Polaris Inc (PII) 2016 Q1 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 Q1 2016 earnings conference call.

(Operator Instructions)

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

Thank you, Melissa, and good morning, everyone. And thank you for joining us for our 2016 first-quarter 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.

Today you will be hearing prepared comments from Scott Wine, our Chairman and Chief Executive Officer; Bennett Morgan, our President and Chief Operating Officer; Ken Pucel, our Executive Vice President of Operations, Engineering and Lean; and Mike Speetzen, our Chief Financial Officer.

During the call today, you will be -- we will be discussing certain topics including product demand and shipments, sales and margin trends, income and profitability levels, and other matters, including more specific guidance on our expectations for 2016, which should be considered forward-looking for the purposes of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. You can refer back to our 2015 10-K for a more detailed discussion of these risks and uncertainties.

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

Thanks, Richard. Good morning and thank you for joining us. When our business or our vehicles fail to perform to our high standards, our leading concern is to figure out what went wrong and make it right. We always strive to act aggressively, but also make time for introspection, especially on our guiding principles.

The first of these is best people, best team, and our success is wholly dependent upon having the talent, teamwork, and leadership to persevere and win in all circumstances. Our second guiding principal is safety and ethics always, and it is our foremost priority to get this right for our customers and shareholders.

This week, we announced a major recall of more than 160,000 RZR vehicles to address fire and other thermal risks in our global RZR business. The recall was the culmination of an extensive investigation that ultimately isolated several disparate and difficult to discern root causes.

We spared no resource or cost and worked closely with Consumer Product Safety Commission to ensure that we had identified and addressed all of the systematic root causes of these thermal issues. We regret the inconvenience this recall has on our customers, but the safety of our products and our riders must always take precedent. Our final guiding principle is customer loyalty, and it is earned not only by the performance and features of our vehicles, but also by our performance when our customers need us.

Over the past eight years, our industry-leading RZRs have garnered amazing customer loyalty, and we are committed to delivering the parts support and experience through this recall to maintain that. Polaris customers expect us to build products that are fun and safe to operate, and we are taking this necessary step toward that goal.

There were a number of positive developments during the first quarter that allowed us to cover substantial retail costs and still hit our commitments. But we will not sugarcoat the fact that we saw declines in sales and earnings per share for the second consecutive quarter. Revenue was down 5% to $983 million, as we again curtailed off-road vehicle shipments to manage dealer inventory positions and battled another quarter of negative currency.

Earnings per share was down a significant 45% to $0.71 per share, with notable cost reductions from our VIP initiatives and tightened operating expenditures only partially offsetting the triple impact of currency, volume, and mix, and considerable legal and warranty costs.

With Indian motorcycles coming off another quarter of 50%-plus growth and aggressive share gains, we have demonstrated that we know how to leverage strategic acquisitions to augment our strong organic growth capability. Taylor-Dunn's industrial vehicles are for work, not play, but the brand is robust and supported by a distribution network that provides them with a competitive advantage that will also benefit our Gem business.

We do not anticipate that Taylor-Dunn will match Indian's aggressive double-digit growth, but we do like the less cyclical nature of their business model. They join our global adjacent markets portfolio, which has grown significantly since 2011, and we are excited about the long-term prospects for profitable growth in this $4 billion-plus work and transportation space.

I firmly believe that acquiring talent is more important than buying businesses, but doing the former enhanced our ability to perform the latter when we recruited Bob Mack to be our Senior Vice President of Corporate Development and Strategy, and President of our Global Adjacent Markets business. Bob has extensive experience in global M&A and shares our passion for powersports and riding. With his intellect, energy, and leadership, we have more capability to plan and execute our aggressive growth agenda.

Typically, I speak about growth when I review our vision and strategy slide, because innovation and market expansion are not only key to our long-term objectives, they are at the core of our DNA. We have exciting technology, commercialization, and product development activity ongoing, and we will continue to grind away at improving all of our fundamentals to spur growth.

Less sexy but equally important to our success is the emphasis and momentum we're building on reducing costs. Ken Pucel is institutionalizing lean and driving sustainable improvements in safety, quality, delivery, and cost. Sometimes this requires investment, with Huntsville being a prime example. But many times it is simply leadership, focus, and prioritization.

Our all-out assault on cost provides that focus, and in his role as Senior Vice President of Enterprise Cost, Dave Longren augments Ken's cost leadership. Together, they are driving more than 900 VIP projects that will generate savings 45% greater than we realized last year.

From plant productivity gains and logistics efficiency to raw material price negotiations in VAVE, we are driving costs out and building capabilities over long-term margin expansion. These efforts are consistent with our quality improvement initiatives and will ultimately provide value to customers, dealers, employees, and shareholders.

I will now turn it over to our President and Chief Operating Officer, Bennett Morgan, who will provide additional insights into our performance.

Thanks, Scott. Good morning, everyone. Polaris' first-quarter North American retail sales performance improved, increasing 6% assisted by a North American power-sports industry that grew similarly, driven by strength in snowmobiles and side-by-side markets. North American dealer inventory declined 1% versus 2015. Specifically ORV inventory levels were down about 10% year over year, with side-by-sides down upper single digits and ATVs down low double digits percents.

Snowmobile levels improved in the first quarter but still remain elevated, up low 20%s due to low snowfall in key regions. Motorcycle inventories, including Slingshot, are now essentially at target levels and are up mid-60%s.

Moving on now to business unit performance, starting with off-road vehicles. First-quarter ORV revenue decreased 12%, with declines in all brands as we work to further improve dealer inventory health. Polaris North American ORV retail was flat in the first quarter, improving sequentially versus fourth quarter. Polaris ATV retail was up low single digits, with side-by-side retail down just slightly as we came up against particularly strong RZR comparables from last first quarter.

Polaris gained a bit of ATV share as we slightly outperformed the North American ATV industry, which was also up low single digits. We estimate that the North American side-by-side industry in Q1 improved nicely, up mid to high single digits, so we lost some side-by-side share.

Oil state performance remains weak at minus 8%, but declines moderated slightly versus 2015 with the exception of Western Canada. We expect side-by-side share gains to be challenged for the next couple of quarters until many of the competitive new products anniversary their introduction comparables throughout the year.

