Polaris Inc. (PII) Q2 2013 Earnings Report, Transcript and Summary

Good morning, everyone. My name is Sarah, and I will be your conference operator today. At this time, I'd like to welcome you all to the Polaris Second Quarter Earnings Results Conference Call. [Operator Instructions] I'd now like to turn the call over to our host, Mr. Richard Edwards, you may begin your conference.

Thank you, Sarah, and good morning, everyone, and thank you for joining us for our second 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; Bennet Morgan, our President and Chief Operating Officer; and Mike Malone, our Chief Financial Officer. As usual, 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 the remainder of 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?

Thanks, Richard. Good morning, and thank you for joining us. This is an exciting time at Polaris and I'm as encouraged as ever by the performance of the team and our prospects for the future. In some respects, it feels like we simply survived the first half as we dealt with challenging weather, increased competition and slow or no growth in the U.S. and European economies. Despite these impediments, we achieved solid results, once more demonstrating our resolve and the strength of our brands. We again captured market share in ATVs and side-by-sides drove significant gains in our PG&A business and made progress in small vehicles. Importantly, we are primed to launch our most compelling lineup of vehicles in years, which we expect to generate significant consumer and dealer excitement and orders in the months ahead. Sales for the second quarter increased 12%, to a record $844.8 million, as share gains and double-digit retail growth in North America supported strong overall organic growth, while adding Klim and Aixam contributed another 3.5% to our top line. PG&A sales increased 33% for the quarter, as our highest margin business continues to build momentum. ORV retail sales remained strong throughout the quarter, fueled by the RANGER 900 XP and supported by our best-in-class RZR products. Revenue for ORV was up 7%, which is less than retail as we work to manage dealer inventory levels in preparation for our new product introductions. Similarly, Victory retail was up slightly, but shipments were down. Aixam was the key driver of our 22% international sales growth, although our core business in the EMEA is performing well in the face of continued weakness in many European economies. Second quarter net income rose 15% to $80 million yielding record earnings per share of $1.13 also a 15-year -- 15% improvement over the prior year period. Our operations team executed extremely well in the quarter, as better productivity and overall cost reductions contributed to our 120-basis-point improvement in gross profit margin. Recognizing the importance of sustaining our global growth trajectory, we continued to invest heavily in new product innovation, enhanced sales and marketing capability and infrastructure, resulting in a 21% increase in operating expenses. This will not become a new normal for Polaris, but we are committed to positioning our business and brands for success. While Indian sales will provide an incremental second half boost, we have other compelling reasons to increase our full year earnings guidance. We enjoyed strong momentum in our market-leading side-by-side and ATV businesses as we finished the second quarter, and anticipate accelerating dealer and consumer demand as our model year '14 products are introduced. Ongoing innovation and improved execution plus the addition of Klim underscores a promising second half of our PG&A business, where we project a 27% to 30% full year sales increase. Overall, we are narrowing our full year sales guidance to up 13% to 15% over 2012. With productivity gains and relaxing commodity pressure, we now anticipate full year earnings per share in the $5.20 to $5.30 range, up 18% to 20% over the prior year period. There's a definite linkage between our celebration of Victory's 15th anniversary and our confidence and excitement about bringing the storied Indian brand back to the market. We learned a great deal while building Victory from scratch into the #2 player in heavyweight motorcycles, and are looking forward to applying those lessons toward the growth of both brands going forward. Victory has garnered many accolades over the years and our lineup of bikes is strong and expanding. We believe that driving the success of Victory and Indian brands together will be the best way to demonstrate how well they complement each other. The model year '14 Indian launch is now 11 days away, and we are eager to reveal the details to our dealers in Washington, D.C. and consumers in Sturgis. The Indian assembly lines are now operational, both in Osceola, Wisconsin for the Thunder Stroke 111 engine and in Spirit Lake, Iowa for the all-new Chief. And we have already produced more than 300 bikes. Between the feedback from over 1.5 million miles of testing and rough [ph] evaluations from select customers and experts, we have rock-solid confidence that the new Indian Chief will be well received by motorcycle enthusiasts around the world. Our creative global marketing plan has been building momentum for months, and will kick it to high gear the official launch in August. The HISTORY Channel will be our primary media partner and they began showing Indian history vignettes last night. These great stories will lead up to the first-ever HISTORY Channel Bike Week in Sturgis, highlighted by their coverage of the Indian consumer unveiling on Saturday evening, August 3. Indian bikes, apparel and personnel will be prominent throughout the Sturgis Rally as we demo and display the new Chief in advance of our first dealer shipments, which will begin in early September. Dealer additions are on track to meet or exceed our goal of 125 to 140 in North America and 70 more internationally by year-end. It has been an exciting, grueling and certainly expensive 27 months since acquiring the brand. And we are now ready to roll. Choice in American motorcycles is here, and I might add, to stay this time. By most any measure, Polaris has grown significantly over the past 4 years and our strategy has evolved correspondingly. But our 5 strategic objectives endure, as we still see an opportunity to build a better, stronger, more profitable business through more effective execution. As we successfully diversify and become a more global business, we remained focused on being the Best in Powersports PLUS. From our newly expanded R&D facilities to our industry-leading dealer network, we constantly strive to become more efficient and better at what we do. I am confident that our new product introductions next week will illustrate how we plan to drive innovation to build on our new industry-leading positions. Our success in Powersports has provided much of the financial strength, technical acumen and leadership required to support our growth through adjacencies. The recent progress of our GEM team and small vehicle business exemplifies how Polaris can successfully enter and grow in new markets. Between acquisitions ranging from Swissauto in 2010 to Aixam in April, and product introductions including Brutus and the expansion of our military offerings, we are successfully creating new opportunities for more balanced, less cyclical growth. Our opportunities outside of North America are significant, and we will continue pursuing international both -- international growth, both organically and through M&A as evidenced by our expansion in Europe with both Aixam and Goupil, as well as the new plant in Poland. While the European economy is challenging, Matt Homan and his team are positioning that business for long-term growth. Similarly, Mike Dougherty, and his Asia Pacific, Latin America team are facing short-term difficulties in some of their end markets, but building capability to capture growth in developing economies in the years ahead. Operational excellence for Polaris is about working more safely, improving quality, driving faster deliveries and reducing cost, and we call that SQDC. Suresh Krishna and his team are leading the creation of our LEAN culture across Polaris, ensuring that as we build capacity, we're also improving our capabilities in support of faster, more profitable growth. Strong financial performance, as measured by margin expansion, profitable growth and, ultimately, shareholder returns, is the scorecard for our strategy. It is likely that we will update our long-term targets for revenue and net income during our strategic planning session with the Polaris Board of Directors next week, and I will make that part of our presentation at the Analyst Day on July 30. I will now turn it over to our Chief Operating Officer, Bennett Morgan, who will provide additional insights into our operations and business unit performance.

