Okay. Thanks very much.

Next question.

Your next question comes from the line of Greg Badishkanian from Citigroup. Your line is open.

Great, thank you.

First question is just with respect to inventory. It seems like dealers have the right amount of inventory. Would you say that's correct, and you kind of want to keep it at this level, adjusting for seasonality?

Greg, this is Bennett.

I think that's a close characterization. We have seen lots of reports. I guess I'd like to maybe elaborate on that a little bit. When you see the increases year over year, I think there's a couple of key factors. Again, we've entered a lot of new market segments, so we're supporting those additional segments. We've made a real commitment over the last 1.5 years to have much better availability, and expect our dealers to have better segment-stocking profiles, which is good for retail. We are having higher velocity.

I think the part people are concerned about, with our movement to MVP over the last couple years and now the retail flow management, we built business models and inventory models that really won't allow us to get off the rails. It corrects itself very quickly, both up and down. We can respond to the market, I think, more effectively than anybody in the market place.

You heard us. We'd like to bring it down a little bit sequentially in the second quarter, but that's really a factor almost of seasonality and trying to clean out for the new model year. All in all, I think we feel fine with where we are, and I think we're in better position than we were a year ago to support retail effectively within the dealer network.

Then with respect to innovation, Scott you mentioned you are I think very optimistic on the future and some other favorable comments. I'm just wondering -- I know for competitive reasons you can't go into a lot of detail, but are there certain business lines that you think are going to do particularly well? What's your level of optimism at this point versus the same time last year for the new products?

We were proud of what we introduced last year. I think, as I said in my prepared remarks, the Ranger 900XP is the highest-volume selling product in the industry in the first quarter of this year, so we really liked last year's launch. The breadth of this year is probably better. I think the quality of the introductions is as good as we have ever had.

As we talk about it, you ask where we're most excited. I cannot tell you the energy and effort that Steve Menneto and his team have put in the last two years to launch Indian properly has been impressive. We are really excited about the potential. Granted, tremendously heavy lifting to do, but we have ridden the bikes, seen the consumer testing. We're really encouraged about the prospects for our motorcycle business, and specifically with the Indian launch this summer.

Dave Longren and his team -- you have heard me, Greg, many times talk about this armada of products. As we spend a lot of money on R&D, you should expect that armada to get stronger and broader. I think you will see that this summer.

Okay. Yes, I'm looking forward to it.

Then just finally, obviously weather had an impact on all the leisure vehicle companies. I'm sure you analyze your business by region, and if you look at the warm weather states that were less seasonally impacted from weather this year, I am assuming you saw a much different trend than in the seasonally colder areas, where snow and very cold weather had an impact. Was that the case? How much of a difference was it?

Greg, this is Bennett.

I'm probably not going to quantify it for you, but we have been studying and looking at those splits. Clearly the weather hasn't been helpful, particularly in March. But we are seeing a notable split between what we might call sun versus snowbelt. That gives us a fair amount of confidence that weather is a primary driver of what anybody might call sluggishness in our retail. I think we're feeling fine.

Yes, our dealer check showed that too. Thank you very much.

Next question?

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

Thank you, good morning. Nice quarter.

I guess my question is on what are you guys thinking is the capacity for Europe? Because I think after Poland you'll also have manufacturing capacity from Goupil and Aixam, as well. Do those fold into Poland at some time, or do they stay as they are? I don't know how you guys are thinking about that?

Jaime, I would tell you that Poland -- remember, every single full-size ATV that we make comes out of Roseau right now. The largest volume of business we have in Europe is ATV. Largely, what we want to accomplish is being able to satisfy the European demand for ATVs in Poland, but we'll also build side-by-side capability as well. Goupil and Aixam are small facilities closely located to their customer base, and just not suited to make the investment to move those over. That's not what we're trying to do.

Now, we certainly expect, and will pursue sourcing opportunities from Eastern Europe as we build that capability for those businesses; but really this is about our satisfying the demand for our off-road vehicles with capacity from that Opole plant, and we're really excited about it.

Okay. So because of tooling and everything else, it just makes sense to leave everything as is, it sounds like?

Well, I wouldn't say we're going to leave everything as is. We've got two very competitive businesses now in what we call the small vehicle space in Europe, with Aixam Mega and Goupil. We're going to look for opportunities to leverage the synergies between those two. We do not expect there to be a payback by transitioning that volume, which -- remember, the customers for those products are all right there in that French, Belgium, Spanish, Germany market. We're just not going to get a return. As you may know, it's quite expensive to shut plants in France.

Then I think it had quantified the extra dealers as 400 from the Aixam acquisition. Can you remind us how many -- or what your reach was before that? How many dealers there were that you had in Europe?

We have about 1,000 dealers across the region, so it's a nice add for us.

