Earnings Labs

Polaris Inc. (PII)

Q1 2013 Earnings Call· Tue, Apr 23, 2013

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Transcript

Operator

Operator

Good morning, my name is Kyle and I'll be your conference operator today. At this time, I'd like the welcome everyone to the Polaris First Quarter Earnings Results Conference Call. [Operator Instructions] Mr. Edwards, you may begin your conference.

Richard Edwards

Analyst

Thank you, Kyle, and good morning, and thank you for joining us for our first quarter 2013 earnings conference call. A slide presentation is accessible at our website at www.polaris.com/irhome, which has additional information for this morning’s call. The speakers today are Scott Wine, our Chairman and Chief Executive Officer; Bennett Morgan, our President and Chief Operating Officer; and Mike Malone, our Chief Financial Officer. During the call today, we will be discussing certain topics, including product demand and shipments, sales and margin trends, income and profitability levels and other matters, including more specific guidance on our expectations for 2013, which should be considered forward-looking for the purposes of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. Now I'll turn it over to Scott Wine. Scott?

Scott W. Wine

Analyst

Good morning, and thank you for joining us. With Minneapolis receiving more snow last night on top of the foot we had dropped on us last week, I'm glad Polaris has a strong Snowmobile business to capitalize on this interminable winter. We did sneak out of the cold for a few days in February to test drive our soon-to-be-launched Indian Motorcycles and new side-by-side offerings, which were both thrilling and inspiring. These new products will not generate revenue for a few more months, but with outstanding results from both our Snow and PG&A divisions, we were able to grind out a decent start to 2013. Our financial results for the first quarter were more solid than thrilling, but I was encouraged by the energy and effort this team put into again delivering double-digit sales and earnings growth. Sales for the first quarter increased 11% to a record $754.9 million, while North American retail sales grew 7%, which was at the low end of our expectations. Despite continued share gains, demand was more mixed than we have seen in recent quarters. We believe some of this is due to our product news being more second half weighted this year, coupled with the weather being more conducive to ORV and motorcycle sales last February and March and much less so this year. In addition, the payroll tax increases and corresponding economic uncertainty likely contributed to the increased cautiousness within some aspects of our consumer base. Outside of North America, sales grew 5% with a surprisingly strong 6% sales increase in Europe. First quarter net income increased 26% to $75.5 million, yielding another record earnings per share of $1.07, also a 26% improvement over the prior-year period. Gross profit margins were up a modest 10 basis points to 29%, as currency weakness and…

Bennett J. Morgan

Analyst

Thanks, Scott, and good morning, everyone. Polaris again gained significant market share in each of our businesses. North American first quarter retail sales for Polaris increased 7% and the Powersports industry that declined slightly, primarily due to a slow start to the spring selling season for ORVs and motorcycles. Dealer inventory is up 23% versus 2012, reflecting our planned efforts to improve product availability and the impact of the slow start to the spring riding season. ORV inventory is up 26%, motorcycles are up 30% and snowmobiles are actually down 4%. Segment stockouts are down dramatically in both motorcycles and ORVs, and dealers in Polaris feel we are in a healthy position to support retail for the key spring selling season. We do expect dealer inventory sequentially and the percentage increase year-over-year to both decline by the end of the second quarter as spring seasonality kicks in and we clean the channel for our compelling Model Year '14 introductions. Moving onto business unit performance, Off-Road Vehicles. Polaris' first quarter ORV revenue increased 7% driven by side-by-side sales. For the 15th consecutive quarter in North America, we gained market share in both ATVs and side-by-sides. Polaris ORV retail sales were up double digits through February, but a cold wintery March in contrast to the unseasonably early and warm start to spring in the first quarter of '12 provided tough comparables for both Polaris and industry retail sales. Polaris' first quarter core ATV retail declined low single digits in an industry that declined low double digits. Polaris side-by-side retail, driven by strength in RANGER and particularly our new RANGER XP 900s, grew mid-single digits in an industry we estimate grew low single digits. The new RZR XP 900 Jagged X has been a hit with consumers and our sell through excellent. But…