Thanks, Scott, and good morning, everyone. Polaris' second quarter North American retail sales accelerated, up 11% against strong second quarter 2012 comparables, driven by better ORV retail demand and a growing and improving Powersports industry. Dealer inventory decreased sequentially from the first quarter, but has increased moderately versus the second quarter 2012, up just 13%. Our working inventory quality is very good. Year-over-year, increases are in support of the 3 incremental ORV customer segments, new dealer distribution points and better segment stocking coverage in Victory attributable to our retail flow management RFM initiative. This is offset by reductions in existing model inventory in ORV and lower snowmobile inventory. Moving on to business unit performance. Off-Road Vehicles. Polaris' second quarter ORV revenue increased 7%, driven primarily by side-by-side sales and initial Brutus product shipments in the Polaris and Bobcat commercial channels. Year-to-date, ORV revenue is also up 7%. For the 16th consecutive quarter, we gained North American market share in both ATVs and side-by-sides. Polaris' Q2 ATV retail sales increased mid-single digits in an ATV industry that returned to growth, up low-single digits. Year-to-date, the industry is down low-single digits. Polaris' North American side-by-side retail sales strengthened in the second quarter, up double-digits percent driven by growth in both RANGER and RZR categories. In fact, both brands had their largest unit retail quarters in their history. We estimate the North American side-by-side industry also improved, growing just under 10% in the second quarter and is now up upper-single digits year-to-date. The Polaris armada of best-in-class side-by-side product solutions continues to serve several growing consumer segments, and continues to fuel both our retail and industry-leading market share growth. We're now just a week away from our upcoming dealer meeting in Washington, D.C. where we will unveil our model year '14 new product innovations and solutions, which even by our lofty standards, are expected to be very compelling. Polaris expanded its commercial product portfolio and business in the second quarter, as we began the initial Brutus shipments into our channel of over 400 Polaris commercial dealers. These dealers are now trained, programs are live and dealers are beginning customer and lead development for this new exciting new business. We are well aware of the longer fuse on the business-to-business sales process and are keeping our expectations in check as we develop and build long-term credibility with this important customer base. The simple reality is that the retail impact of this launch will take longer than our consumer businesses due to the purchase cycle with the commercial customer. Initial dealer orders for our family of Brutus products and attachment are very good, and we expect this initial channel fill will continue through the third quarter. Shipments to Bobcat increased in the second quarter as Bobcat dealers received their first new Bobcat Phase 2 commercial product shipments and Bobcat dealer inventory remains rightsized. Q2 and year-to-date defense revenue declined due to the difficult defense spending environment and some key orders shifting out of the quarter in the first half. Despite the short-term challenges, we remain the clear #1 in ultralight tactical vehicle space, our new MRZR is selling well globally, we're consistently winning the new contracts as they are awarded and we're making tangible business development progress on our future new product and technology initiatives. Snowmobiles. Second quarter is a seasonally slow quarter for snowmobile revenues. Q2 sales were $8.5 million, down slightly from 2012. The model year '14 worldwide orders are now complete and modestly exceeded our expectations. Snow Check sales were solid and our season-ending dealer inventory improved year-over-year, so we are well-positioned and excited for the start of the upcoming season. Motorcycles. Motorcycles second quarter and year-to-date revenue declined 6%, due primarily to reseasonalizing of the annual shipment timing as we transition from our former annual order process to our daily order RFM business model and a tougher retail environment from unfavorable weather and increased competitive activity. The shipment and revenue variability is expected to continue throughout 2013 as our baseline is readjusted for RFM. North American Victory and industry retail sales remained a bit slower than expected. Both grew slightly in the second quarter as we moved into motorcycle seasonality and year-to-date Victory and the industry are both down slightly. We are optimistic about Victory in the second half. We will announce exciting new model year '14 Victory products in D.C. next week. And thanks to our RFM, our dealer working inventory and ability to quickly deliver these new products during an important summer seasonality is significantly better than it has been in previous years. Coupled with the model year '14 Indian launch, it should drive very nice second half retail acceleration for our motorcycle business. Small vehicles. Due primarily to the Aixam purchase and contributions from GEM and Goupil, small vehicle revenues increased $22 million and 190% for the second quarter. Year-to-date, sales are up 109%. The Aixam acquisition was closed in April and is off to a good start with Polaris. We have a high performing team and a business that generates profits and cash. Despite economic and consequent industry challenges in the European quadricycle market, Aixam and Mega brands gained share and remained the leaders in the marketplace. Synergies have been identified between Aixam, Goupil and Polaris, and we are actively investigating those opportunities. Our GEM business is improving. Second quarter retail sales were up in excess of 50%. We're gaining traction with the B2B customers. Our order flow is more consistent, and our operations have improved. Goupil also had a strong second quarter with orders up over 30% and notable cost and productivity improvements in operations, driving gross margin improvements. Polaris' portfolio of small vehicle businesses continues to strengthen and take shape. Parts, Garments & Accessories. Our PG&A business had another outstanding quarter, with sales up 33% driven by double-digit growth in all categories: accessories, apparel and parts. ORV PG&A sales increased 25%, motorcycles were up 71%, small vehicles 165% and snowmobiles 58%, with international up 33%. Year-to-date, PG&A revenue is up 30%. We are aggressively investing in the further growth of our PG&A business. The Klim team is exceeding our expectations, with preseason snow order volume and dealer additions ahead of plan. Our new Eastern North American support distribution center in Wilmington, Ohio will begin shipping to dealers later this quarter. We will introduce over 300 new accessory products, as well as an expanded offering of lifestyle apparel products next week in D.C. and our e-commerce and online activity is up nicely. So things are good in our highest margin business, and we are bullish about building on this momentum. International. International revenue was up 22% in the second quarter, primarily driven by our new Aixam business and strong PG&A growth despite continued difficult market conditions, particularly in Europe and Australia. Year-to-date, International sales are up 13%. Our European team continues to outperform the market and grow market share in all product categories. Polaris' Q2 ORV retail grew and year-to-date, is about flat in an ORV industry that remains down double digits. We remain the clear #1. The European motorcycle industry improved somewhat in the second quarter and is now down mid-single digits year-to-date. And Polaris' motorcycle retail is outperforming, down low-single digits. The Scandinavian snow season ended with Polaris' retail up over 20% in an industry that was up mid-single digits, leading to significant snow market share gains for Polaris for the season. Asia Pacific remained weak in the second quarter, down 4%, due primarily to continued Australian ORV market weakness, which is down double digits year-to-date. Despite these challenges, our largest subsidiary team is winning, achieving #1 market share for ORVs on a rolling 12 basis for the first time ever and delivering motorcycle retail growth. The Polaris-Eicher joint venture based in India is making tangible progress. We broke ground on our new production facility in Jaipur, Rajasthan, India and both the team and the products are progressing as planned. Latin America remained healthy, up 17% in Q2, driven primarily by strong dealer and sales momentum in Brazil. Operational excellence. Operational excellence initiatives continue to spearhead quality cost and speed improvements at Polaris. Q2 gross margins expanded 120 basis points, led by strong productivity performance in our North American plants, higher selling prices and lower product cost from value engineering and supply chain cost improvement initiatives. Factory inventory is up 20% year-over-year, in part due to the Aixam and Klim acquisitions. LEAN initiatives and business processes are driving real speed and waste reductions in motorcycles and small vehicles and we have plans to further expand these efforts across the enterprise. We remain aggressive on investing in future growth and capacity initiatives. We just completed the Phase 2 doubling of our R&D center in Wyoming. We have broken ground in Opole, Poland on our new MNA [ph] plant and the significant capital projects in Spirit Lake, Monterrey, Roseau and Osceola to expand capacity and capability are on track from both a cost and schedule perspective. And with that, I'll turn it over to Mike Malone, our CFO.

