Polaris Inc (PII) 2014 Q3 法說會逐字稿

Good morning. My name is Melissa and I will be your conference operator today. At this time I would like to welcome everyone to the Polaris Third-Quarter Earnings Results Conference Call.

All lines have been placed on mute to prevent any background noise. After our speaker's remarks there will be a question-and-answer session.

(Operator Instructions)

I would now like to turn the call over to Mr. Richard Edwards, Director Investor Relations. You may begin your conference.

Thank you Melissa, and good morning everyone, and thank you for joining us for Third Quarter 2014 Earnings Conference Call. As always 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 the call today our discussions will include various topics including our updated guidance expectations, for 2014 and some preliminary comments about our outlook for 2015, 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 our forward-looking statements. Now I'll turn it over to Scott Wine, our CEO.

Thanks Richard, and good morning everyone. Thank you for joining us.

At Polaris, the third quarter always tests our mettle, from the challenge of pulling together increasingly large and complex dealer shows and delivering on the high expectations of our model year news, to building a strategic plan that charts our course for the years ahead. Add a global crisis or two, major moves in currencies and the inevitable internal/external issues that arise, and the quarter provides the perfect showcase for the tremendous leadership, agility, and teamwork that has fuelled Polaris' growth for the past 60 years.

Across our global business, innovation and execution won the battle against volatility in the third quarter, yielding an 18% increase in Polaris' third-quarter sales to just over $1.3 billion. North American retail sales remained high posting an impressive 12% rise, and that's without a single Scout or Slingshot sale. Motorcycle revenue still led the Company with a 20% increase over the prior-year period with PG&A and ORV recording respectively strong 24% and 17% increases.

Our international business was mixed with robust 40% growth in Asia Pacific/Latin America, offsetting an essentially flat Europe, Middle East, and Africa business for an that overall quarterly increase of 9% for our international businesses. Earnings outpaced revenue again in the third quarter, with net income increasing 20% to $140.8 million, yielding record earnings per share of $2.06, up 26% over the prior-year period.

The resiliency of the Polaris earnings machine was clearly evident in the quarter, as we balanced aggressive top-line growth, pricing, and operating expense leverage to offset the predicted negative foreign exchange impact of the Canadian dollar and most European currencies. Net income margins increased modestly to 10.8%.

Our year-to-date growth has not come easy, as we have worked to overcome persistently high competitive threats in off-road vehicles and motorcycles, weakening demand in Europe and Canada, and the negative impacts of a stronger dollar. Some or all of these trends will endure in the first quarter and beyond, with the potential interest rate hikes and no slack in the stifling regulatory and tax environment, we are starkly aware that we must execute extremely well to maintain our growth trajectory. Fortunately, we were remain confident in our ability to leverage innovation and improving operational and commercial performance to drive our success.

We expect moderate strength in the overall power sports industry and in the final three months of 2014, with share gains continuing to drive growth. With positive momentum in three solid quarters under our belt, full-year sales for Polaris are now estimated to be up 17% to 18% over 2013, which will put us in the realm of $4.5 billion for the year. We are raising our full-year earnings per share projections to $6.55 to $6.65, a 21% to 23% increase.

Strong financial performance, which we define as a sustainable, profitable growth, is but one of our five core strategic objectives. It is typically listed last as we recognize that it is essentially the result of successful execution of our three major growth plans combined with the competitive advantage of our lean enterprise. Any financial objective can be counterproductive if focused on simply or narrowly. But we find that a laser focus on sustainable profitability serves us well in our relentless pursuit of growth.

From guiding our allocation of capital to supporting our ranking of acquisition targets, we never lose sight of our long-term commitment to strong financial performance for the sake of all stakeholders. With our expansive line of industry-leading ranges and razors and our first fray into three-wheeled and mid-sized bikes, we strive to design, manufacture, and launch products that delight customers and enable players in our worldwide dealer network to grow profitably. Our strategy is straightforward and transparent, which means we can only win by consistently out-executing on competition.

Three executive moves in the third quarter illustrate how we leverage our talent, leadership, and Best People, Best Team philosophy to win the competitive battle and deliver on our strategic objectives. We recently announced that Ken Pucel will join Polaris in the fourth quarter to become our first Executive Vice President of Operations, Engineering, and Lean. We aspire to be great in each of these areas to create a lean enterprise that will give us a competitive advantage in quality, delivery, and cost worthy of our world-class innovation machine.

Ken has spent the past 25 years building such an enterprise at Boston Scientific, and with his operations, research and development and Lean expertise and lifelong passion for Polaris vehicles, we anticipate that he will add another cylinder to our profitable growth engine.

Earlier in the quarter we announced the promotion of Matt Homan to President, Adjacent Markets, assigning one of our most experienced and successful leaders to deliver on our stated objectives to create a $2 billion plus non-power sports portfolio. Matt brings a unique skillset to this task having created a broader platform for Polaris in Europe, led the early dramatic growth of our off-road vehicle business, and spent several years now growing and improving our small vehicle businesses.

He is rapidly building a team and creating a strategic framework that will give us ample opportunities to expand both organically and through acquisitions. Our adjacent market strategy has not changed, but under Matt's leadership, we expect that the growth trajectory will quite quickly.

Matt's promotion created an opening in our Swiss headquarters and we were fortunate to have Suresh Krishna fill that role starting his tenure as Vice President Europe, Middle East, and Africa just in time to host a grand opening for our new plant in Opole, Poland. We have a great facility and team there, and I know Suresh will leverage this asset he was instrumental in building to serve our EMEA customers and global stakeholders.

He will not lack for challenges with the prospects of a slowing Eurozone barely overshadowing major risks in Russia, the Middle East, and Africa. I trust Suresh to get things done, and even with extremely difficult circumstances we expect that he and the team will continue to find a way to grow in the Europe, Middle East, and African regions.

