Polaris Inc (PII) 2014 Q1 法說會逐字稿

Good morning. My name is Kyle, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Polaris first-quarter earnings results conference call.

(Operator Instructions)

Mr. Edwards, you may begin your conference.

Thank you, Kyle.

Good morning, and thank you for joining us for our first-quarter 2014 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.

During today's call 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 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 statement.

Now we'll turn it over to Scott Wine, our CEO.

Scott?

Good morning and thank you for joining us.

Two aspects of the Polaris culture I particularly enjoy are the intense competitiveness and willingness our team has to take on stretch goals and objectives. These attributes have served us well and will certainly do so in the future.

But recently, when I found myself pushing for better performance from our Motorcycle and Small Vehicle businesses, where sales were up in the quarter 52% and 248% respectively, I realized that it is also important to remember that we laugh at ourselves.

We value humility and enjoy self-deprecation as much as anyone, but we still prefer to get most of our fun from winning. We won our battles in the first quarter, delivering record performance to start 2014.

Fueled again by industry-leading innovation, Polaris' first-quarter sales increased 19% to $888 million.

We were pleased with the retail and dealer demand for the RZR XP 1000 and the new Sportsman ACE, which helped drive ongoing market share gains and an 11% sales increase in Off-Road Vehicles.

Indian Motorcycles gained momentum and was a solid contributor to sales growth, including in our international businesses. With broad-based share gains and excellent execution, Matt Homen's EMEA business grew nearly 50% in the quarter. While we were aided by Aixam Mega's incremental revenue, our core EMEA business grew an impressive 15%.

Asia Pacific/Latin America also had an outstanding start to the year with Mike Dougherty's teams in Australia and the developing markets delivering 28% growth. Steve Eastman's Parts, Garments and Accessories business extended their winning streak, posting 20% sales growth and boosting our profitability.

First-quarter net income increased 7% to $80.9 million, yielding record earnings per share of $1.19, up 11% over the prior-year period.

We do not like to see our earnings growth rate come in lower than sales, but I will not complain about the incremental tax benefits we received in the first quarter of 2013. Because of the tax impact, operating income, which increased 24%, may offer a better proxy of our earnings performance in the quarter.

Gross profit margin increased slightly as pricing and mix came in better than expected. Mike Malone will provide additional color on margins in a few minutes.

Although, the first quarter, and especially January and February, are weak from a seasonality perspective, we do gain important insight throughout the quarter into consumer sentiment and dealer engagement not to mention the competitive landscape. Based on our findings and results, we are modestly more optimistic about 2014 as we begin the second quarter.

We are gaining market share even as our competitors remain very active, and we see promotional activities elevating as they look to move non and current inventory.

Retail demand is accelerating in April. And while this trend will not continue unabated, we do foresee another second-half boost from our model year 2015 offerings.

Between record earnings and expectations for a stronger second half, we are raising our full year 2014 sales and earnings guidance. While we are maintaining our below consistent expectations for US GDP growth and are only slightly more optimistic on the global economy at large, we believe our improving commercial execution and oncoming product releases will again outpace the economy.

We are holding our outlook for moderate mid single-digit growth in the overall Powersports industry and anticipate share gains will continue to drive growth across Polaris. We are increasing our full-year sales guidance to up 14% to 16% over 2013 and raising full-year earnings-per-share projections $6.30 to $6.45 per share, a 17% to 19% increase.

Polaris is a results-oriented, financially-driven Company; so we have key indicators and metrics for most everything we do. But unlike in our plants or business units, there is no simple metric to communicate and measure our strategic progress towards building and becoming a highly profitable, customer centric, $8 billion global enterprise.

However, a review of how we allocate capital provides a decent representation. And our commitment to being the best in Powersports plus in achieving global market leadership is clearly on display as we enter our second consecutive year of capital investments in growth and capacity exceeding $200 million.

The recent Kolpin purchase, coupled with our previous acquisitions of Aixam Mega and KLiM, demonstrate our ability to find growth through adjacencies that is incremental to and off cycle from our core Powersports business.

Studying our capital allocation provides insight into our progress. But the metric I find most useful for evaluating leaders and businesses is their say/do ratio.

At Polaris, we see our high say/do ratio as a key aspect and result of having, hiring and developing the best people and best teams. We expect to reach our growth and margin expansion objectives by innovating and creating value for our customers and dealers.

We have focused teams in Motorcycles and ATVs working diligently to create a LEAN process that will provide significant improvements in quality and delivery.

We're on a long journey to become a LEAN Enterprise that makes us better and stronger every year. And whether you calculate it from our financial reports, read our press releases, or ask customers, dealers, employees, suppliers or investors, we expect our say/do ratio to be high, always.

With that, I will turn 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 again gained market share in Powersports. First-quarter Polaris retail sales in North America increased 7%, as a late spring in the Northern US and Canada slowed March seasonality in both ORVs and Motorcycles. The overall North American Powersports industry grew at a 4% rate. North American dealer inventory is up 13% versus 2013.

ORV inventory is up mid-teens percent, primarily from new model introductions and our all new Sportsman ACE category. To put this into perspective ORV inventory of existing segments and models increased only 3%. Snowmobiles, Small Vehicles and Motorcycles, even with increased Indian shipments, all rose just mid-single digits.

Moving to business unit performance.

Starting with Off-Road Vehicles. Polaris' first-quarter ORV sales increased 11% with Side-by-sides, ATVs, Defense and Commercial all growing year over year. For the 28th consecutive quarter, Polaris gained market share in ORVs as North American retail sales lead by strong retail from our flagship RZR XP and XP 4 models increased upper-single digits in an industry that grew mid-single digits.

Our Sun Belt Region significantly outperformed our northern regions, with retail sales up strong double digits in every category: ATVs, RANGERs and RZRs. Overall, Polaris core ATV retail sales grew in a North American industry that was flat, while Polaris side-by-side retail grew upper-single digits in an industry we estimate grew similarly.

Our all new Sportsman ACE has gotten off to a very promising start. Retail rates are accelerating, global dealer orders are better than we expected, and early consumer buyer feedback is very encouraging. We are currently adding additional model year 2015 capacity for ACE in our new plant in Milford, Iowa.