Thanks, Bennett, and good morning to everyone. Based on the record second quarter performance, and our projections for the remainder of the calendar year, we are again increasing our 2013 full year earnings guidance and narrowing our sales guidance as follows: Sales of Off-Road Vehicles are expected to increase in the 8% to 10% range, unchanged from prior guidance, with retail sales of side-by-side vehicles and ATVs outpacing the overall market in North America and internationally, in spite of increased competitive pressures. We expect ORV market share to continue to increase in 2013, although as we have previously stated, at a more moderate rate than the past 3 years. As Scott and Bennett have stated, our upcoming ORV new product launch for model year 2014 is impressive and will contribute to continued ORV sales and market share growth in the back half of 2013. Snowmobile sales are now expected to increase in the low-single digit percentage range for the full year. This is slightly better than our previously issued guidance, as the riding season finished strong, resulting in better-than-expected dealer orders for our model year 2014 snowmobiles. Beginning this quarter, we are now reporting our On-Road Vehicle sales in 2 separate categories: motorcycles and small vehicles. With the acquisition of Aixam Mega, and the upcoming relaunch of Indian Motorcycles, the 2 businesses will be growing to a size that we believe warrants more detailed information that should be helpful to investors. With the shipments of the new model year 2014 Indian motorcycles beginning in the third quarter, and full year Victory retail sales expected to grow, our guidance for our motorcycle business is to increase in the range of 15% to 20% for the full year 2013 over last year. For small vehicles, which includes our GEM and Goupil businesses, along with the recently acquired Aixam Mega, we expect sales to increase well over 100% for the full year 2013. Both GEM and Goupil are expected to increase sales for the full year over last year, and our small vehicles sales guidance includes about 8.5 months of Aixam Mega's sales for the year. You will recall that Aixam Mega had annualized sales of approximately $110 million last year. For 2013, we expect Aixam sales to somewhat -- to be somewhat lower than the pro forma 2012, given the weak economy in Southern Europe, where a majority of their sales are generated. We now expect PG&A sales to increase in the 27% to 30% range, which is better than previous guidance, based on the momentum generated during the first half of 2013. Our guidance also includes the additional sales for the Klim and Aixam acquisitions and the upcoming launch of a number of new PG&A-related accessories and apparel for model year '14 products. We expect sales in 2013 to customers outside of North America to increase about 20% over last year, unchanged from previously issued guidance. This guidance takes into account the additional sales from Aixam Mega acquisition in Europe. We also expect to gain market share in each product line across our EMEA, Asia Pacific and Latin American markets in 2013. Rolling up, the above modified product line sales expectations equates to a total company sales increase in the range of 13% to 15% for the full year 2013, narrowed slightly from our previously issued sales guidance. Operating expenses are expected to be about flat as a percentage of sales for the full year compared to last year, unchanged from previously issued guidance. As we have previously discussed, operating expenses include our recent acquisitions and an unprecedented level of investment in sales, marketing and distribution related to the Indian relaunch and continued global infrastructure investment in our future growth opportunities. Projected start-up costs, occurring during 2013 of the Eicher joint venture in India remain on plan, and our 50% share of the loss is being recorded as a component of non-operating expense on the income statement. The income tax provision rate for the full year 2013 is unchanged from our previously issued guidance, and is expected to be in the range of 33% to 33.5% of pretax income, a decrease from the 34.9% reported last year, reflecting the benefit of our first quarter lower tax rate. Guidance for earnings per share for the full year 2013 has been increased and is now expected to be in the range of $5.20 to $5.30, up 18% to 20% compared to the full year 2012. Net income for the full year 2013 is also expected to increase 18% to 20%. This equates to a net income margin of a little over 10% for the full year 2013, a record for the company and slightly higher than our long-range goals. During the second quarter, we repurchased approximately 73,000 shares of the company's stock at a cost of $6.2 million, leaving about 1.6 million shares on the existing share repurchase authorization. For the full year 2013, the number of diluted shares outstanding is expected to be approximately flat with last year, as we plan to target share repurchases that approximate the dilutive impact of shares issued under the employee plans during the year. In the 2013 second quarter, the gross profit margin percentage increased by 120 basis points, which is slightly better than what we had anticipated. As we have for numerous quarters now, we experienced benefits from product cost reductions and higher selling prices during the second quarter. The product mix impact was somewhat better than expected. Recently, the product mix has been negative, but in the second quarter, it improved to neutral, benefiting from the more profitable PG&A mix. These impacts were somewhat offset by higher promotional cost as expected and slightly higher warranty cost during the quarter. We have increased our profit -- gross profit margin percentage guidance slightly for the full year 2013 and now expect the percentage to increase up to 50 basis points for the full year. We anticipate continued benefits from production volume increases, higher selling prices and product cost reductions similar to what we have experienced in the first half of the year. Commodity costs have been favorable to gross margins each of the past 2 quarters, and we now expect commodity costs to be slightly favorable for the full year 2013. On the other hand, currency rates, especially the Canadian dollar, are now expected to be unfavorable to the gross margin percentage for the full year 2013. We will monitor these closely and have and will continue to utilize hedging strategies to minimize our risk. And also we continue to expect the competitive sales promotions environment will remain aggressive and provide some pressure to gross margins for the full year as it did during each of the past 2 quarters, compared to a year ago. Moving now to our balance sheet and liquidity profile. Net cash provided by operating activities was $104 million for the first half of 2013, which is an improvement from last year, primarily as a result of the increase in net income. We now expect cash flow provided by operating activities for the full year to increase at a double-digit percentage rate over 2012. Again in the second quarter, our cash balance was $218 million, which is lower than a year ago, reflecting the cash utilized to fund the acquisition of Aixam Mega in April. We maintained $350 million of borrowing capacity under our unsecured revolving credit facility. We continue to have only $108 million in debt outstanding, which leaves us plenty of debt capacity to fund additional acquisitions and growth initiatives. For the first half of 2013, our investments in capital expenditures and new product development tooling totaled $94 million, up significantly from the first half last year. For the full year 2013, we continue to expect capital expenditures to double to about $200 million. These investments include the factory capacity and capability expansions, as well as increased investments and tooling for all the new products in model year 2014 and beyond. We expect depreciation and amortization for the full year 2013 to increase about 20% from 2012 levels due to the increased capital spending. Polaris acceptance receivables from dealers in the U.S. were $713 million at the end of June, an increase of 23% from a year ago. This increase reflects the mix change of higher value side-by-sides and motorcycles and higher unit inventories at dealers. However, the percent increase is less than the 2013 first quarter, and dealer receivables have declined sequentially from the 2013 first quarter. The retail credit environment continues to remain stable, with approval and penetration rates near historic levels for the -- during the second quarter. The income from financial services for the second quarter reflects both our share of the Polaris acceptance, wholesale joint venture, profitability and the fee income from our retail credit providers. This income was up 40% from the second quarter a year ago. In conclusion, we are pleased with the second quarter results and are looking forward to an exciting second half of the year. With that, I will now turn the call back over to Scott for concluding comments.