We continue to improve our strategy and our team in the third quarter. Neither of these tasks will ever be complete, and almost by definition require change and adjustments over time. We believe that corporate agility is a strength, as is our competitive culture. Expect Polaris to move quickly and aggressively to build on our progress towards becoming a highly-profitable $8 billion global enterprise.

With that, I'll turn it over to our President and Chief Operating Officer, Bennett Morgan, who will provide insights into our operations and business unit performance.

Thanks Scott, and good morning everyone.

As Scott just mentioned, Polaris North American retail sales increased 12% in the third quarter. This retail growth, along with market share gains in each of our businesses, extended our market leadership in power sports.

The third quarter North American power sports industry remain positive, posting mid-single digit growth. Year-to-date, Polaris retail sales are up 11%. Dealer inventory remains in good shape, up 15% versus 2013, primarily to support model year 2015 new model introductions and segments. We continue to introduce an unprecedented level of innovation and news to our customers with 18 new ORV models, five new motorcycles, including the Slingshot, and over 300 new PG&A items.

Let's move on to business unit performance. Off-road vehicles: Polaris ORV business registered a record third quarter as revenue rose 17%. Year year-to-date revenue was up 14%. For the 30th 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 were up high single digits in an industry that increased mid-single digits despite some softness in Canada. Polaris core ATV retail sales were down slightly, but outperformed an industry which declined slow single digits, while Polaris side-by-side retail grew double digits in an industry we estimate grew about 10%.

RZR retail was particular robust, led by the RZR XP 1000 two- and four-seat editions, and later in the third quarter by the fantastic new RZR 900 trails. The Ace lineup is growing both in models and retail sales, and continues to be very incremental as well as attract new customers. The balance of our 18 model year 2015 ORV models began to arrive in dealers late in the third quarter and early sales trends are brisk.

We are investing in and building on our leading ORV brands and customer experience. Just last month we had our first ever Camp RZR for their Eastern US customer base in Brimstone, Tennessee, and it was a rousing success. Over 12,000 attendees, hundreds of demo rides, and almost 2 million positive social media impressions. We expect an even better response to Camp RZR at Glamis in Southern California over the Halloween weekend as we build loyalty and lifestyle in this fast-growing sport.

Motorcycles: Polaris third-quarter motorcycle revenues were up 28%, led by Indian's accelerating retail and market share positions and dealer additions across the globe. Year-to-date motorcycle revenue was up 62%.

Polaris again expanded North American market share in the third quarter. Q3 retail sales jumped nearly 30% in a heavyweight motorcycle industry that increased low single digits. Victory retail sales declined mid-teens percent, primarily due to a combination of extremely strong third-quarter 2013 retail comparables and delayed model year 2015 shipments, particularly of our hotly demanded new Magnum Bagger.

Indian had a very good quarter. Market share is increasing. We now have 109 retailing dealers and our new model year 2015 two-tone paint schemes and Roadmaster touring models are in high demand. Paint capacity in Spirit Lake constrained third-quarter shipments of both Indian and Victory, and will remain a constraint until our new liquid paint expansion comes online in the fourth quarter, providing the additional paint capacity we need.

Our first mid-sized bike, the 1133cc Indian Scout, has received great early response with dealer orders and consumer deposits easily exceeding our expectations. We expect to begin Scout shipments in the next 30 days.

International motorcycle sales percentage growth rates continue to surpass North America with third-quarter sales up over 80% and year-to-date they're well over 100%.

Slingshot: Our revolutionary all-new three-wheeled motorcycle was launched with two model offerings in late July, the base Slingshot retailing for $19,999, and the premium SL model for $23,999. Deal response has been amazing with over 360 dealers signed and ready to retail, and many more waiting in the funnel. Orders have been excellent, with dealers reporting better than expected consumer interest and deposit activity.

Press and consumer interest has also exceeded expectations, with over 1 billion impressions in just the first four weeks. The new slingshot assembly line in Spirit Lake is already in production, and we expect to begin shipping to dealers in the next month.

Snowmobiles: Polaris third-quarter snowmobile revenue increased 13% and year-to-date revenue was up 11% as we accelerated model year 2015 shipment timing to better serve the dealer network.

Polaris North American season-to-date retail sales are off to a very good start, up over well over 50% and significantly out-performing a healthy industry which rose over 30%. Remember, only about 10% of the season's retail has occurred so far, so as always, the next 120 days will be important for both Polaris and the industry.

Our product lineup is strong across all segments. Our compelling all-new access platform is selling very well, and our 800 Switchback access Pro-S was recently named snowmobile of the year by Snow Goer Magazine. Early season consumer snow wheel shows have been very well-attended, and coming off a good riding season last year, we are excited for the riding season to begin in earnest.

Parts, garments, and accessories: Our PG&A business growth continues to outpace overall Polaris revenue growth. Third-quarter sales exceeded all previous records, up 24% and increasing year-to-date revenue to up 22%.

ORV and motorcycle PG&A sales were particularly robust and every PG&A category contributed to our increase. Climb and Kolpan have expanded our customer and distribution reach in PG&A, and both are performing well.

We are expanding our dealer rollout of Smart, which we expect will transform our PG&A sales to a more efficient lean retail pull model, allowing more frequent dealer ordering, tailored stocking profiles and retail execution focus, and improved customer satisfaction through better forecast accuracy and order shipment service levels. We expect the transition fully to Smart in North America by late 2015.

Commercial: as expected, third-quarter revenue decreased as we faced tough year-over-year channel fill comparables for Brutus. Brutus retail sales continue to grow sequentially and year-over-year for both Polaris and Bobcat, but remain lower than our initial expectations.

Nonetheless, we are encouraged about the future of our commercial business under Matt's leadership. National account and fleet sales increased about 50% with a strong order bank, Bobcat's dealer retail improved double digits and the fourth quarter they will transition to a new improved chassis for model year 2015. Also, our supply partnership with Ariens progressed with the dealer launch of a new Gravely Atlas, which was very well-received, and initial shipments will begin in the fourth quarter.

