Polaris Inc (PII) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Tracy and I will be your conference operator today. At this time, I would like to welcome everyone to Polaris' third-quarter earnings results conference call.

(Operator Instructions)

Thank you. Mr. Richard Edwards, Director of Investor Relations, you may begin your conference.

Thank you, Tracy and good morning and thank you for joining us for our third-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 speakers today are Scott Wine, our Chairman and Chief Executive Officer; Bennett Morgan, our President and Chief Operating Officer; and Mike Malone, our Chief Financial Officer. 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 and some qualitative comments on 2014, 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. Five years ago in mid-October we were concerned about credit availability and the ensuing financial crisis. Just five days ago we were again worried about the debt ceiling and the government shutdown.

Over the past five years, Polaris faced tough decisions and we did what was required to build the stronger more diverse and much more profitable Company that we are today. We now expect our elected officials in Washington to make their own difficult choices and set a course that will revitalize our economy. While I'm not certain what will happen in our nation's capital, I am confident that Polaris will remain focused on innovation and execution, which our team did extremely well in the third quarter.

Dealer and consumer demand for our model year 2014 vehicles was excellent and our new Aixam Mega and Klim businesses are providing incremental revenue and fresh avenues for growth. Total sales for the third quarter surpassed the $1 billion mark for the first time in our history, increasing 25% to just over $1.1 billion.

Despite ongoing competitive pressure and amplified promotional spending, we continued to gain share in off-road vehicles, delivering a 23% revenue increase in our largest business. Snowmobile sales were up 25% and high attachment rates coupled with outstanding execution by Steve Eastman and his team spurred 37% improvements in our PG&A revenue.

International sales grew slightly faster up 38% as strong organic growth was augmented by Aixam Mega sales. Despite outstanding retail, motorcycle revenue was down 6%. But I think of this as the calm before the storm, as the Indian business is poised for rapid growth and the new Victory line up is positioned to attract expanding set of bikers and buyers.

Third-quarter net income from continuing operations rose 24% to $116.9 million, yielding record earnings per share of $1.64, a 23% improvement over the prior-year period. Our earnings growth was a bit muted by ordinary and a few atypical factors as high spending for the Indian launch and our overall 31% increase in operating expenses was only part of our drag on profits. We also took an 80 basis point hit to gross profit margins due to our royalty contract dispute, and again overcame the legacy long term base compensation hit from the rapid rise in our stock price throughout the third quarter.

Overall, the unprecedented volume of new products we introduced proved beneficial from a mix perspective. And our operations team executed extremely well to drive gross profit up 90 basis points. We projected a strong second half and the third quarter delivered on that commitment.

Reflecting on what has transpired in the two months since we officially launched Indian Motorcycles, it occurred to me that bringing this business back to life is quite similar to the birth of a child. Tremendous excitement and anticipation followed by great joy and adulation, then years of really, really hard work.

Continue that metaphor a little bit longer and it's easy for me to say that Steve Menneto is the best parent you could ask for for this business. His motorcycle team executed the commercial launch exceptionally well, garnering the press coverage and several prestigious awards, including our Indian Chieftain being named Motorcycle of the Year by Road Runner Magazine.

Our Indian website set Polaris' traffic record each of the first three days following the launch. Facebook fans now exceed 400,000 and more than 13,000 people have taken demo rides. Indian is kicking and screaming to get going.

The Indian brand promises high quality and performance and I'm proud of the work our team has done so insure our dealers and customers receive just that. As much as I've wanted to ride my new Indians this fall, I'm still without bikes as we remain focused on ramping up production to meet the strong demand for or three models.

In mid-September we began shipments to our constantly expanding global dealer network, which remains on track to exceed 200 distribution points by year-end. Building a successful business in the competitive heavyweight motorcycle industry requires a great brand, highly refined bikes, premium distribution, a whole lot of cash, and a world class team.

Indian meets all five of those criteria, and everything we learn from Indian we are driving into Victory. We are playing to win in this space and I am excited about the quarter, the full year and the decades ahead in our motorcycle business.

While Indian shipments and sales will ramp up rapidly in the fourth quarter, we're also benefiting from higher RZR XT1000 demand, which was recently boosted further by the new XP4. Our GEM Electric vehicle business just announced an all new Electric vehicle, the EM1400, which will help our small vehicle business continue to advance in the fourth quarter.

With strong growth across our portfolio, we are increasing our full-year sales guidance to up 15% to 16% over 2012. And we now anticipate full-year earnings per share in the $5.30 to $5.37 range, a 20% to 22% increase over last year.

Financial results are an important measure of success and we are proud of our consistent progress the past few years, but strong financial performance is only one of our five strategic objectives, and it is last on our list for a reason. We expect to become a highly profitable $8 billion global enterprise over the next seven years. And making progress toward that goal is at least as important as delivering strong quarterly sales and earnings results.

Being the Best in Powersports Plus is a fundamental element of our strategy, as our model year 2014 year news continues to flow across our product lines. It is driving growth, market share gains and in many cases higher ASPs and margins. We are investing heavily in R&D and expanding our factories and distribution footprint to add much-needed capacity.

While Indian is leading the way from RZR to RMK and Victory to Sportsman, we are elevating our brands to match our product performance. Growth to adjacencies will play an increasing role in our sales and profits in the years ahead. As we are demonstrating with our small vehicle business, we will use our balance sheet and our core strengths in innovation, distribution and execution to accelerate growth in new markets.

GEM retail sales are up over 50% through the first three quarters and we are still in the early stages of tapping its full potential. Klim is a great business, because of their people as much as their high-performance apparel, and we are excited about adding this growth driver to our high-margin PG&A unit.

The sequester cuts have curtailed orders for our military products, but we delivered strong growth in the third quarter and continue to build out what we believe is an industry-leading fleet of very light tactical vehicles. Our commercial business, anchored by the co-developed Brutus product from our partnership with Bobcat is growing slower than we anticipated and serves as a reminder that we cannot grow out of core business on product superiority alone.