Thanks, Mike. My take is that we had a good but not great first half and certainly expect faster and more share gains in the second half. One of the fun aspects of leading Polaris is the competitive nature of our business. Our success has brought out the best in our rivals and we recognize that our model year '14 products will launch into a heightened competitive environment. Having ridden our new vehicles and seeing the marketing plans, I have to say that I like our chances in this battle. And this dealer meetings lineup is only a small part of a long-range product plan that should position us well for the future. Growth does not come free, and we are making the investments to both support it and keep it going. Monterrey continues to yield significant benefits in savings in its third year. And we are increasing capacity there and in our other North American plants to support our expanding product line up and escalating demand. Our investments in Poland and India will pay dividends in the future. And we are encouraged by their progress. As we introduce new products and build new facilities, we maintain a relentless focus on margin expansion. This emphasis is matched by our commitment to innovation. And when combined with our LEAN enterprise initiative, it creates a pathway to long-term profitable growth. No part of Polaris better reflects our progress in innovation and opportunities in LEAN than Dave Longren's ORV business. They gained market share in the first half with a compelling armada of ATVs, RZRs and Rangers. It will be fun to see what that team can do with a great lineup of new vehicles coming to the market in the third quarter. Indian is ready to launch and we're excited to bring choice back to the American motorcycle market. America's oldest motorcycle brand has a story and an occasionally troubled history, but we are confident that this year and this century, we will restore Indian to its prominence. With that, I'll turn it over to Sarah to open the line for questions.

[Operator Instructions] Your first question comes from Scott Hamann of KeyBanc Capital Markets.

Just in terms of your expectations for the back half in ORV demand, it sounds like you're looking for some share gains and I'm just curious how we should expect the retail inventory levels to kind of play out through the balance of the year and into 2014?