Defense: Q3 Polaris Defense sales were about flat, but year-to-date revenue is up by over 25% as this business continues to gain traction in the marketplace. Our revolutionary nine-passenger Dagor vehicle, which has the optimum combination of transportability, payload, off-road mobility, and value, was officially launched at AUSA earlier this month and was named the star of the show by the press.

We have already received orders from customers and production has already begun. International sales are expanding rapidly with our MRZR now sold in 21 countries, and our order backlog is well-positioned as we head into the fourth quarter.

Small vehicles: small vehicle revenue rose 8% in the third quarter due to strength in GEM and Aixam. Year-to-date revenue is up 52%. Aixam had another good quarter with revenue up low double digits despite continued weakening in the European quadricycle industry which is now down mid-single digits year-to-date. Aixam is out-performing, with share up notably for the third quarter and year-to-date. Aixam retail is up low-single digits.

Gupido revenue decreased due to the softening French and European economies, but we are starting to see signs of improvements. Orders grew in the third quarter, and we will introduce two new models in the fourth quarter.

GEM had a good quarter with revenue up over 30% and retail sales to customers up about 20%. Business-to-business and GSA sales penetration is on the rise and our customer lead generation and closing efforts are beginning to drive real results.

International: Polaris international revenue increased 9% in the third quarter, driven in particular by strong Indian, RZR, and Ranger sales. All regions contributed year-over-year growth; however, we are seeing a softening trend in European markets.

Year-to-date, Polaris international revenue is up 25%. EMEA third-quarter revenue increased just 1%. Weak snowmobile shipments due a poor snow season last year, Russian geopolitical uncertainty, and softening ORV and motorcycle industries in the third quarter were offset by solid Polaris market share gains from Axaim, motorcycles, and ORVs.

Year-to-date, European ORV industry sales are now flat, with Polaris retail increasing low-double digits. Polaris motorcycle market share performance is even better. Industry sales are up mid-single digits year-to-date, while Polaris retail has increased by over 60%.

Our Opole, Poland manufacturing plant celebrated its grand opening last month and has now begun producing ORV products to support our EMEA customers. We are the first OEM to have a plant dedicated to produce ORVs on-continent in Europe, and shipments to customers will begin early in the first quarter of 2015.

Asia-Pacific sales increased significantly, up 37% in the third quarter driven by outstanding market share performance in our largest subsidiary, Australia and New Zealand. We are now number one in ORVs in Australia, thanks in part to models designed specifically for that market.

Motorcycle sales of both Indian and Victory are excellent, and we continue to make progress in China and India with our Eicher EPPL vehicle expected to begin shipping in the second quarter of 2015. We expect a bigger and better future out of this important region going forward.

Latin America revenue surged, increasing 48% in the third quarter driven by strong sales performances in both the Mexico and Brazilian subsidiaries. We launched Indian into the Mexican market in the third quarter, and see this is a nice long-term opportunity.

Lean and operational excellence. As I mentioned earlier, third quarter was a challenging quarter in operations with capacity issues, several capital investment projects ongoing, and a substantial wave of new model year 2015 products beginning production. Between capacity projects in Monterrey and Milford, Iowa, a new liquid paint system in Spirit Lake, and Opole coming online, we are starting to relieve our constraints, but we will remain tight through the fourth quarter, particularly in Spirit Lake liquid paint.

Third quarter manufacturing productivity improved, but declined sequentially year-to-date to just under 5%. The Lean retail flow management implementation for ATVs is in process with the assembly line, dealer profiles, order sliding, and initial orders all complete.

Gross margins declined 55 basis points in the third quarter due to significant currency headwinds, primarily in Canada, depreciation associated with ongoing tooling, and costs related to the capacity investments. We were able to offset some of the pressures through product cost reductions, pricing improvements, and lower promotion rates so that net income margin actually expanded. Factory inventory by units was flat, but in terms of dollars, rose 26% due to PG&A, raw materials, product mix, and acquisitions.

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

Thanks, Bennett, and good morning to everyone.

We are narrowing our total Company sales guidance and now expect sales to increase 17% to 18% driven by year-over-year sales gains in each of our businesses. Based on the strength of year-to-date retail sales, ORVs are now expected to grow 13% to 14%, up from prior guidance of 11% to 13%.

All previously-issued sales guidance for our other businesses remains 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%, PG&A sales are expected to be up about 20%, and sales to international customers outside of North America are expected to grow low teens percent.

With better than expected year-to-date gross margins performance, we now expect our gross margins to decline in the 20 to 30 basis point range, slightly improved from our previous guidance. Operating expenses as a percentage of sales are now expected to decline about 50 to 70 basis points in 2014, a modest change from our previous guidance of down about 60 to 80 basis points. The difference is primarily driven by our ongoing investments in sales, marketing, product development, and distribution, particularly for our newest brands, Indian and Slingshot, and various other global investments and hires for future both opportunities.

We have realized positive benefits to operating expenses from the reduction in our incentive compensation expenses related to changes made to the Company's long-term incentive compensation plan as we have previously discussed. The income generated from our financial services business is now expected to grow about 25% in 2014, an upgrade from prior guidance due to the improved profitability of the Polaris Acceptance dealer financing portfolio, and increased income from our retail credit providers.

The net result of these guidance moves does not change our expectations for operating profit argent expansion. We continue to expect 2014 operating profit margin to grow in a percentage range similar to what we grew in 2013.

Moving on to income taxes. There is a high level of uncertainty regarding the United States Congress extending their research and development tax credit for calendar 2014 as we approach the end of the year. As a result of this uncertainty, we are increasing the operand of our income tax provision rate guidance for the full year to account for the possibility that the R&D credit may not be extended by year end.

If the tax credit is not extended, our expectations are that the income tax provision rate will be near the upper end of our revised tax provision guidance range of 34.5% to 35.5% of pretax profit. If the R&D credit is extended by the end of year, we would expect the full-year income tax provision rate to be near the lower end of the range.