Michael W. Malone

Analyst

Thanks, Bennett, and good morning to everyone. As both Scott and Bennett mentioned, our first quarter results were gratifying, given the tough comparisons with the prior year's first quarter. Based on our performance in the first quarter, our projections for the remainder of the calendar year and reflecting the acquisition of Aixam Mega, completed during the -- earlier this month, we are increasing our 2013 full year sales and earnings guidance as follows. Sales of Off-Road Vehicles are expected to increase in the 8% to 10% range, with retail sales of side-by-side vehicles and ATVs outpacing the overall market in North America and internationally. We expect to increase ORV market share in 2013, although as we have previously stated, at a more moderate rate than the past 3 years. This full year 2013 ORV sales guidance is slightly better than issued earlier, in spite of a weaker-than-planned North American industry in the first quarter, in part due to the enthusiasm we have over our new Model Year 2014 ORV products to be introduced at the upcoming summer dealer meeting. Our Snowmobile business finished the season very strong, with retail sales up and dealer inventories down. And with the majority of our North American dealer orders received for Model Year 2014, we are pleased to be able to improve on our previously issued guidance and now expect our snowmobile sales to be about flat for the full year 2013. On-Road Vehicle sales comprised of Victory and Indian Motorcycles, as well as the company's small vehicles businesses, are expected to be up in the range of 50% to 60% in 2013. Victory's solid retail sales demand is expected to continue, driving additional share gains in all markets in 2013. And the Indian motorcycles will begin shipping all-new Model Year 2014 bikes in…

Scott W. Wine

Analyst

Thanks, Mike. While we are pleased with our start to the year, it should be clear by our words and our investments that we expect the latter half of the year to be stronger than the first 2 quarters. This is not how we normally project the year at this point, but with the Indian launch up revving up and our Off-Road Vehicle lineup continually expanding, we cannot help but be optimistic about the future. With signs of economic and industry weakness appearing, we will redouble our focus on making growth happen. We have a renewed emphasis on building and growing profitable brands, and our product teams will increasingly demonstrate their commercial prowess. We will grind and scrap to win the competitive battle this spring and apply a broad and aggressive game plan to the remainder of the year. Marketers always look smarter when they are promoting and selling innovative, industry-leading products, and our Model Year '14 lineup should make our sales and marketing teams look like geniuses. We will continue to make investments in our future with both CapEx and M&A outflows expected to hit record levels. We are proud of our industry-leading returns on invested capital, so trust that we will continue to work hard to ensure these investments yield strong, positive returns. Currency and commodity markets are slightly less volatile than previous years, and we remain confident in our ability to drive continued margin expansion. Monterrey is operating extremely well and is a major contributor to our output and efficiency. But with our great network of plants and suppliers, we can and will attack margins in other areas as well. Our first quarter results were solid. Our team and business is getting bigger and stronger every quarter, and our opportunities for growth have never been better. After an aggressive 2-year effort, we will only be weeks away from launching our new Indian Motorcycles when we get together for our second quarter call in July. That will be an historic event and is just one of the reasons why we like our prospects for 2013. With that, I'll turn it over to Kyle to open the line for questions.

Operator

Operator

[Operator Instructions] Your first question comes of the line of Ed Aaron from RBC Capital Markets.

Edward Aaron - RBC Capital Markets, LLC, Research Division

Analyst

Just want to start on the ORV guidance which you took up a little bit. I think you said that the reason for that is you're kind of more optimistic about the new products that are launching this summer. And I'm just trying to get a little more color for that because presumably, you kind of had good visibility into what those products were when you last gave guidance so just kind of wondering why the change?

Bennett J. Morgan

Analyst

Ed, this is Bennett. I think we feel pretty good. We continue to gain market share like a drum in both the businesses and as we are kind of alluding to, we feel really good about our Model Year '14 news. It's, in our minds, quite compelling. And that gives us a reason for optimism.

Edward Aaron - RBC Capital Markets, LLC, Research Division

Analyst

Okay. And then just one other question for me on the balance sheet, the accrual for promotions was up about the same on a percentage basis as it was in Q4. But obviously, the snowmobiles weren't a real part of it at the end of Q1. So is discounting the environment on ORVs, would you characterize it as accelerating? Is that kind of how you would interpret that balance sheet accrual?

Bennett J. Morgan

Analyst

I'll speak to the environment and I'll let Mike speak to the balance sheet accounting and accrual. From a market standpoint, as Mike said in his comments, promotional environment is pretty much exactly as we had planned. It's active and aggressive, people are fighting for their space and -- but nothing that we hadn't expected and we haven't seen any, what I would call, crazy levels of discounting in side-by-sides or ATVs. So we feel just fine where it is.