Looking ahead for Q2, it is too early to fully assess how the RZR recall will affect Polaris, but the team has literally been working around the clock to minimize any negative impacts to our consumer and dealer basis. The production of the service kits needed to execute the safety bulletin is underway and ramping up quickly, and they will begin shipping to dealers this week.

Although the team has developed an aggressive allocation plan for these kits, in the short term, we do expect some retail risk and customer frustration while availability lags behind demand. Our number one goal is getting dealers enough parts to address customers who need vehicles repaired, followed by customers who want to buy. We believe we will have sufficient kits to address all of the recalled vehicles within the quarter, and we will expedite at every opportunity to complete every repair as soon as possible.

Beginning next week, we plan for production and shipments to incorporate all updates. However, if necessary, we will allocate production parts to field service kits as our top priority is and will always be doing the right thing for our customers and our dealer partners.

We are encouraged by a number of ORV factors. We launched a new marketing and promotion strategy in late February and saw strong performance gains for the balance of the quarter as retail improved double digits from the pre-launch period. The first-quarter industry improvement and solid year-over-year growth, our progress on dealer inventory reductions down in all brands and double digits overall, and our general is off to a very strong start, and while early, appears to be attracting incremental consumers to the Polaris side-by-side family.

Snowmobiles. First-quarter snowmobile revenue increased 2%. The North American snowmobile industry increased markedly in the first quarter, up about 30%, but still declined upper single digits for the just-completed season. Polaris continued to gain share in the first quarter with retail increasing upper 30%s. And for the full season, Polaris retail outperformed the industry declining only low single digits, and we gained share, achieving our highest market-share level in over 13 years.

We climbed back to number one in the mountains, and for the second year in a row, one of our AXYS models earned the prestigious SnowTrax TV Real World Sled of the Year. Our model year 2017 product introductions, including seven new models, were well received. Global snow orders are still being finalized, but elevated Polaris and industry dealer inventory levels, along with our commitment to further drive any dealer inventory lower, will result in reduced model year 2017 shipments.

Motorcycles. Polaris Q1 revenue increased 21% with solid contributions from all brands and continued improved shipment performance out of Spirit Lake paint and plant. Polaris continues to gain motorcycle share. Polaris first-quarter motorcycle retail, including Slingshot, grew low teens percent against very stealth comparables from both Scout and Slingshot launch deposit sales last year.

The North American midsize and heavyweight motorcycle industry was flat in the first quarter. First-quarter Indian retail increased over 50% with nice first-quarter share gains in both heavyweight and mid-sized segments. This marks the fifth consecutive quarter we have gained share in both heavyweight and mid-size, and Indian same-store sales also continue to grow.

Our new product launch sequence continued during the quarter with the introduction and initial shipments of the Springfield, a multifaceted hard bagger on an all-new chassis and a unique new trunk compatible for higher loading capacity and a premium touring experience without sacrificing any handling prowess. Springfield is the ninth Indian model that we've launched since that August 3, 2013 unveiling of the new generation of Indian.

In less than three years, we've strengthened our brand, we're ahead on our global dealer count, and we've developed two unique powertrains and three chassis. We are very excited about 2016 and the future growth of Indian.

Victory retail improved sequentially, down low single digits in Q1 as availability and stocking improved. The exciting news though, of the quarter was the launch of the Victory Octane, Victory's first entry into the midsize segment. It is a compelling new performance cruiser with an MSRP of $10,499.

Directed right at our leading competitor, the Octane is 39 pounds lighter, almost double the horsepower, with a 6% more lean angle. Octane blows away all the competition with a zero to 60 mile per hour time of just 3.6 seconds and a quarter-mile run in 12 flat. The Octane is the definition of American muscle, and initial dealer and press response has simply been fantastic. Initial shipments began in March.

Q1 Slingshot retail declined mid teens percent against huge pre-deposit backlogs last Q1. In February, we unveiled our new model year 16.5 spring lineup, with two new colors and graphics and a new white pearl SL limited edition. Licensure progress continues. Ontario is now approved as of March 1. This leaves just Maryland, Hawaii, and four small-volume Canadian provinces remaining.

Our marketing efforts are ramping up with seasonality. We launched our first national TV campaign earlier this month to drive greater consumer awareness, as well as a Slingshot X high-performance demonstration video with professional driver, Tanner Foust, shot on the streets of San Diego, which has already received 3 million views and 100 million PR impressions.

Global adjacent markets. Global adjacent first-quarter revenues decreased 8%. Work and transportation revenue increased low single digits driven by strength in [AXM], national accounts in Gem offset by lower sales to Bobcat and [Erance]. We also recognized initial revenue from our newest acquisition, Taylor-Dunn, a leading brand in the light industrial, and commercial vehicle space, adding another strong brand to our growing Polaris work and transportation customer solution portfolio.

Defense revenue in the first quarter declined significantly due to very tough comparables from last first quarter, which had the initial shipments on our $83 million five-year special operations forces MRZR contract. Our order backlog is up year over year. MRZR and Dagor platforms continue to win new orders and customers. The continuing challenge is timing delays with the complex customer approval and funding challenges we see in defense.

Parts, garments, and accessories. Polaris first-quarter revenue increased 2%, driven by increases in ORV and snow-related businesses, partially offset by modest declines in motorcycles, due entirely to the initial Slingshot PG&A launch shipments from last first quarter. Accessories declined modestly for the very same reason, but were more than offset by growth in apparel and parts categories.

International and US regions both grew, offset by some weakness we saw in Canada. Our expanding after-market brand portfolio expanded teens percent, while core Polaris PG&A increased low single digits percent.

International. International revenue increased 6%, up 12% though, on a constant currency basis in Q1, led by strong growth in motorcycles and nice contributions from Latin America and our EMEA regions. EMEA is off to a solid start with first-quarter revenue up 6%, driven by motorcycles, [XM], and PG&A, partially offset by continued weakness in ATVs in Russian and Middle Eastern markets.

The European ORV industry grew low single digits in the first quarter, with Polaris retail outperforming, up mid-single digits. Polaris first-quarter motorcycle retail sales grew in excess of 40%, driven by Indian and Scout in particular, in an industry that increased low 20%s. So we continue to gain nice amounts of motorcycle market share in Europe.

European Octane shipments to dealers began in Q2, and Slingshot European seasonality ramps up so we have catalysts for continued motorcycle share growth as we move forward. European snow industry retail slowed in the first quarter, down high teens percent, while Polaris outperformed down mid-teens percent and gained some share.