We are raising our guidance for earnings per share from continuing operations to be in a range of $6.55 to $6.65, up 21% to 23%, while net income from continuing operations is also improved and now projected to increase 17% to 19%. This is a rather wide range of earnings expectations for just one quarter remaining in the year, due largely to the uncertainty of the R&D tax credit extension and its impact on earnings.

For the full-year 2014, the number of diluted shares outstanding is expected to decrease approximately 3% compared to the full-year last year due to the Fuji Share repurchase in the fourth quarter a year ago. Compared to last year, the 2014 third quarter gross profit margin percentage decreased by 55 basis points to 29.8%, and for the year-to-date period, is down 15 basis points. We now expect gross profit margins for the full-year 2014 to decline 20 basis points to 30 basis points for the full-year last year, slightly better than our previously issued guidance.

As previously discussed, we realized a significantly negative impact from currencies in the third quarter, given the weakness of the Canadian dollar and our exposed inter-company balance sheet positions, primarily in European currencies. If not for the impact of currencies, our gross profit percentage would have increased in the third quarter 2014 from a year ago.

We expect the negative impact from currencies to continue in the fourth quarter and into calendar year 2015, as well. We do have approximately 90% of our remaining 2014 Canadian dollar exposure hedged, exchange rate of about $0.92. Although the hedged rate is unfavorable year-over-year, it does remove much of the uncertainty for the remainder of the year for the Canadian dollar.

Helping to offset some the currency's pressures, we project that we will continue to benefit from higher selling prices and product cost reduction efforts as we have throughout the year. Additionally, product mix no longer appears to be the headwind we initially expected, as sales of higher-priced higher-margin ORV are exceeding our original projections.

For instance, the average per-unit sales price for ORVs increased 6% in the third quarter of 2013 from last year. The impacts of the remaining items listed on the gross margin slide have not changed materially from the previously issued guidance.

Moving now to our balance sheet and liquidity profile, net cash provided by operating activities was $380 million for the year-to-date 2014 period, about flat with the first nine months of last year. Higher net income for the year-to-date period was offset by an increase in factory inventory, as well as the timing of estimated income tax payments. We continue to expect cash flow provided by operating activities for the full year to increase at a slightly higher percentage rate than net income growth.

At the end of the third quarter our cash balance was $169 million, while our total debt balance of $228 million is higher than a year ago, primarily due to the repurchase of the Fuji shares last fourth quarter. Sequentially from the second quarter, our total debt balance is down $140 million as we completely pay down our revolving line of credit at the end of third quarter.

For the year-to-date 2014 period our investments in total -- in capital expenditures and new product development tooling totaled $146 million, down from last year. For the full-year 2014, we continue to anticipate capital expenditures will be somewhat lower than last year, but still exceed $200 million.

Polaris Acceptance receivables from dealers in the US eclipsed the $1 billion mark for the first time ever with a balance of $1.072 billion at the end of September, an increase of 26% from a year ago. The year-over-year growth reflects the mix change of higher value side-by-sides and motorcycles, increased shipments of snowmobiles in anticipation of the upcoming selling season, and higher PG&A sales. The retail credit environment remained stable with approval rates of 57% for the year-to-date period and a penetration of 32%, each slightly lower than a year ago.

I'll now turn the call back to Scott for some closing comments.

Thanks Mike.

From unfavorable movement in currencies to the potential lack of movement in the Long Beach ports, we see no lack of challenges as we work to the final months of 2014. But with a great team and an exciting lineup of new products and commercial campaigns, we expect to finish strong and position Polaris well for 2015.

The past few years have been marked by a combination of a persistent policy and regulatory uncertainty and a consistent pattern of the US economy growing below expectations. I would like to think the US electorate we speak loudly in a few weeks and demand action on taxes, energy, immigration, and the other areas that have the potential to unleash our economic engine, but we do not rely on wishful thinking at Polaris. As such, will plan for a moderate domestic GDP increase again next year, with the Eurozone possibly not growing at all, which will leave Asia-Pacific and parts of Latin America as the most likely markets to offer tailwinds.

Once again, we will rely on innovation and share gains to lead us to double-digit growth. As the US dollar strengthens, we anticipate adverse currency movements again in 2015, but in concert with our robust balance sheet, the stronger dollar will also assist us in our M& A pursuit, which could enable us to drive faster growth in our international businesses.

We will remain capable of managing expectations for Ken Pucel, but nonetheless, expect him and his team to carefully balance our need for capacity with their mandate for margin expansion. Lean is our answer, and 2015 will mark a major inflection point for Polaris' Lean transformation. From an investment in people at all levels of the Company and in all parts of the world to a plant in Poland, Indian motorcycles, Slingshot, our Dagor military vehicle, and our Eicher joint venture in India, we have made significant calculated bets on our future.

Cumulatively, these represent hundreds of millions of dollars of invested capital, which we have not yet seen a return on. We anticipate that 2015 will be a year where several of these become contributors to, rather than detractors from, our market-leading returns on invested capital. Very few investments match the return as generated by out off-road vehicle business, and Dave Longren continues to invest heavily in dollars and process improvements to ensure we build on our number one market share position in 2015.

Steve Menneto will have more models and a broader dealer network to expand our Victory and Indian businesses, and Mike Jonikas has the new AXYS sleds to go with the Slingshot business to grow our snow business. With off-road vehicles, snow, and motorcycles growing rapidly, we foresee another big year for Steve Eastman's parts, garments, and accessories business. As we position ourselves to close the year with positive momentum, with expectations to do more and be better in 2015, I believe this team's ability to drive sustainable, profitable, growth surpasses anyone else in our industries.

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

(Operator Instructions)

Mike Swartz, SunTrust.

Just on FX, if we can dig into that a little bit, I know that's been a significant drag this year on gross margin. Just really two points, and I guess based on Mike's commentary, it looks like gross margin -- the drag to gross margin is at least 60 basis points in the quarter, you said gross margin would've been positive. How do we look at that for, maybe, fourth quarter?