While international sales are at record levels for Polaris and we continue to extend our global reach through acquisitions and plant investments, we must expedite our growth outside of North America. Matt Homan is leading a business transformation in Europe that will enable us to serve that market locally. And we are beginning to accelerate growth in the Middle East and Africa as well. Mike Dougherty is doing the same in India with our joint venture with Eicher and we are continuously evaluating our opportunity to expand more rapidly in other parts of Asia Pacific and Latin America.

As we strive to become a better Company for our customers, dealers, investors and all other stakeholders there's nothing more important than advancing our efforts to become a lean enterprise. We are committed to adding value for customers as indicated by the recent addition of Tim Larson to lead our customer excellence efforts. We are engaging in some of the best lean consultants in the world to teach us our leadership team to identify and eliminate waste, not merely in our factories but across our business. Our lean journey will belong but it may be the most rewarding road we will ever travel.

We expect to deliver strong financial performance and we believe we have the talent, team and strategy to continue to do so. We are less than half way to our goal of being $8 billion in revenue and $850 million in net income, and will strive to expand margins and drive growth to insure we get there as quickly as possible. I will now turn it over to our President and Chief Operating Officer, Bennett Morgan, who will provide additional insights into our operations and business unit performance.

Thanks, Scott. Good morning, everyone. Polaris' North American retail sales accelerated in the third quarter, up 12% against strong third-quarter 2012 comparables, driven by increasing ORV and motorcycle retail demand and a robust powersports industry that was up low double-digits.

PG&A sales which are not included in the retail sales number that I report, are up an impressive 37%. With the strength of the third quarter, Polaris North American retail sales are now up 10% year to date. Dealer inventory is in good shape, up 16% versus 2012 primarily due to initial stocking of new model year 2014 ORV segments and higher third-quarter snow shipments.

Our model year 14 product introduction represents the single largest launch sequence in Polaris history, with compelling news across multiple product lines and consumer segments, led by the relaunch of the historic Indian brand. Most model year 2014 models began shipping in mid- to late-third quarter and their impact on the marketplace is just beginning. We have an unprecedented level of mid-model year 14.5 model introductions across our portfolio, some just announced that we expect will add further to our market leadership.

Moving on to business unit performance. Off-Road Vehicles. The Polaris ORV business registered a record third quarter as revenue rose 23%, driven by strong double-digit contributions from Ranger, RZR, ATV and commercial. Year-to-date ORV revenue has increased 12%.

Polaris North American ORV retail improved in the third quarter and we gained share for the 17th consecutive quarter in both side-by-sides and ATVs. Polaris' North American ATV sales grew low double-digits, delivering the highest quarterly market share in our history, as the industry grew about 10%. Polaris North American side-by-side retail sales improved low-teen%s in a side-by-side industry we estimate grew low double-digits.

Rangers sales were particularly strong and late in the third quarter we had outstanding RZR XP1000 retail as the new 1000s began to arrive in dealerships. Less than 10% of our third-quarter retail sales contribution came from our huge model year 2014 product news, but early customer reaction has been very positive. The new Ranger 900 Crew, Ranger mid-size 570 and 570 Crew and Sportsman 570s are all in high demand, and we are looking forward to their impact on retail in upcoming quarters.

We are staying on the gas with the very recent announcement of the all new RZR XP4-1000, just in time for the upcoming Dune season in the Southwest. This highly anticipated four-seat big brother to the 107-horsepower RZR XP1000 has had incredible initial dealer order response and we will be on allocation for the foreseeable future. It is already in production and we will begin dealer shipments within the next 30 days.

The Polaris ORV armada of new industry-leading vehicle solutions keeps expanding and improving, and we remain hungry for retail and share growth in a more competitive ORV industry. The Polaris ORV commercial business was up double-digits in the third quarter, led by the new Brutus product rollout and sales to Bobcat.

Our dealer network and product is in place, but frankly speaking, we were too slow on some initial attachment shipments and too optimistic on early market penetration assumptions with the longer business-to-business purchase process and our low customer awareness within key customer segments. We are focused on success in this vital strategic opportunity and we are increasing investment in both marketing awareness and sales conversion, as well as dedicated commercial business resources as we move forward.

Our military business had a nice third quarter. Revenue grew significantly year over year. More importantly, our team and products were awarded a number of key contracts.

These include a special operations command LTATV award with an estimated value of $29 million over the next five years. A second contract from that same customer for a militarized ATV award, with an estimated value of $9 million over five years. And a smaller initial German Army contract for MV 850s. Government agency order activity is up versus a year ago and versus the first half of 2013, and our new technology and business development efforts continue to progress.

Snowmobiles. Polaris' third quarter snowmobile revenue increased 25% while year-to-date revenue was up 30% as we accelerated our model year 2014 shipment timing to better serve the dealer network and customer base. Polaris' early season to-date retail sales are down mid single-digits in an industry up mid-teen%s percent. But only about 10% of the season's retail has occurred, so as always the next 120 days will be critical for Polaris and the industry.

Our product line-up is strong and with the new model year 2014 Indy and entry rec utility introductions, we expect retail and share performance to grow for the fifth consecutive year. Thanks to last year's healthy late season snow, retail is up season to date and early snowmobile consumer events have been well attended. We are excited for the riding season to begin in earnest.

Motorcycles. Motorcycle revenue remained down 6% for both third quarter and year to date due primarily to the quarterly and year-over-year shipment adjustments necessitated as we transition to our lean RFM business model. However, we gain market share both for the quarter and year to date as North American third-quarter Victory retail sales rose over 30% in a heavyweight industry that grew about 20%.

Year-to-date Victory retail is up about 10% in an industry up mid single-digits. Victory model year 2014s are already arriving in dealerships, led by the new value Cross Country and Cross Road 8-Balls and our innovative new factory custom paint program.

Motorcycle dealer inventory is in excellent shape, down sequentially versus the second quarter, and with a small increase year over year comprised of dealer additions and initial Indian shipments that began late in the third quarter. Scott has already covered the details on Indian so let me just say that we are eagerly looking forward to the future of our two exciting American motorcycle brands.