Asia-Pacific first-quarter revenue declined 7% due primarily to a modest decrease in Australian subsidiary sales, partially offset by growth in India and China. Multix retail and distribution, while still relatively small, are on plan through the first quarter. Latin America continues to surge, with first-quarter revenue up 29%, driven by excellent year-over-year growth in Mexico and Brazil and Indian motorcycle sales.

And with that, I'll turn it over to our Executive Vice President of Operations and Engineering and Lean, Ken Pucel.

Thanks, Bennett, and good morning to everyone. As Bennett mentioned earlier in the call, our Spirit Lake motorcycle plant is now producing to planned schedules, and inventories are essentially at target levels. In January, we executed a series of planned paint system enhancements in Spirit Lake, and today we are meeting production requirements without overtime. Production output in the first quarter was 31% higher than first-quarter 2015. Additionally, our manufacturing lead time has improved by 75%.

Our new Huntsville, Alabama plant is on plan to start production in the second quarter. Huntsville is a key enabler for our lean enterprise program, and it will provide capacity to manage our plant network more efficiently, eliminate costly overtime premiums, access a capable regional supply chain, and facilitate future growth.

Huntsville will initially produce Ranger side-by-sides and we will add Slingshot production in the third quarter. Transferring Slingshot from the Spirit Lake area to Huntsville will support Slingshot growth, while increasing available capacity in Spirit Lake for our growing motorcycle business.

From a lean perspective, the Huntsville site incorporates our most advanced lean flow and state-of-the-art manufacturing technologies, and improves throughput by approximately 80% versus our existing manufacturing facilities. And enables us to execute retail flow management for side-by-sides with less overall inventory while supporting our strong customer base in the southeast United States.

Improving our inventory performance is a key element of our lean enterprise program. As our manufacturing footprint and portfolio products have expended, we have seen increased inventories and reduced inventory turns. To reverse this trend, we are focused on several elements of our lean enterprise program from how we design our products through customer delivery. Key focus areas that enable inventory reduction include side-by-side RFM, inventory planning, vehicle platforming, localization of suppliers, supplier lead-time reduction, and reconfiguration of our distribution network.

In addition, inventory management is now a key performance metric for incentive compensation at executive levels. First-quarter net inventory ended at $710 million, including acquisitions completed in the first quarter, which was slightly favorable to our expectations. We expect to see year-over-year inventory reductions beginning in the second half of 2016, with our inventory turns performance improving sequentially going forward.

Now I will turn it over to Mike Speetzen, our Chief Financial Officer.

Thanks, Ken, and good morning, everyone. As Scott and Bennett mentioned, there were some unanticipated costs in the first quarter related to product liability and warranty. While these items were not contemplated in our previously issued guidance, we were able to cover these additional costs in the first quarter and report earnings in line with our previous expectations. A combination of slightly favorable foreign exchange, improved financial services performance, and significantly more aggressive cost actions allowed us to offset these unplanned expenses.

We continue to expect total Company sales to be in the range of down 2% to up 3%. On a constant currency basis, this equates to total Company sales being flat to up 5% compared to 2015. Although foreign exchange rates for Canada and Europe were slightly favorable to our expectations in the first quarter, the impact to the top line was not significant. Furthermore, given the volatility of exchange rates in these regions, we are not building in significant upside and have held rates relatively close to our original guidance levels for the balance of the year.

Despite incurring substantial unplanned costs in Q1, we are maintaining our earnings per share guidance range for 2016. We expect EPS to be in the range of $6.20 to $6.80, down 8% to up 1% compared to the full year 2015. On a constant currency basis, earnings per share will be flat to up 9% compared to 2015.

While we are maintaining total Company sales guidance, we are slightly adjusting our segment sales growth expectations. Global adjacent markets is now expected to be up in the high single digits percent range, reflecting the recent acquisition of Taylor-Dunn.

We also now expect our ORV snowmobile sales to be down low to mid single digits. This reflects a slightly lower growth rate than previously indicated, driven primarily by the short-term impacts to retail Bennett mentioned earlier.

Our previously issued sales guidance for motorcycles, PG&A, and international remain unchanged. Motorcycle sales are anticipated to be up high teens, international sales are anticipated to be up low to mid single digits, and PG&A is anticipated to grow faster than the overall Company growth rate.

Moving down the P&L, we are adjusting our previously issued guidance for the following items. Gross margins are improving slightly versus our previous expectations and are now anticipated to be down 70 to 120 basis points. Consistent with prior guidance, we anticipate foreign-exchange to be a 90-basis-point headwind.

On a constant currency basis, gross margins would be up 20 basis points to down approximately 30 basis points. I'll provide more detail on gross margins in the next couple of slides.

Operating expenses as a percent of sales are expected to be up 10 to 30 basis points, given product liability costs recorded in the first quarter, coupled with acquisition-related costs and severance booked in Q1. We will continue to make the necessary trade-offs between preserving critical growth investments and improving or eliminating unproductive processes throughout the year.

Income from financial services is expected to be slightly better than previously anticipated given improved retail financing penetration rates, and share count is expected to be down approximately 2% given more aggressive share repurchases in the first quarter. Our guidance for the remaining P&L items remain unchanged.

Our gross margin decreased by 320 basis points in the first quarter. On a constant currency basis, gross margin for the first quarter was down approximately 180 basis points driven by increased warranty associated with the RZR recall and higher promotional expenses, which more than offset continued progress and product cost savings.

On a segment basis, our expectations also remain unchanged. ORV/snowmobiles gross margins are expected to decline due to currency and mix shifts. Motorcycle gross margins are anticipated to improve from higher volume and product cost reductions, and global adjacent markets' gross margins are expected to be about flat with 2015.

In the first quarter, currency negatively impacted sales and pretax income, with revenue down 1.5 percentage points and pretax income down by $8 million, with gross margin negatively impacted by approximately 140 basis points.

While there were other currencies that moved against us during the quarter, the Canadian dollar continues to be the most significant negative exposure for Polaris. Our 2016 guidance assumes a rate of approximately CAD0.71 to $1, which is slightly improved from our initial guidance. While current rates are further improved from this assumption, we have intentionally left the rate at this level given the volatility experienced in Q1 alone where we saw the currency move approximately 11% in a short period of time to where it is today.