This is Mike. We would expect gross margins -- we increased our guidance for the full year on gross margins a bit. It will still be down for the year.

Currencies will continue to have headwind impact in Q4, as well, at the current rates. We don't see things as getting materially better any time soon.

Okay. You said you're at about 90% hedged, I think, for the fourth quarter. What does that look like for 2015?

Well, we have some hedges for 2015 at this point in other currencies. The peso and the yen and the Australian dollar.

We currently do not have any Canadian dollar hedges for 2015 as of yet. We haven't been able to execute on any of those yet.

Okay, and then maybe switching over to Scott and you made some commentary on just -- I think international M&A. Based on what you said, are we to read that something has changed or something's more likely today than it was, maybe, several months ago?

No. We don't see much different. We've had a long history of looking at opportunities to accelerate growth in our international businesses and I was simply commenting on the fact that that gets a little bit easier as the dollar gets stronger.

Scott Stember, Sidoti & Company.

Just getting back the currency topic, can you talk about how the new facility in Poland, now that you'll be having your costs also being impacted by the euro, how that could act as a potential hedge next year to help you out on the currency front?

Obviously, it creates more of a national hedge for us. The reality of the volume of the shipments is not going to provide too much incremental coverage, but certainly that's one of the reasons -- obviously the biggest reason we did the Opole plant was to serve the European market better and reduce our logistics cost, but obviously the currency benefit will be helpful, but I wouldn't change your model completely on it.

And what are your plans as far as, let's say by the end of 2015, how much of the European ORV supply will be provided by the plant in Poland?

Scott, this is Bennett. As we get to the end of 2015, we'll be ramping the production rate up really fairly aggressively through the year, and by the time we get to the end of 2015 we should be doing the majority of, at least, European region product out of Opole. There'll be a few models where it doesn't make sense and some homologations where we're still doing that engineering work that will probably increase the percentage as we get to 2016 and 2017, but think about it as a significant portion by the end of the year.

That's just off-road vehicles, not motorcycles.

Gotcha. And just moving over to Slingshot. Can you maybe just talk about -- get a little more granularity about the positive reception?

I know that some states, in order to get a motorcycle license you have to actually ride a two wheeler, so that could present some headwinds going into a dealership to test ride a Slingshot. Can you maybe talk about how all those logistics are taking place and if there's anything that you guys are doing to help smooth that out?

Clearly, by definition, it's a motorcycle and you need a motorcycle endorsement to do that. And I would say in a number of states, majority of states, it is difficult to take that on a three-wheel product based on the test.

So our team, just like Can-Am has done with the Spyder, continues to work on trying to develop more three-wheel specific type of test and evaluation process, that will be a process that will happen over a period of months and frankly, probably years as you work with the individual states, but again from the early innings here, we couldn't be more pleased with the response, really, from all stakeholders, from dealers to consumers to the response by the press. It's frankly been the most -- it's been the highest response impressions product we've had, frankly, in the history of Polaris, really over the first couple months and I think that really ties to its sexiness and its uniqueness and customer deposits, while I'm not going to comment on the specific amounts, its certainly far exceeded ours and dealers' expectations, so we're pretty encouraged early.

Okay, just one last question on the financial services income. Can you maybe just talk about -- I mean we had a near 50% increase year-over-year. Was there anything one-time in nature, and is that $16 million, $17 million run rate per quarter something that we should model going out?

Well, I'd just hold to our guidance. We've increased our guidance to up 25% for the balance of the year, and we're -- we've got a strong business both on the wholesale side with Polaris Acceptance and improving profitability from our retail credit providers, as well.

Okay, that's good enough. Thanks again, guys.

Listen, before we get going, we're going to have to limit the questions to two per participant because we've got quite a few on the list. So going forward here, let's keep it to two questions and then if we have time we'll circle around at the end. So go ahead, Melissa.

Greg Badishkanian, Citigroup.

First question is with respect to Indian. So Scott, I think you mentioned, I think it was a few quarters ago that your three-year target would be to achieve high single-digit low double-digit share for Indian, so just wondering how you feel about that target and do you think that that maybe ended up a little bit too conservative of an estimate?

It's hard to say. I think when I said that, we hadn't really launched much and were just building the business.

Clearly the first year has gone extremely well. The excitement, as Bennett mentioned, around Scout has been literally through the roof, so we still feel very good about it. As we know, the motorcycle industry is quite competitive, so we're going to project too much success, but we certainly do feel better than we did a year or two ago about potential for the Indian brand business.

Okay, great. And my second question is just the promotional environment, maybe give us a little bit of color of what you're seeing from your competitors on the ATV side, as well as the side-by-side, both your competitors and what you're doing.

Greg, this is Bennett. Promotion environments, I would say generally are really relatively stable and within our expectations. ATVs is -- I would characterize as a pretty stable environment over the last 12 months, and I don't think there's been any surprises there, and side-by-side has remained -- because it's a much more competitive industry with lots of additional product introductions by different competitors has been more elevated.

As we've launched products and customer -- I mean and competitors have responded to those products I think it's been particularly aggressive on the recreational side, but it's also been aggressive on the utility side and RANGER, but everything is, again, within our expectations, and as you can see it's not really been a headwind to the P&L and we continue to gain share, so we feel okay about it. But it's going to remain aggressive. I wouldn't expect it to get any easier.

Good. Thank you.

Joe Spak, RBC Capital Markets.

Sticking on Indian for a little bit, is it -- it seems like the pace of the dealer had slowed a little bit, so maybe you can update us if there's anything specific going on there, or that's really just timing, and then the other thing is, if it's possible to separate some of the growth you've seen in Indian from true retail demand versus dealer expansion and if you are seeing any impact on Victory from the Indian growth?

