Polaris Inc (PII) 2014 Q2 法說會逐字稿

Good morning, my name is Simon and I will be your conference operator today. At this time, I would like to welcome everyone to the Polaris second-quarter earnings results conference call.

(Operator Instructions)

Mr. Edwards, you may begin your conference.

Thank you, Simon, and good morning, everyone, and thank you for joining us for our second-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 shipment, sales and margins trans, income and profitability level, and other matters including more specific guidance on our expectations for 2014, which should be considered forward-looking for the purpose of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements.

Now I'll turn it over to Scott Wine. Scott?

Good morning, and thank you for joining us. Over the years, I've learned not to underestimate what our Polaris team can accomplish, which matches well with my consistently high expectation.

With tremendous energy being expended to build new plants, grow internationally, drive our lean transformation, and prepare for the launch of an awesome array of new products, it was impressive to see our North American team deliver 15% retail sales growth in the second quarter.

As we get ready to celebrate our 60th anniversary, there's no better way to honor our history than by demonstrating that through the Polaris tradition of passionate execution, perseverance, teamwork, and innovation, we can overcome a lackluster economy and increasing competition. With broad strength across our portfolio of global businesses and brands, Polaris' second-quarter sales increased 20% to just over $1 billion, representing accelerated growth both sequentially and year-over-year.

It was encouraging to see our best retail performance in two years precede the launch of an outstanding lineup of model year 15 vehicles. And a welcome surprise to report that quarterly sales growth in EMEA and Asia-Pacific Latin America outpaced growth here in North America. In line with our emphasis on profitable growth, earnings outpaced revenue in the second quarter with net income increasing 21% to $96.9 million, yielding record earnings per share of $1.42, up 26% over the prior-year period.

Despite continued pressure from the Canadian dollar, we delivered a small 20 basis point improvement in gross profit margin supporting our second consecutive quarter of 24% growth in operating income. Mike and Bennett will provide details in this outstanding quarter shortly.

While there has been minimal impact on our results, we are keenly aware of the turbulence and uncertainty in many parts of the world, and remain skeptical of the outlook for the US economy. With many improving trends in our own retail sales and market share gains throughout the first half, and undoubtedly our best year of product innovation yet to be unveiled, we are encouraged as we approach the final six months of 2014.

We are maintaining our outlook for moderate to mid-single digit growth in the overall power sports industry, and anticipate that share gains will continue to drive our growth. As we work to deliver just over $2.5 billion in revenue in the second half, we are increasing our full-year sales estimates to be up 16% to 18% over 2013. Correspondingly, we our raising full year earnings per share projections to $6.48 to $6.58, a 20% to 22% increase.

During our extensive preparations for next week 60th anniversary dealer show, we have many opportunities to reflect on our progress over the past six decades. We still benefit greatly from the spirit of innovation and hard work that Edgar and Allan Hetteen and David Johnson instilled in the Company in 1954. And we proudly follow the trail they blazed with that first snowmobile by continuing to take risks, build new products, and create new markets.

From Edgar, Allan, and David's humble beginnings in Roseau, Minnesota, we have grown to encompass 12 plants and over 6500 employees around the world. Not to mention more business units than they had vehicles. But we strive to maintain a humility with was their hallmark.

Confidence and competitiveness are also key attributes of our Polaris culture, and certainly contribute to the innovative products and excellent execution that enables us to be the clear number one in a hotly contested power sports industry. We have an armada of vehicles to provide excitement, get the hardest work done, and bring families and friends together.

From our legacy snow products to our new Indian motorcycles, we are constantly building on our heritage with industry-leading style and performance. Our new ACE vehicle's a great addition to our pioneering RZR's Rangers Sportsman ATVs, and we are far from done pushing the industry forward.

Strategy will play an even larger role for the success of Polaris over the next 60 years as we position ourselves to compete in new markets in new parts of the world with new technologies. We remain committed to our five strategic objectives with the expectations that we will create shareholder value by delivering on our goal of building a highly profitable $8 billion global enterprise by 2020.

Whether it is continuing to extress our lead in the best in power sports plus or expanding our adjacent market business with international acquisitions, we will win with people. We have talented, competitive, hard-working employees and I am energized by what they do everyday to make Polaris a better Company.

From the passion and ingenuity of our sales team to the tireless efforts of our operations staff, we are embracing lean and improving every aspect of Polaris while fulfilling the significant customer demand that drives our business. We will surely have more facilities and people, different products and customers, and new challenging competitors in the future, but as we look at the next decade I am excited about our potential to execute our strategy and do big things.

Our executive leadership team will provide additional perspective on our businesses, plans, and strategies on Monday July 28 here in the Twin Cities at her analyst investor meeting, which I hope many of you will attend. With that, I will turn it over to our President and Chief Operating Officer, Bennett Morgan, to provide insights into our operations and business unit performance.

Thanks, Scott. Good morning, everyone.

Polaris North American market share in retail sales accelerated considerably in the second quarter. The 15% increase in retail was driven by excellent ORV and motorcycle retail demand and a power sports industry that was up mid-single digits.

Dealer inventory decreased from the first quarter and is up 13% versus the second quarter of 2013. ORV inventory increased low-teens percent, motorcycles about 20%, and snow and small vehicles low-single digits percent.

Our working inventory composition remains very good. Year-over-year increases are primarily in support of incremental ORV customer segments, Indian expansion, and new dealer distribution points. We are in a very healthy position as we transition into the model year 2015 products.