Yes, Scott, this is Bennett. From a dealer inventory standpoint, we feel really good about the progress we've made. The quality of the working inventory is really outstanding. We're kind of spread like peanut butter across dealers and across segments. We've done a very good job over the last several years of moving it from being in the warehouse where there's pockets, to it's all up there and really, really is working inventory. As we go into the third quarter, we've got some, as we kind of alluded to, some pretty compelling new products, but we expect that our dealer inventory levels will kind of maintain themselves through that launch period for the most part. And then I would tell you that we'd expect they'd moderate some further as we get towards the end of the year and into '14.

Okay, great. And just on the PG&A & business, looks like guidance was raised since last quarter and I was just wondering if -- what was kind of driving that? And if we should continue to expect those products to be a nice mix benefit on the margin side going forward?

Yes, I think we're all anxious to answer that because that business. We've talked about the -- our desire to have PG&A grow faster than the whole goods business. And right now, Steve Eastman and the team have it well positioned, I think, for the second half and quite honestly, for the next several years. The attachment rate that we've seen on the Ranger 900 XP with the new integrated cab system is phenomenal. We obviously have built the Indian bikes to have a nice attachment rate. And I think it's fair to expect, as we said in our guidance, that business to continue to grow faster than your overall portfolio.

Your next question is from Scott Stember of Sidoti & Company. Scott L. Stember - Sidoti & Company, LLC: Can you talk about the pricing environment? It seems as if it possibly abated somewhat, just looking at your gross margins in the quarter. Can you talk about where that is and how would you expect that to go as you launch your new products next week?

Scott, this is Bennett. I would tell you, I think our view in general, at least in the ORV business, is that, that pricing environment is reasonably stable. And again, as our brand continues to strengthen our innovation, even with more competition, I mean, we feel pretty confident of our ability to get price premium for our brand and frankly, for our product superiority. So not seeing too much pressure there. I think what the one trend that, maybe, we have seen in motorcycle is, there's been a number of new motorcycle announcements from a number of competitors over the last 6 months and frankly, they have played value a little bit over in heavyweight. And that would be, again, we're not -- wigged out about that, but that clearly is a little bit more of a notable trend that we're seeing that you could argue Victory has had to deal with in the first half of the year. Scott L. Stember - Sidoti & Company, LLC: That's great. And on capacity now that you have what is expected to be one of your best product launches in years, can you just tell us what you're thinking about capacity and how you're prepared for the incoming orders?

Yes, again, as we moved the business model, really, to RFM and MVP, it's not like we go to the shows and we take orders for big buckets of times in the periods. We feel really good about where our capacity is. And we should be able to meet marketplace demand. I mean, obviously, anytime you have exciting new products, there is a period of time to fill the channel, particularly if you're getting really positive consumer reaction. But our plants are in very good shape with the additions we've done, both in Monterrey and Roseau and Spirit Lake and Osceola. And we're going to be busy, no question about it, but we're feeling very good about our ability to meet demand. Scott L. Stember - Sidoti & Company, LLC: Okay, and just a last question on the small vehicle side, with GEM and Goupil apparently seeing some accelerated sales gains there. Could you just talk about the end markets? What kind of customers we're seeing there?

We've been working on this little project now for a couple of years. And I think we've got the right leadership team. We've had a chance to capture some of our synergies, both on innovation and on cost, and really, I think we're starting to find our footing. Obviously, the Aixam and Goupil, their major customer base is in Europe and quite largely in France. So it's not a great end market there. But nonetheless, they are bringing innovative industry leading in their respective Light Duty Hauler and People Mover products that they have. And I think they're doing quite well on a share perspective. Here in the U.S., I'm extremely pleased with the way our GEM team has executed both on the factory side of driving perhaps one of our best LEAN transformations to be able to improve the quality and delivery of those products. And the commercial sales team has really done a nice job of creating bigger opportunities and really the GEM vehicle is a premium in the U.S. People Mover market. And I think we're doing a better job of communicating that and taking advantage of it, as evidenced by the significant growth.

Your next question comes from Greg Badishkanian of Citigroup.

Just on the side-by-side segment. Have you noticed any competitive launches or any change in the competitive environment? I think you said that promotional environment is somewhat stable. I'm just wondering new products that have come out?

Well, yes, Greg, we've noticed. There's been a number of new products announced here over the last 6 months, some of which have started to hit the marketplace, some of which are about to hit the marketplace. And again, as I think we've made in our remarks, it hasn't stopped our continued ascent to gain market share and retail growth. So I think we feel very good about our -- kind of our class-leading brands and innovations even as guys start to shoot at us. Going back to the things we've told you for years, I mean, we'll put our long-range product plan and our speed-to-market up against anybody, frankly, in this space and we're pretty confident, which you'll see next week and what we continue to have in the product line. We're not going to just stay ahead of our competitors, we're going to continue to accelerate and get further and further ahead even as they make moves. So I mean, that sounds a little braggadocious, but we feel good about where we are.

Yes, I mean, that was kind of where I was going. I mean, if you're gaining share now and you're going to come out with some new innovation, which is, I mean, you guys are usually a little bit more conservative about your new product launches. So historically is, I mean, it sounds like you guys are really excited. So I mean, it sounds like you could even pick up further market share despite new entrants, et cetera.

I think that's fair, Greg, but remember, we are not going to grow to the moon. There's -- we've had great market share gains. The pace of those gains is certainly going to decrease over time. And what you're hearing is a lot of confidence in what we're bringing and how it fits into the competitive landscape. But just recognize we do expect that, that doubling of shares that we've had, really, over the last 4 years is not going to happen over the next 4 years, but we're very proud and confident on what's going to happen.

Yes. No, I understand. And just on the gross margin side, the 3 line items that helped you -- maybe this is for Mike -- the product cost reductions, commodities, increased selling price, which of those had -- was there one that was like materially much more important for the quarter?

Well, what I'd tell you, Greg, is that we've experienced the benefits from product cost reduction in some higher selling prices for quite some time. I think the one that maybe surprised us a little bit and that helped out a little bit more than what we had thought was the mix. As you know, the product mix has been negative for a number of quarters now, to our gross margins. And as I said in my comments, that improved to neutral for the quarter, largely on the benefit of a 33% increase in PG&A sales for the quarter. So as you know, PG&A is our most profitable business and significant growth in that category really across the board in every product category of PG&A helped out our gross margins quite a bit. And that's primarily the reason that we increased the full year a bit to the guidance up to 50 basis points.