We will continue to provide visibility into FX impacts on the Company as we communicate in future calls. Remember, as a rule of thumb, a CAD0.01 move in the Canadian dollar represents about a $4 million move for both sales and pre-tax profits for the balance of the year. The majority of the potential impact to the business will be translation in nature, as we have approximately 80% of our Canadian dollar exposure hedged for the remainder of 2016.

Currency is anticipated to negatively impact full-year 2016 sales at the high end of the range by about $75 million, or about a 1.5% decline in sales, and negatively impact pretax profit by approximately $55 million, which is similar to previous guidance.

Our financial position and cash-flow generation continues to improve. Cash flow provided by operating activities was up $135 million in the first quarter driven by reduced working capital needs. While factory inventory was flat sequentially from the fourth quarter last year at $710 million, as Ken pointed out, we have plans in place to lower factory inventory significantly in the second half the year, which will drive increased cash flow generation in 2016.

In the first quarter we spent $55 million in capital and tooling. Our expectations for capital and tooling spending in 2016 remain unchanged and at amounts slightly higher than 2015, as we complete the Huntsville plant and make additional critical investments in our Spirit Lake motorcycle factory.

Lastly, we were more aggressive in our stock buyback program in the first quarter. We repurchased 1 million shares for $85 million. We will continue to repurchase shares and expect to reduce share count by approximately 2% versus 2015, representing a total of 2.9 million shares that we repurchased by year end.

Finally, you'll remember that during our January call, I gave more clarity around our expected first-quarter performance. While it's not normal practice for us to provide guidance for the quarter, given the current environment, we feel it is important to continue to highlight certain items for your consideration as you think about our second-quarter expectations.

As we experienced in Q1, foreign-exchange will continue to be a headwind in Q2. We anticipate roughly a 2 percentage top-line headwind against last year's sales. And it's important to note that this will also have a significant impact on gross margins.

You'll remember that I indicated that gross margins were expected to be down around 300 basis points in the first half of 2016. That expectation is still valid, as improvements in product cost reductions and minor currency benefits have enabled us to offset increased warranty costs associated with the RZR recall.

While we anticipate our motorcycle business will demonstrate continued growth in Q2, we do anticipate that the ORV/snowmobile business will be flat to down low single digits. And our first priority in Q2 will be the effective execution of the RZR recall. And lastly, we anticipate Q2 operating expenses to be approximately10% higher than last year.

With that, I'll now turn it back over to Scott for some final thoughts.

Thanks, Mike. I certainly do not plan to make a habit of reporting declines in sales and earnings, but we were confronting our inventory and market issues head-on and made good progress sequentially from Q4. Indian Motorcycle continued to gain share at a healthy clip, and Steve Menneto has both our bikes and our dealers on the gas heading into the heart of the riding season.

Off-road vehicle sales were sluggish in January and February but improved notably in March with our new program launch. For over a year now, we have seen higher variability in our markets from month to month, region to region, and even product category to product category. We were much better at anticipating and managing this new normal in the first quarter, and remain diligent as we look skeptically at the optimistic outlooks for the economy and our industry.

Shorter lead times and standard work are hallmarks of a lean enterprise, and both are excellent tools to reduce variability. Ken Pucel is aggressively building our lean capability in the associated VIP cost and inventory reduction initiatives, and Dave Longren is successfully championing our broad-based assault on cost.

We will spare no resource or cost to effectively execute the RZR recall, as we work to get our customers back on the trails and dunes with ironclad assurance that these thermal issues have been resolved. This is a complex matter on many levels, but I have confidence that our team will implement the repairs and ensure customers and dealers have full access to the best-selling recreational side-by-side ever.

It is exciting to watch Matt Homan and Craig Scanlon build and execute their plans to reaccelerate growth in our largest business unit. Demand creation through more advertising and promotion is the most visible element of their efforts, but strategically, there are many more sustainable high-impact actions underway in our off-road vehicle business. Matt now faces a much more competitive environment than he did the last time he ran ORV, but he is never one to bet against.

Investing in growth is important to our business, but leveraging those investments properly is key to productivity and profitable growth. From a Huntsville plant that is designed for maximum flow and efficiency to new tooling processes that dramatically reduce costs and lead times, we are investing in our future. Bob Mack inherited a solid acquisition pipeline, and we will work together to make another profitable growth engine for Polaris. We need that horsepower to hit our long-term goals of becoming an $8 billion Company in 2020.

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

(Operator Instructions) Jaime Katz, Morningstar.

Hi, good morning, guys. I have a couple of questions on motorcycles. First, can you just discuss maybe the backlog and lead times on getting units to consumers? It sounds like dealers are getting back on track, but I'm curious how fast you guys are able to respond to demand there.

Jamie, this is Bennett. Ken and the team have made tremendous progress really over the last six months. From what we're seeing in the business unit now, is I don't think we're quite at what we would call our RFM target yet, but the new orders that are coming are flowing rather -- quickly. As Ken said, our lead time is down 75%. We've taken the vast majority of the chunk out of the backlog, and we feel like we're in an excellent position to respond in a very timely manner to all of our dealers' needs as we head into the second quarter. So I am frankly, thrilled with where we are.

And then I think you guys said that Slingshot was going overseas, and I was under the impression that initially it would primarily be a domestic product. But can you talk about maybe the adoption of that product overseas and how dealers internationally might be responding to that?

Yes. It was initially a North American launch, and then late last year, we put it through the regulatory and homologation so that we could begin to ship it into the EU. And we did that essentially, in the fourth quarter of last year and began some initial shipments late in the year. And those have continued here through the first quarter.

We're just getting into seasonality in Europe, and we expect the -- the response has been good. And I think we expect that to be a nice little contributor to Slingshot growth as we move forward. We're also now I think in Mexico, and we continue to look for international opportunities where we've been in the Middle East and the UAE as well. So there is some exciting interest globally for the Slingshot where regulatory laws allow that.

Okay. And then for your factory inventory, can you let us know what part of that is attributable to the Taylor-Dunn acquisition and is maybe new to the inventory base?

Yes, it's about $9 million in total.

Trey Grooms, Stephenson.

So really just wanting to get a little bit more understanding around the recall, really the mechanics there. So with the, I think it was 160,000 units, will you focus first on repairing the RZRs that are in the field and then those that are in dealer inventory? And any color you can give us on cost per unit you're expecting there.