Moving on to business unit performance. Off-road vehicles. Polaris' second-quarter ORV revenue increased 13%, driven by strong RZR, ATV, and ACE demand. Year to date, ORV revenue was up 12%.

For the 29th consecutive quarter, we gained share in ORVs in North America, gaining in both ATVs and side-by-sides, and building upon our clear number one positions. Polaris ORV retail sales improved to up low-double digits in an industry that increased upper-single digits.

Polaris ATV retail sales increased mid-single digits in an industry that grew low-single digits, while Polaris side-by-side retail sales grew a robust low-teens percent, exceeding our industry estimates by roughly 3% to 4%. Sales increased across our entire side-by-side portfolio with Ranger and RZR both up double digits, and all our customer segments growing in each brand. ACE continues to sell briskly and provide excellent and incrementally.

We have already began the model year 2015 product launches with a bang with last month's announcement of the model year 2015 Ranger XP 900 that received 13% more power, and the red hot RZR XT 1000 that is now up to 110-horsepower. We are less than a week away from our 60th anniversary dealer meeting where we will launch the balance of our 2015 model lineup, and we again have tremendous product and business news to across our entire ORV portfolio.

Motorcycles. Motorcycle revenue more than doubled in Q2, up 107%, primarily due to Indian retail sales and dealer expansion. Year to date, motorcycle revenue was up 79%.

Polaris motorcycles continued to significantly expand North American market share. Polaris second-quarter retail sales grew about a 50% rate in a heavyweight industry that was about flat.

Victory retail was down mid-single digits and lost a small bit of share, likely due to an execution of a product recall back in May. Nevertheless, we remain encouraged by the resilience of the Victory brand and distribution channel. We recently promoted Rod Krois to general manager of Victory to lead the brand team, and dealer network to new levels of performance.

Indian sales momentum remains very positive with Vintage and Chieftain sales leading the way. Early buyer quality satisfaction is extremely high, and sales per dealer is very strong. We now have over 95 North American dealers actively retailing Indian.

The timing from dealer sign up to dealers being ready to retail continues to be more variable and take longer than we initially anticipated. As a result, we now expect to have about 125 retailing dealers at year-end. Our long-term outlook of approximately 300 North American Indian dealers remains unchanged.

We are eagerly anticipating the full unveiling of our compelling model year 2015 motorcycle product launches. They began earlier this month with the announcement of hotly demanded two-tone paint versions on all current model year 2015 Indian models, and we will introduce further news for Indian and Victory at our 60th anniversary dealer meeting next week and in Sturgis in early August as Polaris continues to rapidly expand our American motorcycle business.

Slingshot. The worst kept secret in power sports is about to be unveiled as the official public reveal of our exhilarating new Slingshot will occur on July 27 during our 60th anniversary sales meeting in Minneapolis. There we will launched two distinct trim levels, a base trim level model called Slingshot and a premium priced model with additional features called Slingshot SL.

Social media is buzzing in anticipation of this exciting new on-road driving experience. Further details will be announced at the meeting, so stay tuned for more.

Snowmobiles. Second quarter is a seasonably slow quarter for snowmobile shipments and retail sales. Q2 revenues were $6.1 million, down versus 2013's $8.5 million.

Model year 2015 orders are complete, and in total, slightly exceeded our expectations. Strong North American dealer and consumer snow check orders were offset by weaker Scandinavian and Russian orders due to poor snowfall. With the positive response to our model year 2015 product lineup, led by our new Axys platform, we are excited for the start of the upcoming fall snow shows and riding season.

Parts, garments, and accessories. PG&A momentum remains very healthy with both second-quarter and year-to-date revenue up 20%, led by strength in both ORV and motorcycle related products. All product segments grew, led by accessories which were up 26%, and apparel up 57%.

Klim had another excellent quarter and year-to-date sales have grown 36%. Kolpin and gotten off to a fast start and adds a quality aftermarket brand to our portfolio, providing access to new distribution channels and customers.

Our Wilmington, Ohio PG&A distribution center has improved service levels to our eastern US customers over the past year. And in July, we extended its support to our eastern Canadian dealer network. An innovation remains as alive as ever in PG&A.

Next week we will launch over 350 new accessories to support the largest new product launch in our history. These new products highlight our commitment to seamless integration with the vehicle, ease of installation, and improved quality. We couldn't be more pleased with our performance and consistency in our highest margin business, and we remain bullish on building on this momentum in upcoming quarters.

Commercial. As expected, second-quarter Polaris commercial revenues declined mid-teens percent, since we faced much tougher year-over-year initial channel field comparables for Brutus. Brutus retail sales in the second quarter improved, but remained below projections, and clearly it will take longer to gain scale with the business-to-business customer than we had initially forecasted. Bobcat retail improved strong double digits and our national account business continues to post nice quarterly increases.

Defense. Defense sales improved by about 50% in the second quarter and the entire business is gaining momentum. International sales were up about 100%, customer quote activity is increasing, our order backlog is up notably, and our MRAZR and DAGR vehicles are receiving outstanding customer acceptance. Our defense outlook has never been so encouraging.

Small vehicles. Small vehicle revenue increased 29% in the second quarter, led by Aixam. Gem and Goupil also contributed to Q2 small vehicles growth.

Aixam had another strong quarter, considerably expanding its market share leadership position with retail up mid-single digits in a European quadricyle market that remained down low-single digits in Q2. The Aixam business is operating at a high level one year after the acquisition, and we are finding additional synergies to drive further profitability and efficiencies.

Our Gem and Goupil businesses continue to improve. Goupil's Q2 revenue and profits grew despite sluggishness in its domestic French market. Gem retail increased double digits, orders were up, business-to-business penetration is trending upward, and we are seeing increased backend cost improvements.