Michael W. Malone

Analyst

As far as the balance sheet is concerned, what I would say is even though the snowmobile inventories are down 4% year-over-year, they're still higher than they were a couple of years ago. And there's an opportunity for those to go down again in the future as we look to next year's build. If you look sequentially at the sales promotion reserve, sequentially from December to March, it only went up 2%. And last year, at this time in the first quarter, sequentially from the fourth quarter to the first quarter, it went up more than that. So I think that should give you comfort that there's not a lot extra going into that sales promotion reserve at this point.

Edward Aaron - RBC Capital Markets, LLC, Research Division

Analyst

One more quick one, if I could. Obviously March was a tough month across the industry. Any kind of early read on how kind of the early part of Q2 is shaping up would be great. And I'll leave it there.

Bennett J. Morgan

Analyst

I'll tell you, we're not showing many motorcycles in Minnesota with the snow on the ground right now. But Ed, we're -- our guidance I think gives you an indication about how we feel about the business going forward. We're not big box retails, we're not going to start giving monthly guidance, but trust that we're okay.

Operator

Operator

Your next question comes of the line of Scott Stember from Sidoti & Company. Scott L. Stember - Sidoti & Company, LLC: Could you maybe just give a little more granularity about Brutus and what your expectations are as the year progresses? And maybe just talk about how well it's been received so far through your dealer channel?

Bennett J. Morgan

Analyst

Scott, this is Bennett, I'll start and maybe the guys can finish. I mean again, we're very pleased with the launch that we had from a Polaris standpoint in March, a well attended event. The product has been extremely well received from both the press and the dealers. We're over 400 strong now on the dealer network, which is slightly ahead of our expectations. The orders have been -- initial orders for both the product and the attachment have been better than are than expected. But I think, as we would say, we're in the first inning of this game. We just in the last week have begun shipping the product. This is a big step for us in into the commercial market. Our dealers in Polaris, we still have to prove that we can compete effectively against some of the bigger brands there. But again, we think we have, without question, industry-leading product solutions that are unique to the market. And that's pretty much how our dealers, and at least the customers we've interacted with, have been playing back to us, so we're very encouraged. From a guidance standpoint, again I think that factors into where you see the ORV. We've nodded it up a little bit and some of that's a little bit more bullish on Brutus. Scott L. Stember - Sidoti & Company, LLC: Okay. And on our end over here, we've heard some reports that April ORV sales have improved somewhat from what we saw in March. And I know you don't want to comment too much on a month by month basis, but could that be playing into your relative comfort level going out to raise your guidance?

Michael W. Malone

Analyst

Scott, we have our outlook planned long before April starts on things. So as I told Ed, we're giving you about as much color as you're going to get on Q2 retail. Scott L. Stember - Sidoti & Company, LLC: Okay. Got you. And could you just again, just give when the -- you mentioned when you'll be breaking ground on a new facility in Poland? And when that will start ramping up again?

Scott W. Wine

Analyst

We'll break ground in Q2 and construction will really continue through most of the rest of the calendar year. And again, we expect to be in essentially in the second half of 2014. So we're really getting down to starting to be the very heavy lifting, but we've got a really strong team already assembled there, both local and ex-pats and we're feeling really good our ability to execute this project. Obviously, Monterrey has helped pave this way as we get those cycles of learning. So we're feeling real good about Opole and where we are in that the project. Scott L. Stember - Sidoti & Company, LLC: Great. And last question. Could you just talk about, I know the new products obviously you sound very bullish on it going forward for 2014. Maybe just talk about the amount of R&D that you've spent over the last year versus the previous year, just to talk about how that's supporting your efforts?

Scott W. Wine

Analyst

Scott, we've very, very consistently been at about 4% of total revenue. And as I've said a number of times now, our revenue has doubled over the last 4 years and our R&D spend has more than doubled over that period of time. So it's a very heavy period. Mike and I have both alluded to the spending levels to bring the new Indian bikes out, to bring the new lineup of ORVs out. We are deep in the spend right now on product development and product launch. So we -- we should feel good about it. I mean, if we were not optimistic considering the amount of money and energy we're spending, I think you should be disappointed. But that's not the case. We like where we are.

Operator

Operator

Your next question comes of the line of Jimmy Baker from B. Riley & Co.

Jimmy Baker - B. Riley Caris, Research Division

Analyst

First, just a follow-up on the codeveloped commercial side-by-side product. You're looking for a very strong growth there this year, can you give us a sense for what portion of that growth is coming from Brutus and Polaris dealers versus incremental sales in the Bobcat channel?