The ORV competitive environment, particularly side-by-sides, remains elevated with new products and non-current promotions from some key competitors. We expect to continue to outperform our competitors moving forward thanks to our compelling ever broadening armada of Polaris ORV product solutions.

Motorcycles.

Polaris' first-quarter Motorcycle revenue growth stayed very healthy, thanks primarily to the continued success of the Indian re-launch in both North America and internationally. Revenue increased 52% for the quarter.

Polaris heavyweight motorcycles continued to expand market share at a very nice clip. Polaris North American retail sales were up about 50% in a North American heavyweight industry that was up low-single digits.

Indian's momentum remains excellent as new product quality, dealer sign ups, and dealers retailing continue to increase as more Indian showroom constructions are completed. The global power of the Indian brand has been even better than we expected, with international Indian sales to dealers and retail sales well above plan since our launch. We have over 70 international dealers signed, and most of them are currently retailing.

Victory retail sales declined mid-single digits, but essentially outperformed pretty much all heavyweight brands in the first quarter other than Indian and Harley. Late in the quarter, we launched the Victory Gunner bobber style cruiser with an MSRP of $12,999 in the US. We've received very good early dealer and consumer reaction to this model.

Recent buyer trends are proving out our differentiated two brand strategy with Indian competing directly and favorably against Harley, and Victory source of customer volume being primarily from the metric brands.

Snowmobiles.

First-quarter Snowmobile revenue increased 6% driven by a small number of early model year 2015 shipments that we seeded to North American dealers to increase visibility and awareness of our new consumer spring snow check preseason order program and was offset by lower first-quarter dealer shipments in Scandinavia due to weak snow conditions.

The North American Snowmobile industry concluded its strongest season in five years, with industry retail up just over 10% and industry dealer inventories in excellent shape down strong double digits. Coming off very difficult comps from a year ago first-quarter, retail sales for the industry and Polaris were down slightly as we had expected.

For the season, Polaris' retail grew mid-single digits. So we gave back a little of our significant share gains over the past five years, due entirely to share losses in the mountains caused by weak preseason sales last spring and prior year RMK quality hiccups.

Despite our modest share erosion this season, we are optimistic for the upcoming season. Our dealer inventory is in very good shape and is down year over year on model year 2014s.

Our model year 2014 snowmobile quality was excellent, and our model year 2015 snowmobile introductions were very significant and well received by both dealers and consumers.

We introduced what we believe is the strongest product news in the industry lead by our all new AXYS next-generation chassis, which is featured on nine Rush performance and Switchback crossover segment products. AXYS is an unrivaled lightweight chassis, the very first in the industry to offer perfectly balanced rider control with progressive rate suspension with active pitch control for a smooth ride in the whoops and the chatter bumps.

On the strength of our news, preseason consumer snow check orders in North America have been significantly better than last season.

Parts, Garments and Accessories.

PG&A momentum remains very strong with first-quarter sales up 20%. Parts, Accessories and Apparel all grew strong double digits lead by strength in both ORV and Motorcycle-related products.

KLiM had another strong quarter with year-over-year apparel growth at 47%. PG&A product introductions remain robust, with over 300 new accessory and apparel items launched in the first quarter.

Our acquisition of Kolpin, which closed earlier this month, adds another quality aftermarket brand to our portfolio providing us access to new distribution channels and customers. We are investing in capacity and infrastructure with a $9.5 million project modernizing our material handling systems in our Vermillion distribution center. And we continue to add significant talent and human capital to our most profitable business at the margin line through our Category Management initiative.

Commercial.

First-quarter Polaris Commercial revenues increased by over 60%, thanks to our multi-pronged attack plan for the diverse Commercial customer segments. Sales to Bobcat, Polaris national accounts, and to Brutus all were up notably year over year in the first quarter. However, we have a lot of work to do as Brutus retail through our distribution is growing at a slower rate than we anticipated, partly because we underestimated the time, effort and resources required to build this segment out quickly.

To help address this, we are adding a dedicated Commercial sales force to add expertise, tools and pure commercial focus for our dealers and customers.

We also launched a new RANGER-branded Diesel HST with hydrostatic transmission into our core RANGER channel to appeal and better reach our agricultural and MAHO customer segments.

Success may come more slowly than we are used to at Polaris, but the Commercial market remains an appealing, under-indexed segment for Polaris ORVs. And you can expect we will stay focused on this opportunity through our own brand and team efforts and those of our strategic partners, Bobcat and soon Ariens.

Defense.

Defense sales improved by over 50% in the first quarter driven by a strength in order book as our new product development, innovation and business development began to show more traction. We executed our first significant delivery on our LTATV contract that was awarded in late 2013 for M RZRs. Our newly developed DAGOR vehicle, designed for special operations global needs, is receiving outstanding consumer acceptance. And sales to international customers increased by over 200%, and our overall Defense order bank is growing.

Small vehicles.

In our last quarter before XM revenue annualizes from last April's purchase, Small Vehicle first-quarter revenue increased by 248% as all three brands -- GEM, Goupil and Aixam -- grew year over year. Aixam expanded its market share lead in Q1 in the European Quadricycle industry, and realized both strong dealer orders and shipments as our recently-launched model year 2014 vehicle platform continues to be very well received in the marketplace.

GEM orders improved by over 20%, and LEAN initiatives continued to favorably impact the productivity and profitability of all three brands.

International.

Polaris' International business had another strong quarter, with sales increasing 44% lead by nearly 50% and 60% growth in the EMEA and Asia Pacific regions respectively. Motorcycles, Small Vehicles, PG&A and Side-by-side sales all grew over 30% offsetting some weakness in European snowmobiles and Latin America.

Our EMEA region continues to deliver strong growth through market share gains in the Aixam business. But even without Aixam, EMEA sales increased 15%.

We are seeing some encouraging early signs from the EMEA, ORV and Motorcycle industries, with ORV industry up modestly and Motorcycles up significantly year to date.

Polaris has gained significant share early, notably through RZR and Indian. The first-quarter European snow industry, slowed due to poor snow, was down double digits in Q1. And this will have some impact on model year 2015 European snowmobile orders. Our Opole Poland plant is right on schedule for start up later this year.