International. International revenue was up 26% in the second quarter, driven by strong RZR, Indian motorcycle, and small vehicle demand. And excellent sales momentum in all regions. Year to day, international sales are up 34%.

Europe, Middle East, and Africa had another very solid quarter with revenue increasing 22%. We continue to outperform the industry and gain significant market share in both ORVs and motorcycles. ORV retail sales are up low-teens percent year-to-date and motorcycle sales, on the strength of Indian, are up over 80%.

European markets are also improving with year-to-date ORV industry sales increasing low-single digits and motorcycle industry sales up high-single digits. The European snowmobile industry ended a disappointing season with retail down low-single digits, and Polaris down a bit more ceding some share for the season.

Our Opole, Poland plant is substantially complete and will begin initial limited ORV production early in the fourth quarter. Shipments to customers will not commence until January 2015.

Asia-Pacific second-quarter revenue increased 40%, led by strength in Australia, New Zealand, and China. In Australia, our largest subsidiary market share is up significantly in both ORVs and motorcycles.

Q2 sales in Latin America surged up 36%. The launch of our New Mexico subsidiary has gone even better than expected and Brazil remains strong. Our overall international business is performing at a higher level across the globe in 2014 as our teams and brands continue to strengthen.

Lean enterprise is competitive advantage. Lean initiatives continue to drive results at Polaris. Gross margins improved 20 basis points despite pressure from Canadian currency and product mix.

Consumer quality and warranty improved. Retail flow management, or RFM, is driving results in motorcycles with 14 day order to ship lead times. Q2 productivity improved 5%, helped by Kaizen teams attacking key opportunities such as reduced assembly and changeover times and lead time and inventory reductions in our various businesses.

Factory inventory is up at 31% versus a year ago, driven by product mix, acquisitions, new products, and timing to assist with second-half production capacity. We are bringing a number of plan investments online in the third quarter.

New Ace and Ranger lines in Milford, a liquid paint system and new Slingshot and motorcycle lines in Spirit Lake, additional Monterrey capacity increases, and of course Opole. But these will take a bit of time to ramp up. As a result with all of our demand growth, we are essentially at full production capacity, especially in ORVs, for most of the second half.

And with that, I will turn it over to Mike Malone, our CFO.

Thanks, Bennett, and good morning to everyone. It is gratifying to report that our 2014 second-quarter results represent another record quarter for sales and earnings for the Company.

As Scott mentioned earlier, we are again raising our full-year sales and earnings guidance as follows. Total Company sales are now expected to increase 16% to 18%, driven by increases in our ORV and international businesses as follows.

ORVs are now expected to grow 11% to 13%, up from prior guidance of 9% to 11%. And international sales are now expected to increase low-teens percent. Our previously issued sales guidance for the other businesses remain unchanged.

Snowmobiles are expected to grow mid-single digits percent, motorcycles are expected to increase 65% to 75%, small vehicles are expected to increase 25% to 30%, and PG&A sales are projected to be up about 20%, including the sales from the Kolpin acquisition.

Moving down the P&L, given our performance at the gross margin level for the first half of the year, we now expect gross margins to decline in the 30 basis point to 50 basis point range, slightly better than our previous guidance. I will provide more detail on my next slide.

Operating expenses as a percentage of sales are expected to decline about 60 basis points to 80 basis points in 2014, a modest change from our previously issued guidance of down about 100 basis points. The variation is primarily driven by our desire to make additional investments in sales, marketing, product development and distribution in some of the new brands, namely Indian and Slingshot, and to make various other global investments in future growth opportunities.

In addition, in the second quarter we made an additional provision for product liability costs related to a settlement of a significant case. We will continue to expect positive benefits to operating expenses from a planned reduction in our incentive compensation expenses, related to changes made to the long-term incentive plan as we have previously discussed.

The income generated from our financial services business is now expected to grow about 20% for the full year, an improvement from prior guidance, due to the improved profitability of the Polaris acceptance dealer financing portfolio. The net result of these guidance moves does not change our expectation for operating profit margin expansion.

We continue to expect the 2014 operating profit margin to grow in a percentage range similar to what we actually grew in 2013. The expected income tax provision rate for the full year remains unchanged at 34.25% to 34.5% of pretax income, compared to 33.7% last year.

Although the US Congress has not yet extended the research and development tax credit for calendar 2014, which has caused our second-quarter tax rate to be higher than last year, our guidance assumes the legislation will be passed retroactive for the full year in the fourth quarter of 2014.

Earnings per share from continuing operations for the full year is now expected to be in a range of $6.48 to $6.58, up 20% to 22%, while net income from continuing operations is projected to increase 16% to 18%. For the full year 2014, the number of diluted shares outstanding is expected to decrease between 2% and 3% compared to last year, due to the Fuji share repurchase late in the year.

Compared to last year, the 2014 second-quarter gross profit margin percentage increased by 20 basis points to 30.1%. And year to date, it is up 10 basis points.

Given the better than expected performance in our gross profit margin percentage year to date, we are adjusting our 2014 full-year guidance, and now expect gross profit margins to decline only 30 to 50 basis points for the full year. We project that we will continue to benefit from higher selling prices and product cost reduction efforts as we have the past few years.

However, as we have previously discussed, we expect an negative impact from currencies this year, especially the Canadian dollar, which has a much greater impact in the second half of the year when we shipped the majority of our snowmobiles to Canada. The second-quarter currency impacts were negative versus last year, but not quite as much as expected, given the modest sequential improvement of the Canadian dollar exchange rate during the quarter.