Small vehicles. Small vehicle revenue increased over $21 million and 188% for the third quarter, due primarily to the Aixam purchase. Year-to-date revenue was up 136%. Aixam had a good quarter. We continue to expand our European quadricycle market share lead in the third quarter and year to date as our retail sales remain roughly flat while the overall market declined upper single-digits.

Aixam celebrated its 30-year anniversary in September by launching a new generation of vehicles with improved styling, interiors, electronics and MVH performance. Initial orders have exceeded expectations.

Goupil revenue grew nicely year over year and year-to-date customer orders are up double-digits. GEM continues to accelerate with retail sales up over 50% for both the third quarter and year to date as our dealer network and B2B sales efforts gain more traction.

We also recently announced our newest GEM, the eM 1400 to our dealer network. The eM 1400, which will begin dealer shipments in the upcoming months, is a more robust light-duty hauler that we expect will allow us to expand our customer reach. With the addition of Aixam complementing our growing GEM and Goupil businesses, we are pleased with our portfolio of small vehicle brands, our improving business scale and profitable financial performance.

Parts, garments and accessories. Our PG&A business growth continues to outperform the Polaris portfolio. Third-quarter revenue exceeded all previous records, up 37% and raising year-to-date revenue to up 33%. Growth from every business unit and product category exceeded 20%.

Our distribution capacity and response was bolstered when our new Wilmington, Ohio distribution center which serves our Eastern North American dealer network, went operational in August. The Klim business is growing nicely and has added a ton of apparel capability. Our 300 new model year 2014 accessories are selling well.

And later in the fourth quarter we will enter the inverter generator market with a line of 1-kilowatt, 2-kilowatt and 3-kilowatt Polaris power generators that will be sold through a portion of our Polaris dealer channel, as well as our eCommerce site. Our most profitable business at the gross margin level is performing well and we are excited about our future opportunities in PG&A.

International. Third-quarter international sales were up 38% driven primarily by the Aixam acquisition and strong ORV and PG&A sales. Year-to-date international sales are now up 21%.

Our EMEA business continues to outperform both the market and our expectations in the third quarter, with core sales up about 20% and total sales including Aixam, up 52% off modest third-quarter 2012 comparables. The European ORV industry remains relatively weak with third-quarter and year-to-date sales down about 10%.

Polaris is building on its market share leadership position with third-quarter retail sales about flat and year-to-date retail sales down low single-digits. The European motorcycle industry was down low single-digits for the third quarter and 2013 year-to-date with Victory outperforming. Third-quarter retail was up low double digits. Impressably, despite the tepid industries, all of our European subsidiaries increased revenue in the third quarter and year to date.

Third-quarter Latin America revenue increased 23% driven by sales into Mexico and Brazil. Asia Pacific remains weak, down 6% although we are seeing positive Polaris signs in our largest market in Australia and improvement in our China performance.

Our Eicher JV in India is making nice progress on plant, product and team. Building businesses in new regions and markets is never easy but we are confident in our ability as we establish this foundation for a bigger global Polaris business.

Lean and operational excellence. Gross margins expanded 90 basis points in the third quarter, driven primarily by manufacturing productivity gains, product cost reductions through sourcing and value engineering initiatives, and improved pricing. Net income margin remains healthy at 10.6%, down just slightly from the third quarter of 2012 due primarily to our continued aggressive investment in growth initiatives and capacity expansion.

We have broken ground on our new manufacturing plant in Poland and expect to be producing product in the second half of 2014. The Monterey plastic plant expansion is complete and operational. And the Spirit Lake liquid paint project is progressing as we continue to prepare that facility's conversion into a dedicated motorcycle plant.

Finally we are rapidly expanding our Milford facility in the Spirit Lake area to accommodate additional lines and volume beyond the current GEM and Brutus production. Factory inventory is improving, up less than sales at 12% due largely to acquisitions and product mix. And with that, I'll turn it over to our Chief Financial Officer, Mike Malone.

Thanks, Bennett and good morning to everyone. Our third-quarter results built on the momentum we generated in the first half of the year, setting another record for sales and earnings. Based on this performance and our projections for the balance of the calendar year, we are again pleased to be able to increase our 2013 full-year sales and earnings guidance.

I would like to remind you of our previous disclosure in late July of a non-recurring loss from discontinued operations of $3.8 million net of tax, or $0.05 per diluted share in the third quarter. This non-recurring charge resulted from a personal watercraft product that we ceased manufacturing in September of 2004. My comments going forward will be based on numbers from the continuing operations of the Company.

Sales of off-road vehicles are expected to increase in the 11% to 12% range, up from prior guidance, with retail sales of side-by-side vehicles and ATVs continuing to out-pace the overall market in both North America and internationally. We expect ORV market share to increase in 2013, although as we have previously stated, at a more moderate rate than the past three years.

As both Scott and Bennett have indicated, we are very pleased with the launch of our new model year 2014 products. And these products will help to drive continued sales and market share growth for the balance of this year and into 2014.

Snowmobile sales are expected to increase in the low single-digits percentage range for the full year, unchanged from our previously issued guidance. Shipments of the new model year 2014 snowmobiles are more heavily weighted to the third quarter than the fourth quarter this year, due to the timing of the production cycle.

Motorcycle sales are expected to increase in the 15% to 20% range, unchanged from prior guidance. This guidance is based on Victory continuing to gain market share for the year and Indian motorcycles ramping up production and global shipments throughout the fourth quarter.

For small vehicles, which includes our GEM, Goupil, and the recently acquired Aixam Mega brands, we expect sales to increase over 150% for the full-year 2013. Both GEM and Goupil are expected to increase sales over last year and the full-year results will include about 8.5 months of sales from Aixam.

We now expect PG&A sales to increase about 30%, which is at the upper end of our previously issued guidance range based on the momentum generated during the first nine months of the year. Our guidance also includes the additional PG&A sales from the Klim and Aixam acquisitions.

We expect sales in 2013 to customers outside of North America to increase about 25% over last year, up from our previously issued guidance. The revised guidance includes the strong third-quarter performance of our international business and the additional sales from the Aixam acquisition in Europe. Rolling up the above product line sales expectations, total Company sales increased in the range of 15% to 16% for the full year 2013, which is increased from our previously issued sales guidance.