Latin America sales were down 18%, due entirely to timing from our transition from a distributer to dealer direct in the strategic Mexican market. As of April, our new sales subsidiary is now open in Monterrey, Mexico.

Brazil is off to a very good start with sales in dealer increases. Asia Pacific sales were driven by strong market share gains in Australian ORV and Motorcycle markets, a great start in our China subsidiary, and India performing to plan.

Our Eicher EPPL joint venture is progressing nicely. The Jaipur plant is almost complete, product validation is right on track, and we expect to launch the new product very late this calendar year.

LEAN Enterprise.

We are ramping up LEAN initiatives focused on reducing ways to improve speed, quality and ultimately profitability. Both our Motorcycle and GEM businesses are being transformed into LEAN models for the rest of the Company.

Our retail flow management LEAN business model has improved Motorcycle order to ship lead times from over 100 days to now less than 14. We've increased Motorcycle capacity by approximately 50% per day through manufacturing process improvements and reduced down time by over 20%, and we are still very early in our journey.

In our GEM business we reduced work space needs by 31% and freed up 25% of our workforce to begin production on our all new GEM eM 1400 with zero headcount additions. Later in 2014, we plan to expand LEAN initiatives into our ATV business.

Across Polaris, gross margins expanded 10 basis points, driven primarily by value engineering and purchasing cost-reduction efforts. And manufacturing and productivity improved by 6% in the first quarter.

Factory inventory remains an opportunity. Including Aixam, it was up 30% year over year due product mix, acquisitions, and a bunch of new products and locations.

Polaris' quality continues to improve with our most recent net promoter scores for Victory, side-by-sides, and now ATVs, number one in our respective industries. We expect NPS and customer loyalty to improve even further in the future thanks to our Global Customer Excellence initiative which is already generating value for Polaris and our dealers.

With that, I'll turn it over to Mike Malone, our Chief Financial Officer.

Thanks, Bennett.

Good morning to everyone. We are pleased to be able to report record results for our first quarter and, based in part on the strength of those results, to raise our full-year 2014 sales and earnings guidance as follows.

Total Company sales are now expected to increase 14% to 16% for the full year 2014, with the following sales expectations by business.

ORV is now expected to grow 9% to 11% driven by ongoing product innovation and market share gains, an increase from prior guidance. Our Snowmobile guidance remains unchanged with expectations of mid single-digit percentage growth for the year. Motorcycles are expected to increase 65% to 75%, also unchanged and driven primarily by Indian.

Small Vehicles is unchanged up 25% to 30% which includes a full year of the Aixam acquisition. PG&A sales guidance has increased, now up about 20% including the sales from the recently-acquired Kolpin business. And International sales are now expected to increase in the low double-digits percentage range over the full year 2013.

Moving down the P&L, we continue to expect gross margins to decline 50 to 70 basis points in 2014, even though we showed a 10-basis-point increase in the first quarter. I will provide more detail on my next slide on gross margins.

Operating expenses as a percentage of sales are expected to decline about 100 basis points for the full year 2014 compared to 2013, unchanged from prior guidance.

We will continue to invest in sales, marketing, product development and distribution related to Indian Motorcycles and make numerous other global investments in future growth opportunities. As a percentage of sales, these expenses are expected to be more than offset by the planned reduction in our incentive compensation expenses related to changes made to the long-term incentive compensation plan, as we have previously discussed.

Between our projections for gross margin and operating expenses for the full year 2014, we expect to generate operating profit margin expansion in a range similar to what we achieved in 2013. However, as we have previously disclosed, the recent acquisition of Kolpin is expected to be slightly dilutive to earnings for the full year 2014.

Nearly all of this expected dilution will impact the second quarter 2014 in gross margins and operating expenses, largely due to the purchase accounting implications of the transaction.

The income tax provision rate for the full year 2014 is expected to be in the range of 34.25% to 34.5% of pretax income, unchanged from previously-issued guidance and higher than the full year 2013 tax rate of 33.7%. As a reminder, in calendar 2013, we had the benefit of two years of the research and development credit.

The retroactive R&D credit, along with favorable outcomes of tax audits, generated a non-recurring $8.2 million benefit to the first quarter of 2013 income tax expense a year ago. For 2014, the US Government has yet to renew the R&D tax credit to date. This change in the income tax rate accounts for about 130 basis points negative impact to the net margin percentage in the first quarter 2014 results.

Earnings per share for the full year 2014 is now expected to be in a range of $6.30 to $6.45, up 17% to 19% compared to 2013. And net income for the full year 2014 is expected to increase 14% to 16%.

For the full year 2014, the number of diluted shares outstanding is expected to decrease between 2% and 3% compared to 2013, due to the Fuji share repurchase late last year. We are not planning to repurchase any significant number of shares in 2014 at this time, although there are 1.6 million shares remaining on the current share repurchase authorization.

In the 2014 first quarter, the gross profit margin percentage increased by 10 basis points to 29.1% [sic 29.0%, per slides on Company's Investor Relations website] While we realized a small improvement in our gross margin percentage for the quarter, we anticipate gross profit margins will decline 50 to 70 basis points for the full year, unchanged from prior guidance.

We project that we will continue to benefit from higher selling prices and product cost reduction efforts, as we have the last few years.

However, there are several pressure points on gross margins that we believe will intensify throughout the remainder of the year. For instance the impact from unfavorable currencies, particularly the Canadian dollar, is expected to increase for the balance of the year.

In the first quarter, the Canadian dollar was negative to our reported sales and gross margins. But our Canadian sales are more skewed to the remaining three quarters, putting greater pressure on gross margins for the balance of the year. Currently, we have only about 15% of our remaining 2014 Canadian dollar exposure hedged at a rate of about $0.925, while the current spot rate is under $0.91.

Product mix was neutral to gross margins in the first quarter of 2014 and benefited from a greater number of RZR XP 1000s and XP4 passenger models sold in the quarter. However, product mix is expected to have a negative impact to the gross margin percentage for the balance of the year as our ORV product mix changes and we ship relatively more motorcycles and small vehicles, which currently have lower gross margins.