Yes, Trey, obviously this recall is of paramount importance to us, because we want to take care of our customers. And as Bennett said in his remarks, our first priority is to get our customers that own RZRs back to riding as quickly as we possibly can. We will start shipping the kits out on the 22nd, and be repairing vehicles in dealerships very, very rapidly from there on out.

As Ken said, in his remarks, or Bennett, we expect to get through this all in the second quarter, and we're going to take every opportunity to expedite parts as quickly as we can. We're cutting them into production simultaneously with the shipment of the parts, so we will be able to get good products to our dealers and ultimately, work through what's on the floor in our dealerships, get those repaired. But the first priority is to get those customers that have vehicles back to riding as quickly as possible. We're not going to give the specific cost, but we covered a good bit of it in the first quarter, and then the rest of it is included in our guidance.

Yes, so Trey, we obviously booked it against cost-of-goods sold from a warranty standpoint. It's about a 120 basis point drag on gross margins in the quarter. And as Scott indicated, we don't want to get into a lot of detail, because obviously, the recall is complex and different for each RZR model, so the cost per unit is going to vary quite a bit based on that.

All right, thanks. That's very helpful. And then for a follow-up, can you guys go into more detail around shifting your ORV marketing and promotional campaign more towards the brand versus the deal that you laid out in the presentation? Does this imply being less promotional with incentives than you were before? And how does that -- how do you balance that with your expectations around market share for the year?

Trey, this is Bennett. I think if you've watched, primarily what we're talking about is our marketing messaging. And I think what we found over the last couple years is we've gotten into a pattern of most of our messaging to our customer base was frankly, you'd see the TV ad and we're trying to cover the whole portfolio and it became a 30-second ad on what was the factory authorized clearance or what was the XP sales event. And we were losing the messaging of our great products and the great strength that we have in the brands.

What Matt and the team have really done here, and Craig, over the last 60 days is they have orientated the message to be much more brand-oriented around the strengths of RZR, the strengths of General, the strengths of Rangers. And so that message is paramount, and then we're tagging at the back end, you'll see five seconds of making people aware of what the deal is.

So it's just, I think a better positioning of us as the industry leader. I don't think you're going to see dramatic changes from us from a standpoint about how we run our promotion environment. We're very good at that. I think our dealers appreciate that. Our consumers appreciate that, and you should expect us to continue to be aggressive on the promotion front.

And on the implications for share, we're not changing our share expectations for the year. As Bennett said, we had a very positive reaction in March when we made that shift in the advertising campaign, and we expect some of that momentum to carry forward.

Robin Farley, UBS.

Great. A couple questions on the side-by-side business. First, I just want to understand when you're lowering slightly your shipment guidance for snow and ORV, is that more of a reduction in snow, or are you also changing your expectation for ORV shipments? And then I have another question after that.

Yes Robin, this is Mike. It's a slight reduction on the ORV side and, as Bennett indicated, the uncertainty around how the recall could impact us, at least here in the short term. I would just say that it's a slightly lower revision in the context of adding in the Taylor-Dunn revenue in the global adjacent market business.

Robin, just a little bit more color on that. If you think about this recall effort, as we've talked about the need to bring Huntsville on long term for capacity reasons, we don't have tremendous excess capacity. So the ability of our plants, if we lose too much production as we're waiting for this parts flow to come in, it may not be possible to get it all back.

So we're just trying to properly hedge how this works from a production standpoint as we go through the year. Because it would be, if it turns out that there's parts aren't coming in and we lose the capacity for three or four weeks, we would not have the ability to bring that back. We're just trying to be cautious and realistic as we get into this recall initiative. We're very comfortable with the way the team's executing it, but trying to be realistic with what could happen.

That's understandable. And the reason I ask is when I look at your side-by-side sales and industry side-by-side sales, the Q1 trends year over year were better than the Q4 trends year over year. And I think the industry being up mid to high single digits. I'm wondering, do you see that as an inflection point?

And maybe let's think about the industry for a minute, Bennett, then you don't have -- just taking out the recall and whatever temporary impact that may have. But just looking at demand overall from just slight industry growth in Q4 to now being up mid to high single digits. Is this an inflection point, do you think, or is there something seasonally that -- where there would be, even though we are talking on a year-over-year basis? Just trying to think about how we should look at the trends.

I think it's a fair question, Robin. This is Bennett. I think a little bit about the drama around side-by-sides last year got overblown. The whole market and through most industries was really in turmoil in the fourth quarter. And I think we saw the weakness in side-by-side. If you look at the balance of the year though, side-by-side growth was, for the industry, was reasonably healthy. By our numbers it was up mid to upper single digits. And I would tell you we're encouraged by the first quarter bounce back.

But I think what I'd like to tell you is I don't think it's an inflection point, but I think it's -- that's a strong industry. And I expect side-by-sides to continue to grow nicely based on what we saw. We're encouraged by the first quarter, because frankly, we thought it would be a tad softer, so that's encouraging to us.

Okay, great.

Thanks, Robin. Next question.

[Michael Core], SunTrust.

Good morning, guys. Just wanted to touch on some of the quality and warranty aspects, and I think Scott, you mentioned in the preamble that you're taking steps behind the scenes to eliminate some of the root causes of some of these recalls. But could you just give us a little more color on what the genesis of all of these quality issues are? Is it just the complexity of the product you're building? Is it some of the capacity tightness that you've experienced?

Michael, that's a very good question and I think it's consistent with the vision that we've laid out of, first of all, bringing Ken on board. If you think about what we are trying to do is create a lean enterprise, which ultimately delivers better safety, quality, delivery, and cost. He's made a ton of progress, but we're not completely there yet.

The RZR recall specifically is a little bit different beast than we've had in the past. Instead of going after one specific issue, we've literally looked at the entire system of the vehicle and tried to determine if there's anything in there that could cause a thermal risk and then going after it.

So this is a different way of looking at it than we have in the past, and I think we'll be a better Company for it. But I don't think it's -- because of a bit of an apples and oranges comparison to how we've done things historically, it's not really right to look and say it's dramatically worse than we've ever been.

We are taking this seriously. We are learning from it. I'm extremely confident in what Ken's driving in the manufacturing and quality initiatives. This is an extremely unfortunate event and we are in the process of getting better. But I wouldn't read into it that there's a systematic, fundamental problem other than what we've been talking about for a long time of trying to get the fundamentals right of building a lean enterprise to be able to build in quality, reduce rework, reduce warranty consistently over time.