Operating expenses are expected to increase slightly as a percentage of sales for the full year, which is a bit higher level of spending than our previously issued guidance. Operating expenses include our recent acquisitions, unprecedented level of investment in sales, marketing and distribution related to the Indian relaunch and ongoing global infrastructure investments, along with higher incentive compensation expenses from the rising stock price.

The start-up costs for the Eicher joint venture continued during the third quarter of 2013, and our 50% share of the loss is recorded as a component of non-operating expense on the income statement. The income tax provision rate guidance for the full year 2013 has been narrowed from our previously issued guidance and is expected to be in the range of 33.25% to 33.5% of pretax income, a decrease from the 34.9% recorded last year reflecting the benefit of the first-quarter lower tax rate. In the third quarter of 2013, our income tax provision rate was higher than the third quarter last year as we accrued additional foreign tax reserves, along with providing for certain unfavorable tax events related to the finalization of the calendar-year 2012 tax returns.

Guidance for earnings per share from continuing operations for the full year 2013 has been increased and is now expected to be in the range of $5.30 to $5.37, up 20% to 22% compared to the full year last year. Net income for the full-year 2013 is also expected to increase 20% to 22% from last year. This equates to a net income margin slightly above 10%, a record for the Company. We had no share repurchases during the third quarter of 2013.

In the third quarter 2013, the gross profit margin percentage increased by 90 basis points, which is better than we had anticipated. We again experienced benefits from product cost reductions and higher selling prices during the quarter.

As it was in the second quarter, the product mix impact was neutral in the third quarter after being negative for many prior quarters, due in part to the Klim acquisition and the initial RZR XP1000 shipments. These impacts were somewhat offset by higher promotional costs as expected, and slightly higher warranty costs during the quarter.

Additionally during the 2013 third quarter, the Company lost a contract dispute, resulting additional royalty payments which had an approximately $9 million or about 80 basis points unfavorable impact to the 2013 third-quarter gross profit margins. Future royalties related to this contract dispute are expected to amount to approximately 10 basis points per quarter through calendar year 2014.

We have increased our gross profit margin percentage guidance for the full year 2013 and now expect it to increase up to 70 basis points from last year. We anticipate continued benefits from production volume increases, higher selling prices and product cost reductions similar to what we've experienced in the first nine months.

Commodity costs and currency rates were both neutral to gross margins in the third quarter but for the full-year 2013, we continue to expect commodity costs to be somewhat favorable and currency rates, particularly the Canadian Dollar, to be negative to gross margins. We'll monitor these closely and we'll continue to utilize hedging strategies to minimize our risk. Lastly, we continue to expect a competitive sales promotions environment to remain aggressive and provide some pressure to gross margins for the full year.

Moving now to our balance sheet and liquidity profile, net cash provided by operating activities of continuing operations was about $382 million for the first nine months of the year, an improvement of 50% from last year. Primarily resulting from the growth in net income, improved working capital, and an increase in non-cash expenses such as depreciation and incentive compensation.

We expect cash flow provided by operating activities for the full year to increase about 20% over last year. At the end of the second quarter our cash balance was $388 million, down from a year ago, reflecting cash utilized to fund the acquisition of Aixam in April.

We maintained $350 million of borrowing capacity under the unsecured revolving credit facility. We continue to have only $107 million in debt outstanding, which leaves us plenty of debt capacity to fund additional acquisitions and strategic initiatives. For the first nine months of the year, our investments in capital expenditures and new product development tooling totaled $192 million, up significantly from the same period last year.

During the quarter, an opportunity to purchase the land and building housing our previously leased Monterey, Mexico facility became available, and we moved forward and purchased the property. Our capital expenditures are now expected to be approximately $240 million for the full year.

These investments also include the factory capacity and capability expansions as well as increased investments in tooling for all of the new products and model year 2014 and beyond. We continue to expect depreciation and amortization for the full year to increase about 20% from last year's level due to the increased capital spending.

Polaris acceptance receivables from dealers in the US were $852 million at the end of September, an increase of 19% from a year ago. This increase reflects the mix change of higher value side-by-sides and motorcycles and higher dealer inventories that Bennett spoke of.

The retail credit environment continues to remain stable, with approval of penetration rates near historical levels during the third quarter. The income from financial services for the year-to-date period through September, 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 41% from the year-to-date period a year ago.

So in conclusion, we are pleased with the third-quarter results, particularly given the headwinds we had to overcome during the quarter. We look forward to finishing the year strong with record sales and earnings for the full-year 2013. With that, I'll turn the call back over to Scott for concluding comments.

Thanks, Mike. I'll try to be quick so we can get to the Q&A, but do want to provide a few comments as we look into what to expect in 2014.

I'll start with our view of the global economy. I'm mindful of the fact we've gotten used to driving growth in the face of economic weakness. That, however, cannot last forever and we will encourage pro-growth policy decisions wherever possible.

While much of the global economy shows signs of optimism, these must be tempered by so many forecasts relying on the US to lead the way to recovery. The US may improve slightly from its sub-par performance this year, but it should be noted that US GDP has failed to reach consensus forecast levels each of the past four years. 2014 could certainly be a fifth.

While we can only guess the economy's impact on our business, we can be certain the competitive environment in power sports will remain high and possibly intensify. We are winning market share in the hotly contested side-by-side category and as our model year 2014 line-up demonstrates, Dave Longren and his ORV team are committed and prepared to once again win this competitive battle.

We are mindful that growth requires investments and we will continue to build infrastructure, especially in support of our global growth objectives. Our facility in Monterey will be the model, as it continues to pay dividends. That plant will deliver well over half of our side-by-side volume in 2014.

M&A will also be a tool to expand our international reach and enter new markets for growth. And if our funnel is any indication, acquisition pace will, at a minimum, remain steady throughout 2014.

We like the terms make growth happen and out-performance; however words do not translate well to the bottom line, so we will convert them to action by continuing to drive market share gains in retail growth across our business. Indian will enter 2014 with momentum and we will have our shoulder to the wheel with that business throughout the year.