And our depreciation and amortization expenses are anticipated to increase about 40% for the full year 2014, given our recent and continuing significant investments in product development tooling and capital expenditures putting pressure on the 2014 gross margin percentage.

Moving now to our balance sheet and liquidity profile, which continues to be well positioned to support our strategic initiatives.

Net cash provided by operating activities was $44.7 million for the first quarter, slightly less than a year ago in a seasonally low cash flow generation quarter. We continue to expect cash flow provided by operating activities for the full year to increase at a similar percentage rate as sales grow.

At the end of the first quarter, our cash balance was $102 million, lower than a year ago, while our total debt increased to $332 million primarily due to the repurchase of about $500 million of Polaris stock from Fuji in the fourth quarter of last year.

For the first quarter, our investments in capital expenditures and new product development tooling totaled $40 million, about flat with the first quarter last year. For the full year, we anticipate capital expenditures will be lower than 2013 but still exceed $200 million.

Polaris acceptance receivables from dealers in the US were $958 million at the end of the quarter, an increase of 22% from a year ago, but only a 3% increase sequentially from year end. The year-over-year increase reflects the mix change of higher value side-by-sides and motorcycles and increased PG&A sales.

The retail credit environment remains stable with approval rates near historical levels for the first quarter. However, the penetration rate declined 4 points due to more aggressive financing programs available to our consumers from alternative finance sources.

In summary, our first-quarter results are a good start to the year. And we continue to have confidence the team can deliver another record year for Polaris.

Now I'll turn it back over to Scott.

Thanks, Mike.

It has taken six years, but I am finally learning that April is actually a winner month in Minnesota. Last week's snow melted quickly and certainly reinforced the concept of a late spring, but it did not dampen our early momentum in the spring selling season. Positive trends are helpful, but we still expect the latter half of year to be stronger than the first two quarters.

We are not looking beyond the second quarter. But there is a great deal of planning and excitement around our upcoming 60th Anniversary celebration to be held during our summer dealer show here in the Twin Cities. Our Company founders were leading innovators of their time, and we are honoring and carrying on their ingenuity with another record year for Polaris invention, surpassing the high bar we just set in 2013.

Designing and launching new products is what we do best, but we are working hard to be excellent in many other areas.

Tim Larson and his customer excellence team are improving our commercial execution every day and complementing the LEAN Enterprise work that Jonathan Blaisdell is driving across the Company. And while we are excited about our new plants in Poland and India coming online later this year, we are also adding capacity and technology in every Polaris facility.

As a committed capitalist, I must acknowledge the benefit we get from our competitors. They have stepped up their game in volume, quality and performance. And in this crucible of intense competition, we are being challenged to forge a better, stronger Off-Road Vehicle business. After several years of rising to this challenge, Dave Longren's Off-Road Vehicle business is strong and getting better.

The same is certainly true in snow, where Mike Jonikas and his teams new AXYS sleds were specifically designed to surpass competitors and excite riders.

If tough competition compels us to be better, then we are truly fortunate in the heavyweight motorcycle industry where the level of competition is nearly unmatched. Our Victory and Indian motorcycles are winning accolades for their style and performance, and generating energy and excitement around our Motorcycle business. While neither brand is new, in many ways we are competing as agile, unburdened newcomers.

It is exciting to watch Steve Menneto and his team accelerating growth and aggressively building on our number two position in the heavyweight motorcycle industry.

We continue to track interesting opportunities for profitable growth in Small and Commercial Vehicles, Polaris Defense, and other adjacent markets. Look for us to be more aggressive, both with our investments and our pursuit of returns, as we seek to diversify and strengthen our portfolio.

Looking at the external factors, we expect continued pressure from currencies and mediocre economic growth here in the US, but moderate improvements in the global Powersports industry. For the past 60 years, Polaris has determinately succeeded through good times and bad.

We have a responsibility to make the next 60 years better than the last, and I have confidence in this team to do exactly that.

I will now turn it over to Kyle to open up the line for questions.

(Operator Instructions)

Robin Farley, UBS.

I have two questions. First is trying to back into maybe what your Indian shipments were in the quarter versus Q4 and it looks like possibly they were flattish with the shipments for India in Q4. And I'm wondering if that was a capacity issue or that the dealers were not all up in retailing earlier in the quarter or that you were being cautious about if your dealers were opening in winter markets versus sun belt markets initially?

And then my second question is trying to think about ACE and how that may be affecting where the cannibalization may be falling whether it's ATVs or side by sides. And also one of your -- the slides it looks like ATV shipments were slightly lower year over year and I'm wondering if ACE is included in that bar chart or if you're (inaudible) ATV shipments (inaudible)?

So Robin, I'll start with the Indian and obviously we're probably not going to give you all of the detail you're looking for. But you really -- it's tough to struggle in these early -- you're explaining these early quarters exactly what's going on with shipments because the fourth quarter of last year was really our ramp up of shipping out to all of our available dealers both internationally, here in the US. And with not all that many retailing in the month of January and February, we are very committed, and Bennett talked about the reduction we've had in our lead types, and that's not just with Victory, that's with Indian as well.

So we're very committed to only shipping in based on what's retailing. So it was a -- we did ramp up capability throughout the quarter. So by the end of the quarter we had much better and more consistent shipping capability than we did at the start of the year. But I wouldn't -- there's really not that much color to offer between comparing the fourth quarter and the first quarter from a shipment perspective given the early stages of this product.

And Robin this is Bennett, I'll try to tackle the ACE question. From a cannibalization standpoint and a start as I commented, we're very pleased with the start. We're still actually filling the pipeline on ACE and global orders frankly both in North America and Internationally have been better than expected. So we've been chasing a little bit of capacity and still feeling the pipeline with dealers.

The early buyer trends I think are very encouraging. It looks -- again it's the very early innings, but we're not seeing any harsh cannibalization from either side by sides or ATVs at this point. But again I would make the remarks that we're only 90 days into it, and as this new category builds out, we'll see. But it looks to be a largely incremental model and we're getting from a consumer purchase pattern, we're seeing wide applications amongst a number of buyers and we're particularly thrilled that we also seem to be indexing well with some of the areas that Dave and his team had targeted that maybe had been underserved customer segments, so that's encouraging.