Bennett J. Morgan

Analyst

I'm going to be careful with that, Jimmy. This is Bennett. At least right now, our outlook would say that both will contribute meaningful into the Brutus thing. But now right now, my -- our outlook would say that might be more predominantly Polaris Brutus than Bobcat.

Jimmy Baker - B. Riley Caris, Research Division

Analyst

Okay, that's helpful. And then, Mike, your comment on Q2 being the slowest sales growth quarter of the year. Well first, did I hear that correctly? And would you say that's true for both ORV and the consolidated sales?

Michael W. Malone

Analyst

Yes, you heard it correctly. And yes.

Jimmy Baker - B. Riley Caris, Research Division

Analyst

Okay. And then just lastly, Scott, I think in your prepared remarks, you indicated you'd expect to continue to expand organically and inorganically outside the core powersports category. Could I get you to maybe elaborate on that at all and would at least the organic component of that be included in your current guidance?

Scott W. Wine

Analyst

Yes, I think part of the excitement you hear us talk about the model year '14 launching includes that type of stuff. And inorganically, we've been building over the last several years our M&A capability. Hopefully, you've seen we're diligent buyers, we're not trigger-happy on anything, but we continue to see lots of opportunities to add to long-term profitable growth outside of powersports and we'll continue to pursue those.

Operator

Operator

The next question comes from the line of Greg Badishkanian from Citigroup.

Gregory R. Badishkanian - Citigroup Inc, Research Division

Analyst

First question is, just with respect to inventory, it seems like dealers have the right amount of inventory, would you say that that's correct and you kind of want to keep it at this level adjusting for seasonality?

Bennett J. Morgan

Analyst

Greg, this is Bennett. I think that's a close characterization. I mean, we've seen lots of reports and I guess I'd like to maybe elaborate on that a little bit. I mean, when you see the increases year-over-year, I think there's a couple of key factors. Again, we've entered a lot of new market segments, so we're supporting those additional segments. We've made a real commitment over the last 1.5 years to have much better availability and expect our dealers to have better segment stocking profiles, which is good for retail, we're having higher velocity. And then I think the part that people are concerned about, with our movement to MVP over the last couple of years, and now the retail flow management, we've built business models and inventory models that really won't allow us to get off the rails. It corrects itself very quickly, both up and down. And we can respond to the market I think more effectively than anybody in the marketplace. So you heard us, we'd like to bring it down a little bit sequentially in the second quarter, but that's really a factor almost of seasonality and trying to clean out for the new model years. So all in all, I think we feel fine with where we are and I think we're in better position than we were a year ago to support retail effectively within the dealer network.

Gregory R. Badishkanian - Citigroup Inc, Research Division

Analyst

Good. And then with respect to innovation, and Scott, you mentioned you're I think very optimistic on the future and some other favorable comments. And I'm just wondering, I know for competitive reasons, you can't go into a lot of detail, but are there certain business lines that you think are going to do particularly well? And what's your level of optimism at this point versus the same time last year for the new products?

Scott W. Wine

Analyst

We were proud of what we introduced last year. I think, as I said in my prepared remarks, the RANGER 900 XP is the highest volume selling product in the industry in the first quarter of this year. So we really liked last year's launch. The breath of this year is probably better. And I think the quality of the introductions is as good as we've ever had. As we talk about it, you asked where we're most excited. I cannot tell you the energy and effort that Steve Menneto and his team have put in the last 2 years to launch Indian properly has been impressive. We're really excited about the potential -- now granted, tremendously heavy lifting to do -- but we've ridden the bikes, we've seen the consumer testing, we're really encouraged about the prospects for our motorcycle business and specifically with the Indian launch this summer. And Dave Longren and his team, you've heard me, Greg, many times talk about this armada of products. And as we spend a lot of money on R&D, you should expect that armada to get stronger and broader, and I think you'll see that this summer.

Gregory R. Badishkanian - Citigroup Inc, Research Division

Analyst

I'm looking forward to it. And then just finally, obviously weather had an impact on all of the leisure vehicle companies. And I'm sure you analyze your business by region. And if you kind of take the warm -- if you look at the warm weather states that were less seasonally impacted from weather this year, I'm assuming you saw a much different trend than in the seasonally colder areas where snow and very cold whether had an impact. Was that the case or -- and how much of a difference was it?