That's four questions. The pace of Indian dealer adds -- we came out of the gates this year saying it was taking us longer to retrofit the dealer locations and find the quality of dealers we were looking for, so really it hasn't slowed. In fact, if anything, the pace and quality of the dealers that we're adding to the list is going quite well. It's just, ultimately getting these dealers to the point where the doors are open and their retailing is taking -- it just takes a while.

I will tell you that the quality of the dealerships we're getting is fantastic, and because of that, the retail of those dealers that -- I have 109 right now that are selling bikes, has surpassed our expectations, so absolutely it's not at all coming from dealer ads as we'd like to catch up and we certainly will. We see good progress there, but the retail and quality of the dealers we've got is fantastic.

And then maybe to address your question, Joe, on the Victory angle, Victory was down, as I said, mid-teens, and I think there really were a couple factors. Remember we're coming off a pretty amazing third quarter last year with the red tag, it was our best Victory quarter ever, we were up 32%, all-time high share gains, so it was a pretty tough comp, and as I kind of indicated in my remarks earlier around liquid paint in Spirit Lake, we were constrained on shipments. Victory inventory is actually down 10% year-to-date, and you certainly saw that in our new product availability of Magnums, which certainly hurt retail end.

So that's more of what's going on in Victory. When we look at all of our cannibalization numbers from Indian to Victory, frankly it's about 10%, so I would tell you -- I would probably say we're fairly thrilled with that.

Indian is getting its source of volume from exactly the competitors we thought it was going to get it from. And frankly, Victory is just like every other heavyweight motorcycle manufacturer has to compete with the offerings out there, whether that's from Indian or Harley-Davidson or from the Japanese. And we haven't been able to get that brand quite as much news in the short term, and that will change, certainly, over time so we still remain very bullish on our future in Victory and are not daunted at all because it seems a little soft right now.

Okay. Just, quickly on the operating cash flow guidance, I know you said it will grow a little bit faster than net income, year to date, it's been pretty flat. So is there anything unusual in the fourth quarter that's going to be providing that large -- or making up the difference for the year?

No. It's just timing-related this year versus last year.

Jaime Katz, Morningstar.

Nice quarter. I have a couple questions. First, I think you guys had put a chart up on capacity utilization at the meeting earlier this summer. And with Poland opening, I'm curious how you feel about the extra capacity you'll have online domestically, and maybe if growth continues as it has, how you felt about that, maybe, for the next year or two and what that means for expanding your footprint.

And then second for inventories, I know you guys said something about product mix is part of the reason they had gone up. Can you maybe dive a little bit deeper into that? Thanks.

Bennett and I will answer this one together. The Poland play was really about making more profitability and adding the ability to serve the European customers. We obviously get a nice little capacity benefit from that as it ramps up production throughout next year, but certainly, as we continue to grow quite fast, specifically in our off-road vehicle business and as we've shifted Spirit Lake to be more of a motorcycle facility, we do find ourselves looking at how to expand our capacity in the most effective manner.

So we're in the process of looking at that right now, and will ultimately make -- I mean, we are very committed to maintaining our returns on invested capital, so trust that if we do something it's going to be in line with that. Bennett, do you want to talk a little bit about the inventories?

Jaime, were you talking in reference to factory inventory or dealer inventory?

Factory.

Okay. On factory, I think a couple of factors. I mean, I think you know we've been not necessary thrilled with our performance in factory inventory over the last several quarters, we remain to believe that that is an opportunity for us as we continue to get our Lean initiatives off and rolling and we expect better performance from ourselves and the team as we go forward.

Specifically on the number this quarter, the differences really were driven by really tremendous growth in PG&A, and a couple of acquisitions that add to that inventory. As we add that, these new factories and plants and capacity we are dealing with more raw materials as we go forward structurally, and then you just look at our product mix, more expensive motorcycles a bigger and higher performance ORVs. That product mix of more expensive products is adding to the dollars level because the units, frankly, again, are flat, which we view as a positive, frankly.

It will be helpful in the fourth quarter as we begin to ship Scout and Slingshot, which were both poised for shipment in the third quarter.

Tim Conder, Wells Fargo Securities.

A couple things, gentlemen. One, on motorcycles.

Scott, a little while ago you talked about potentially getting to breakeven by the end of 2015. Number one, is that with or without parts and accessories, and then it sounds like you've got the paint issues going on with Slingshot and a little bit on Victory, so has that maybe slowed that up just a little bit?

That's question number one, number two is Bennett, if you could give any color, you said that Canada sales and everything going on currency and so forth there hurt your ORV in North America. If you just sort of exclude that, can you give any comment on US ORV and side-by-sides year-over-year?

On motorcycles, we do see a path to profitability at the end of 2015 and there's a lot of investment continuing to go on, but as we've referred to several times, what we're seeing with Indian and the prospects we have for Victory and ultimately Slingshot adding to that mix, we certainly feel like we've got potential to have a very profitable business exiting -- as we get into next year and certainly as we finish. As far as the -- and again, it's a complex new liquid paint system and it's going to be way better future for us.

We'll get through that here over the next couple of months and then it is, I don't know if it's going to be smooth sailing but we'll have a ton of capacity in our on-road stuff going forward in Spirit Lake. So we're really poised for a better future.

On the Canada question, I don't want to over-dramatize it. What we would call it is it's notably softer, and I think that really is attributable to what's going on in the Canadian economy right now. If you look at our wholesale performance, United States is up really strong double digits, over [20%] in the third quarter in Canada, it was down about 5%.

The market differences on the retail aren't quite that pronounced, but it is softer and Canada is an important market for us for both ORVs and sleds. So it hasn't been an impact on sleds yet, but we're watching it carefully and I just wanted to make sure people were aware of it. It's about 10% of our sale that's an important market, so we watch that very, very carefully.

And within your ORV guidance, does that include military getting to $100 million this year?

No. We're -- as Bennett said in his speech, the introduction of Dagor at AUSA, I was there for that, it truly is a really potentially disruptive product and incredibly helpful for the war fighter, and certainly it's going to help be one of things are propels our business over $100 million over time, but certainly not suggesting that that's going to happen in the fourth quarter.