Your next question comes from Gerrick Johnson of BMO Capital Markets.

I was hoping we could get back to the capacity utilization question. What specifically is your utilization right now? And what has come fully online and what is yet to come online in the near future? And how would that change your utilization?

Gerrick, you probably know us well enough to know that we're not going to throw out an actual utilization number. I will tell you it's north of 60. And as Mike said, we're investing $200 million across the globe. Not all of that's in plant capacity, but a heck of a lot of it. And remember, Bennett answered the question earlier very accurately. The -- it's not just about building more plants and adding capacity. It's about how effectively and efficiently we build the products. And what Suresh and his team are doing and what Longren and Kemp on the engineering side to make these products easier to build from a design standpoint, it's not a 1 for 1 capacity issue. We're getting more productive, significantly more productive all the time. Really, the big constraint for us is paint and you're seeing us add paint capacity in Europe. You're seeing us add paint capacity in Spirit Lake. And we feel very, very comfortable that we're going to be able to deliver on the next several years of demand with the investments we are making.

Okay, in lieu of an actual number, that's a pretty good answer. Moving on to PG&A. Kind of -- to the extent you can, what would it look like if we could exclude Klim? Just trying to get an idea of what the run rate kind of organic growth has been in PG&A?

Sure, what I would tell you, Gerrick, is as you know, Klim is largely snowmobile apparel. And that business, as is our snowmobile business, is quite seasonal. So the Klim sales in the first half of this year are actually quite low and that'll ramp up quite a bit in the second half of the year as we deliver the snow garments for the upcoming riding season. So the growth contributed by Klim in the first half is really not all that meaningful.

Okay, great. And if I could just sneak in, on Latin America, nice shipment growth there. But retail sales growth in Brazil, how is that looking on a retail basis? And Scott, we always love your views on the economy. How's the economy in Brazil going these days?

Well, I'll jump in on what's going on with the sales and dealer. Retail and the dealer network has a tremendous amount of momentum right now in Brazil. That -- the last few quarters have been really encouraging. We've got a number of dealers up and they're retailing significant units,. And that's increasing right now. So we're pretty bullish on the dealer network establishment and the momentum -- and that is versus the other couple of markets, there is a little bit of an established powersports market there and I think that's really helping build up momentum for our dealers and our retail base. And I'll let Scott do his thing on Brazil.

I think Brazil is just an example of the variability we're seeing around the globe with India being a little bit slow, and China slowing down. The protests are a good example that everything is not perfect in the Brazilian economy. And I think our team has done a great job of positioning us for success so the slowdown is not going to hurt us. I think we've got plenty of opportunities to grow into the face of slowing. But obviously, with the Olympics coming there, I think they're going to end up getting that economy back on track. And we expect to see growth there going forward.

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

Scott or Bennett, whoever wants to comment on this, you've given your update and how you're on track with your Indian dealer target for year-end, the 125 to 140 North America; 70, I think you said, Scott, for international markets. Roughly how many units are you targeting for initial shipment or stocking units per dealer, I guess, is question #1. And then question #2, would be warranty. That was called out as being up. Just any additional color, Mike or Bennett, you might want to give on that. Then I have one other additional question.

All right, I'll take the Indian question. And I think you already know the answer. I mean, that's a multiplication question. I mean, the fact is it's going to be an interesting time over the next 6 to 8 months and really pleased, as I said in my prepared remarks, with the progress we've made in Osceola and Spirit Lake about being able to build the bikes. We've made several hundred now. We know how to produce them. We've tested the supply chain. But really, getting a few bikes into the dealers is going to be the first priority. So consumers have a chance to see them. And then it'll be about really, I mean, chasing demand as much as we can. As Bennett alluded to, I mean our RFM retail flow management process that we've implemented with Victory, that's how Indian's going to start. So we're really going to be able to ship in product very, very quickly. So the idea is not to have a big huge channel fill here. It's about shipping to demand as much as we possibly can. Warranty, Mike?

Yes, warranty did jump a little bit in the second quarter. The claims actually paid were up about 25% and the cost accrued into the P&L was up about 50%. So it was a bit punitive. Really the primary issue, if you call it that, is that our snowmobile riding season was extended quite a bit and the snowmobile claims were a bit higher than what we had modeled in, so -- and what we had experienced the prior year. So there's a couple other smaller issues, but the primary driver is snow warranty up a little bit.

Okay, and then the last question, however you want to comment on this, gentlemen. Any color you can give us on how July is trending to-date? Obviously, weather had an impact in May and June in particular in motorcycles and some other areas. But anything on July at this point at retail, just broadly in North America? And then maybe Western Europe where weather really had some havoc in the second quarter.

Tim, we're not going to get into giving monthly. We're not retailers where we give monthly retail reports. But I will tell you that throughout the first half, there was significant, not significant, but notable correlation, especially in motorcycles, with the weather and we've had better weather in July.

Your next question comes from Robin Farley of UBS.

So in your guidance breaking out the On-Road into motorcycle and small vehicle, that's very helpful. Just one thing since last quarter it was given as On-Road guidance, when you look at your overall sales being narrowed at the top end of the range, the increase in PG&A, the math kind of suggests that maybe your total sales guidance could have moved up just a smidge, maybe 0.5, 2 percentage points. So I'm wondering if the On-Road, if you had given it -- your guidance in the same grouping again. If there was something at the top end of that range that may have come down a little bit in the On-Road guidance?

Yes, very perceptive, Robin, it's Scott. We talked -- I just mentioned to Tim about the impact of weather. And with the late spring, and then not great weather even parts of June, we did tamp down our Victory shipments for the year a little bit. And I think that probably had a little bit of muting effect on the overall On-Road category.