Currently, we have about two-thirds of our remaining 2014 Canadian dollar exposure hedged at a rate of about $0.92, which puts us in a more predictable position than earlier in the year. The impact of the remaining items listed on the gross margin slide for the full year 2014 has not changed from previously issued guidance.

Moving now to the balance sheet and liquidity profile. Net cash provided by operating activities was $131 million for the first half of the year, up 26% from the first half of last year. We now expect cash flow provided by operating activities for the full year 2014 to increase at a slightly higher percentage rate than net income growth.

At the end of the second quarter, our cash balance was $119 million, while our total debt balance of $368 million is higher than a year ago, primarily due to the repurchase of about $500 million of Polaris stock from Fuji in the fourth quarter of last year. For the first half of 2014, our investments in capital expenditures and new product development tooling totaled $102 million, up slightly from last year.

For the full year 2014, we continue to anticipate capital expenditures will be lower than last year, but still exceed $200 million. Polaris acceptance receivables from dealers in the US were $880 million at the end of June 2014, an increase of 23% from a year ago, but down 8% sequentially from the first quarter of 2014.

The year-over-year increase of 23% in dollars reflects the mix change of higher value side-by-side vehicles and motorcycles, and increased PG&A sales. Whereas the units in the portfolio grew at a 15% pace. The retail credit environment remained stable with approval rates of 54% for the first half of the year and penetration rate of 32%, each slightly little lower than a year ago.

In summary, these solid first-half results provide a springboard for what is expected to be another record year for Polaris. I will turn it back to Scott for some closing comments.

Thanks, Mike. July is the busiest month of the year of Polaris, and between today's results and next week's new model introductions, I believe it may also be the best month of 2014. Coming on the heels of an overall solid and sequentially improving first half, we start the back half of 2014 with high expectations and even a higher sense of urgency.

We gained market share in side-by-sides and ATVs in the first two quarters, but with come largance customer excellence efforts providing better sales tools to complement a magnificent array of new vehicles, we expect to accelerate share gains and retail sales growth over the strong first-half performance.

Indian motorcycles had a good first year, delighting thousands of new customers and contributing to the growth of not just Polaris, but the entire motorcycle industry. I love my new Chief and am pleased with how Steve Menneto and his team have positioned the business for the future.

But we did not deliver our A game in year one. As we get better and our lineup gets bigger, I am more confident than ever about the future of our motorcycle business. And this includes a bright outlook for Victory, which continues to supply bold styling and outstanding quality to discriminating riders who want our edge.

Motorcycles, ATVs, snowmobiles, and every vehicle in our stable are better by our Polaris engineered parts, accessory, and apparel. Steve Eastman and his team are building capability to enhance customer value and continue the aggressive growth trend there on. With new plants nearly completion in Poland and Indian, excellent performance from Aixam Mega business and heightened global interest in Indian, RAZR, Sportsman, and ACE, and other products, we expect to maintain above market growth in our international businesses.

We are diligently building capability and enhancing the offerings of our small vehicle, military, and commercial vehicle businesses. These are attractive markets and a priority for future investments.

I remain much more confident in this Polaris team and business than I am in US economy and global stability. Which is again to what we frequently refer to at Polaris is a very bad baseline.

In turbulent times leadership matters, and I have tremendous confidence in the leaders at every level of Polaris. We have many interesting opportunities and no shortage of challenges in the months and years ahead. Expect a lot from this team, I certainly do.

With that, I will turn it over to Simon to open the line for questions.

(Operator Instructions)

James Hardiman, Longbow Research.

Hello, good morning. Thank you for taking my call and congrats on a great quarter. A couple of questions on gross margin.

Obviously, you saw some real nice acceleration in the second quarter. Gross margins ended up being certainly better than I think most of us thought. How does that gross margin number compared to how you guys we're thinking about things in the second quarter?

And in particular, given the fact that even though you tweaked the number, second half still looks like it's going to need to be down meaningfully. So, maybe talk a little bit mix within Q2 for gross margins. Which products were sort of outperforming, which maybe not as much so?

And in the back half of the year, how should we think about mix? And then the other piece just being the promotional environment. You guys have talked more about that in recent quarters. Didn't hear as much of that on this call. Maybe talk a little bit about competitive environment with respect to promotions. Thanks.

Okay, James, this is Mike, I will try to answer all those questions.

I think we expected the second-quarter gross margins to be down less than the full-year expectations. So we gave our guidance, we knew that the second half of the year was going to be tougher for us on our gross margins than the first half of the year, and that is how it played out.

I would tell you that the 20 basis points is probably a little bit better than what we had thought going in. The pieces of that are the Canadian dollar improved a little bit during the quarter. And as we said at the end of last quarter, we weren't hedged very much on the Canadian dollar.

So as it improved, that penalty, if you will, was probably less impactful in the negative impact in the second quarter than what we had planned. So as a result of that, we were able to get some more hedges.

So as I said, we are about two-thirds hedged now on the Canadian dollar for the balance of the year at about $0.92. So the good news is that that gives us a little more predictability and less volatility as we go into the second half.

But it does kind of lock in, if you will, the year-over-year negativity of the Canadian dollar in the second half, which we have about two-thirds of our Canadian sales are in the second half of the year versus the first half of the year.

As far as the mix is concerned, the mix is generally about the same quarter to quarter. We will have accelerated ACE shipments in the second half of the year as we're just kind of ramping up in the first half and we will have full model year 2015 ACE line in the second half.