Robin Farley, UBS Securities.

First on ATVs, I wonder if you could comment on the market is down for the first quarter and six, seven, eight quarters at least they've had increases, and is that related to the ACE or is the ACE cannibalizing or is the ACE in your ATV numbers? So just kind of how to think about that?

And then also on the Indian dealers, when you look at the total number of new signings, is there any change in the existing signed dealers? In other words, is or any turn, so is it just the incremental dealers that signed or did you lose some that had signed and kind of gain others and just how should we think about how to expect the dealer rollout in new signings over the next year?

Alright, I'll try to take the Indian one first. We're not -- we really haven't had any dealer turnover in Indian since we started as [we're going retailing]. Because some of these are pretty extensive build outs, in some cases they need zoning.

We've had a few guys that have dropped as they've gone through that process and not been able to get the land or the building, those processes have dragged out and then we've kind of jointly decided to go a different direction, but that -- I would say that's not even a handful. It's very small numbers. So it's basically going as planned, it's just, as Scott mentioned, it's a very involved process and it takes time, longer than we certainly initially estimated.

And every time -- I'll tell you just inside the locker room stuff, Robin, every time I get pissed off about how fast or how slow it's going, the guys send the picture of the next dealer that's coming online and I feel better about it. Really, the quality of what they're getting and as evidenced by the retail of those that are coming online is better than we expected, so certainly we're building capability go faster, but not compromising quality at the dealer end at all.

In regard to your question on ATVs, we've been pleased with how the -- what we would call that core ATV industry has performed year to date and we're a little disappointed that it was down low single digits. But I would say if you look at it over a little bit longer period of time, the ATV industry is doing what we expect it to do.

ACE is not in our number on that, and I would say ACE is still early enough as a new category in this and from everything that we're reading in our numbers, it's not cannibalizing our ATV sales at all. And obviously if you threw ACE into an ATV industry, if you wanted to do that, the numbers look better, but we're not worried we're seeing significant cannibalization at all. Right now the metrics we're looking at says that ACE still is largely almost 100% incremental on the sales side from us at the retail standpoint, so we're thrilled with that.

Can I just clarify, when you say that ACE is not cannibalizing, does that mean that if you include ACE in your ATV number that would swing it into positive territory?

Yes. If you wanted to look at it that way, yes, it would.

Scott Hamann, KeyBanc Capital Markets.

We get a lot of questions on the ag business and some of the potential softening there. Can you give us your updated thoughts on what your direct and kind of indirect exposure might be there, and what some of the trends that you're seeing there might be?

Obviously the ag market has been week now for almost a year, and if you look at our performance over that prior-year period versus those, the larger companies, I don't have to name them for you, that are very focused on heavier ag equipment, you'll see that it hasn't hurt us much at all that's kind of what we expect to see going forward. We didn't get a huge benefit on the run-up with ag, and we're not seeing much of an impact at all on the way down.

That being said, a lot of our customers are farmers and ranchers. What we find, though, is that the -- and this is -- our products are [a rounding error] to what they're hanging on, so, obviously it's a little bit of impact, but something well, as we've proven over the last nine months, well within something that we can deal with.

James Hardiman, Longbow Research.

Talk about the retail growth through the lens of the capacity issues as you've mentioned a couple times, do you think the retail growth would've been higher if you'd been able to get out all the product that you would have liked? It sounds like, at least with motorcycles, the clear answer is yes. But maybe talk a little bit about ORVs, if that high single-digit number would've been a little bit better if capacity issues hadn't been there in the third quarter.

Jim, this is Bennett. I don't like to deal in would've, could've, should'ves, but, yes, I think it would have been modestly higher. Certainly motorcycles, because we were slow, the demand on these new model year 2015s on both Victory and Indian two-tones and Roadmasters and we were constrained.

So no question that impacted our motorcycle retail, and I'd prefer for you can say modestly, but no question. And again we were swamped in our ORV plants as well, and so we were a little slower on those even though we were able to get the shipments out so I think it did have a modest retail impact on ORVs as well.

Got it. And then, second question, I think Mike mentioned ORV ASPs up 6% in the third quarter. That's a great number.

Maybe talk through how we should think about that going forward. It doesn't seem like a whole bunch of the special edition really high price point XP 1000s hit in the third quarter, that should help, but you're also going up against a real tough ASP comp, ORVs specifically I'm speaking to here. So anyway, it seems like that could be a really big swing factor in the fourth quarter; how should we think about that going forward?

You know you're encroaching on Hovorka's question there. It was 6% in the third quarter. It's 4% on a year-to-date aces.

I don't know that we can project too much going forward at this point on what that might be. I think you're right, there are opportunities for higher-priced ORVs.

We also introduced a fair number of value models and EXPs and those types of things, which -- 570s, that are on the mid to lower end of the scale, as well, so -- and then ACE, as the ACE ramps up, ACE is lower. So I don't think I would get too carried away with that.

Mark Smith, Feltl and Company.

Can you just walk us quickly through the Eicher timeline? Bennett, I think you said second quarter 2015 expected shipments?

As we've built out the JV, gone into a new market with a great partner. I mean again, I would tell you everything is moving along probably as we expected, but just as we expected, when you're doing an all new kind of new to the Earth kind of product category and concept, you have a new partner, you're building a new team, you're [trying] a distribution channel, you're building a plant, there's always a little bit of complexities that even though you try to plan for them, slow you down a little bit as you go through regulatory.

So we're about three months behind where we expected to be about a year ago, and so right now we're in the process of kind of signing up distribution, the teams are preparing the final go-to-market launch and marketing plan. The plant is essentially ready and we expect to begin shipping in the second quarter.

It is really the plan and we expect, as does Eicher, that we'll be successful in this venture. But again any time you go into an Indian market, I want to make sure you're clear, it's a big, vast, wonderful market, but you're dealing with traditionally lower margins and it'll take time for us to build that to everything that it can be over the next three to four years.