Okay, great. Now that's helpful. And then just on the Eicher JV, and I know it's a small part of the outlook. But I think in January you had talked about that launching in 2014 and today's slides mention on track for 2015. And I'm just wondering if that -- maybe there was just a couple of weeks of shifting but just what may be causing that?

Yes, this is Bennett. Frankly, as we bring our CEO and our Eicher team up, and we really look at optimal times to launch, that's really the debate. I mean it was a second-half planned launch and we're still working through that. But there is a possibility that, just based on market timing and what we want to do with the products, that may slip into the early part of '15. So that's what you're seeing.

Okay, great. And then just my last question on small vehicles, in your slides you give some color about orders increasing and retail sales increasing. But in terms of actual Q2 shipments, just looking at GEM and Goupil, and excluding the impact of the acquisition of Aixam Mega, it looks like the shipment growth in Q2 was pretty flat for GEM and Goupil. I mean, you refer in the release to -- just to growth. But is it fair to say, it sort of was just barely above flat?

I think you're noticing -- clearly the fundamentals behind the shipments are stronger than what you're seeing on the shipments, but both businesses are up modestly. It's just, again, they're relatively small businesses so that would be my...

And the other thing I would do, and I'm sure everybody is running their models with our new numbers and trying to dissect all the information very specifically. And I'll just point out that when we talk about Aixam Mega, in total, that includes both whole goods and PG&A. And then when we split it up into small vehicles, that's only the whole goods part and the Aixam PG&A sales go under the -- into our PG&A sales guidance. So just remember, as you're dissecting all the information that the total Aixam data is both in small vehicles and in PG&A.

But, Robin, you bring up a very good point. Part of the reason that we're feeling good about our small vehicle business is, it is the fundamentals. The orders were up more significantly and the retail were up more significantly than our shipments, which really positions the business better going forward.

Your next question comes from Jamie Katz of Morningstar.

I was looking through some of the financial services data and obviously, it's jumped pretty significantly year-over-year. Do you guys think that's sustainable? Has something changed in kind of the payout agreement with one of your partners? Or are we going to kind of go back to sort of a normalized rate like last year's?

Well, Jamie, we're obviously very happy with our financial services income. It's really in 2 buckets. The wholesale dealer inventory financing is up significantly, and the primary reason for that is our dealer inventory levels are up. And as you know, those inventory levels are moderating. And as Bennett answered earlier, we expect them to moderate a bit more by the end of the year. So we would expect the rate of increase of our profitability in that joint venture to moderate somewhat from elevated levels here in the first half. On the retail credit side of things, there really isn't any new agreements or relationships that we've established. But I would tell you that we are improving our profitability on that part of the business as the retail credit portfolio grows, and our financial partners are successful in that business, we're sharing in that success. And we would expect, if retail continues to be strong, then our income from those relationships will be strong.

And I'll just add to that on the relationship side. We made the move 3.5, 4 years ago to add Sheffield to the business. And if you talk to any of our dealers, they have executed extremely well for us and their growth has certainly been part of our improvements in our financials as well. But that's been a great partnership for us.

Okay, and then it looks like you guys provided growth rates for small vehicle and motorcycles. And it appears that in the 10-K, those data points are broken out for sales. Can you -- do you have accessible what the full year sales were for the 2 segments? Because I don't think it was in the K broken out that way.

The full year last year?

I mean the growth rate is helpful, but the base is useful too.

Yes, yes. So last year, in our file presentation for this call, we're showing, for us, the small vehicles last year for the full year was $44.4 million and motorcycles was $195.8 million.

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

First, just a follow up on the weather with regard to motorcycles and ORV. Is it your view that adverse weather pushed a meaningful amount of demand into the second half? And then I suppose, separately, do you think anticipation of your upcoming product launch has also built some pent-up demand at the consumer level that may be indirectly presenting a headwind to the first half?

Yes, I think it's different for both of our businesses. On motorcycles, I think we actually just lost some sales. And that's, as I indicated earlier, taken some shipments out for the year. It was just a late spring and June wasn't great weather in lots of parts of the country. And we saw the impact of that. On the ORV side, really, our Ranger products were rock solid and there was -- just the retail was really, really good. And on the RZR side, we gained share, but it wasn't any surprise for anyone that we were bringing something new in that category I think and potentially, there could be some pent-up demand there. But I think the weather had less of an impact on ORV than it did on motorcycles.

Okay, that's helpful. And then just a follow-up. One of your competitors recently had a, I'll say, an anticipated and well-publicized utility side-by-side launch that seems to have been met with, let's say, mixed receptions at best. Did you see a pickup in sales in the wake of that launch? As if consumers were, let's say, waiting to see the alternative and instead decided to stick with Polaris?

I think Ben and I can both answer this one a little bit. One of the things, and Bennett mentioned it earlier, is we have worked really hard, Jimmy, to accelerate our product development cycle. And I think what you're seeing by many of our competitors is they are bringing a product to market to compete with what we had 1 year or 2 ago. And I think that's some of what you're seeing here. And I don't know that, that gave us a boost. Ben, what do you think?

Nothing that we could see in that regard. And again, it's still very early, so we'll see how they do. But again, we feel good about what we've got.

And we have just -- don't misread our comments in the wrong way. We have tremendous respect for the competitors across this landscape. And we're not the only company that can make great products, but we will certainly do everything we can to maintain the lead we have.

It's 10:00 now, but we have 4 more individuals in the queue. So we're going to keep going, Sarah, so we'll take the next question.

Your next question comes from Mike Schwartz of SunTrust.

Just I think there were some comments made about synergy potentials and really just looking for synergies in the Aixam business and how that kind of fits in with the rest of the small vehicle group. Could you maybe walk us through that, provide some more color on maybe where exactly you're looking at synergies and perhaps how -- what the real scope is there?