So the ACE mix impact is little bit tougher in the second half. So hopefully that gives you some context to the margin.

It does. And just a couple comments on the promotional environment. It seems like maybe less of a pinch or less of a worry maybe going forward then you felt in the last couple of quarters. Comment on that a little bit?

Yes, James, this is Bennett. I think the other thing I would add to Mike's comment was is that our plants have been performing at a pretty high level year to date. I think that was little bit helpful to our margin performance as well.

On the promo environment, it's pretty much what we have seen. It remains elevated in side-by-sides. And I would say ATV is essentially stable.

And what we are seeing is pretty much consistent with how we model the year going in. And we expected to remain aggressive in side-by-sides, particularly maybe in the RAZR recreational space and stable in ATVs.

As we do new products and other guys do new products, it changes the mix. But again, I would say it's kind of breaking down pretty much as we saw it as we came into the year. So I would say that we feel good about that.

Great. Thanks, guys, see you next week.

Scott Stember, Sidoti and Company.

Good morning. Can you touch base on the comments that you made about capacity? If I heard correctly, you talked about how in the back half of the year, particularly for side-by-sides or ORV, you were going to be at capacity.

Can you talk about how you will work your way through that in the back half, particularly with these new models coming out next week? And maybe just talk about some of these expansion projects that you've talked about outside of Europe?

Yes, Scott, this is Bennett. I don't think this is any reason for concern. Frankly, with all the growth we've had over the last five years, as we've gotten to the second half the last three years this has been a fairly normal situation for us.

We're pretty tight in the second half of the year, it's a little bit tighter than it's been, so we thought we would call it out. We are making, as you guys have heard, a number of investments to improve our capacity and a lot of those are coming online. And frankly, they are all on track.

So Milford is frankly right on schedule, and so they will add the additional new high-volume Ace and Ranger line, and that looks good. Spirit Lake is really becoming a motorcycle and an on-road plant with paint system. And again, they are tracking beautifully well.

And Monterrey and Roseau are both expansion projects as well. As well as Osceola. So capacity is coming along really nicely, and again, Poland is right on track as well and that will start early in the fourth quarter.

So all of the capacity stuff is going right as we planned, the teams executing well, and we're excited to bring that additional capacity online.

Okay. And a follow-up question just on the European facility.

Beyond the obvious benefits of building product cheaper that you can sell into Europe, can you talk about some of the other inherent benefits, such as being able to build purposely built models for the European marketplace? And how you would expect that to manifest itself in 2015 and beyond?

Again, we believe it's going to be significant long-term advantage to have a plant in Poland right in the region. We'll be really one of the few or only guys building that purpose built European-region products in the market, which should save on logistics. Our speed to market will become much quicker.

And then, frankly, over a period of time, we will be able to do a lot more on the product development side. And really rather than what I'd call North American (inaudible) where we're outfitting, really sign those right there in Poland for that marketplace. And I think long term, that is a big competitive advantage for us.

Okay. And last question on Brutus. You talked about the tough year-over-year comparisons as you were doing the initial rollout last year around this time.

And you also talked about the there is still more work that needs to be done to bring the product up to snuff. Is there anything else to be read into that or we just talking this last quarter, just tough comparisons?

I think clearly we are one year into it, if we're coming up against comparable issues. But obviously being clear, we've been pretty clear, we are not thrilled with our initial start and penetration with that customer base.

I think we were clearly at too optimistic. But we also know that we need to do much better and we're going to need to take different strategies and tactics, and I think you'll be hearing more from us in upcoming quarters on how were going to get that going. Because we've remain very committed to this segment of the market, it's a big long-term opportunity for us.

Great. That's all I have, thank you guys.

Robin Farley, UBS.

Great, thanks. Two questions, one is just back in the envelope, I'm calculating Indians market share as a percent of the US heavyweight market is seeing about 3% market share. I was just wondering if you could confirm that ballpark?

And then my other question is, looking at your total revenue guidance, and then the category that went up with the off-road vehicles as relative to your previous guidance, but that actually doesn't explain all of the increase. So I assume you moved up within the existing range in some of your other segments.

I wonder if you could just highlight which other segment as you saw your expectations move up even though your range didn't change?

Hello, Robin. This is Scott. You're not too far out of the ballpark on the Indian market share. Obviously, it's early and we are just ramping up and lots of opportunities.

But we're in that low-single digits range and we'll expect to ramp that up quite significantly over time. You know we pulled our guidance, so you can tell we still feel really good about where we are today with Indian, and after the next couple of weeks when Steve and his team unveil the products to compete for the remainder of the year, I think feel we'll feel even better.

So that is certainly a positive outlook for what Steve and his team are doing with that business. Mike, you want to take the rev and mid move anyway?

Yes, I think the revenue guidance changes, my guess it's into the rounding with ORVs being two-thirds of our sales and that guidance going up, that is the bulk of the increase. We also did increase our international sales guidance a bit, not a lot but a little bit.

So we've been very happy and surprised with the strength of our sales outside of North America. So those are the two that went up. And the balance is rounding.

Okay, great. And then just lastly. You talked about production capacity in the second half for off roads increase pretty full at that level of the second half.

Will that be the case heading into Q1 next year? Or at that point, will you have increase production capacity because of the other facilities you've talked about? So that's really only a second-half issue, not a 2015 issue?

Yes, Robin, it's really just a second-half issue. The way our marketplace exists, we have more demand in the second half so we feel that pinch a little bit more normally in the second half.