And then motorcycle guidance implies really pretty strong fourth quarter numbers year-over-year. Is a lot of that just timing of Scout the biggest impact on that?

Scout's going to help, we're going to ramp up Roadmaster, and don't forget Slingshot's going to be in there, as well. So we've got a lot of good stuff coming in the fourth quarter.

We're at the 9 o'clock hour, but we've got three more questions so we're going to try to get through them here as quickly as we can. So next question, Melissa.

Craig Kennison, Robert W. Baird.

Scott, a lot of investors perceive you to be the leanest company in power sports already, so maybe the question is what can you do further to, I guess, press that advantage? Maybe frame, if you would, what's still on the table for Polaris to get more lean to drive better margin? It just seems like you've done a lot already.

We've talked about a bad baseline sometimes and when we talk about the improvements we've made, it's really not -- it's more the power sports industry was versus where we could be, and I think if you just look at the automotive industry and some of the metrics they have and what they've done in their lean transformation over the years, gives you a good example of what we can do. I mean the main areas where we expect to get better, this lead time reduction effort, getting product to our dealers and our consumers. We've started to do that with our motorcycle business, and we are going to continue to get better with motorcycles and expand that across our ATVs.

So lead times are going to improve. Our quality, which includes net promoter scores, our warranty costs, and ultimately the rework that we do, will improve over time. The labor productivity, which is not a huge number for us, but it's going to get better.

As Bennett alluded to, we're not on top of our game with factory inventory right now, and we believe we've got a great opportunity to free up cash by better managing inventory in the future. So those are just a couple of areas, and I think the potential as we -- it's not just a single person. Obviously Ken brings a lot of great experience to help us accelerate that growth, but I think it's a requirement for all of us on the team to really embrace this opportunity to be a great lean enterprise.

Jimmy Baker, B. Riley & Company.

Just had a couple follow-ups here, first on capacity, can you just talk a little bit about the flexibility of capacity at Spirit Lake, is that at all interchangeable, I guess for example, could you take advantage of some potential weakness on one line to meet demand in, say, Indian or Slingshot?

And then secondly, on the income from financial services, can you just kind of talk a little bit more about what's differing there from your prior expectations? I think, as you mentioned, penetration rate remains flat sequentially, still down couple points year-over-year, so is the guidance raise there just really a function of higher-than-expected dealer inventory?

Let me take the Spirit Lake flexibly capacity. I think it remains kind of a hallmark strength of Polaris versus any of our traditional competitors. Generally speaking, our lines with a minimum of rework and investment and time can produce other products in our portfolio, particularly in a motorcycle thing with, really, not a tremendous amount of lead time, so I would say absolutely, Jimmy, that's true and our expectation.

What we would probably do, unless we saw something major here over the next several months, is what we would use is try to use our labor forces to kind of slot that around to go faster or slower based on what's going on because we have some dedicated lines set up for each of the key categories, whether it's Victory, heavyweight, Indian, or essentially mid-sized Scouts right now and then Slingshot. So we're feeling pretty good about our flexibility, particularly now that the big paint system is about to go live here over the next week or two and we'll have that behind us.

On financial services, as I said before, it's really coming from both our wholesale and retail. In the wholesale area, our portfolio balance is now over $1 billion, and in a stable interest rate environment, in a stable cost environment for that business with the inventory -- the finance inventory being up 26%, it's just generating a lot more profit opportunity for the joint venture that we share with GE.

On the retail side, the penetration rates are holding stable, but our volumes continue to increase as our retail sales increased, and the profitability with our relationships, the metrics that are driving the payments that we get are improving, and that's generating significantly higher profit for our financial services business.

Joseph Hovorka, Raymond James.

Just two quick questions. The first on Victory, Bennett, you talked a little bit about the Indian not cannibalizing Victory any more than you thought it would be, but we now have three quarters of down retail sales, and I can understand what's going on here in the third quarter. How do you foot that with three consecutive [good down] quarters and cannibalization not being any worse than you thought, because I think we were kind of talking about Indian potentially growing alongside with Victory growing.

That's a fair question, Joe. I think when we really are honest and we assess the situation, I mean the heavyweight motorcycle industry is an extremely competitive space, and as we've entered with Indian, with really, really compelling products in all of those key segments, it's only gotten more so. Harley has responded with some very good products of their own, and a lot of our Japanese competitors are now responding if not with new product, with really aggressive promotional efforts.

And so I would tell you it's a product more so than anything of a very competitive industry, and again in the short-term we have not had as much product news as our dealers or our customers are used to, and we expect to rectify that in the near future. And then I think secondarily, clearly, in the third quarter it was worse because we didn't help ourselves with our capacity constraints in getting our key new products and the appropriate model year 2015s out to the marketplace; that would've helped us. I'll tell you the answer, we're certainly not panicked and we know what we've got to do to make that better as we go forward, it's straightforward.

And we still -- I mean, we make great motorcycles with Victory and I think all the reports say that. We've got some exciting new members on our team, so I expect the commercial execution of that as well as the operational execution to get better, so certainly not the growth -- or the lack of growth is not what we wanted this year, but we feel very good about the long-term ability for Victory to be a growing and viable part of Polaris.

Okay, and then the second question is on your gross margin guidance, you've got -- production volume is actually a push in the third quarter for the full year, but we've got volumes up. How is that not gross margin accretive? What am I missing there?

Well I think the real thing there, Joe, is we've been talking about it for much of the call, capacity. We're bursting at the seams on capacity and to get the product out, we're not always as efficient as we'd like to be.

We're expediting stuff, we're working overtimes, we're moving stuff around from factory to factory. We're not as efficient as we'd like to be --

A bunch of the line ramp-ups --

So we're not getting a lot of absorption benefit operating as tight as we are.

Okay, fair enough, thanks guys.

Okay, thank you, I want to thank everyone for participating and we look forward to talking to you again next quarter in January. Thanks again and goodbye.

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