Thanks for the color, Scott. And then, Mike, maybe talk about the retail financing part of the business. You guys are taking guidance up a bit there for the full year, and I think what you indicated was that some higher penetration rates that you've seen in the first quarter. So can you maybe talk about how you're looking at that for the full year? And as you're seeing these increased penetration rates, does that say anything about the type of credit quality that you are experiencing?

First of all, the credit quality, no. We maintain high standards. We work through several of our retail financing partners that are very strong, and we're not looking to expand the credit profile down into areas that are going to put us in a position to have increased loss reserves. We just don't see that as part of it.

I think a lot of it is really driven in the first quarter. We had some incentives in the business relative to the way we were promoting snowmobiles, for example, that ultimately drove a fair amount of volume into some of our retail partners. And as you know, we share in the profits of those businesses and so that's really what led to it.

We took the financial services guidance up. I can tell you, you're talking a couple million bucks from a full-year standpoint, and a significant portion of that was what we recognized in the first quarter.

James Hardiman, Wedbush Securities,

Hi, good morning. Just to close the loop here on the recall stuff. So $30 million in the first quarter. How much of that was COGS versus OpEx? And can you give us a full-year number of incremental costs that you now have to incur versus the last time you gave us guidance?

Yes, so as I mentioned earlier, about 120 basis points of impact in gross margins. If you look at our year-over-year increase in our operating expenses, about 60% of that is related to product liability, M&A, as well as the severance that we booked. We're obviously not going to get into a lot of the details of that for obvious reasons, but that's really the sum total of what came through in the first quarter. Now we and our guidance had contemplated the severance costs, because that was part of our cost actions plan. But the acquisitions, product liability, and the warranty recall were obviously not contemplated.

And then not sure if you wanted to speak to maybe what the full-year number is. But then beyond that, my follow up is on the currency side. Correct me if I'm wrong, I think you said that you're assuming CAD0.71 for the Canadian dollar. It's at CAD0.79. You're not going to assume that at this point, but if it stays at CAD0.79, I get to about $0.20 plus in upside just if the Canadian dollar stays where it is. Is that the right way to think about things?

Yes, the reason we did not move the currency assumption, one, it significantly changed after we had closed off the first quarter, and that just gives you a sense of the volatility. The number you've got is pretty close. And again, we've seen that currency move $0.02 or $0.03 in a given day, so I would just caution against just adding that to the top line. And obviously as we go forward, we're going to bake that in as we incur it.

I think the important thing to realize is that it's all translation. We've hedged about 80% of any of the cash-flow movements, so it's not economic, per se, but it would add to the top line.

And then back to your first question around the full-year costs. We essentially booked coming out of the first quarter everything that was anticipated based on what we knew about the recall at the time. So obviously, we're not anticipating additional costs, but that's not off the table as we get deeper into the recall and understand how the mechanics work in more detail.

Lee Giordano, Stern Agee CRT.

Thanks, good morning, guys. I was hoping you'd talk a little more about the overall motorcycle market, looks like it was flat in Q1. Any sense of puts and takes for the industry and how the market could trend during the remainder of the year? Thanks.

Clearly, I think there was another motorcycle player that reported early a little bit different numbers than ours. So it's not really as much an industry thing as it is a brand, a dealership, and bike thing, I believe. So we're not expecting a dramatic increase in the market. We expect to slog it out.

I think Steve Menneto has really done a nice job, not only with Indian, but now with the Octane coming in, our first midsized bike with Victory, we've got another arrow in our quiver. So we feel good about where the motorcycle industry is. As you know, we're very dependent upon weather. We're thinking the economy, it's okay. I wouldn't say it's great.

We do think that with the increased advertising and promotion, there's a chance that there's going to be a little bit of tailwind for the industry, and we expect to benefit from that. Nice when someone else pays for your advertising, and we're encouraged by where we are in motorcycles right now.

Great. And then just secondly, any update on the performance of your business in the oil and ag markets, have you seen a potential bottoming in the declines in those regions? Thanks.

I'd say oil is performing pretty much how we called it. We expected it to be weak. We expected it to stay weak for most of year, but as it started to come up against -- annualize against some of the weaker comps, that we would see it be, so-to-speak, less bad. That's largely how the first quarter played out. And I think we'll continue to see that, in all honesty, through the balance of the year, maybe up until fourth quarter, which was particularly weak. So I expect oil will continue to be tough, and then we'll see maybe by fourth quarter if we start to see it anniversary and start to look up.

Greg Badishkanian, Citigroup.

Great, thank you. Just with respect to March and the improvement that you saw there, was that fairly meaningful? And how much of that do you think is underlying versus maybe weather related?

Greg, this is Bennett. Again, usually we try not to comment about inter-quarter movements, but this one was substantial. And I think in all honesty, it's probably a little bit of both, in all honesty. We clearly were operating differently, and with our advertising and our promotion. And the dealers responded almost universally positive to the cleaner, tighter message and the aggressiveness behind it.

So there's no question the program had a large, large part to do with it, as well as the advertising program, and I'm sure weather helped a little bit. So we're hoping that we're going to see that be relatively sustainable as we go forward. We expect to do better going forward just like we saw in March.

Good. Very helpful. Second, as a follow up, when did you see that, the full -- when will you or did you see the full benefit of the general launch? Could we see maybe a greater contribution in the second quarter than you saw in the first quarter and how impactful could that actually be to your overall retail sales?

Yes, we were rolling the product out really through the first quarter, and I think as we started to get into the second half of the quarter, we started to see really what I'd call material benefits. But we're still feeding it and dealers are still asking for more product, so I think second quarter you will see a bigger impact. And I think as we get into second quarter, I'd like to think that should be more of a steady-state. I think that's clearly a product on the rise, and it's going to be a very nice addition to the Polaris side-by-side family, based on what we're seeing right now.

Scott Hamann, KeyBanc Capital Markets.

Thanks, good morning. In terms of that ORV retail picking up in March, is it fair to say that your share dynamic fared better as the quarter ended versus earlier in the quarter?

Yes. We believe so. Scott, we don't get monthly data. But we believe so. It seems pretty obvious to us as we look at the numbers.

Okay, and then just a follow-up on gross margin. Obviously, it sounds like you didn't change the gross margin guidance much for currency and you had an incremental headwind with these costs that we have been talking about. So ticking it up 20 basis points, what were some of the real underlying positives that were different than they were at the beginning of the year?