The first half generally is not a pressure point for us, and as we bring on a lot of this capacity, we're obviously clearing up some additional capacity. I would tell you as we continue to grow rapidly, I think capacity investments may become a way of life for us.

They certainly have over the last few years. And based on our growth outlook, I don't see that changing in the forseeable future. I think we will have to continue to invest in capacity.

Thank you.

Scott Hamaan, KeyBanc Capital Markets.

Hey, thanks, guys. Good morning, everyone. Just a couple questions. Number one on the motorcycle guidance.

Overall, I realize this has not changed, but can you maybe speak to the three main components of that? And maybe if Victory was a little bit lighter as that ATVs moving up, and where do we stand was Slingshot?

And secondly, just on the Polish facility. Can you give us a sense of what the expense costs were in 2014? And what the anticipated benefit would be for 2015? Thanks.

Hey, Scott. Not surprisingly, we're not going to give a lot more color on the mix. Not dramatically different for motorcycles than it was at the beginning of the year.

Obviously, Indian is doing a little bit better and Victory with the recall had a slight blip there in May. But overall, they are still in the game. And we haven't even shipped the Slingshot yet. So that's not a huge contributor, but it is still part of the mix.

But overall, the year is playing out as we said by holding our guidance, pretty much like we expected in the motorcycle segment. Mike, do you want to cover the -- ?

The primary planned startup costs impediment to our gross margins this year is Poland investment. As we've said, we were ramping up throughout the year on our investments in Poland.

We haven't been real specific with exactly how much impact that has on the gross margins this year. But as we get the plant finished and we start production next year, that impact on the gross margins next year will still be probably a negative, but it will be less dilutive than it is in 2014.

And then that maturity, when we get the plant up and running fully and we've got fully -- capacity utilization, we expect $20 million of annualized savings from the Poland facility. So that won't all happen at once, but it will ramp up as we move to capacity utilization.

Okay. Is it safe to say that in terms of dollars though that maybe the hit to 2014 was similar to Monterrey in terms of the start-up costs?

It's probably a little less than that.

Okay.

We did smart.

Okay, thanks.

Gerrick Johnson, BMO Capital Markets.

Thanks, good morning. Hey, I wanted to ask you a couple of questions on ACE. Did it achieve the goal that you were looking for to attract new riders, younger riders, women?

Put another way, where are the sales coming from? New riders or share gains, or perhaps some cannibalization?

And then related to that, you mentioned ATV retail was up mid-single digits, excluding ACE. Why exclude ACE? What would have looked like with ACE?

And then, did you gain share in ATV? You gained share in ATV, did you gain it with ACE or without it? Thank you.

Gerrick, that's a lot of questions. Let me --

Actually, we tried to make it more clear is the problem. (laughter) Let me talk more first about ACE and then I go into some of the ATV comments.

ACE is I think doing everything we expected, it's frankly a little bit better than expected. I think the most, I don't want to say pleasant surprise so far is, is we, at least by our studies, it has had very little cannibalization impact. It's almost been 100% incremental so far.

We are reaching the customer base that you mentioned. Again, the other real positive sign of this is it is reaching new or underutilized customers that probably would not have gotten on our types of products. And it is also is appealing to a broader sense within the existing category.

So we're feeling really good about the customer base that ACE is drawing from. And it's a new product and a new category. And we just launched it and it is a new concept with a new engine, and we are going to continue to build this category out as we thought we would do over couple of year period.

And I think as you stay tuned for the upcoming analyst meeting, we will continue to talk more about ACE and where that is going. But we are very encouraged by this start.

We don't put ACE in our ATV numbers because we believe it is an all new category, it does not fit the definition of an ATV, and so it is inappropriate to report it as such. We gained share in our core ATVs without ACE, and we gained a lot more share with ACE is how I would tell you if you want to put in there.

We gained a lot more share if you would put ACE in the ATV industry in our numbers. I think that was all your questions.

Yes, you got it. Thank you.

Michael Swartz, SunTrust.

Hey, good morning, everyone. Just maybe hopping on Gerrick's question about ACE.

How much of the raise in guidance to the ORV business is from things like ACE or products that are already in the market and doing maybe better than expected versus your expectations for some of the new model year 2015 products that's going to be introduced next week?

I think ACE is contributing to that. As is I would say our second-quarter performance, as well as what we're going to unveil here next week. But to be clear, I think most of our raise is based on our current products.

We are not smart enough to change the projections of the products we haven't launched yet. So really, as we have said, a sequentially improving first half that gave us optimism about the second half.

Okay. Great. And then just on some of the capacity discussion that we have had on the second half of the year.

I think as I recall last year, you moved around some snowmobile production in order to fit in I guess it was ORV side-by-side. Is something similar to be expected this year?

We made a number of moves proactively, Michael. One of the things I mentioned is you saw little bit of some of our model year 2015 news coming little bit earlier. That was partly to help manage that.

So we were really on the gas in June much more so than last year in the plants. Usually that is a time for model year transition. And we kind of effectively managed that aggressively.

And then obviously all the capacity that we were bringing online was a proactive thought around what we were going to need in the second half. So again, this is lots of questions on this.

We've dealt with this the last three years. It's a little tighter than it's been the last few years. But we are used to this and we have I would say very robust second-half expectations for what we're going to ship, and I don't see this being a significant issue for Polaris.

Great, thanks a lot.

Tim Conder, Wells Fargo Securities.

Thank you, a couple of questions here. One, just a clarification on the Indian share cited earlier. That's only the 1400 and above segment, this is only what you're in, just to clarify that?

That is all we shipped today, yes.