As far as the shipment data that you saw in the chart, again we believe ACE is going to be an all new category and we're trying to be fairly pure that's to some degree how we'll report it. As you see it in the chart there, it is -- ACE is included in ATVs, but our ATV shipments were not down year over year. So that's probably just a graphical thing on the bar is the only thing I could say because we're actually up. Okay?

Okay, great, thank you very much.

Gerrick Johnson, BMO Capital Markets.

Actually a couple questions on Snowmobiles. Curious as to how Snowmobile inventory was up at retail even modestly and will it cost you more in rebates to move those units now that AXYS renders many of those obsolete? And then the second part on Snowmobile, a snow check now is largely completed, I see no change in your Snowmobile guidance, so I'm wondering if you didn't see out performance to your expectations owing to AXYS and how that played out? Thanks.

Gerrick, this is Bennett. I tried to cover that in the remarks on the inventory. It was a little unique. We've got a pretty interesting snow check program particularly with this customization. And so we actually seeded a number of model year 2015 shipments into the marketplace to accelerate snow checks and frankly that's what drove the inventory up year over year. All the stuff that's existing inventory is actually down year over year. As I remarked our snow checks were actually better than we expected, up considerably year over year. But we're frankly holding guidance frankly because there's been some weakness in the European snow market in the first quarter and we think their orders are going to be impacted. And until the dust settles, we usually don't modify our Snowmobile guidance until all the orders are completed globally and that usually happens in our July call.

Okay and on that European aspect, how many of -- or how much European snowmobile sales are to Russia? And any softness there from the economy or geopolitical concerns or anything like that outside of weather?

Yes I mean, obviously we're watching Russia real closely. The primary impact we've seen over the last 90, 120 days has really frankly been, in Snowmobiles has been weather there. They had a pretty lousy snow season, didn't have good snow coverage for most of the year and that's affected their snowmobile orders. Again we're going to be cautious and careful with Russia in general and overall. From a volume standpoint, Scandinavia and Europe, it's probably a little less than half.

Great, thank you.

Scott Hamann, KeyBanc Capital Markets.

I have a few questions. First one on wholesale inventory up 30%. If you were to strip out the Aixam deal how much would that be up? And then secondly in terms of your ORV guidance, that was one of the bright spots you talked about here. As you see the retail trends, can you call out a few products or segments or geographies that's driving you to be more optimistic in that guidance versus where we were 90 days ago?

Yes, on the factory inventory number, Aixam is about 4% of that increase year over year and again there's a number of contribution factors as we get a little bit bigger, broader and I don't want to use the word more complex, but more diverse in our locations and our businesses that are driving that. But certainly we think that's an opportunity.

Yes, and the other thing I'd add to that like we said in the dealer inventory increase where there's a number of new categories and new models, we have the same thing at the factory as well. We have those new categories that we have raw materials for and inventories for as well. So there's some impact to the plus 30% based on the overall growth of the Company.

Yes, but to be very clear, we have an opportunity and a responsibility to get our inventory better in line with where it should be for a LEAN Company. We are certainly not LEAN with our inventory management today and we've got a lot of work to do there and we've not made the progress that certainly we would like to. But it's certainly an area that we continue to drive a focus on and we expect our inventory turns to improve over the next several years, probably not over the next several quarters.

Yes. And then relation to ORV retail trends and guidance I think as we look, we're seeing that contribution from a number of factors. Certainly the RZRs have been very strong. ACE is off to a good start, we're very optimistic about that going forward. International has been a little bit better than expected. And again, we remain very optimistic about the model year 2015 news that we'll announce here in about 90 days. So it's really a broad based contribution Scott of where we're seeing ORV strength.

All right, thanks.

Greg Badishkanian, Citigroup.

Great quarter. And wondering qualitatively how -- what your dealers are telling you in terms of how they feel about inventory and mix and what their general sense is?

Yes, Greg this is Bennett. Again I think as you guys continue to do your surveys you're capturing the tone reasonably well. I think our dealers generally feel pretty good about where our inventory is. There's still a couple areas we're still chasing demand frankly, ACE and some of the big RZRs most notably. And as this marketplace becomes more competitive and there's a lot of these dealers don't have the largest show room and we have this broader portfolio segments that they really need to cover to grow and competitors get more aggressive with new models, they have a lot of stress on their show rooms. And so that really is in my mind the battle front right now. And we're seeing and feeling that virtually every day but again with our amount of products and our leadership in those segments, for the most part, our dealer feedback has been with the RFM and MVP improvements and where we're going with ATVs I think they feel pretty good about what we're doing on inventory.

Yes, I think Greg as you do the surveys at the end of the quarter, whenever you have high seasonality changes going from the winter months to the spring months and that final transition month at the end of the quarter doesn't come out as robust as some would like, I'm sure there's some dealers that felt like if the timing had been a little bit different they might have been better off. But I think by and large, as they still continue to see retail momentum flow especially here early in April, it's by and large about exactly where we want it.

Good, yes that's pretty consistent with what we're seeing, I just wanted to get your take. Also with respect to the promotional environment, you mentioned that it remains elevated. Has that accelerated from late last year or is it consistently elevated?

It's -- again, I think where we're seeing the aggressive environment is generally in side by sides and it's elevated, it's not insane. And what I would really tell you is it's just a more crowded marketplace right now. You got a bunch of new products and competitors that really have entered with new products over the last 12 months. And then you have people responding to those competitive threats with more new products with elevated promotion. And so you've got the confluence of both of those factors. And so we view the side by side market as very competitive right now and -- but again we like our ability to win going forward.

Right. Okay that's helpful, thank you.

James Hardiman, Longbow Research.

A couple questions. Let's start on ORV. So the current wholesale guide is up 9% to 11% for the year. How should I think about what level of retail you're going to need to get to that number, even if you don't quantify it I know you don't give retail guidance? But if I think about the different puts and takes, it seems like inventory is going to be a positive, ASPs are going to be a positive, Defense and Commercial seem like they're positives. It almost seems like even where we are today in the first quarter high-single digits type retail but that's enough to get us to 9 % to 11%? How should I think about all that?