Bennett J. Morgan

Analyst

Greg, this is Bennett. I'm probably not going to quantify it for you, but we have certainly been studying and looking at those splits and clearly, the weather hasn't been helpful, particularly in March. But we are seeing a notable split between what we might call sun versus snowbelt. And that gives us a fair amount of confidence that weather is a primary driver of what anybody might call sluggishness in our retail. So I think we're feeling fine.

Operator

Operator

Your next question comes from the line of Jaime Katz from Morningstar.

Jaime M. Katz - Morningstar Inc., Research Division

Analyst

I guess my question is on what is our -- what are you guys thinking is the capacity for your -- because I think after Poland, you also have manufacturing capacity from Goupil and Aixam as well. And do those fold into Poland at some time or do they stay as they are? I don't know how you guys are thinking about that.

Scott W. Wine

Analyst

Jaime, I would tell you that Poland -- remember, every single ATV that we make, full-sized ATV that we make comes out of Roseau right now, and the largest volume of business we have in Europe is ATV. So largely, what we want to accomplish is being able to satisfy the European demand for ATVs in Poland, but we'll also build side-by-side capability as well. Goupil and Aixam are small facilities closely located to their customer base and just not suited to make the investment to move those over. That's not what we're trying to do. Now, we certainly expect and will pursue sourcing opportunities from Eastern Europe as we build that capability for those businesses. But really, this is about our satisfying the demand for our Off-Road Vehicles with capacity from that Opole plant. We're really excited about it.

Jaime M. Katz - Morningstar Inc., Research Division

Analyst

Okay. Because of tooling and everything else, it just makes sense to leave everything as is, it sounds like.

Scott W. Wine

Analyst

Well, I mean I wouldn't say we're going to leave everything as is. We've got 2 very competitive businesses now in what we call the small vehicle space in Europe with Aixam Mega and Goupil, and we're going to look for opportunities to leverage the synergies between those 2. But we do not expect there to be a payback by transitioning that volume, which remember, the customers for those products are all right there in that French, Belgium, Spanish Germany market and we're just not going to get a return. As you may know, it's quite expensive to shut plants in France.

Jaime M. Katz - Morningstar Inc., Research Division

Analyst

And then I think it had quantified the extra dealers as 400 from the Aixam acquisition? Can you remind us how many -- or what your reach was before that, how many dealers there were that you had in Europe?

Scott W. Wine

Analyst

We have about 1,000 dealers across the EMEA region, so it's a nice add for us.

Jaime M. Katz - Morningstar Inc., Research Division

Analyst

Okay. And then finally, I know that you guys said the seasonality with more second-half weighted for the small vehicle business. Is there any material difference between the third and the fourth quarter, is it marketing to different end users or anything like that, that we should be thinking about?

Michael W. Malone

Analyst

Yes. Jaime, again, we're learning about this new business that we just bought a couple of weeks ago. So the best data that we have indicates that there is a bit of seasonality later in the year for whatever reason. So the sales and the profitability are skewed towards the later parts of the calendar year.

Operator

Operator

Your next question comes from the line of Michael Swartz from SunTrust.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division

Analyst

Just wanted to touch on the On-Road business and kind of, I guess, breakdown the guidance. I'm trying to figure out with the new guidance, with the Aixam acquisition, I mean how are you looking at the core business? I guess, your prior guidance was up 25% to 35%. I mean, should we still think about that the same way?

Michael W. Malone

Analyst

Yes, largely unchanged.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division

Analyst

Okay. And then just with -- sticking with Aixam, could we talk about maybe some of the synergy or supply chain opportunities in the near term? Will we see any of those in 2013 and then are there any kind of -- I'm certain there's a onetime transaction costs and maybe how they flow throughout the year?

Scott W. Wine

Analyst

Well, the onetime transaction costs are going to be in the first half of the year. Then obviously the amortization hits us throughout. And as far as pursuing, I mentioned in my prepared remarks, we see a very nice opportunity for us to add value on the sourcing. I mean, they're a great company, I'm really impressed with their leadership. But they haven't had the global reach to source products as competitive -- or source components as competitively as I think Polaris can. So as we've done with Goupil, we'll pursue those opportunities. In any vehicle class, it's difficult to get them in an 8-month period, but we'll go as fast as we can. And because we've already been through the exercise with Goupil, we largely know how to approach this. A lot of the synergies, from logistics and distribution, we'll certainly pursue those. Because we have such an engineering capability, improving NVH and just improving the overall vehicles, as well as letting Aixam Mega help us improve some of our GEM and Goupil vehicles, some of the synergies we will be pursuing.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division

Analyst

Okay, great. Have you quantified how large any of the transaction costs will be?