We will not be buying any businesses in France next year, but we do expect to grow in EMEA as Indian and Victory accelerate motorcycle share gains, and our plant in Poland begins to support ORV growth in the second half. We will continue to invest aggressively in R&D and the output from our Wyoming facility expansion will continue to cover everything from the new Slingshot to innovations in most every category of our off-road vehicle business.

We will make meaningful progress on our lean journey next year, with continued focus on motorcycle quality and lead times and a new emphasis on our ATV product lines. Done right, we can deliver notable improvements in cost and inventory, although expect them to ramp up late in the year, next year.

With the outlook for interest rates no more certain than US fiscal policy decisions, we will plan for continued volatility in currency markets but slightly more stability commodities. We have a very talented treasury department and are reasonably comfortable managing risk, and will continue to aggressively do so.

While we are beginning to plan for the year ahead, our focus and energy remains squarely on finishing 2013 on a soundly positive note. 2014 should be another year of profitable growth, although the magnitude is really a guestimate until we get further into the fourth quarter. At this point we see an easier path to revenue growth than continued margin expansion.

Our product line-up and business unit plans will be strong but the risk of political start up or economic crisis somewhere in the world provides just cause for concern. External factors aside, my confidence in this Polaris team and their proven ability to execute in good economies and bad, leads me to believe that we will build upon our recent success in the year ahead. With that, I'll turn it over to Tracy to open the line for questions.

(Operator Instructions)

Your first question is from Mike Swartz with SunTrust.

Hey, good morning everyone.

Good morning, Mike.

Could you run through the royalty issue that hampered gross margin in the quarter? Give us a greater sense of what that stems from?

Actually, that issue was under a confidentiality agreement. What we've said today on the call and what we've issued in the press release is all we're going to comment on it. That's about it.

Okay. And you said that the impact going forward through 2014 is about 10 basis points a quarter, is that what I heard?

Yes, that's right.

Okay, great. Then with the timing of snowmobile shipments this year, could you provide us a little more granularity around that? And maybe the magnitude of what that shift was in the quarter?

The issue really was around, and this was something that's historically happened periodically for us. But really, as we've alluded to, we are a little bit of at a capacity problem, especially in our Roseville plant where all of our snowmobiles are made.

As we tried to make room for the significant model year 2014 news and off-road vehicles, one way to make capacity available was to ship more snowmobiles early. We chose to take advantage of that. Certainly positioning sleds for availability heading into the heavy retail season is not a bad move for us.

Okay, great, thank you.

Your next question is from Robin Farley with UBS.

Great, thanks, two questions. One of them, the settlement. I know you don't want to go into more detail about it, but are we thinking about it correctly that your earnings would have been $1.72 and your gross margins would have been up 170 basis points without that? I just want to make sure we're thinking about that right.

Then in terms of Indian motorcycle, I know there's a supply constraint that you don't necessarily want to quantify for next year. But can you at least talk about what you may ship in Q4 for Indian motorcycles? Just so we can get a sense of where supply capacity is right now.

Then lastly, you gave a dealer number, I think you said something like 200 dealers by the end of the year, for Indian. I assume that includes international as well. How many of those are US versus your target of the 125 to140 dealers? Thanks.

Boy that's a mouthful there, Robin. You've got your math right on the royalty dispute issue, so that is correct. Although it should be noted it's difficult to back out one-time items and put them back in, because you never know how we would have spent the money otherwise. But assuming everything else held steady, that's exactly how it would have worked.

The Indian shipments are, as we've said, we're ramping up nicely. Capacity is really a constraint right now. We're not going to disclose actually numbers for the fourth quarter or the numbers next year.

But I think the important thing to note on Indian is that while the initial challenges ramping up dealer availability and getting our pre-sold units, which we're quite pleased with, getting those filled, this is really going to be a pull model from the very beginning. So what happens in retail is what we're going to ship.

I don't think we're going to have a capacity constraint meeting whatever that retail number is. Now if I'm wrong it would be a wonderful day for Polaris, but nonetheless I think we're going to let retail drive the shipment schedule for the fourth quarter and 2014.

As far as dealers, you've done the math right. We've got, we're still on track to hit the 125 to 140 here in North America. And the rest, we think we're probably going to be at or above 70 outside of North America. So that's how it works.

Thank you.

Next question?

It's from Jaime Katz with Morningstar.

Could you guys talk a little bit more about the competitive environment for off-road vehicles? I think the press release said that North American retail sales were up low double-digits. And then side-by-side and ATVs were in double-digits. So a little bit closer than in the past. Are other competitors promoting more or selling more competitive products? Then could you talk a little bit about the progress of the Indian joint venture?

Jaime, this is Bennett. I'll try to take the ORV competitive market environment discussion. I think as we've seen from a competitive product launch, is there's been a tremendous amount of activity, particularly inside by sides over the last 1.5 years. And there's no question, it's a broader, more competitive marketplace out there. I think competitive products are improving.

But again, the way we look at it is, our third quarter was stronger than any quarter we've had yet. We're clearly building momentum. We came to a model year 2014 product launch that we had been targeting, where we had broad news across every critical segment in ATVs, Rangers and RZRs. Frankly those model year 2014s, as I touched on in my remarks, really didn't contribute much to the third-quarter retail.

So we were able to gain share and I think we feel good that the industry was up double-digits, that's awesome. A strong industry is helpful. And we think we have, frankly, the products now to further extend our lead. From a standpoint of promotion, it's been as we've seen. It's been pretty aggressive.

With our armada of products across the portfolio, a number of our competitors are choosing to promote more aggressively. Again, it's aggressive, but it's really within our expectations of how we thought they would compete. We feel pretty good, really.

We're not certainly alarmed that it looked like we had a little less market share gains than we would become spoiled by, because again, we feel really good about what we got coming into the retail marketplace today. Sorry, I was so consumed with that, what was the second question?

Just the progress of Eicher.

Yes, Eicher is moving along very nicely. We really filled out the entire operating leadership team and the plant is under construction in Jaipur, India. And we're on track for a late 2014 launch of this new vehicle solution, which again, from all of our consumer insights looks like it should be very compelling. So we're very pleased.

Thank you.