You should think about it that's for sure. (laughter) I would say from a retail standpoint on ORVs, it's a pretty complex business. There's lots of puts and takes in there and what you saw in the first quarter some of our ASP trends are going to minimize in future quarters as we start -- as that mix change a little more pronounced, I think we'll lose some of those advantages. I would tell you to think about the retail rate being at least similar to what you saw in the first quarter or a little better --

Just to set a bar though 7% for the year won't do it.

Yes, but he's talking--

I'm saying for the overall Company though.

That makes sense. And I guess along those same lines I thought one of the most significant parts of the presentation is where you point out that you expect retail sales and market share to accelerate as we move forward. Is that more a function of warm weather climates doing better than cold weather climates or is it -- is there something that's happened so far in April that gives you a lot of confidence that that's going to be the case?

Yes. Yes, I think that certainly we're very encouraged by our sun belt performance and everything we've seen frankly in Jan and Feb, and frankly what we've seen in April, throwing March out, has been frankly pretty encouraging in the north as well. So I think that improves and again, we feel very good about a lot of the new products and the momentum we're seeing with the models we introduced here over the last six months and the news we have coming. So we do think we'll accelerate as we go into the last three quarters of the year.

And we're just getting started with ACE. We didn't have anywhere near a full quarter of ACE in the first quarter.

Perfect and then last question for me on Indian. You had I guess a little over 60 dealers retail and coming out of Q4, it sounds like maybe 75, 80 coming out of the first quarter. Does that rate of dealers actually retailing accelerate at some point? It seems like its been a little bit slow to get these guys actually retailing some of these bikes rather than just signed on. At this rate it's going to be awhile before we even get to that 120 number. How should I think about that pace of dealers getting actually retailing bikes as we move forward?

Well I mean obviously, we're quite cognizant of seasonality in motorcycle sales. So there is a race both with Polaris and with those dealers to get up and retailing as fast as they can throughout the spring and summer sessions. So we'll get to 100 in the second quarter at some point, probably towards the end I suspect. And then literally we're building capability to help them get set up faster.

But truly James it's mostly an aspect of making changes to buildings, getting approval codes from cities and municipalities and it's not as easy as we had hoped of just putting up a new Indian sign and start selling. So I think we're learning as we go through this process how to help them do that, but it's not going to accelerate tremendously but may tick up a little bit here as we start to try to get more detailers -- more dealers retailing in the second quarter.

Got it. Very helpful. Thanks, guys.

Jimmy Baker, B. Riley & Company.

So as we think about PG&A, can you give us any color on how PG&A attach rates on Indian and some of your newest offerings like the ACE are comparing to let's say the prior corporate average? And then can you share any metrics regarding say any change in frequency, consumers or visiting dealers and if you're seeing a repeat traffic benefit from an expanding PG&A portfolio?

Yes, Jimmy this is Bennett. I would tell you the examples you pulled out, most of the new products and new categories that were coming, their penetration rates and dollar per unit is very favorable to essentially what proceeded them. So Indian has been significantly better than Victory and we expect that that trend will continue and hopefully even accelerate as we continue to build out that PG&A Indiana assortment.

ACE has been again very, very favorable in relation to traditional ATV, much, much better. Not yet at the side by side level which we expected. So we've been very pleased with our new models. And the RZR, the new RZRs have been great, the RANGER XPs have been outstanding. So most of our new generation of products are seeing much better penetration rates.

We don't have any data that's, I wish we did, about frequency of store visits on PG&A. We continue to be a little data starved in this business and that's something that long term, Steve Eastman and Tim Larson are working on, how we can use data a little bit better. But we're going to need system improvements both within our dealer network to be able to do that.

Okay, great. And then a follow-up question on motorcycle dealer inventory up mid-single digits. I guess given the rate at which you're adding dealers and the 50% growth at retail I'm surprised it's not up much higher than that. Is there a point at which your motorcycle dealers can improve, cannot improve turns in perpetuity and will need to see motorcycle inventory growth accelerate maybe similar to the dynamic we saw in ORV a couple years ago?

I don't think it's fair to compare it to ORV several years ago because really two things happen in ORV that drove that. It was the proliferation of new models and a slight improvement in turn. What you're seeing in Motorcycles is a, and Bennett spoke of the numbers, a dramatic decrease in our order lead times and that is going to give dealers an opportunity to custom order bikes, it is going to really -- and I think you're seeing, Bennett mentioned it, it's a competition in the show room for floor space. A

And we're going to give a dealer an opportunity to have higher velocity and we are seeing them take advantage of that. So obviously when we have 300 dealers, it's going to increase a little bit. But with our current run rate I don't expect to see a dramatic increase. You'll see some fluctuation as I mentioned earlier quarter to quarter, but by and large we are committed to running a LEAN inventory model in our Motorcycle business.

Okay, thanks very much, Scott. Thanks, Bennett.

Jaime Katz, Morningstar.

The first question I have is on Latin America and I know that part of the shortfall appeared to be from this dealer transition in Mexico. And I'm curious when that is completed and if there was anything else impacting that number because it sounded like you mentioned that Brazil was actually strong?

Yes, this is Bennett, Jaime. Mexico is a pretty sizeable part of what is a relatively small part of our business in Latin America. So when we're going through a transition in Mexico, that's pretty material. And we'll be -- you'll see, I don't want to say re-seasonalization as we go direct here over the next 12 months. And then I think from within a year you'll start to see the numbers normalize. But I think you'll see some wobble in Latin America based on this transition from distributer to dealer and what's a significant market.

And yes Brazil was up and so there really was no other material move other than a Mexico timing issue on transition and that has to do with buying back and dealer inventory situations with the distributer buybacks that make 2014 in the first quarter in particular a little bit odd.

Okay and then for Brutus, it sounds like things are still not going exactly as expected. Has the change to the sales force helped or are there other steps that you guys are taking maybe to accelerate the growth in that business as far as getting on track to where you want it to be?

We're taking -- we got a number of counter measures going on Brutus. I would -- I think as you saw from my remarks what we underestimated, how quickly we were going to be able to be great at this business without question. The Commercial sales force has really just gone in in the last 90 days and we're still building that out. So they're starting to make a modest impact, but I expect as we go over the course of the next 12 months you'll see more. Again the part we -- that we're not a very patient Company, the purchase cycle through the B2B and the B2G buyer is very long and frankly we still got to build some brand credibility with some pretty frankly entrenched competitors.