Okay. Then finally, I know that you guys said the seasonality was more second-half weighted for the small vehicle business. Is there any material difference between the third and the fourth quarter? Is it marketing to different end-users, or anything like that, that we should be thinking about?

Jaime, again, we're learning about this new business that we just bought a couple weeks ago, so --

Okay.

The best data that we have indicates that there is a bit of seasonality later in the year, for whatever reason, so the sales and the profitability are skewed toward the later parts of the calendar year.

Okay, thank you.

Thanks, Jaime.

Next question.

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

I just wanted to touch on the on-road business, and break down the guidance. I'm trying to figure out with the new guidance with the Aixam acquisition, how are you looking at the core business? Your prior guidance was up 25% to 35%. Should we still think about that the same way?

Yes. Largely unchanged.

Okay. Then just with sticking with Aixam, can we talk about maybe some of the synergy or supply chain opportunities in the near term? Will we see any of those in 2013? Are there any kind of -- I'm certain there's one-time transaction costs, so maybe how they flow throughout the year?

Well, the one-time transaction costs are going to be in the first half of the year. Then obviously the amortization hits us throughout. As far as pursuing -- I mentioned in my prepared remarks we see a very nice opportunity for us to add value on the sourcing. I mean they're a great Company. I'm really impressed with their leadership, but they haven't had the global reach to source components as competitively as I think Polaris can.

As we've done with Goupil, we'll pursue those opportunities. In any vehicle class, it's difficult to get them in an eight-month period, but we'll go as fast as we can. Because we have already been through the exercise with Goupil, we largely know how to approach this. A lot of the synergies from logistics and distribution -- we'll certainly pursue those. Because we have such an engineering capability, improving NVH, and just improving the overall vehicles, as well as letting Aixam Mega help us improve some of our GEM and Goupil vehicles, are just some of the synergies we will be pursuing.

Okay, great. Have you quantified how large any of the transaction costs will be?

No.

Okay, great. Thanks guys.

Next question.

Your next question comes from the line of Tim Conder from Wells Fargo Securities. Your line is open.

Thank you. A couple here, gentlemen. Scott --

Gentlemen? (laughter)

(laughter) Could you just give us an update on your progress? I think at your last dealer meeting you mentioned you made a commitment to the dealers that your delivery times to the dealers on average for all your products would move basically from six weeks to four weeks. Let us know where you are in that, and then maybe any color how you see some of your competitors?

Then I guess that plays into the discussion on the channel inventories. It seems like the last couple of quarters you feel pretty good where you're at related to those inventories, and you are talking about bringing those down a little bit. I guess just pairing all that together, just any additional color you guys can add?

Bennett and I will tag team this one.

We are making very good progress with our lead time reduction efforts. I think the RFM process, retail flow management with Victory, we've learned a lot from that on how to get closer to a pull-type system, and we are seeing -- I will call it just dramatic reductions in lead times in our Victory business as we prepare to launch Indian. A lot of those lessons are being applied to our ATV and side-by-side business. Part of the inventory build is that we've just gotten much better at not only reducing lead times, but improving on-time delivery to the orders that are placed by our dealers. I think they have a lot more confidence in what we can deliver.

That confidence is part of the reason we believe we can bring down inventory in the second quarter as we get ready for the model year '14 products, is because dealers don't have to stock up any more, because they feel confident we'll be able to meet the lead time. It all kind of ties together. We feel like long term we have an opportunity to continue to improve lead times and decrease dealer inventory. I think the second quarter is an opportunity for us to do that a little bit.

Would that be -- the second quarter -- should we sort of use that level, what you get to in the channel, as sort of a new benchmark level?

No. I think we are just not that precise right now in terms of -- as Bennett articulated quite well a second ago, the breadth of our product range is so much bigger than it was years ago, and the demand for these new products -- we're trying to set out segment stocking, and we're trying to get this thing completely nailed. But it is absolutely not the case as we bring down dealer inventory going into the second quarter and get ready for what we expect to be a high demand for our products in the second half -- I wouldn't set the bar at that level going forward.

Okay. Any color, again Scott, maybe overall where you are as a matter of weeks versus what you had mentioned at the dealer meeting last year? And any color on where you think your competitors are?

Yes, Tim, this is Bennett.

I think on the Victory RFM stuff we are right on plan. We talked about a statement of being inside of 30 days, with an eventual objective of getting down to 18 days. We are right now operating within the earlier time frame of 18 days. Again, we have not gone through the full cycle of an RFM, so I will put that caveat in. I want to see how we respond to heavy bike selling seasonality. But our lead times are inside of three weeks from order to delivery to your door, which is quite amazing. Our belief is, we are much quicker than the traditional models that most of our competitors are fielding.