Michael W. Malone

Analyst

No.

Operator

Operator

Your next question comes from the line of Tim Conder from Wells Fargo Securities.

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Analyst

A couple here, gentlemen. Scott, could you just give us an update on your progress? I think at your last dealer meeting, you mentioned -- you made a commitment to the dealers that your delivery times to the dealers on average for all your products would move basically from 6 weeks to 4 weeks. Can you let us know where you are in that? And then, maybe any color how you see some of your competitors. And then I guess that plays into the discussion on the channel inventories. It seems like the last couple of quarters you feel pretty good where you're at related to those inventories and you're talking about bringing those down a little bit. So I guess, just pairing all that together, just any additional you guys can add?

Scott W. Wine

Analyst

Ben and I will tag-team this one. We are making very good progress with our lead time reduction efforts. So I think the RFM process, retail flow management with the Victory, we've learned a lot from that on how to get closer to a poll-type system and we're seeing, I'll call it just dramatic reductions in lead times in our Victory business as we prepare to launch Indian. A lot of those lessons are being applied to our ATV and side-by-side business. Part of the inventory build is that we've just gotten much better at not only reducing lead times, but improving on-time delivery to the orders that are placed by our dealers. So I think they have a lot more confidence in what we can deliver and that confidence is part of the reason we believe we can bring down inventory in the second quarter as we get ready for the Model Year '14 products is because dealers don't have to stock up anymore because they feel confident that we'll be able to meet the lead times. So it all kind of ties together and we are -- we feel like long-term we have an opportunity to continue to improve lead times and decrease dealer inventory. I think the second quarter is an opportunity for us to do that a little bit.

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Analyst

And would that be the second quarter? Should we sort of use that level what you get to in the channel as a sort of a new benchmark level?

Scott W. Wine

Analyst

No. I think we are just not that precise right now in terms of -- as Bennett articulated quite well a second ago, the breadth of our product range is so much bigger than it was years ago and the demand for these new products -- we're trying to set out segment stocking and we're trying to get this thing completely nailed, but it is absolutely not the case as we bring down dealer inventory going into the second quarter and get ready for what we expect to be a high demand for our products in the second half. I wouldn't set the bar at that level going forward.

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Analyst

Okay. And then any color, again, Scott, maybe overall where you are as a matter of weeks versus that -- what you had mentioned at the dealer meeting last year and just any color on where you think your competitors are?

Bennett J. Morgan

Analyst

Tim, this is Bennett. I think on the Victory RFM stuff, we are right on plan. We talked about a statement of being inside of 30 days with an eventual objective of getting down to 18 days. And we are right now, operating within the earlier timeframe of 18 days. Again, we have not gone through the full cycle of an RFM so I'll put that caveat in. I want to see how we respond to heavy bike-selling seasonality. But our lead times are inside of 3 weeks from order to delivery to your door, which is quite amazing. And our belief is we are much, much quicker than the traditional models that most of our competitors are fielding. And on ORV, again I think we're closer to 4 to 6 weeks and what we've gotten way better at it is becoming way more accurate on our delivery and giving people way more dates even in product shortage situations. So our commitment to availability and the speed of response is, I think, we are delivering on the promises we made a year ago.

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Analyst

And then the ORVs, Bennett, relative to some of your primary competitors?

Bennett J. Morgan

Analyst

I would say, again, we take orders more frequently than anybody in the business and we're delivering generally in that 4- to 6-week cycle. A lot of guys are trying to make adjustments to respond to what we've done, and I guess I'm just not close enough, Tim, to say that -- whether we're way better or on par, as some of these guys have made their adjustments. As you know, even with that quick response with our kind of runaway demand the last 3 or 4 years, we hadn't been perfect because we had been short on a number of key segments which was driving some of that availability issue.

Operator

Operator

Your next question comes from the line of James Hardiman from Longbow Research.

James Hardiman - Longbow Research LLC

Analyst

A couple of quickies here. On the Aixam acquisition, how does that reflect in the bottom line guidance? I mean, your total guidance is up $0.15 to $0.20, how material is the acquisition? And then, Mike, you mentioned that we should expect something less than that $110 million of top line. Would that reflect some of the fact that we only have 8 months or was it, I think you mentioned, weaker markets in Southern Europe. For the full year is that going to be less than it was last year or was it just a function of 8 months versus 12?