So we got our work cut out here. I feel like we're eating a little bit of humble pie here in all honesty, and as we usually do we try to come very clean on when we're disappointed. And I would tell you right now we're disappointed with Brutus, but by no means are we giving up and we've got a multi faceted approach to how we're attacking this Commercial customer segments between Bobcat and Ariens and what we're doing in national accounts and what we're going to do with our own channel. And again, it may take a little longer, but we're going to win this battle.

Okay and lastly I know somebody on the call would have capital allocation and I'd be curious to hear your thoughts on optimal capital structure and what you think about adding leverage to the balance sheet just because you obviously have the ability to do it and I know there was a new piece of debt recently issued. But how do you feel about that longer term maybe?

Well clearly we have capacity to do it, but you used the words just because. We will not add to our balance sheet just because. If there's a reason to do it and I think we'll pursue it. And we are still very bullish on what the opportunities inorganically to accelerate profitable growth and if we see great opportunities we'll add to the balance sheet as necessary. But there won't be any just because interest rates are low, we're going to bulk up the balance sheet.

Excellent. Thank you so much.

Michael Swartz, SunTrust.

Starting with the Off-Road Vehicle business if we look at that sales are up 11% during the quarter. How much of that would have been price mix versus units?

Specific to the ORV business in the quarter, the plus 11% that we reported, about 4% of that is ASP.

Okay and then thinking about how that plays out--

For the 11%.

Okay, and looking at how that plays out to the rest of the year I know you've got ACE is seemingly doing better than you had anticipated and you're also going to be lapping the initial sell in of RZR - or I guess the XP 1000 in the back half of the year, so is there a possibility that price mix actually turns negative at some point during the year?

Yes, I would -- we would not -- I guess the way I'd answer that is we wouldn't anticipate that it'll be as healthy as 4% for the year. As the ACE rolls out for the balance of the year and our mix of the products going forward, we'll anniversary the big RZRs and those things. We would not anticipate that it's as healthy for the full year.

Okay and then over to the Kolpin acquisition. I know you haven't given revenue or any kind of financials on that, but it looks like with the guidance raise in PG&A, is it safe to assume it's about $30 million business? And then if so, is the margin structure similar to the legacy PG&A business excluding some of the one-time and integration type costs?

Yes, I would tell you that last year for the full year, the Kolpin sales were around $20 million. So we'll get three quarters of whatever that is for 2014, that's what's embedded into our guidance. As far as the overall margins are concerned, what we've said is that the overall margins of the Kolpin business are about what our accessory -- they sell accessories and their margins on accessories are about what our accessory margins are, which is part of our overall Parts, Garments and Accessories business.

Okay, great. Thanks for the color.

And that's -- and as I said on the call, that's before the purchase accounting implications and all that. So going forward, this will be accretive and then we have the second quarter issue where we'll be somewhat dilutive.

Okay, thanks a lot.

Rommel Dionisio, Wedbush.

A couple of questions on the (inaudible) capacity expansion. First of all I didn't write down fast enough Bennett where you said that's going to take place, is that Monterrey where you're adding the capacity?

Well we're adding in capacity in lots of places right now. We are actual -- I didn't mention Monterrey, but we are adding some capacity there with third line and some additional shifts. Specifically what I was talking about was Milford, Iowa which is about 20 minutes from our Spirit Lake plant. As Spirit Lake becomes frankly really focused primarily on motorcycles, we needed additional space and capacity to run all of our various ORV product lines. And so we have secured about a 360,000-square foot facility there and that's where we're going to be doing some of the higher volume ACE stuff.

Okay and as you ramp up capacity on ACE, obviously that's for the vehicles, but are you guys also increasing a line up for accessories that will go with ACE going forward?

Yes. Yes, I think again the way you should think about ACE is very encouraging start, very early innings, more to come.

Fair enough. Thanks very much.

Craig Kennison, Robert W. Baird & Company.

Bennett, wanted to follow up on that show room space discussion you had earlier. To what extent is Polaris already the number one brand in your dealer base such that it's going to be harder to grow inventory beyond retail because you've already established yourself within that dealership?

I want to make sure I understand question, Craig, but if I don't answer it, you can jump in. Clearly with our move to leadership and with the amount of compelling product lines in virtually every dealership we're in, we're probably the number one player in the vast majority of those. I can't speak for all 1700 points in the vast majority of it. And once you have that share and you're turning it as quickly as we are and you're being a responsive partner, it's harder to take that space away from us. But again a lot of guys carry other brands and a lot of those brands have been fairly dormant and they're a little more active. And their people are in there saying you got to give us space. So it's a battle, but I expect that it's going to be much more difficult than maybe it would have been seven, eight years ago.

So following up on that, part of your inventory growth is really driven by the growth in the armada, not because inventory is not turning. Is there a limit to how much you can grow the armada within the existing footprint of your dealer network?

Craig, that goes back to what we're doing with this LEAN Enterprise approach. Our philosophy is to be able to put more variety of innovative products in that turn faster under the same floor space. And to the extent we can do that better than the competition, it makes more money for the dealerships and increases our market share. It is not about asking them to add on to the building so we can put more products in there.

Great, thank you.

Tim Conder, Wells Fargo Securities.

A couple here, gentlemen. On your ORV piece, you had mentioned last quarter, and a competitor even mentioned that also, that you felt that your dealers focused maybe a little excessively on the new products, not that they shouldn't, but maybe to the neglect of let's call it some of your legacy products and that you were taking steps to address that. Can you maybe give us an update on that? And then also the 570 engine products in the middle part of the ATV market and then also there in the RANGER product, a little bit of color how those are doing relative to RZR and ACE and so forth.

Tim this is Bennett. I would tell you as this -- particularly the side by side environment gets more competitive, I was one that made the remarks and we've taken a number of steps over the last 90 days to shore that up both within the product and within the sales teams and I think within the dealership, but I think the honest answer at this point is it's still pretty early on a number of the moves we can make.