Your next question is from James Hardiman with Longbow Research.

Hi, good morning. Thanks for taking my call. Help me connect a couple of the dots here. You had low-teens retail growth, this is ORV specifically, low-teens retail growth. Inventories were up high-teens, obviously as has been the case last couple quarters. New SKUs are contributing to that inventory growth.

What does that look like in the absence of the new SKUs? And ultimately, anecdotally everything I'm hearing is that dealers can't get enough of the new product to satisfy the demand, and yet inventories are up. Is this a timing issue where a lot of it's shipped at the very end of the quarter? Is it the makeup of the inventory? How should I think about all that?

Yes, James, I think you're actually pretty close. We continue as we develop these new product solutions, we are adding what we would call, new segment stocking requirements. So that's going to increase inventory.

But I said less than 10% of our retail, about 15% of our inventory at the end of September was in those model year 2014s. A large part of that is we're just moving the products that the dealers are, as you said, demanding very, very highly of these new products. We're trying to get those into the marketplace as quick as we can and we did a good job in the third quarter on that.

I think really, as you're looking at it, I think you've got it nailed exactly. Obviously, again, the other material differences were up a couple of percentage points on that from a snowmobile shipment standpoint, that we pushed into the third -- pushed is the wrong word, but moved into the third quarter.

Great, and then a couple follow-ups on that. I thought that was really interesting that, the idea of only 10% of the retail was on the new products. That seemed like a really low number. How does that compare to prior years? Are you a little bit behind in terms of getting some of the stuff in the channel?

As I look at the individual new products, it sounds like we've got a ways to go before we match demand on the new XP 1000. But can you go through some of the major new products that you guys announced in whatever it was, late July or early August? What's the availability on some of these major new products and how do we expect that to progress as we move through the fourth quarter? Thanks.

Yes, sure. Again we had really broad new product news, so I think from a retail standpoint, in many ways it might be about similar. We just had a lot more news than we had, for example, last year. Frankly, I think there's a lot more opportunity as we move into the fourth quarter and beyond.

We did a nice job of moving, I would say significant shipments, in each of those models. With the 570s we still have the Ranger and the ATV Sportsman 500s that dealers are in the process of transitioning to. We're starting to fill those segments now. I think we'll see that translation to retail much more aggressively here in the fourth quarter.

The RZR XP1000s, like I said, people can't get enough. We're still very tight and probably will be tight on those for the foreseeable future.

And the XP4.

And the XP4. Obviously we'll begin here in the next few weeks. And I think we'll be tight on those well through the end of the year.

Then the Crew 900 is again in high demand, and we're in the process of filling those segments out as well. But again, I think we'll be tight on those products for a good part of the quarter as well. So, we feel pretty good.

Great, thanks guys.

Your next question is from Scott Stember with Sidoti & Company.

Could you talk about -- you mentioned that Brutus was going a little bit slower than expected within the Polaris channel. Could you talk about how the Bobcat version is selling within their channel?

Yes, I can give you a little bit of color. We've talked to Bobcat. They're about the same speed as we would be.

So in our Polaris vernacular, everything is always too slow for us. I think this is really largely in part the Polaris resetting this expectations for a different purchase cycle and the business-to-business environment. That purchase cycle takes much longer. And again, Bobcat seems comfortable with largely their sales rate.

We're disappointed, frankly, and we expect more of ourselves than a Bobcat. We're going to redouble our efforts, really trying to improve our marketing and our resource attack, as we really think this is a strategically important part of the business that we really want to excel in as we move forward on. That's really the color you're hearing in my remarks.

Got you. Now with the facility in Poland breaking ground there, could you refresh us on whether the assumptions for synergies for 2014 and beyond have changed? Or is everything pretty much still on track there?

Scott, this is Mike. Yes, I think everything is pretty much on track. We're happy so far with the production plan.

It appears to be on schedule, on budget so that we'll be up in production by the second half of 2014. If you'll recall, our estimates were that we were going to be able to save about $20 million in gross margins at maturity, when the plant is up and running and we get an annualized level of production coming out of that facility. So that's all on track.

Got you. That's all I have, thank you.

Thanks, Scott.

Next question?

Your next question is from Tim Conder with Wells Fargo Securities.

Thank you. Just a couple here. First, Bennett, on the dealer North American inventories, clearly a lot of reasons why they're up. When would you anticipate those coming back down?

On the chart you have on Slide 9, should we anticipate those being back down below 2012 levels by year-end? Or did you allude in your preamble that may take more the back half of 2014 before we see some cost and inventory.

You made some cost and inventory comments about some significant improvements by the back half of 2014. That's one question and then I have two for Scott.

I'll just take it, Tim. My comments on the progress in cost and inventory was related to factory inventory. Obviously, as we get better with our lead times, which is a primary goal of what we're doing with our lean objectives, will require less factory inventory and ultimately less dealer inventory as well. And that's the goal.

It's really not realistic, given the model year 2014 news, given the Indian shipments, that we can bring inventory down below 2012 dealer inventory by the end of the year. I do expect -- remember what we report is quarterly retail. But within the quarter there's a lot of fluctuation sometimes between what happened in the month. We're hopeful that we get that right.

The end of the quarter month happens to be when retail hits where it should. We're certainly expecting, in our actions and our forecast, expect dealer inventory to decrease from the sequentially from the 16%. But it's not realistic to think that it's going to go negative compared to last year.

Okay, well understood and it makes sense, okay. The other two questions would be, number one, on Indian. You had said, Scott, in a meeting I think, when asked the question, when could Indian potentially become the same size of Victory? You said that, I think, earlier in the year that that could be in 2 to 3 years. Any change in that thought process as to way things stand now? I think Victory did about 12,000 units globally in 2012.

I'm not sure that I ever said 2 to 3, but if you're telling me that's what I said, it's possible. I would say that it's at the very -- again as I mentioned earlier, this is really about retail demand. Our early indications are that retail demand is very strong. We expect Victory to continue to grow. But I would say that it's probably 1 to 2 year, probably not 2014, but certainly I'll be in Menneto's office quite a bit if it's not 2015.