Okay. I just wanted to reaffirm that. Thanks. Ship at this point I guess is key, key part.

Victory, you cited the recall in the commentary. Any weather or you've seen that turnaround here now that the recall is sort of behind you here as we move through July at this point?

Tim, this is Bennett. Again, the only thing you saw on our press release, the reason why we commented on the recall was we were able to gain share in April, we gained share in June, we normally don't comment on that month to month. So we think that was kind of the anomaly on the Victory interruption which affected it for the quarter.

Weather has not been great. But you know us, we're not going to use weather as an excuse. And as we said, collectively our motorcycle sales are up about 50%, so we're feeling just fine about the motorcycle industry.

Okay. And then, Mike, if I may, on the Canadian dollar, you called out that it's better than you thought versus 90 days ago. And that helped a little bit in the second quarter and then you put in some hedging.

How much of that change in the currency given you still have two-thirds of the Canadian business ahead of you, but given that you hedged in, how much of that have you factored in now to the higher guidance?

What I tell you, Tim, is that we have hedged at, like I said, our average hedge rate is about $0.92. And so that is kind of how we forecast in and how we do our guidance is basically at the hedged rate.

So we are assuming $0.92ish for the balance of the year. And today it is a little bit better than that but if you're hedged, your kind of locked. So, yes.

Okay. And then last, not much was commented on about the Eicher joint venture. How are things trending there with the plans and costs and the launch timetable?

Yes, Tim, this is Bennett. We're going to talk about that a little more next week at the analyst meeting, so I think that's why we saved the remarks since we're not in production.

That team continues to make tremendous progress. Anytime you're dealing with an all-new plant and new team and new product, there's schedule pressure that we're feeling right now.

So we may lose a few months before we actually get in the full launch, but we will talk about that a little bit more. But I would say all in, we remain very excited about that we have got a compelling offering for the Indian market as we move into the future.

And just to add to that. We feel really good about our partner. Eicher is a wonderful partner. Their core business is doing extremely well.

And obviously, there's been some positive movements in the Indian economy that we think we will be launching at the right time. So obviously, as Bennett said, more later, but pretty good early signs for what could be a really good growth business long term for us.

Great. Thanks, gentlemen.

Joe Hovorka, Raymond James.

Thanks, guys. Just a couple quick questions. One, could you give the ORV ASP increase or decrease for the quarter?

Mike, why don't you just add that so Joe doesn't have to ask our -- ? (laughter)

You know I'm going to ask it, right?

You are, you are. Okay, I got to look that up. Go on to your net question.

Okay. So, Bennett, I think you said that ACE was pretty much 100% incremental.

You've also put out some consumer profile stats I think on your slides or one of your websites. You had 6% first-time buyers of ACE, how do I flip those two numbers? How do you have 6% first-time buyers, but they're 100% incremental to ACE?

Joe, I apologize, I'm not sure I'm familiar with the chart you're referencing and I know Dave is going to talk about that next week in analyst. I'm sure he will spin some more color on ACE.

But these guys have done a bunch of triangulation from the customer base and when they're looking at the profiles of where these customers are coming from in the segments that were in, and it's just not cannibalizing ATVs at all. And that was obviously one of the, now I'll say the fears, but that was obviously what we were very interested to see how it interacted.

But as we survey these people, they were not necessarily in the market for an ATV or a side-by-side. So that's where we're getting the incrementally of the numbers I'm quoting.

Okay, and then just on Victory and the recall. Just to clarify, the recall was a lack of availability of products at the dealers, right? It wasn't that people weren't buying the product because of the recall, but you did ship it in?

You know, as you deal with the nips and the regulators, as you go through an issue like that, until then you have to send out a note that we might have to stop sale on it, and so really, by law, we may not be able to ship and dealers can't sell. So in the middle of the height of the selling season, it becomes a one- or two-week interruption that seriously has an impact on your short-term sales.

And we believe we immediately recovered, there were no long-term implications. But there's no question you feel it in the month that it happens.

I think you said it well, the recall was something like 800 or 900 bikes. And it sounds like your retail was down probably a couple hundred bikes year over year, so it would --

Yes. And again, we felt it really just in about a 2 to 3 week period there in May when it was just in the height of it until you're moving the parts and the fixes are going on. But it creates some uncertainty and slowdown there.

And then the last question. I think you mentioned paint was on track. Is it up and running yet? I thought it was model year changeover was about the time it was supposed to come online?

Obviously, the paint it's a $28 million investment. It's a highly complex things that's going to be coming up online here over the next month, and then we will be ramping it up really over about a 90-day period throughout third quarter and into early fourth quarter.

So, it is not necessarily online yet, but will be coming on very shortly and then we will ramp it up here over the next 90 days, probably through October.

And that increases throughput down there, too, right? That's part of the bottleneck in capacity?

Absolutely. It's capacity, quality, technology improvements. It will be a significant improvement. And cost.

And cost. Right, that's all I have --

Okay, Joe?

Yes?

Joe, the ASP change for ORVs is 2%.

Okay, great. Thanks, guys.

Joseph Spak, RBC Capital Markets.

Thanks for taking my question and congrats on the quarter. So it sounds like the larger part of the gross margin guidance change was obviously the second-quarter performance, but then also a little bit more visibility on currency.

I guess I'm little bit curious as to why the volume factor hasn't really changed versus your prior guidance given that the topline is better? Is that some conservatism or am I missing something in the back half of the year?

I think what I tell you there, Joe, it's we've talked about it a lot, its the capacity discussion we are having. We are stretched and making adjustments and moving things around and getting stuff done. Working overtime, those kinds of things to handle the volumes.