I think Scott hit on a number of them. I think Ken and his team in combination with Dave Longren really have made this all-out assault on cost come to life. And we really got on a number of areas much faster than we had originally anticipated. And I think in light of seeing some of these headwinds coming our way, these things didn't happen overnight. So we had a little bit of advanced lead time to really try and reconfigure and reorder where we were going after.

The one thing I would tell you is that it's showing up in gross margin. So obviously, we're obviously going to continue to monitor our general and administrative costs, but we're not going to sales and marketing or engineering and trying to pull back there. We're really going after where we think we have got the most opportunity. Our largest cost base that's over $3 billion and I think Ken and Dave and the team are really doing a good job there.

Brandon Rolle, Longbow Research.

Hi, this is Brandon Rolle on for David MacGregor. I wanted to touch on the side-by-side segment. With the segment down low single digits year over year, would you be able to break out what you saw in Ranger versus RZR? And to follow on that, do you see the new general model cannibalizing sales of RZR and Ranger in the upcoming quarters? Thank you.

Brandon, this is Bennett. We're not going to give you any specific color between RZR and Ranger, other than I think you can deduce that they were down slightly and they both were down a little bit.

The General, as I said in my remarks, I think we're pleased. It's a crossover segment and we had modeled in a reasonable amount of cannibalization. But again, it's early. First three months, but what we've seen is it's bringing in a new incremental customer that frankly was not in the Polaris family. And I think we find that very, very encouraging that if we can continue that trend with the customer base, it could be a very nice incremental play for us. So the early returns are good. It's not doing a heavy degree of cannibalization of either Ranger or RZR.

Craig Kennison, Baird.

Morning, thanks for taking my question. Bennett, you guys have made huge strides on the inventory front, really surprising in many respects. But some dealers have expressed frustration to us that their returns on the inventory are not as good as they used to be. Is that a fair characterization or is that -- are we missing something?

No, I think, Craig, I think we're hearing that too. I think there's a couple of things that drive that. You get into a little bit of dealer psychology, and I'm not going to play psychologist. But when you're chasing demand and you're in a massive growth uptick, they feel like they can't get enough and they're more aggressive and they're more confident.

And when things slow down, like we saw a little bit in the second half of the year, I think guys get worried about things. They're a little bit more aggressive on moving on the deals. And I think they feel that pressure from their peers that can cut into their margins a little bit.

And as a manufacturer, I think what's incumbent on us and why you're seeing us be so aggressive about trying to take dealer inventory down and move to a retail flow management model is we really want to get to a pull model so that there is no even perception that there is excess availability out there, that you just get the right product, the right place at the right time. And then make sure that we drive the right behaviors within our channel. And I think we still have work to do on that, clearly.

And you know, this is a topic that Tim Larson has really taken on personally and is championing within the Company. It's a multi-pronged approach, and I think it's not something we're going to turn around in the second quarter. But it partially, as Bennett said, with driving dealer inventory, partially with the additional tools that we give the dealer, and we have a lot of tools that we are developing.

We believe that we'll get this back. Just because of the sheer volume, they've historically made dramatically more money with Polaris than they have other products. And I think right now as the volumes slow a little bit, they're looking at the specific margin per unit that they get, and looking at that disparity. So we're working through that. Tim, Scott, and I think when you come to the Analyst Meeting in July, we'll be able to put a little bit more color on some of the steps we're taking.

That's great. Thank you.

Tim Conder, Wells Fargo Securities.

Thank you. Let me stay on that same thing, given that you're seeing a little bit more aggressiveness and innovation from several key competitors and the promotional environment, would you say then that the RFM is probably the big differentiator? Again, you're going to continue on with innovation, that's a given. But is RFM the big differentiator versus those other key competitors? That's question one.

And then for Mike, back to the FX and the guidance here. You commented related to the Canadian dollar, which is your largest exposure. But given the sensitivity that you had provided many days ago and the moves in the other currencies, it would seem the Canadian dollar is CAD0.20, CAD0.20-some-odd just in the movement where the spot rate is, but the other currencies also would appear to have added some additional benefit. So again, back to why not take a little bit of that in the guidance?

Tim, let me answer your first question first and then let Mike cover the currency question. I want to focus on terminology here. You said is RFM going to be the differentiator? And it's absolutely not the differentiator. It is a differentiator that is going to be part of the tools, but I don't think you should ever underestimate the innovation and -- both on the product, there's really good product innovation in the pipeline.

But also again, what Tim is doing on the front end of our business for and with our dealers, it's altogether part of it. But I don't think that you should in any way underestimate how we're working to differentiate our products from the competitors. It is by no means something that used to happen at Polaris and no longer is going to happen.

And Tim, on the foreign-exchange side, certainly you've got a valid point there. I think the couple pieces that have to play into it is one, the benefit we saw the first quarter from not only the Canadian dollar but also the euro move, it was just around $5 million of revenue. So it gives you a sense it really didn't move things dramatically.

Now part of that is the shipment level in the first quarter relative to Canada and Europe is relatively low compared to the rest of the year. We've also seen some currencies move the other way throughout the portfolio, and so that's obviously put some pressure on the bottom line.

I think the answer is pretty simple for us, which is at the end of the day, we're going to continue to tell you guys as we churn through the year how much of an impact the currency is having. If we feel things are stabilizing, we'll obviously start to get a little bit more comfortable.

You saw us do that with the Canadian dollar. Our original assumption going into the budget was just around CAD0.69. We moved it up to CAD0.71 because that has tended to be a bit of a floor. But what I don't want to do is put a big number out there and then we get to the end of the quarter and we're talking about a miss that's purely driven by foreign-exchange translation. I'd rather have us be able to give you the pieces as we go through the year.

Scott Stember, CL King.

Good morning, guys.

Good morning, Scott.

Could you talk about this new go-to-market strategy on the ORVs? Maybe just talk about the -- was this side-by-sides versus ATVs? Was this RZR versus Ranger? Which models really was this geared towards and which models did you actually see the rebound in retail in March? And just maybe also talk about whether this new mode of going-to-market is -- how much more expensive, if at all, it is versus the prior method?