Scott W. Wine

Analyst

James, I think the math works out pretty well. We bought the business in April, we've got 8 months so you're going to get essentially 2/3 of the $110 million revenue of the business generated in 2012. As we've said, Mike said, we talked about the European economies being weak, we have planned for the business to be slightly smaller this year than it was last year. So all of that is included in our guidance. The transaction costs, given the stub period that we own the business, those transaction costs are largely going to offset the profitability of the business. We'll get a little bit of accretion throughout the last 3 quarters but not a tremendous amount. And I will tell you, this is a very profitable business. I mean we -- part of the reason we wanted to get into it is we saw a niche business with great market share positions and a strong brand. And we really liked the contributions long term, I just wouldn't bake too many of those in, in 2013.

James Hardiman - Longbow Research LLC

Analyst

Got it. And then just closing the loop here on the inventory side. You've mentioned a couple of times bringing down inventories sequentially, and it seems like that's typically the case in the second quarter. How should I think about things on a year-over-year basis? When we reconvene a few months from now, it was up 26% year-over-year in the first quarter, is that number going to be down in the second quarter, or is it just entirely seasonality?

Michael W. Malone

Analyst

I think it's both, James. I mean, seasonality will come down -- but I think our objective would be that, that percentage decline or increase will decline year-over-year. And again, the fundamental factor on that was is if you remember back to last year, we were still chasing and had a lot of stockouts and some availability shortages. So it almost took really until about the third quarter last year really before we really normalized the inventory levels with our new commitment to the new segments and availability. So I think it's seasonal, as you suggest, but we expect that the percentage increase should decline year-over-year in the second quarter.

James Hardiman - Longbow Research LLC

Analyst

Meaning that it's going to be a number less than 26%, but not necessarily going be a negative number?

Scott W. Wine

Analyst

Yes. It will not be a negative number.

Michael W. Malone

Analyst

It will not be a negative number, right.

Richard Edwards

Analyst

Okay, we got time for one more question, Kyle.

Operator

Operator

Your last question comes of the line of Gerrick Johnson from BMO Capital Markets.

Gerrick L. Johnson - BMO Capital Markets U.S.

Analyst

On the tax rate going forward in 2014, should we see reacceleration to 34%, 34.5%?

Bennett J. Morgan

Analyst

Unfortunately, yes.

Gerrick L. Johnson - BMO Capital Markets U.S.

Analyst

Okay. And then on Brutus, can you just remind us the economics behind Brutus? What does Bobcat get as a royalty or how does that arrangement work?

Michael W. Malone

Analyst

Yes. The economics, again, is we are the manufacturer of record and we supply that vehicle like we've been supplying the supply vehicle to Bobcat. However, because it was a codeveloped product and there was a number of technology sharing and partnering on this one, the margin agreement, even though we're the manufacturer, is a little bit different than the supply vehicle. So Bobcat will make a little more margin on that per se, which is appropriate.

Gerrick L. Johnson - BMO Capital Markets U.S.

Analyst

Okay. On Indian, no revenue yet obviously, but it sounds like you're racking up some expenses.

Scott W. Wine

Analyst

A lot of expenses.

Gerrick L. Johnson - BMO Capital Markets U.S.

Analyst

Yes. Is there a way to quantify how that impacted the first and perhaps the second quarter?

Scott W. Wine

Analyst

No.

Gerrick L. Johnson - BMO Capital Markets U.S.

Analyst

No. We'll figure it out ourselves.

Scott W. Wine

Analyst

But remember, this in the second year. It's not like we didn't have a lot of those expenses last year as well. This is a very aggressive 2-year. And just a reminder, I mean I'll use this opportunity to make the advertisement. We are bringing an all-new bike, an all-new engine to market in less than 30 months. And that takes resources, it takes dollars, and then we're going to transition into a decent-sized marketing spend. So -- but year-over-year, it was a lot of money last year and a lot of money this year.

Richard Edwards

Analyst

Okay. We want to thank everyone. That's all the time we have this morning. Certainly, we appreciate everyone's time and interest in support of the company and we look forward to talking to you next week, or next quarter, not next week, sorry. All right. Goodbye and have a good day.

Operator

Operator

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