On ORV -- again I think we're closer to the four to six weeks, and what we've gotten way better at is becoming way more accurate on our delivery and giving people way more dates, even in product shortage situations. Our commitment to availability and speed of response is -- I think we are delivering on the promises we made a year ago.

Then the ORVs, Bennett, relative to some of your primary competitors?

I would say, again, we take orders more frequently than anybody in the business, and we are delivering generally in that four- to six-week cycle. A lot of guys are trying to make adjustments to respond to what we have done. I guess I am just not close enough, Tim, to say whether we are way better or on par as some of these guys have made their adjustments. As you know, even with that quick response, with our kind of run-away demand the last three or four years, we hadn't been perfect because we had been short in a number of key segments, which was driving some of that availability issue.

Okay, great. Thanks for all the color, gentlemen.

Thanks. Next question.

Your next question comes from the lane of James Hardiman from Longbow Research. Your line is open.

Good morning. Thanks for taking my call. A couple quickies here.

On the Aixam acquisition, how does that reflect in the bottom-line guidance? Your total guidance is up $0.15 to $0.20. How material is the acquisition?

Then, Mike, you mentioned that we should expect something less than that $110 million of top line. Was that a reflection of the fact that we only had eight months, or was it -- I think you mentioned weaker markets in Southern Europe? For the full year, is that going to be less than it was last year, or was it just a function of eight months versus 12?

James, I think the math works out pretty well. We bought the business in April. We've got eight months, so you're going to get essentially two-thirds of the $110 million of revenue the business generated in 2012. As we've said, Mike said, and we talked about the European economies being weak. We have planned for the business to be slightly smaller this year than it was last year. All of that is included in our guidance.

The transaction costs -- given the stub period that we own the business, the transaction costs are largely going to offset the profitability of the business. We'll get a little bit of accretion throughout the last three quarters, but not a tremendous amount. I will tell you, this is a very profitable business. A part of the reason we wanted to get into it is we saw a niche business with great market-share positions and a strong brand. We really like the contributions long term. I just wouldn't bake too many of those in, in 2013.

Got it.

Then just closing a loop here on the inventory side. You've mentioned a couple times bringing down inventories sequentially. It seems like that's typically the case in the second quarter. How should I think about things on a year-over-year basis? When we reconvene a few months from now -- it was up 26% year over year in the first quarter. Is that number going to be down in the second quarter, or is it just entirely seasonality?

I think it's both, James. Seasonality will come down, but I think our objective would be that, that percentage increase will decline year over year. Again, the fundamental factor on that was, if you remember back to last year, we were still chasing and had a lot of stock outs and some availability shortages. It almost took really until about the third quarter last year really before we really normalized the inventory levels, with our new commitment to the new segments and availability. I think it's seasonal, as you suggest, but we expect that the percentage increase should decline year over year in the second quarter.

Meaning that it's going to be a number less than 26%, but not necessarily going to be a negative number.

Yes.

It will not be a negative number, right.

Got it. Great. Thanks, guys.

Okay, we've got time for one more question, Kyle.

Your last question comes from the line of Gerrick Johnson from BMO Capital Markets. Your line is open.

All right, last but not least. Thanks a lot.

(laughter) We still love you Gerrick.

Thanks, guys.

On a tax rate going forward in 2014, should we see re-acceleration to 34%, 34.5%?

Unfortunately, yes.

Okay. Then on Brutus, can you remind us the economics behind Brutus? What does Bobcat get? Is there a royalty, or how does that arrangement work?

The economics, again, is we are the manufacturer of record, and we supply that vehicle like we have been supplying the supply vehicle to Bobcat. However, because it was a co-developed product and there was a number of technology sharing and partnering on this one, the margin agreement -- even though we're the manufacturer -- is a little bit different than the supply vehicle. So Bobcat will make a little more margin on that, per se, which is appropriate.

Okay. On Indian -- no revenue yet, obviously; but it sounds like you are racking up some expenses?

A lot of expenses.(laughter)

Is there a way to quantify how that impacted the first and perhaps the second quarter?

No.

No. Okay, we'll figure it out ourselves. Okay.

But remember, this is the second year. It's not like we didn't have a lot of those expenses last year as well. This is a very aggressive two-year -- and just a reminder, I will use this opportunity to make the advertisement. We are bringing an all-new bike and all-new engine to market in less than 30 months. That takes resources. It takes dollars. Then we're going to transition into a decent-size marketing spend. But year over year, it was a lot of money last year, and a lot of money this year.

Okay. Great, thank you.

Okay. I want to thank everyone. That's all the time we have this morning. Certainly, we appreciate everyone's time and interest and support of the Company, and we look forward to talking to you next week -- or next quarter, not next week. Sorry.

All right, good-bye, and have a good day.

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