I probably wouldn't characterize it as go-to-market, but what we did is obviously be a little bit more brand related and then we've done a tremendous amount of simplification in our programs. As we became the industry leader and we're being attacked on multiple fronts, we're very good at promotion but I think our program complexity had gotten quite severe, frankly, that you almost needed a doctorate and a squadron of people to interpret what programs we were offering you on a monthly basis. And certainly that reduces our effectiveness.

So that's really what Matt and Craig have been working to clean up a little bit, and that affects the entire portfolio. But particularly, at least as we headed into the spring, our focus was on what we call key models, bread-and-butter winners, in both the RZR and the Ranger family where we were seeing a fair amount of competitive activity and new entrants. And I think that's the areas, in all honesty, that you've seen the most significant improvement, along with a very, very nice start to the new General that we're starting to build the brand on.

And the overall spend? Is it more than the previous --?

The new approach doesn't necessarily affect spend patterns. But what's going on in the competitive environment and our strategy drives that. And I would tell you we are going to defend our market share position in a very competitive environment vigorously. And I think we're going to spent a little bit more than we did last year, I think which is appropriate based on the environment.

But the first quarter was essentially a geography shift.

Yes.

Joseph Spak, RBC Capital Markets.

Hi, thanks, good morning. Two quick ones. First one is for Ken. If I look at the timeline for Huntsville on page 16, is it fair to assume that proper absorption of cost run rate is into early 2017, maybe if you could just talk a little bit about that?

And for Mike, on FX, I agree with your strategy. The question is really on the hedging. It looks like you stepped up the percentage of cash flows that are hedged quite meaningfully. I was wondering if you could give a little bit of color as to how long those go and whether you expect to keep rolling them every quarter or so.

Yes, Joe, let me talk FX and I'll give you an intro back into Huntsville. The strategy on the hedging is we're rolling forward as we speak into 2017. Given the volatility that we saw, we tried to put ourselves in a position with Canada on the cash-flow side to essentially mitigate as much as we were comfortable with. Going much above 80% gets to be a little bit risky, because if you have a significant move in volume, you can end up having a hedge accounting problem. And we feel like we've protected ourselves pretty well and we've got a pretty active process. Bennett and I sit down with the Treasury group on a pretty consistent basis and walk through that. We're already starting to layer into 2017 to really make sure that we're protecting the cash position of the Company.

So from an absorption perspective, and I think about it in a few different dimensions. First year this year, we're not starting until May, so if you add growth to that and annualize the rate, we're about 50% next year at rate. Where we'd want to be over the next four years. But I don't just view the cost implications as an absorption issue. I look at throughput being up 80% versus our current technology. I look at labor improved 10%. I look at back-shop velocities, lead-time reductions. The total value proposition for and how you view the cost of Huntsville is a big, lean strategy, much more comprehensive than just absorption.

Jimmy Baker, B. Riley Company.

Thanks, good morning.

Good morning.

After losing some side-by-side share in the first quarter and now an expectation for at least some disruption from the recall, can you just talk about what you're doing to ensure that you don't suffer some lasting loss of floor-plan share at your multi-line dealers that may be allocating more of their capacity to the share gainers?

And then my follow-up is on the financial services commentary. Are you confident the competitive lending availability is not contributing to your improved penetration? And lastly, will you incur any floor-plan costs for these inventoried RZRs that may sit waiting for the recall kits as customer vehicles are prioritized? Thanks.

Jimmy, this is Bennett. On the side-by-side share standpoint, I think our top priority right now is to make sure we execute this recall, as complicated as it is, as seamlessly as we can for our dealers and our consumers. And that's our top priority as an enterprise right now.

And I think if we do that, I think there'll be some modest short-term impact, but I think people will appreciate how we respond. And I think you learn a lot about your partners on how they respond during a little bit of a crisis, and we expect to be what we hope is a shining star as a partner. So that's really how we're attacking that.

And I think as Scott alluded to on an earlier answer, we have a great innovation pipeline. We've got a very clear I think improved, as Scott mentioned, go-to-market plan with how we're going to market. And we feel really good about our ability to complete in the short-, medium-, and long-term with side-by-sides. The market is growing and we are the preeminent leader and we expect to continue to be that going forward.

And to your last question, we will cover some of the flooring costs for our dealers. Obviously not going to expect them to be hurt by this.

And Jimmy, on the retail side, I want to keep reiterating the credit quality of the customers that go through our retail financing partners is maintained. We're not seeing any significant uptick in lost rates, and frankly, our credit partners aren't interested in dipping way down in those FICA ranks to try and get the business. So a lot of this is really steered by the types of promotional programs that we were running in the first quarter, as I mentioned earlier, and really making sure that the retail partners are there to get the right customers approved and into our vehicles.

Mark Smith, Feltl and Company.

Hi guys. Real quick, Mike, just looking at the operating expense guidance, just wanted to understand the second quarter of guidance. Did you say that would be up 10% total operating expenses in Q2?

Yes. So very similar to the commentary I gave in the first quarter, a lot of that is really just driven by really two elements. One is even though we had moderated expenses last year, there's a lapping effect of cost that had been added in the first and second quarter, number one. Number two, as I've indicated in our prior call, we took a pretty heavy hit in terms of both our short-term and long-term incentive plans last year. And as we roll into 2016, we're obviously accruing those plans at levels that are commensurate with us making our financial commitments this year, and so that gives is little bit of headwind. So those are really the two big drivers.

Outside of that, we're driving a very disciplined cost-management program. Prior to the first quarter one-off events that we had, we had a view to the full year, operating expenses being down as a percent of sales. So we're going to continue to have that rigor and discipline behind making sure we're prioritizing and looking for opportunities to take costs out.

If I'm looking at the full year, you've got to have a pretty big decline year over year in the second half of the year to hit that full-year guidance.

On operating expenses?

On operating expenses.

In terms of the percent of sales, it's more about slowing the momentum down to be more similar to what we had as an exit rate coming out of last year.

Chris Krueger, Lake Street Capital.

Hello, good morning. Just one question, as you guys move into your new facility in Huntsville and shift some production from other facilities to that one, do you see any disruption at the current facilities as far as capacity utilization or moving equipment around or changing the hours of the workforce or whatnot?

No. And we've got the right team and we've got good planning and one thing that Polaris does pretty well is transfer products, and that's what we're doing this time. So we've got it covered.

All right. That's all I got nice quarter.

We went over a little bit of time there. I want to thank everyone for participating in the call this morning, and we look forward to talking to you next quarter. Thanks again and goodbye.

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