I don't know that we're going to give you the color exactly that you want, but the -- when we bought Goupil, we found a notable opportunity to leverage the Polaris global sourcing capability and engineering and design capability to help lower the overall cost of those vehicles. And that was a, considering the Mega business is very similar to the Goupil business, we have deployed a similar approach and team to go after that. And it takes a little while to ramp up and figure out exactly a dollar amount that we can get, but it's certainly nice. But the growth synergies are also possible there because the Aixam Mega team has really done a good job of learning how to build light vehicles very efficiently and effectively, And we'll try to bring some of that back into our GEM business as well. And obviously, I think just a productivity standpoint, but with the work union rules in Europe, don't expect a ton of headcount synergies. And that's not -- it's hard to get a payback on some of those moves and quite frankly, we see growth opportunities that can probably get us the productivity cheaper.

Okay, great. And then just a quick follow-up, maybe for Mike. Did you -- and I may have missed this, but did you provide us with the expected top line impact of FX in the back half of the year? I know you mentioned something about gross margin.

No, I did not address that, but we are not expecting benefit from currencies in the second half of the year. Top line will be impacted, I don't know if I would say significantly, but it will be impacted depending on where the Canadian dollar lands. Right now, the Canadian dollar is punitive to us relative to the second half last year. We have some of that hedged, about 25% of it actually, but that doesn't help the top line impact. So we do anticipate some headwind on currency.

Your next question comes from Rommel Dionisio of Wedbush Securities.

I wonder if you guys could just give a little more color on the international roll out of the upcoming new model launches. So on Indian, I think, Scott, you mentioned 70 dealers, are those going to be Europe, Asia or Latin America, maybe just a little more color on that? And on the RZR launch, something tells me you'll have a lot of demand from just your domestic dealers. Are you going to hold off on the international launch for a few months or will that be simultaneous?

Rommel, this is Bennett. Frankly, the Indian launch will be, really, our first almost simultaneous global launch. And when we talk about the 70 dealers, most of those are primarily in Europe, but we also have some dealers in Asia, obviously with our flagship stores in Australia and a couple of other key points in China and distributers. And we'll ship those, really, essentially as we start bringing the bikes to North America. On the RZR front, it's very similar. We're going to go global and we've got the capacity and we're ready to roll. And we will feed those markets and that global demand, frankly, in the same sequence as we do North America. So -- and we've got a lot of very excited markets for that new product.

Your next question comes from Mark Smith of Feltl and Company.

I'll try to be quick. First the improvement that we saw on snowmobiles, do you feel like that was -- was there any lift in the industry, as we saw kind of a later season? Or do you guys feel like you did a better job clearing some inventories late in the year?

Yes, I think the answer is yes to both. I mean, the industry was a little bit stronger because of the longer season. It's at the end of the season, so it doesn't drive a ton of retail. And obviously, as we talked about -- we gained share really throughout the year and finished with really what I'd say better inventory positions, good market share gains. And that's really driving. And then the orders consequently have been a little bit better. So that's really what's driving the upside, along with some strong PG&A sales.

Okay, and looking at PG&A and looking primarily at Klim, I don't know if you can speak to their growth in the motorcycle business and any lift that maybe you're seeing there. And then also your ability to capitalize on the Garment business with Indian?

Rommel, their growth, we're very pleased with Klim. The integration has been very, very efficient. Justin and his team have just really come on board quickly. And they had a good product plan and it was predominantly snow-related and they are adding dealers. And we feel very good about their growth rate in their core business of snow. One of the opportunities we liked about it was the opportunity to expand into motorcycles and more ORV apparel and they're making good progress there. I think in the near term, the growth opportunity is going to come predominantly from snow. But the long-term potential there is significant growth in motorcycles. Quite honestly we were not very good in Apparel before. So there's significant upside by having their team help us get better, obviously, keeping the brands very, very separate. But they're going to make us a better apparel company. And that's going to speed our PG&A growth in the years ahead.

Okay. And then lastly real quick, I don't know if Richard has it, but your expected attendance at the dealer meeting, any improvements this year?

Yes, I have those numbers. It could be on par or better than what you've seen last year. So we're feeling really good. We have well over 80% of our 12 retail will be at the show, which is generally what we target. And so dealer response is good, and we've got a lot to show.

Your last question comes from Joe Hovorka of Raymond James. Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: Just a couple of quick questions. First on Brutus, is -- are the Bobcat dealers still lagging Polaris dealers? And if so, what changes that?

Yes, Joe, this is Bennett. I'll try to handle that, and talk to you. We are -- Bobcat's been a wonderful partner for us. It's clearly been incremental. It's an outstanding brand. But frankly, for whatever reason, the Bobcat dealer network has lagged Polaris on kind of utility vehicle retail performance over the last year or so. And I don't know if it's attributed to the brand, and that it's a little bit of a short line for them. But that's frankly the trend we've seen. And we're expecting in the mid and the longer term that this new Brutus-type product for the Bobcat dealer should drive some acceleration. Because again, it's really spot on and heart of the market for their target customer. So again, we're in the first couple of innings frankly on this, so it's very, very early. Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: They have taken the Brutus product, though, right?

Yes. And again those initial shipments just began like that. Again, if you look at the way we do launches versus Bobcat, it's a totally different business model. So that kind of stuff leaks into their channel much slower than it does a Polaris channel. Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: Okay, and then for Mike, just 2 numbers if you have them. If you happen to have the wholesale portfolio number at the end of the quarter? And then also ASP growth for the ORV segment?

Yes, the wholesale number for Polaris acceptance, is that what you're looking for? Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: Yes, yes.

Yes, yes. $713 million. And the ORV price ASP, is that what you're looking for? Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: Yes.

That's -- that number is 6, 6%. Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: The volume growth...

Sorry... Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: 6%?

Yes. Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division: So volume growth in the quarter was basically 0%? Am I doing that right? Wholesale shipments?

Yes, yes.

Okay, that's the last question. I want to thank everyone for participating in the call this morning. And for those of you that are coming to the analyst investor meeting next week, we look forward to seeing you in Washington, D.C. So, have a good week and we'll talk to you next week. Goodbye.

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