Okay. So there's some -- you're moving some stuff around, obviously. But clearly just the production volume is a little bit better. So isn't there more of a benefit then versus what you were thinking prior?

Again. We are stretched enough that that is not contributing.

Okay.

As you normally would expect it to when you are operating at less than capacity levels.

I think we built a plan, we built a plan pretty much at or near full levels before, so most of that stuff was modeled in as we came into the year.

Okay. And then just quickly on Victory. I know you said the recall has been impacted.

But now that you have a little bit of a history with Indian, I was wondering if you could comment at all whether you are seeing any sort of competition between the two brands? Or, I know you're trying to reposition Victory a little bit, just some update on how that transition is going?

You know, Joe, I think the net-net is we are seeing a positive impact on Victory because of our Indian ownership and what we're doing with that brand. You mentioned that it gives us a chance to put in a little bit more distinctive brand positioning on its own.

But the dealerships that have both, there's buyers that want the Indian brand and there's buyers that want the great styling and performance the comes with the Victory. So we're happy with the price points. We think that both brands perform very well.

The Gunner has done exceptionally well in the initial launch for us. And you know, by and large, not cannibalization. We thought it was going to be 3% or 4% cannibalization, and I think that's probably about the right number, if that.

Got it. Thanks a lot for the color.

Jaime Katz, Morningstar.

Good morning, guys. Nice quarter. I have one really quick question on small vehicles.

It looks like in the second half that obviously drops off because we're lapping really difficult year-over-year comps. But I'm curious if you guys still see the market for that business growing?

I think it was 8% to 10% you guys had mentioned in the past and that you guys might grow slightly faster than that. Is your outlook for that business the same or has is changed?

Our long-term outlook for that business is still very bullish. Aixam, really we lapped that in early April, so was it wasn't much of an incremental benefit in the second quarter.

The Aixam Mega business is performing exceptionally well. What Phillipe and his team continue to do in that essentially duopoly in Europe is encouraging.

We've seen our Gem business, the retail growth has just been fantastic over the last couple of years. And we are starting to make some more investments. Obviously, as a new business for us, there was a limited number of significant investments we could make in that category and we are starting to do that over the next couple of years.

So the long-term trends for that are still pretty darn good. Demographically, not only in the US but globally, in that small vehicle, what we classify as a small vehicle segment, and we expect to do better in the years ahead. Matt Homan and his team will be at the analyst meeting, I think you will get additional color from them next week.

Great, thank you.

Jimmy Baker, B. Riley & Company.

Hello, good morning. Thanks for taking my questions.

Bennett, you mentioned that your defense outlook, I think the quote was, never been so encouraging. It's a pretty strong statement, so can you maybe just give us a little bit more color as to what is driving that optimism? Maybe just speak to the backlog? And also remind us what level of visibility you have historically had in that business?

Yes, Jimmy, obviously over the last couple of years as we've gone through kind of constraint defense spending, that business, which had been growing rapidly, has kind of been bumping along. And we've been working behind the scenes obviously on a number of what we would call transformational type projects.

And frankly, I think the primary cause for optimism right now is really around the MRAZR continues to build out acceptance, both here stateside as well as internationally with the customer base, it's just the right product for those customer's needs. And so it's getting much broader use an appeal in orders.

And then this DAGR, which is a new product, it is a much larger footprint than anything we've done before. A much higher selling price type of product. A much more capable vehicle that really moves us into a space we have never been.

And again, the potential for that product, we don't want to get too far in front of ourselves, could really transform our business if we do it right. And we've got plenty of landmines we've got to work our way through with competitors and so forth.

It is early, but we're very encouraged by that and I think that's the sense of optimism. The team is frankly executing at a much higher level as we continue to build our brand with the customer base throughout the world.

Understood. That's helpful.

And then just on Slingshot, looking forward to that unveiling next week. Can you maybe offer any preliminary insight into the distribution strategy for that product?

Jimmy, I really would like to hold that until we get to the meeting. I will tell you that if you are trying to make analogies to Indian or something, we are expecting more from our partners on that. But it is a subset of our existing power sports and motorcycle dealer base.

So again, I don't think that the magnitude of build outs and variability that we saw with Indian will be anything nearly as complex as what we dealt with on Slingshot, if that was the general answer to your question.

Okay, got it, thanks a lot.

We have two more questions that we're going to take. Next question, Simon?

Mark Smith, Feltl and Company.

Hello, guys. Real quick, just the Slingshot, now knowing that there's two trim levels. Can you talk at all about your expectations for attachment or add-on accessories?

No, I'm going to again let -- again, I'm just trying to give you a little taste of what is coming and we will talk more about that obviously in the analyst thing. We are going to hold that for the unveil. Again, there will be a decent accessory business with that. But again, we will talk more color on that when we launch the vehicle.

Sounds good. See you later this week. Okay thank you.

Last question, Simon.

Trey Grooms, Stephens.

Hello. Thanks, guys. Just a real quick kind of housekeeping I guess. On the quarter, were there any comp and acquisition costs?

Yes. There was some acquisition related transaction costs and inventory evaluation things like that on the purchased accounting that impeded the gross margin slightly.

Anyway to quantify that or is it not that material?

It's not that material.

Okay. Thanks. See you next week.

Okay, guys, that is all the time we have. We certainly appreciate everybody joining us this morning for the call.

And those of you that are coming to our analyst investor meeting this coming Sunday and Monday, we look forward to seeing you then. Thank you again and we will talk to you next quarter, bye.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.