Some moves you can make getting people to focus on it and bring their attention to it and sharpen up some quick things around your marketing and your promo. And then some of it's a little longer term with product. And so expect more to come on that sharpening on that competitive edge in all of the segments. I think that's going to take another six months to build out.

As far as the 570s go, I would tell you that the Sportsman 570s picking up momentum. Now that the Sportsman 500 legacy all that -- those inventories have cleared through, we're seeing very nice ramp up rates in the first quarter on 570s. And frankly, our RANGER 570 sales are quite good as well. So we're feeling really good about the 570s right now.

Okay that engine will look great in an ACE product by the way. Looking at Motorcycles, I'll -- want to shift back to that. Any color as to how much Indian drove the overall increase in the Motorcycle segment, rough percentages?

And then Scott, obviously you're making a lot of investments here especially in capacity the last couple of years. Should we potentially see maybe a little bit of a pause button here on capacity type of investments and a little maybe of the harvesting type of mode as we move into 2015?

Yes, first on Indian, I think our press release and our comments said that Indian drove almost all of the Motorcycle increase in the quarter. Victory was down just slightly on retail and as I said we're basically shipping to retail. So I think that speaks for itself. We're very, very pleased overall with the early momentum on Indian. I tell you that I can not talk to a dealer and find them to be -- I question their optimism sometimes. But the early results that we're seeing are quite encouraging both not just here in North America, Europe's been strong, Australia's been strong. So very good early momentum with Indian.

And don't let our comments on Motorcycles steer you to the fact that we're going to neglect the Victory brand. We've got some very innovative products with the Gunner coming to market. Just released a new ad that I think is -- positions that brand the right now. So overall, we're feeling good as we enter the spring selling season about where the Motorcycle business is.

As far as capacity, we go through a little bit of waves here and we're in one of those investment waves. And it's going to -- we're going to catch up and we're going to have a little bit of extra capacity for a little while and it'll slowdown and with any luck we'll continue to drive retail globally and we'll have to make another round of investments. But certainly this is one of those high points where we're adding international capacity with Poland and India. We did the Monterrey investment a couple years ago and quite honestly, we're tapped out on the benefits of that one and so we're making the second round of investments here in North America.

But certainly, we are not going to be investing at this level in organic capability for years ahead. This was the high watermark and it'll ramp down, we'll harvest a little bit and then we'll like I said with any luck we'll drive retail and do it again in a few years, but not next year.

And then finally there to clarify on the capacity on Motorcycles, Bennett, you mentioned in your preamble that you're picking up some nice incremental volume capacity ability with some of the LEAN initiatives on the motorcycles and yet you're expanding also Iowa. So are we still looking, when everything gets all done there on Spirit Lake, Iowa, of about a 60,000 to 70,000 unit annual capacity ability or is that now maybe a little bit higher?

There's two things, Tim. Bennett was mostly speaking about the Milford facility which is not going to be Motorcycles. So we're adding to our Spirit Lake capacity and I think we're going to have plenty of capacity to build all of the motorcycles we're going to need to build over the next three years. And a great new paint system that's coming on line later this year. But it's that Spirit Lake facility that's going to really be an On-Road motorcycle facility and additional capacity coming online for some of our new products in Milford.

Okay, great. Thank you, gentlemen.

Mark Smith, Feltl and Company.

Couple quick ones. Respect to Victory of Victory retail being down, can you point at all to cannibalization from Indian? And then second on that your guidance for Motorcycles I don't know if you can break out for us what you have applied for Victory this year?

I'll take the Victory cannibalization question. In all honestly, we have not seen a lot of cannibalization from Indian. Again as I put in my remarks the source of volume as we look at the purchasers tends to be the trends we saw the first 15 years in Victory are the same. We're tending to get most of those people that are -- that have generally been metric people. And on the Indian folks are mostly Harley people and largely they're separate distributions and there just isn't. And I would tell you our Indian had a great first quarter and I think Harley had a pretty darn first quarter. And I think if you look at everybody else, Victory did pretty darn well in the first quarter, so I wouldn't expect that we're seeing big cannibalization right now.

And as far as the guidance is concerned, Mark, we're not going to give anymore specifics than the 65% to 75% that includes Indian obviously which is the vast majority of that. It includes our Victory shipments that are expected and it also includes a little bit of Slingshot at the second half of the year.

And that was my second question was Slingshot will be classified under Motorcycle and not Small Vehicle?

Yes.

Okay, excellent. Thank you.

Joe Hovorka, Raymond James.

Couple quick questions. One is if we put 70 Indian dealers up there on the slides, are all those retailing or is it like North American dealers where it's half of that?

No, it's slightly more than 70 that are actually retailing right now.

I think he was talking about International.

Yes you put up 150 International or domestic and you say half of this is retail and then there's a--

International the percentage is much higher than our retailing. It's not 70 but it's pretty darn close on the International side.

How many International dealers does Victory have as a comp?

I know that number, but I've got to look it up, Joe. I don't have it off the top of my head.

Okay, and then the dealer direct in Mexico, does that drive factory inventory as well? You got more inventory on the balance sheet at Polaris because of that as the transition goes on?

Yes, there is a little bit more incrementality there. What happens when we transition, the transition was in April, so what happens as we transition is the distributer quits ordering basically running up to that period and we have to supply inventory in Mexico on our subsidiary ready to turn it on in April. So in the short term, there is a little bit of subsidiary inventory build and a reduction in the actual revenue ship which is what Bennett talked about in Q1.

Okay was that significant on the 30% increase of the inventory in the quarter or no?

No.

And Joe, Steve Menneto just chimed in and says we've got just a little over 150 International dealers.

For Victory?

For Victory, yes.

Okay. And then last question, the ACE shipments in the quarter what was the progression? Were you shipping anything in January, were you at either 100% run rate by March or is it still ramping into April?

We started shipping right at the end of January and we've been plugging away. I would tell you we're close to our ramp that we had planned for the first half of the year, but again we're planning on adding additional capacity to take those rates up in the second half of the year.

Okay that's it. Thanks, guys.

Okay, thanks. That's all the questions we have and the time we have this morning. Want to thank everyone for participating and we look forward to talking to you again next quarter. Thanks again, goodbye.

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