Okay. Then lastly, on your net income margin, you'd said in the analyst presentation, reiterated it here, you anticipate over the long term a little over 10%. You're already there. Then if you benchmark off of a Harley for example, they're approaching 14%. I mean, over 10%. Basically you're still saying over the next however many years you're going to hold flat, basically, at net margin? Or should we expect some very modest ongoing improvement?

I mean if you just do the math, to go from where we are to $850 million of net income on $8 billion in sales, we're going to continue to expand net income margins. What we've said, and we're not going to get into financing and have all of the elements that some of our competitors have that contribute to the P&L. So while it's a good comparison, it's not our -- the gross margin numbers, the gross profit margin numbers is a good goal for us, but not the net number.

We are looking to become a much more global enterprise and a much more diversified entity. And as we do that, I've tried to explain, some of the markets and some of the products we get into will have initially a lower net income margin.

Now, we've demonstrated that we know how to expand margins. We will get after anything we get into to bring them up to the corporate average. But I'm just saying, over the next five to seven years, expect us to enter some markets that start off at lower net income margins than our current business. We'll be bringing them up over time.

Okay, great. Thank you, sir.

Next question?

Is from Greg Badishkanian with Citigroup.

Great, thanks. Just to clarify, I know last quarter you were expecting -- last actually two, three quarters you'd been expecting acceleration in the promotional environment. This is in line -- what you saw in the third quarter was in line with what you're expecting, right?

Yes, Greg this is Bennett. I think this is exactly what we expected. It's, again, we wish it to be a tad lower. But with the nature that the market's growing and lots of new products from Polaris and competitors across the portfolio, people that are a little more older in the tooth with some of their products, are going to choose to be more aggressive around promotion to try to move their sales. So again, we've got that modeled into our expectations.

Yes, that's what I thought. Then from what you can see now, I'm guessing there's not a very significant amount of cannibalization between Indian and Victory. Particularly, I mean, Victory seemed to have really strong retail third quarter, even though it would probably have a very little impact at Indian at this point. But is there -- what do you see there?

It's still looking low single-digits. We spent a lot of time researching that before we did this and we expected low single-digits and its been very encouraging how its played out. We've really seen lots of benefits to having both brands. And one of the -- obviously we love having the iconic Indian brand in our portfolio. But it really has freed us up from a brand and marketing perspective, and really bike style and design perspective, over the long term. So we don't see cannibalization increasing anymore than that.

Right, thank you.

Next question?

Your next question is from Jimmy Baker with B. Riley & Company.

Thanks. I have a couple follow-up questions there on the motorcycle side. First, can you elaborate on the RFM implementation? And if you would expect Victory shipments to be up meaningfully in Q4 as we work through that? And then as a follow-up, with Victory gaining share showing more than 30% growth here at retail, is there meaningful opportunity for you to leverage that growth and the new price points to get your new Indian dealers to take on both lines whenever possible?

I'm going to double check here real quick, just what we could tell you on fourth quarter on Vic here. Mike's taking a look at that real quickly.

I don't think we should break it by brand.

I think the embedded guidance is up for the fourth quarter is up significantly for motorcycles, which includes both brands. So we are not going to get into a discussion of individual brands or products.

I think the part as we work through this, which I know it's difficult for you guys with this transition to RFM. And that really took us most of the year to make that transition. You got some adjustment issues about trying to normalize our shipment. But obviously with retail up 30% in the third quarter and our inventory levels being, what we would say is quite current and quite comfortable, that that's a good indicator that we're feeling good about our ability to ship.

But remember the timing of motorcycle shipments, there's not a lot of dealers across the country begging for bikes in December. So we'll try to manage that. Again I think it's good for Polaris and ultimately good for our dealers. We are really trying to make this a dealer-driven pull system. So as they're retailing, they will bring in bikes. Our focus is going to be on driving retail with both Victory and Indian.

Okay thanks that's helpful. And quickly if I could get you to elaborate on the Brutus disappointment, can you give us a sense of what your expectations are for 2014 in terms of commercial side by side distribution growth? Or is there some risk of dealer attrition in the line, given the slow start?

Jimmy, I think we said we were going to go with some of our most capable and committed subset of our existing Polaris ORV channel. So I think that's going to be, from a Polaris Brutus standpoint, that'll be pretty stable.

Obviously we have the reach of the Bobcat. We continue to look for other, what we would call, strategic alliance opportunities. We expect that both of those brands and dealer channels will grow nicely from a retail standpoint as the ramp continues to accelerate, and we're able to improve upon our awareness and conversion on that B2B process into 2014.

At this point, we're not going to necessarily model for you exactly what the expectations would be from a financial standpoint. We expect to significantly improve upon our retail rate with both brands and channels as we head into 2014.

I'm not worried about significant attrition on either side at this point. The dealers are, frankly, really just getting going and they're positive and the products excellent and the feedback we're getting from our customers is positive. It's just the very early innings, frankly.

Okay, thanks very much for the time.

Next question?

Is from Gerrick Johnson with BMO Capital Markets.

Hey, good morning. In motorcycles, if a dealer is pre-selling Indian bikes before he gets delivery, is that included in your 30% up motorcycle retail number you reported? Or is that purely Victory?

That's purely Victory and that's a no. We would not seed that into a retail number until it was actually registered. So any time you hear us talk about anything about pre-sold, that's just a proxy from an order process. It doesn't come into our retail numbers at all.

And really, we spread shipping in mid September Indian, but it was not a meaningful number. In fact, not nearly what those pre-ordered customers or our dealers wanted. I'm pleased with where we are now and where we're ramping up nicely. But it was not an impact on retail or a significant impact on retail at all in retail or sales for the third quarter.

Okay, and another dealer dynamic question here. When you ship sleds early, do you entice them to take those sleds by paying some of their financing? And if so, did that have any impact on the quarter? And where would that show up?

Yes, Gerrick, the answer is yes. We have always, with a seasonal business like this, the way our industry works is that we help pay the floor plan interest for the dealer to incent them to carry the inventory pre-season, so to speak, before the snow flies. That's the way it always works. So you accept that we're sharing in that interest cost, that is borne in a contra sale on our income statement. That was embedded into our guidance and some of the actuals that we had in the third quarter for the little bit heavier-than-normal snowmobile shipments.

Okay, thank you very much, bye.

Next question?

Is from Craig Kennison with Robert W. Baird.

Thanks. Scott, you offered a sober reminder about the sluggish economy. Can you remind us how much of your business is tied to rural economies in particular and agricultural prices? Then secondarily, comment on the M&A pipeline. Thank you.

We've been, probably not fair to say chased around, but we've been questioned quite a bit on what happens if the farm economy slows down. The rural customer, probably well over half of our business. That multi-acre homeowner and those small farmers are -- they're hunters. That is the life blood of our off-road vehicle business.

As far as the farm and ag community, probably 20%. But as I constantly get reminded that their insurance payments will cover the cost of our vehicles, it's the larger equipment impacted.

So as we think about the economic outlook, we're more broadly speaking into the overall US economy. It disappointed this year. The housing numbers aren't where -- the employment numbers that came out this morning aren't quite good.

And as I indicated in my remarks, my concern is is that I talk to economists, the projection is that the global economy is going to be based on a US recovery. I'm just not optimistic that the US can get above that important 3% GDP growth number next year.

M&A.

M&A. The M&A pipeline is -- obviously we're building capability. Just like we're expanding capacity in our factories and distribution, we're building M&A capability.

As we build capability, we identify more opportunities and we're exploring those. We've never felt like we've got a gun to our head to move faster. We don't do deals that don't make strategic and financial sense.

We'll continue that discipline as we head into 2014, but we do head in with a longer list of opportunities. If things work out, we'll execute on a few of those.

Your next question is from Mark Smith with Feltl & Company.

Hi, guys. With no share repurchases this quarter, has your strategy or thought process changed at all on repurchases?

Nope. Strategy stays exactly the same. We are obviously, first and foremost, funding the business.

And we've done that then we pay a dividend. Then we go after M&A and then we repurchase shares. We're still committed to maintaining our share count flat.

We decided to purchase the factory in Monterey in the quarter. And quite frankly, just didn't feel compelled to purchase any shares in the quarter. But our strategy and our philosophy for capital allocation has not changed.

Okay. As we look at snowmobile, it looks like Russia, Scandinavian countries are becoming a bigger piece of the growth part on snowmobile. Is your parts, garments and accessories business following? And is there more opportunity there on ORV as well?

You know, a Scandinavia market really is pretty stable snow market. I would tell you that it's generally performed a little bit better than the North American market due to snow really the last several years. We feel pretty good about that market.

The opportunity for snow growth really remains Russia. Russia really is the growth region of the world for the snow market, and at least up to the last couple years that's been helping. We'll see what the Russian economy does this year.

And PG&A is an opportunity, frankly, not just in Scandinavia. It's an opportunity, frankly, across the globe. We see plenty of opportunities everywhere for more penetration in all of our business units, and whether it be snow, ORV in Scandinavia and the rest, really.

And Mark, I'll just add as we look at the global economy, Russia's one where we do see risk in terms of their ability to maintain consistent economic growth, considering the expansion of oil production here in the US and potential loss of markets for that big commodity for them. While we're doing well and we like the opportunity there, we're not putting a whole lot more eggs in that basket right now.

Okay, last question for Mike. Any changes in tax rates as we start to look into 2014?

You mean you don't believe Washington is going to have corporate tax rate reform? (laughter)

I think an early look at 2014 tax rate would be comparable to where we'll land this year.

Great, thanks guys.

Last question?

Is from Joe Hovorka with Raymond James.

Thanks, guys. I'm going to give you one more question on the dealer inventory. So you're looking at the Slide 9 and obviously your units are higher than they are in 2009 but your retail is up significantly since then as well. So presumably your turns and your dealers are up and week's inventory down. Can you describe where we're at on a week's inventory basis relative to, let's say, 2012, 2011, 2010?

Yes, we'll be directional with you on that, Joe. You've done your math right, it is correct. Our velocity is up.

And again, as we add to a broader portfolio, as we bring Indians into the segment stocking, as we bring in and more and new and compelling ORV segments, there is going to be a natural tendency if we keep our dealer network flat, that our physical number of boxes or units is going to go up.

But our velocity, frankly, it's our strategy to continue to drive that faster and faster. We've seen modest improvement in our velocity this year and we're feeling pretty good about where we are in dealer inventory. That's why I characterize it as good.

So your turns are actually up versus 2012? Or no?

Yes, they're up.

They are, Okay. And Indian is a lower turn than ORV? Or is it a higher turn?

We're not going to get into that.

Well, I'll get into it. It's going to be a higher turn over time. Our whole RFM philosophy that we started with Victory is predicated on a pull system. And we're not yet there, we're starting with motorcycles. We're going to go to ATVs and ultimately get to side-by-sides. We certainly expect motorcycles to turn faster, and Indian starts off that way, to turn faster than our overall business.

So if we reorganize that chart on Slide 9, and we did it by turns, 2013 would be the highest turn. And presumably 2008 would be the lowest turn?

For sure 2008 would be the lowest turn, followed by 2009 and then 2013. We were very low there for a period when our business exploded, and frankly we were well short of the market. I don't have that data in front of me right now, Joe. But I know our turns are up notably from 2012. Again, we were a little lean in 2010 and 2011, so I'd have to do the math on that. But they were quite rapid as well.

And then the follow-up from the other question is, clearly unit inventory is not going to come down, right, as retail sales continue to go up. But you would expect -- it sounds like from your comments because we got the front end load from the new products in 2014, the start of Indian, that units may go up but turns should also improve, maybe starting as early in the fourth quarter.

I would expect -- we've been seeing turns improvement all year. I would expect we are going to continue to see turns improvement in 2014. And as Scott said in the question, expect us to bring the sequential increase down in the fourth quarter.

Okay, great. That's all I had.

Okay, guys, that's all the time we have this morning. We want to thank everyone for participating in the call today, and we look forward to talking to you again next quarter. Thanks again and goodbye.

Thank you for joining, ladies and gentlemen. This concludes today's conference call. You may now disconnect.